To The Editor:

Your March 2020 cover story, “How Advisors Generate Income for Clients,” was very surprising and somewhat upsetting to me. I want to share my experience with you and see if there is some agreement.

I came into the financial services business in June 1960 as a life and health insurance agent for what was then Pacific Mutual. I worked my way through college in sales and went full time upon graduation. I started in the insurance business, but in 1969, along with just a few others, ventured into the financial planning arena. There were very few of us and a steep learning curve. Now, at 80 years old with 60 years of experience, I think I have learned a few things. I have had positions in sales, in sales management, worked as president of a financial planning subsidiary of Pacific Mutual (Pacific Consulting Corporation), was the CEO of the National Association of Insurance and Financial Advisors in Washington D.C., and have been on the boards of a number of industry groups including the American College.

I mention all of that because I treasure what we do, particularly in these difficult times. I also become concerned when advice appears to lack consideration of financial instruments that are built for various situations. For example, one wouldn’t ordinarily suggest that a 28-year-old who is planning on retiring in 40 years buy tax-free municipal bonds. It doesn’t make sense.

I read a bunch of investment strategies in the article. They certainly have a place, but when one thinks about generating income, I cannot understand why income annuities never appeared. I know there are positives and negatives that people have with annuities. But they should be part of the conversation.

My years of experience have led me to believe that we discuss accumulation for retirement until the cows come home. But we pay little attention to distribution outside of discussions of whether or not the 4% rule works. I have an opinion that it rarely works with qualified retirement plans that are subject to required minimum distributions.

We all know that qualified retirement plans subject to RMDs have a minimum that owners must withdraw each year based upon age. We know that the percentage normally is below 4% in the early years but eventually increases to over that amount. So, in my opinion, the 4% rule doesn’t apply. We all know something else. We know that markets go up and down. For the typical investor who can live with that and not take distributions, that’s fine. But for qualified plans, the combination of a down market and a forced withdrawal usually spells “no chance at recovery.”

I think advisors might consider using all or part of their qualified plans to provide an income through an annuity that will last for the clients’ lifetimes and be at least equivalent to their current expenses. Since annuity payments are part principal and part interest, they are invariably creating a higher income for the retiree and eliminating investment and longevity risks.

Without arguing the common pros and cons about annuities, I do think that when they are omitted from the conversation it is unfair to the client and perhaps unfair to readers who are influenced by your wonderful magazine.

Thank you for your consideration.

Arthur D. Kraus, CLU, ChFC, CAP
P.S. It probably wouldn’t surprise you that a number of my clients have called or written me during this pandemic to thank me for the comfort of a regular income.