Annuity? Never

"But, again, no certainty that I will continue to receive the income? Correct?"

"A high probability," Bert reiterated. "95% is quite high. That should give you confidence."

Sheryl, however, did not feel confident. Her inner voice told her that she should seek out another financial advisor. The following day, Sheryl called her friend, Jamie, and asked if she could recommend a financial advisor. "Well, my husband likes a guy named Andy."

The following week Sheryl met Andy in his office. As she did when she spoke with Bert, Sheryl very specifically described her goals and financial priorities. Andy's response was like Bert's. "Sheryl, I believe you should purchase an annuity. The reason is that it will continue to pay you monthly payments throughout retirement."

"Andy, I have questions about that. I can't know how long I'm going to live in retirement. I do know that my mom lived until 94. If I live to an old age, say to 94 like my mom, or even to 100. Will the annuity continue to pay me for that long?”

"Good chance!" asserted Andy. "Let me get a printout from my computer here while we're speaking.” A moment later Andy picked up the key piece of paper. "It says here, Sheryl, that you will have a 77% chance of receiving this income for a long as 30 years."

Sheryl paused for a moment. "Andy, I'm no mathematician, but this tells me there is a 23% chance that my income will not last. Am I right?"

"Yes, Sheryl, you are correct. But 77% is a high probability. It should give you confidence."

The following day, Sheryl decided to take another path. She called a well-known investment firm, one that advertises heavily on television. When finally connected with a financial advisor, she described her goals and objectives. Once again, it was an annuity that the advisor recommended. "I suggest you purchase an annuity that will pay monthly income and have a 90% probability of lasting for 30 years."

Sheryl asked the advisor, "Is there no annuity that guarantees that the income will last until I die? What happens if I live 42 years? I don't want to be well into old age only to discover that I have lost my income!"

"No," replied the advisor, “Annuities don’t do that. But there is a 90% probability your income will continue. And that's really high. Really, really high! That should give you confidence."

Several days later, Sheryl met her friend Kathy for lunch. Sheryl related her frustrating experiences with the three financial advisors. She described how each advisor had recommended an annuity, but that each recommendation varied when it came to what Sheryl considered to be the most important issue: her income.

"Okay,” said Kathy. “You explained your needs in a consistent way to all three of them. Why the three different results? Seems to me that this annuity business is pretty arbitrary. I'm thinking like you. When I retire, I want certainty. That last thing I want is to be worrying about is my income stopping! What do these advisors expect? That we should go and become a financial burden on our kids?"

"Exactly! That is my perspective,” said Sheryl. "It's amazing to me that all three of these financial advisors asked me to be confident. But how can I be confident when one says 95%, another says 90%, and yet another says 77%? That doesn’t give me any confidence at all. That only gives me skepticism. They’re asking me to trust this annuity approach, but there’s nothing that I can hold on to that is certain. The annuities they suggested have no guarantee of anything!”

Sheryl continued, “Look, I watched my mother in retirement. God knows, I took over the job of paying her bills. It taught me that when we are retired, we will need income that doesn’t stop. If I live to 90, or 95, or 100, I absolutely know that I will need income every month. And it has to be income that I can count on. It needs to be certain. This annuity these advisors keep suggesting is no answer for that!”

The ladies looked at each other and neither said anything for what seemed like a long time. They were, however, communicating. Some things did not need to be spoken. Finally, Kathy spoke: “I question whether these three men actually heard you when you described what you wanted. You asked that they protect your money. You stated that you want income that is guaranteed for life. They responded by recommending an uncertain approach. And then they expected you to feel confident about a recommendation that did not provide what you told them you wanted! This is such an inappropriate way to treat a potential customer, it would actually be funny if it wasn’t so sad.”

“Yes, that is how I see it. I’m supposed to push aside my needs in favor of their answer. Annuity? Makes me wonder. Is it the men? Or is it the companies behind them? Are they trained to be this way? Pretend to listen to me, and then just recommend what they want to sell you?”

“I think it’s probably the culture,” said Kathy. “I won't do business with that. I'll look for a woman to work with, or a man who will hear me, assuming I can find one! Ha ha!"

"And, believe me,” Sheryl relied," I will never buy one of those annuities! No, no, no. I want certainty. I want it guaranteed. Don't tell me to be confident in some percentage that is entirely dependent on whom I speak with. These people just don't get me. So, they won't get my money. My search continues! Annuity? Never!"

Now make this substitution

Consider this satirical story. But this time, substitute "Monte Carlo simulation in conjunction with a systematic withdrawal plan” for "annuity." This reveals what is wrong with the most-used approach for retirement-income planning. Do you see why the systematic-withdrawal strategy is misaligned with the needs and objectives of most boomer women?

When will planners move past this? Will it be only when they are fired by widows? Or will they accede to women's concerns about outliving their incomes and start recommending the longevity protection that only annuities provide?

I would ban Monte Carlo simulations in the context of retirement-income planning. In practice, Monte Carlo is used as a proxy for safety. But it is not a proxy for safety: Read why here or hear me explain why here.

To advisors and planners who remain steadfast in their opposition to annuities: Give it up! All your historical objections to annuities have been eliminated. Are you not a fiduciary? Are you not legally bound to act in the client's best interest? In the woman's best interest?

Embrace no-commission/no-surrender-charge annuities. Charge your AUM fee on them. You deserve to be paid for the recommendations you make, including annuity recommendations. It's easy. Today's annuities appear in your portfolio management system just like any investment. There are no valid excuses left.

“Annuicide” is yesterday’s news. “Longevicide” is what your self-interest should motivate you to avoid.

Postscript

I am not condemning Monte Carlo simulation per se. Monte Carlo has shown its utility in many industries and contexts. Rather, I am highlighting that Monte Carlo simulation is misused by advisors when it is understood by clients as a proxy for safety to instill a false sense of confidence. In instances where clients, especially women, are denied longevity protection because of a Monte Carlo simulation indicating a "high probability" of continuing income, expect the outcome to be shame for a long time to come.

Wealth2k® founder David Macchia is an entrepreneur, author, marketing strategy expert and public speaker whose work involves improving the processes used in retirement income planning. David is the developer of the widely used The Income for Life Model®, and the recently introduced Women And Income®. David has authored many articles on the subjects of retirement income planning, macroeconomics, and financial communications. He is the author of two books, Constrained Investor®, and Lucky Retiree: How to Create and Keep Your Retirement Income with The Income for Life Model®.

Read more articles by David Macchia