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Prudential Life Insurance Masterclass audio for transcription

Gillian: [0:00:57] Welcome to Asset TV, I’m Gillian Kemmerer. Today I am thrilled to bring you a panel of experts from Prudential who are here to share the unexpected ways in which life insurance can help bolster retirement income. While the primary function of life insurance has always been death benefits, today we want to share the ways in which it can be used to mitigate emerging risks to incoming retirement. First our panelists will talk us through the changing retirement landscape and five threats that financial planners must be aware of today. The first two are about advances in healthcare, namely retirees outliving their savings and the rising costs of medical care. The last three touch on economic factors, taxes, increased market volatility and the low interest rate environment. Given the right circumstances, life insurance can assist clients in addressing all of these derailers. And we are thrilled to tell you more about this solution in today’s episode of Masterclass. So I want to get started on the outliving retirement savings bucket now. Jim, we’re going to start with you, kind of bittersweet, right, so you have people living longer but their income needs to be living alongside them. So due to some of these improvements that we’ve seen in healthcare, we’re finding that people are living longer than when Social Security was really imagined in the 1930s. So with lifespans increasing, how big of a concern is outliving money to your clients?

James Mahaney: [0:02:19] I think it’s a huge concern. The average life expectancy for a retiring male at aged 65 years now 21 years and for a female it’s 23 years. And so there’s been this huge increase in longevity for retirees, not just since the 1930s, but since the 1980s as well. And I think it’s … the surveys are showing us that it is a concern, outliving assets, especially with the demise of traditional defined benefit pension plans in the private sector. And those plans as we know provide a guaranteed lifetime income to the retiring worker. But it also provided guaranteed lifetime income to a surviving spouse as well. So outliving assets in a 401(k) world is very, very top of mind to pre retirees and retirees.

Gillian: [0:03:04] So the longer you wait to collect your Social Security benefits the more you’ll eventually receive let’s say up until age 70, is that correct?

James Mahaney: [0:03:10] That’s correct.

Gillian: [0:03:11] But many people are starting to collect even before retirement age, so let’s say age 62 or to their full retirement years. How specifically can life insurance help clients maximize their social security income in addition to providing a needed death benefit, which is equally important?

James Mahaney: [0:03:27] Yeah, it’s a great question. So if retirees and pre retirees are concerned about outliving their retirement income, one way to mitigate that risk is by maximizing their Social Security benefit. And to do that, one waits from say aged 62 or when somebody retires through their full retirement age, which is currently 66, all the way up until aged 70. And in the background, cost of living adjustments will apply. So if somebody waits from aged 62 to 70, the initial benefit will actually more than double when you factor in projected cost of living increases. So you’re starting at a much higher base of Social Security when you actually trigger your Social Security and that will provide much needed retirement income that’s inflation protected, so the cost of living adjustments that apply in real dollars will be higher. So if one wants to take on that strategy, what life insurance could do is it could provide a source of tax free income from the point that somebody retires, say at aged 62 to the point that Social Security starts at aged 70.

Prudential Life Insurance Masterclass audio for transcription of

Gillian: [0:04:28] Now, are there any other retirement income vehicles that life insurance can also help to maximize?

James Mahaney: [0:04:33] Well, in a 401(k) world, when individuals take their 401(k) assets and they roll them over to an IRA, one of the biggest risks really is sequence of return risks, which happens when … look, somebody who has an IRA portfolio, they’re taking withdrawals for retirement income, the stock market takes a dip and the portfolio is going to deplete much more quicker because money is being taken out to provide retirement income as well. What life insurance can do in that case is provide an alternate income source so that the IRA can actually stay intact and the life insurance can be tapped to provide a retirement income during the interim period. And hopefully the IRA can then recover and you could tap that, later on it’ll provide a longer lasting portfolio through retirement.

Gillian: [0:05:19] Now, with so many more years that they have to account for, how do clients need to change their thinking around retirement income planning?

James Mahaney: [0:05:25] Well, I think minimizing taxes is going to be very, very important and then coordinating – properly coordinating the different types of retirement wealth that somebody has available, whether it’s an IRA, Social Security, life insurance or non-qualified sources.

Gillian: [0:05:41] So, Stephanie, I’m going to orient to you a little bit, you’re bringing the financial planning expertise to us. So what role can life insurance play to someone who’s already starting to tap into their social security benefits?

Stephanie Sherman: [0:05:51] That’s a great question and to really piggyback on what Jim was saying, life insurance can really play several roles, not only as Jim indicated, to take out some tax free withdrawals, to provide some gap income or some income during those years before you start Social Security. But also even if you don’t need it for that there’s a couple of things. Think about it as a tax planning tool as well. Because the life insurance, as the death benefit comes in, can also be there to help take advantage of some IRA strategies, perhaps it makes sense to convert your existing IRA to a Roth IRA at that point and use the life insurance proceeds to help pay the taxes that may come due. So life insurance needs to be thought of much more holistically than it has traditionally been thought of in the past, most people grew up with the idea that life insurance might not be necessary once the mortgage was paid off or once the kids graduated and sort of were out on their own, which we now know it takes a little longer anyway.

But I think that the key is to know that if it’s a cash infusion, as well as the opportunity to have a tax diversified pool of resources to start drawing down on if need be in those years when you’re looking to get additional income. The last thing just to follow is that the other challenge is that with our retirement assets we’re required at 70½ to start to take distributions. Those percentages are not set to create a lifetime annuity. Those percentages are set to start to have the tax burden paid by the owner of that retirement account. And as Jim indicated, if markets are fluctuating, more assets are going to have to come out to satisfy your required minimum distributions. So you may find yourself depleting that asset much faster than you would like, so the life insurance again can replenish those assets.

Gillian: [0:07:58] Great, such an interesting perspective on life insurance that I feel like we don’t hear about so often. Dr. Bob, from the medical perspective, so we have an interesting array of perspectives


on the panel today, can you give us some of the examples of the challenges that retirees are facing, both in the lead up to retirement and after, particularly given how long lifespans are becoming?

Dr. Bob Pokorski: [0:08:15] Sure, Gillian. A lot of folks imagine that risks start at aged 66 when they retire. But they actually start a lot earlier than that. And they’re what I call preretirement shocks. And the issue is a lot of us get complacent because life’s been good to us, we’re making good money. And we don’t realize all the things that can go wrong. And there are a lot of them. As you’re coming into retirement there are situations where you may have to leave the workforce early, you could have a health event, cancer, a heart attack, something like this. And suddenly you’re not going to get your nest egg because you have to stop working or not work as long or as hard. Or maybe you lose your job, people get downsized. And if you get downsized at a bit of an older age it’s sometimes hard to find a job that is as good. And some people divorce, they were on track to have a very healthy nest egg, and then they divorce and the egg breaks in half and nobody has any money. And here’s another one that people face as they’re coming into retirement. And they don’t see this coming, you are sitting home in the evening relaxing and you get a call in the middle of the night from your brother or sister who lives a few states over, and there’s some bad news that mom was diagnosed with Alzheimer’s disease. And you’re lucky because your brother or sister can provide the care at the other end, but they ask you, you’ve done well, can you help out financially.

And the issue here is that a lot of people think I have enough money or if there’s a couple, we have enough money for the two of us. But now we’re casting a broader net and it’s not just the two of us, there are others are going to come to us for help and adult children are a good example. They stay home for a long period of time and even if they are independent, we’re helping them with cell phone bills, mortgage payments, credit cards, student loans; we’re helping them on and on and on. And people get a little bit cavalier sometime and they think, well, my children have moved away, I’m not helping them. And then they get a call in the middle of the night from a son or a daughter and there’s some marriage problems or something else has occurred and that question is, can I come home with my two children, your grandchildren? And of course you say yes. So now you’ve gone from two people to a family once again and you don’t have that kind of income. You have enough for two people only and you find that you need to save more, in an ideal world you’re going to save more than you could ever imagine that you might need.

Gillian: [0:10:29] It’s an interesting point, so you’re not just retirement planning for yourself, but you’re retiring for a village really.

Dr. Bob Pokorski: [0:10:34] Well you do, and what I always tell people, Gillian, people think my financial obligations have ended because the kids have moved out or I’ve retired. They don’t end until the people that we love no longer need help. And those are just the preretirement issues, longevity is a huge one. We’re living so much longer than we used to. And it’s to the credit of modern medicine, I’ll give an example, if we have individuals, a man and woman who are 65, they’re healthy, non-smokers, how long do you think they’re going to live? Well, the answer is a lot longer than you would ever have imagined, about half of those men and six in ten women are going to reach age 90. And, Gillian, 90 used to be an age we thought, oh my gosh, that’s a benchmark of a long, long life. Now it’s almost average for people that are in pretty good health. And you think back, you do a little back of the envelope calculation about how much of a nest egg you’re going to have. And you think do I have enough money to live well out to these older ages? And those same people, the healthy folks that were 65, about one in ten men and a


bit more than one in ten women are going to reach 100 – age 100. And they haven’t saved for this kind of money, or kind of longevity. Now, that’s the individuals. If you look at couples it’s even more interesting.

And to simplify this, I’m looking at four couples and at aged 65, healthy non-smokers, how many of them are going to live until aged 90? Well, here’s what to expect, about one in four couples, neither one of them are going to reach age 90. And then two in four couples or half of them, one person will reach age 90, so they are widowed, so half of them are widowed, but, Gillian, here’s what’s really remarkable, one in four couples, they both make it. They both reach age 90. And again, do that back of the envelope calculation, my heavens, I thought that nest egg was so strong, and you’re living till age 90, one in four cases. And here’s the last bit of amazing information, if you’re healthy as a non-smoker at aged 65, about one in five couples, one person will reach age 100. So it’s absolutely astounding. And after longevity, Gillian, we have been alone later in life and this is the natural order of things, we are together, we’re married or a couple, but as we get older and older and older, people tend to be alone. And at age 85 and older, about three in ten men are living alone, but a lot more women are, this is very much a woman’s issue; it’s half the women are living alone at age 85 and older.

And the last of the big challenges is the need for chronic illness care or long term care late in life. And this is a big one. It’s a big unknown, nobody knows if it’s going to be them or somebody else, about half of us. So if you’re 65 and you’re looking forward for the rest of your life, about half of the people are going to need chronic illness care. And I’ll tell you why it’s so hard to imagine that. When you first start talking about this issue, people are young, they’re 40, 50, 60, they’re strong, they’re young, they’re healthy, they’re as rich as they’re ever going to be because they’re coming into this big nest egg. And they have a partner or a spouse in most cases, so that’s where they are now, and they can’t imagine when they’re going to need the care. And when they’re going to need the care they’re going to be in their late 70s, 80s, 90s, they’re not young, Gillian, they’re not strong, they’re not healthy anymore, they need care. They may not be rich because they’ve been in retirement for decades and they’ve spent down the money and they’re often alone. So the need for chronic illness care is a big unknown and it weighs heavily on all of us.

Gillian: [0:13:57] So building off of this discussion, right now the primary caregivers are the children and spouses. So do you envision any changes coming to this model?

Dr. Bob Pokorski: [0:14:05] Gillian, I expect major changes in the future. Right now it’s very favorable. We have a huge group of baby boomers, a very large demographic and we’re taking care of relatively few older people, this is the silent generation. So there are many of us available to take care of older folks. And now I’ll give an example of how favorable it is today. If you look at an 80 year old person in the year 2010, ask how many potential caregivers would there be, and the answer’s about seven. And who’s a potential caregiver? Mainly it’s folks who are between 45 and 64, because these are adult children, those are the main caregivers. So to restate, for the 80 year olds in 2010, it was about seven potential caregivers for one person. But, Gillian, now what happens, we have this huge group of baby boomers who are moving into older age and they’re being trailed by a much smaller group, and that’s the Gen X - the Generation X. So if we look at 2030 what we’re going to find is how many potential caregivers will there be, instead of seven, there’ll be four. And it’s all a matter of demographics. And then if you go even farther and farther out to 2050, there are only going to be three potential caregivers.


And the issue is that we’re not going to be able to call up friends or family anymore, because there just are not going to be people who are going to be able to take care of us.

Gillian: [0:15:22] A very interesting demographic change. Now, we are certainly living longer and we’re talking about chronic illness, but are we living healthier and if we’re more active in retirement, does that change our income needs?

Dr. Bob Pokorski: [0:15:31] It’s a big question, everybody asks this, say, “Dr. Bob, is it a matter that we’re just going to live longer and we’re going to be sick or disabled?” And there’s some good news. Studies dating back now to the 70s have tracked what happens to a 65 year old person, man or woman. And we are living longer and longer and longer, and not only that, we are living healthier. We are less likely to be disabled. But there’s always two sides to every coin and the issue here is that if we are healthier we want to be out in the community, travelling, visiting friends, family, grandchildren, sporting events, the theater or whatever, this takes money. And already we have all of these challenges and now we’ve added, we’re living longer and healthier and we need even more money.

Gillian: [0:16:13] So staying with you, we’re actually moving onto our second derailer, but it’s still on the medical case, so let’s talk a little bit about rising healthcare costs. So, longer lifespans are coming with greater risk of course developing serious health problems maybe at a later date. So what kinds of conditions do financial planners need to be thinking about for their clients?

Dr. Bob Pokorski: [0:16:36] Well, it is the natural order of life that as we get older we’re going to have illnesses, and it’s hard to imagine. I referenced a 40, 50 or 60 year old person, they can’t imagine it. But when you get to be older, 70s, 80s, 90s, we do tend to fall ill, not just with one health problem, with multiple health problems. I categorize the illnesses that can affect us into two broad groups, short term care and long term care. And I do that because they are dramatically different in their cost implication and the care giving implications. So let me talk first about the need for short term care. Now, short term is truly short, it’s some days, some weeks, maybe a few months. And here we’re talking about conditions such as cancer, heart attack, heart failure, minor stroke and a big one, people always ask me, “Well, Dr. Bob, what happens if I have a broken hip or what if I need my knee replaced?” That’s what people are thinking when they’re thinking about care and short term care in particular. And here believe it or not, Gillian, the news is all good, because Medicare is going to pay most of your bills. And what Medicare doesn’t pay for, the Medicare supplement or the Medigap will pay for. And then you’ve got some money left from your nest egg, and I say some money because remember, we’re decades out in retirement now. We started with this very healthy nest egg; we’ve spent a lot of it. But we still have enough money that we’re not going to bankrupt the family because you’re not going to need care for very long and it’s not going to be too expensive because Medicare pays most of it.

And then we have family, and I think this is a great example, Gillian, if you were my daughter I’d call you up and say, “I had a small stroke, Gillian, as my daughter can you help me out because the doctor said two weeks, I’ll be back on my feet in two weeks?” And you say yes because that’s what we do for each other, that’s, so that’s why it’s not a big problem to have a short term care need, cancer or a heart attack or whatever. Long term care, it’s absolutely totally different. These are the things that you and I dread because they’re not going to go away. And the care is measured in terms of months, years, usually the rest of our lives. And here we’re talking about the Alzheimer’s, the bad stroke, the crippling arthritis, the frailty, maybe it’s simply a brain or spinal cord injury in an automobile accident or perhaps neurologic


degeneration such as Parkinson’s disease. Now, these are absolute catastrophes financially and for a care giving perspective, by law Medicare is not allowed to pay for long term care. Believe it or not, Gillian, there are still people thinking that if I need long term care, Medicare will step in. And I direct them to the statute, and by law Medicare is not allowed to because if you need long term care, it’s help with the activities of daily living, it’s called custodial care, Medicare cannot pay for it. And believe it or not, neither can the Medicare supplement, your Medigap, it won’t pay either. And then you have whatever’s left of your nest egg and here you could truly bankrupt your family because the care need goes on into years and the rest of your life.

And then, Gillian, I come back to you as my daughter. Now, I’ve gotten a bit older and I call you up and say, “I have been diagnosed with Alzheimer’s disease, as my daughter, Gillian, can you stop your life to care for me for the rest of my life?” And if you ask this question to people you’ll always get the pause and they’ll say, “Dad, I would really like to but I can’t because I’ve got a life, I’ve got a career, I’ve got a family, I’ve got a mortgage, I’m saving for retirement.” So this need difference between short term care and long term care is very profound.

Gillian: [0:20:00] What are some of the costs associated with these conditions?

Dr. Bob Pokorski: [0:20:02] Well, the estimates vary, but they converge on one point, and one point is high. It’s very high. And I’ll give you an example. Now, the estimates vary because it depends on where you live, perhaps how long you live. But as the general rule, a 65 year old couple today would be expected to spend several hundred thousand dollars on out of pocket medical care, that’s not reimbursed by Medicare or by Medigap insurance. Now, it certainly could run into the $300,000 range or conceivably even more, that does not include the need for long term care or chronic illness care, we’re just talking about medical expenses. And here’s what’s included in that figure of several hundred thousand, Gillian, and there’s a bit of good news here, and that is that Medicare premiums, deductibles and co-payments are included in that several hundred thousand dollar figure. And then we have doctor, hospital, drug bills that are not fully reimbursed and vision, hearing, dental, a pretty long list of things that are included in here. And again to restate, we’re looking at a 65 year old couple whose retiring today and looking forward to the rest of their lives and saying, “Out of pocket how much am I going to have to pay?” Now, that’s a lot of money but there’s an even a more surprising side to this and that is folks who are healthy.

Now, folks who are healthy think, well, I’m never going to get sick. Well, as a physician I can almost guarantee, yes, you and I will eventually fall ill. But the main driver of out of pocket healthcare costs is the need to pay for Medicare, every single month, it goes on and on, and Medicare supplement and whatever. So here’s the surprising thing, by all means take very good care of yourself, but that generally means you’re going to have to pay more for healthcare than people who are sick because they will pass on at a younger age.

Gillian: [0:21:53] Great points, Dr. Bob, thank you so much for sharing that perspective. Stephanie, I’m going to take it to you, how can certain life insurance policies help clients who become chronically or terminally ill?

Stephanie Sherman: [0:22:03] In so many ways, Gillian. So I think the first and relatively newest way is that many of the life insurance policies today that are permanent. So they’re designed to last for your whole lifetime or a portion of your whole lifetime, have riders now that you can add to them, either


specifically focused on a long term care need or a chronic illness, where you can actually access the death benefit up to a certain limit in a tax efficient way month after month. So a lot of people, really of every age, almost anyone looking to buy insurance for their lifetime and have a permanent policy should be talked to about adding on a rider that provides for this long term care or chronic illness need. It really can take the edge off of the finances at just the right time. And if it’s not a policy that has that type of rider on it because many people have already gotten their insurance and they’re already in their 60s or 70s and to get a new policy would be very cost prohibitive and perhaps they might not even be able to qualify from an underwriting perspective. Think of it as again a cash infusion into their finances, if somebody passed away, to replenish the assets after they’ve spent down the hundreds of thousands, and I think it’s even more unfortunately, potentially in expenses. And it is a very emotional issue.

So what we talk to our clients about all the time is let’s try to let you focus on the emotion and take the financial stress away. And if you can think about this, the earlier the better of course, because life insurance, the pricing of it is based on your health and age at the time that you go to purchase the policy. Then you really have the opportunity to sort of check that box and say I’ve started to think about this. But I wouldn’t be fooled to thinking I don’t have to think about it again and again, you always want to make sure that you have the right portfolio of life insurance in place as your needs and as your life changes.

Gillian: [0:23:47] Sure, so early planning, pretty key here?

Stephanie Sherman: [0:23:49] It is key.

Gillian: [0:23:49] Absolutely. So, Quincy, we’re going to take it to you. You have an eye on the economic trends. Let’s talk a little bit about Medicare and medical costs in general. How do you see those playing out as markets change?

Dr. Quincy Crosby: [0:24:02] Getting more expensive, also Medicare and Medicaid is the biggest issue for the deficit. It’s one that has never really been taken apart and fixed, it’s a Band-Aid approach and each time it’s done you have more and more Americans coming into the system. And right now it’s almost a tsunami of Americans going into the system. So it’s going to get expensive, and the fact is as Dr. Bob pointed out, just the cost that we’re using right now, for an average couple retiring at 65, good health and looking at maybe 20/25 years of life expectancy. You’re looking at about $265,000 of medical expenses. That does not include long term care. So with long term care, remember, now, all of this is after taxes, this is all after you’ve paid your taxes, it’s about $90,000 if you then need long term care or you have to go to a nursing home. Short of that, good news I suppose, it’s about $45,000, again after taxes. And that’s just the cost right now. So it’s expensive really to live longer, to live well, and in fact it’s probably going to get more expensive as the system is taxed by the amount of Americans just coming in. At some point it’s going to be breaking down.

Gillian: [0:25:55] So in light of this demographic shift, what role do you think Medicare is going to play in helping clients offset these costs both now and in the future?

Dr. Quincy Crosby: [0:26:01] Well, it’s going to be crucial. It’s going to be absolutely crucial. The group that’s coming in now is not a group that wants to sit in a room doing nothing. It’s an active group of Americans, they want to look good, they want to play, they want to do everything, and they want top


quality healthcare. And that costs a lot of money. And so there’s got to be some sort of equilibrium that provides that, that offers that, but at the same time someone has to pay for it.

Gillian: [0:26:31] Well, thank you so much, this was an interesting discussion on the healthcare side. But let’s move over to taxes because an equally important part of this discussion. Stephanie, so along with these rising healthcare costs, the tax impact can represent something major in terms of retirement income. So when you’re looking at your clients, if they’re not properly managing this income tax burden in retirement, what are some of the potential ramifications of that?

Stephanie Sherman: [0:26:54] Gillian, I think that taxes can absolutely derail in retirement. And we can’t control it. No more than we control our health of course and the rising healthcare costs, but you really have to almost plan for the worst and pray, I guess, a little, because we just don’t know. If we’re living a long time the likelihood is that tax rates are going to go up and down throughout our lifetime. The prior sort of school or rule of thumb was that when I retire I will pay less in taxes because I will have less income. And I will earn less so I will pay less. But that only works if rates stay the same. If the whole tax rate structure increases to help pay for things like Medicare and just our world in general, then the challenge is you might not always be in a low tax bracket. So remember, we talked very early on in the conversation about retirement assets. When they come out, for the most part, they’re taxed, right, if you didn’t pay a tax to put the money in the account, you’re going to pay a tax when you take it out. There are some things you can do to mitigate that, through Roth IRAs and 401(k)s, but for the most part most of our retirement assets, especially for the current retirees are going to be taxed as the distributions are made. So you must also take a specific percentage, once you hit 70½, so think of tax rates rising, a mandatory amount coming out, so now you have less net to work with.

When you have less net to work with you have to dip more into your accounts to take more out and it’s a very circular calculation but you quickly deplete your portfolio at a much faster rate, at almost exactly the time you don’t want to do that. You’re usually not working, so you’re not re-contributing savings, you’re usually in a spend mode, not a savings mode. The environment is such from an investment perspective that you can’t just rely on living off the interest, which used to be what many people did when they retired. So taxes are going to continue to play a very important role. And one of the things we have to think about as we start to structure our clients retirement planning, whether in retirement or, you know, 15, 20, 30 years before retirement is helping them understand that it’s as important to start to create tax diversified investments through life insurance, through certain retirement accounts. And life insurance can begin to play a much different role, again broadening our perspective of how life insurance can help us in retirement at a time when we might need it. So it’s really going to become very important.

Gillian: [0:29:13] So in this context, in what ways both on a large and small scale might retirees have to change their lifestyles?

Stephanie Sherman: [0:29:19] Gosh! Nobody wants to hear that, right. That’s sort of the worst case scenario is I retire and I have to live less or I can only live large for the first year after retirement. But I think the important thing is if we’re living longer, which we are, it’s not a set it and a forget it sort of policy. The planning has to continue throughout your lifetime. And you have to have a keen eye on where you are annually to see how is your rate of return relative to plan? Where are taxes relative to plan? Where are your expenses? And I think you have to be prepared as we live longer, to cut expenses. I try to counsel clients, certainly if they’re not retired yet, do it now so that you have more flexibility later. And


that’s a really difficult concept, just like we don’t understand that we might get sick or need care later, we certainly can’t imagine a world where we can’t live the life we want to live. And I think that the sad thing is when that is the reality. And unfortunately that’s when you get those calls, not just because you’re sick in the middle of the night, but you get those calls because they’ve got to move in with you, your parents or your children because they can’t afford the lifestyle they feel they’re entitled to. So it’s not easy work to retire. Unfortunately it’s not all fun, but if clients plan and if advisors work with their clients to plan, the idea is to help our clients have the fun and take the financial stress, tax stress, health stress away from them.

Gillian: [0:30:35] Can you break down for us in both the short and long term what the impact of these issues would be on the clients?

Stephanie Sherman: [0:30:40] Gosh! In the short term I think that, you know, you could probably weather some short term fluctuations, so certainly if there’s a tremendous drop in your portfolio value, I think clients are nimble enough to say, “It’s not going to feel right to continue spending at the rate I was spending.” But I think it’s harder for us to envision it as a long term perspective, especially if you’re not yet retired. I will say that almost everyone I know that is retired, their number one fear is they’re going to run out of money, they’re going to have to move in with their children and nobody’s going to take care of them. So if they keep that front and center in a healthy and happy way, instead of like a doomsday scenario, I think they’ll be able to weather the storm, because they’re going to have to adjust as they see the economy or taxes or healthcare shifting over their lifetime.

Gillian: [0:31:24] So I think up until now, before this discussion, obviously we think of life insurance as a death benefit payout. But we’re starting to understand a little bit more about how it can really be helpful for cash flow in retirement. But it’s interesting, why do you think so many financial advisors and clients aren’t aware or aren’t using this perspective when dealing with retirement planning?

Stephanie Sherman: [0:31:43] You know, it’s not an easy conversation to have quite candidly, it takes a real thoughtful approach and getting your clients to open up and see beyond life insurance sort of at its face value, if you will. I mean absolutely you must need the death benefit. But now you can help your clients understand that they might need it for a multitude of reasons regardless of their age for their whole lifetime. And I think also it’s an economic issue, you know, it’s expensive relatively speaking versus some other types of life insurance, like term life insurance. So if you just compared the cost, you might say, “Right now, my budget allows me to do the less expensive option.” And they might not be aware that they can then take that less expensive option, like a term insurance policy and depending on the carrier and the policy you might be able to change the character to permanent at some time, it’s called the term conversion. And working with your advisor you could really understand how to sort of flip the switch and have some permanent coverage, depending on what’s available with that carrier you have to really understand the rules. But I think it’s important to have those conversations. And it’s not a pleasant one. I mean life insurance, you know, people think of it as I’m dead, so now my family needs it. So it’s facing their own mortality, facing their own potential longevity and the risks and it’s a lot easier to procrastinate. I mean it’s sort of our human nature.

And I think that as advisors it’s our job to help our clients not procrastinate, be the nudge, you know, you’re a sort of a professional nudge in a lot of ways to help clients understand the importance of these things for their loved ones and for themselves, because life insurance as we’re hearing today can really


be used not only for your loved ones when you pass as a pure death benefit, but it can be used for you. And that’s not often thought of.

Gillian: [0:33:22] Playing a slight devil’s advocate here, why wouldn’t a client want to tap into the cash value of their life insurance policy to become a supplemental part of retirement income?

Stephanie Sherman: [0:33:31] Why wouldn’t they? Well, first of all, depending on the policy and the structure and how well it’s done with the accumulation, it might risk the health of the policy. So any one policy isn’t perfect for 15 objectives, so you have to know what the lead objective is at that time. And perhaps when they started the program and they purchased their life insurance it was really about accumulation. And now fast forward 15/20 years, and now they have some health challenges. They may say, “Oops, maybe now my primary objective is being able to tap into that policy for long term care or chronic illness. And luckily I had that rider on the policy and I’m able to do that.” I think the importance there is that the need for which you purchase the policy initially will change as your life changes. And you want to have a flexible insurance portfolio in place so that you are nimble enough to say, “I thought I needed it for this, but look at that, I could use it for this and this and this.” And understand what your objectives are. So you might want to, but you might want to make sure the policy’s healthy before you do that.

Gillian: [0:34:29] So it sounds to me like we might want to have better conversations, even pushing through some of the tougher ones that are uncomfortable, quite frankly, to address to clients?

Stephanie Sherman: [0:34:36] Without a doubt, I think it’s really our job to do that and to really try to challenge our clients to think outside the box of what they perhaps grew up with as where they thought life insurance could play a role in their planning.

Gillian: [0:34:49] So I’m going to transition over to Jim, there’s sometimes a misperception among clients that a company sponsored retirement vehicle will offer a tax free revenue stream once … excuse me, once they leave the workforce, same with Social Security. But the fact of the matter is that isn’t always true. So what are some of the situations that might trigger some kind of tax event?

James Mahaney: [0:35:09] Well, Stephanie started the discussion on this. I’ll say regular 401(k) contributions as opposed to Roth 401(k) contributions are made with pretax money. The earnings grow tax deferred and the income, when it’s received by the retiree is taxable. I think most people get that, that’s kind of the deal going in. In regards to Social Security though, I think a lot of people do think that Social Security will be received tax free. I think a few people really understand that with proper planning you actually can minimize the taxes on Social Security. And we’ve done a lot of research in this area, mainly because as Stephanie alluded to, if you’ve got a retirement portfolio and you’re looking for a certain amount of after tax income and the amount you’re taking on your portfolio is not providing that, you have to keep drawing that down. And the more you draw it down, the less that’s available to grow and the quicker that retirement portfolio will be deleted. So with Social Security what happens is Social Security unto itself is not going to be taxable when it comes out to a retiree. However, when certain income thresholds are met and these thresholds were set in 1983 and they’re not indexed to inflation, when these thresholds are met, money coming out of say a 401(k) will be taxable as we discussed, but it will also force up to 85 cents of the social security dollar to also be taxed.


So the marginal tax rate on that IRA dollar can approach and actually exceed 50% for a lot of people when you consider federal taxes and state taxes. So a lot of people when they’re looking at their 401(k) balance, if it looks like it’s $500,000, that seems like a lot of money. But if it’s only going to provide say $250,000 of after tax income you’ve got a much bigger problem. So what a lot of individuals would be able to do is look at ways to structure their retirement income portfolio to minimize the taxation on their Social Security income.

Gillian: [0:37:07] So if you have two clients comparing that side by side, why might one be paying significantly more in taxes while the other isn’t?

James Mahaney: [0:37:13] Well, I think that they probably haven’t done proper planning. I like the term that Stephanie used, tax diversification is going to be very, very important for people. And to really understand how the tax rules work, they are complex, they might change going forward. But really to understand and minimize the tax bite is going to be so important.

Gillian: [0:37:34] A great point. And we’re going to stay on the economic side of things. We’re going to transition over from taxes to market volatility, so both incredibly important when thinking about retirement income. And we’re going to move just down the line to Quincy. So we see that healthcare costs are expected to rise. You alluded to it earlier. How do you help clients understand how this might play out, particularly if their income is tied to investments in the market?

Dr. Quincy Crosby: [0:37:56] Well, this is why we also talk about diversification in your portfolio. So not only do you have tax diversification, you have to have diversification in your portfolio because there’s always something that does work in the market. So if one thing doesn’t work it needs something else is working, it’s the nature of the market. And as we do the show today you’ll see for example, interest rates are starting to rise. We saw a major selloff as that’s happening in the bond market. And then that money is now going into the equity market. That will switch at some point, soon probably we’ll start seeing money coming back into the treasury market because it’ll be attractive. So it moves this way. If you have a very well diversified portfolio, you can ride it out because there’ll always be something in the portfolio that works. And again along with a tax diversification, it’s organic, it’s holistic, that’s how you have to look at your planning. And that is what’s meant to give you the maximum amount that you can get from the markets, volatility is going to be with us. It doesn’t go away. Sometimes it’s rather benign, and then one day you wake-up and it’s up and you think, oh my goodness, this is over, then it pulls back. But it also provides opportunity and that’s the irony. When we have a selloff in one part of the market it usually provides a major opportunity to buy something. And most people again when you retire it scares the daylights out of you because you think, I don’t have enough time to catch up. But the fact of the matter is living longer you are going to have the time. But again the key is diversification.

Gillian: [0:39:45] What’s going to be the driver of this volatility and what kind of ride are we in for right now?

Dr. Quincy Crosby: [0:39:51] Volatility can come from anywhere. It could be, we call an exogenous shock, something outside of the markets, something in terms of something happening in geopolitical, military, outside of the US, that could … usually that tends to be actually a very good buying opportunity. But when it happens the market just sells off dramatically. And it could be the market itself, it could be the market looking ahead and actually seeing a recession. Keep in mind, the market looks ahead, not …


we look every day, right, we look at our 401(k)s every day. But the market is looking ahead. And the market looks for clues and what’s scary is when suddenly the market sells off between 20 and 30% when it sees a recession. And recessions happen, it isn’t like 2008, 2009, old fashioned recessions are going to see a major selloff. But then it doesn’t take that much time to actually recoup it. What happens is we get so nervous we sell everything at the wrong time. That’s also what happens, and we have to look at history. That’s why I think everyone needs to work with an advisor, because it’s the advisor’s job to say to you, “Calm down, this is what history dictates, these are the statistics. Let’s work with this.” But it’s very hard as an individual, particularly if you are retired or near retirement.

Gillian: [0:41:26] So do you look at it as something that is more threatening to someone who’s already retired and depending on that retirement income versus someone who has yet to retire?

Dr. Quincy Crosby: [0:41:32] Absolutely. Absolutely, because what happens is you panic, you begin to wonder, oh my goodness, I’m watching it shrink. And you need to have a coach and unfortunately a psychologist. That is increasingly the job of your financial advisor. I often wonder if the financial advisor has an advisor to help the financial advisor. But it is extremely important, and particularly as we went through probably one of the worst times we’ve ever had, 2008 and 2009, 2010, it was extremely important to understand there are mechanisms even within the government to suddenly come in and change the dynamic. All you need is one word from a central banker that basically says, “Don’t worry.” Or, “We’re all in” as Ben Bernanke did in March of 2009. The S&P 500, 666, that, yes, it felt like that as well. And he, you know, at that Federal Reserve meeting, no press conference, The Fed basically said, “We’re all in.” The market had just, you know, come back. You need to be prepared in the market to be there and not panic and leave, because it just helped push the market, underpinning the market. That’s the goal of your advisor and why you have to work with an advisor. So, yeah, but just volatility, it’s just like the weather, Gillian, just when you think that there’s no such thing as mother nature, mother nature has a way to come in and remind you that she is alive and well and forget this idea of, you know, tropical weather all the time. Mother nature comes in, the market does the same exact thing.

Gillian: [0:43:18] Well, you’ve said repeatedly that we need a financial advisor, and luckily we’ve got one sitting right there. So we need a solution, how does life insurance help to protect retirement income from market volatility?

Stephanie Sherman: [0:43:29] Again, life insurance really can play so many roles, especially as we look at all the risks that all of us face and it’s quite frightening and in fact very daunting because you don’t know where to hide, right. And our natural instinct is to pull back at exactly the wrong time as Quincy said, and sell off and call your advisor and say, “Hope you’re not mad. You know, I just moved my 401(k) to cash”, which we get all the time. But from a life insurance perspective, you know, a couple of things, first of all, if you have a tax diverse portfolio and you have a strategy in place, if there’s cash accumulation in the policy, certainly if you’re starting to withdraw those assets usually within the life insurance contract, you can change the character of the investments. So if you know you’re going to be utilizing those assets during the early years or later years of retirement, you could perhaps make them a little safer so that you’re not experiencing the market volatility as much in the asset you’re going to rely upon. It really gets to the question or the concept of, you know, a diverse portfolio allocation if you need those assets in the next, you know, zero to three years perhaps, or three to five years, they shouldn’t be as exposed to market fluctuations. So you can make those changes in the policy.


And of course if you’re forced to start taking more as a percentage down from the portfolio because you still have your same lifestyle and you’re not making adjustments and you’re taking it down and it’s depleting because of the market volatility. Then that life insurance when one passes away can be used to replenish the supply, if you will, so now you have more assets to invest over time. But it’s important to focus on the asset allocation because that’s going to help drive which assets will be there to draw down on. And you have to have a very focused withdrawal strategy and constantly revisit it. When you look at all of your portfolio, whether it’s a life insurance contract, assets inside or outside of retirement plan and annuity, all of those things are going to play into how you drawdown on your assets as well as your pension and Social Security. So it’s really, it’s a distribution focused plan as you begin to approach retirement.

Gillian: [0:45:23] All great points, and I already feel better when we direct to you for those solutions. We have one last derailer that we have to talk about and that’s low interest rates. So, Quincy, lower for longer has been the name of the game for a while now, how much longer do you see this low interest rate environment persisting?

Dr. Quincy Crosby: [0:45:39] Well, yeah, I mean actually rates are moving higher. And it’s a double edged sword because it’s good in one way, if you’re an insurance company, that manufacturers or provides products in insurance or annuities, it’s extremely helpful. And if rates continue to rise, I don’t mean skyrocket, but rise in a way that’s reflective of a stronger economy, because that’s what you want. You want rates rising, but underpinned by a stronger economy, it means that Americans are actually going to be offered, I think, more attractive products in terms of planning for retirement and post retirement. It’s actually very beneficial to the industry, that manufacturers produces these products. So that’s very good. Now, do we want rates skyrocketing? No. And at some point – at some point, you are going to see, as we do this program, rates are rising, investors are going to come in and take advantage of it. You have populations around the world that need yield. And they’ve been coming in, there have been consistent big buyers of US treasuries, the Japanese for example, they are probably looking at this and just salivating and saying, “This is very good, we’ll come in because we’ve got a population that lives very long.” They need it for their pensioners. And so it will help keep a bit of a lid on those rates.

But having rates rise from lower for longer is ultimately very healthy for the financial companies, for savers who have been starved all of these years. It’s good for the economy, because there’s one thing that we’ve left out about retirees, more time to spend. And the fact is they have not been able to spend very much over these years because they’ve been nervous about the economy, nervous about where we’re headed, about costs, about getting a CD that basically just almost wants you to pay them to put the money into a CD. This is going to be very helpful.

Gillian: [0:47:53] Well, that was going to be my next question. So we know that lower rates are good for homeowners or homebuyers, for business owners, but for retirement income it seems like it could also be an interesting place.

Dr. Quincy Crosby: [0:48:03] Absolutely, it can help. And getting back to mortgage rates for example, as long as again that rates are rising because of the stronger economy we will get through the issue of higher mortgage rates because more people will have jobs. Wages will be moving higher and in some places there will be an adjustment in the price of the real estate, meaning come down if rates move up too high.


Gillian: [0:51:40] And if you’re the financial planner that’s thinking about incorporating life insurance into your toolbox, what are some of the factors you have to consider about your clients before you get involved?

Stephanie Sherman: [0:51:49] I think the first thing is like anything we do is you really have to understand your client, certainly as we said much earlier in the program, you can’t just buy life insurance. And a lot of times people want it and they actually can’t get it. So, if there’s been a health incident, if they have a chronic illness it may make it expensive or cost prohibitive or even not even a possible event. So the challenge is to really understand your client, understand the underwriting for life insurance, understand the different products and product structure. You may have a client who’s very, very conservative, so certain types of policies like a universal life contract might be more appropriate. You may have a client who’s willing to, you know, and all in, jump right in and be a very aggressive investor. So maybe it’s a traditional variable policy. And they come in all different shapes and sizes, it’s no longer a sort of term and whole life, there’s a lot of different life insurance contracts out there. And it behooves you as an advisor to understand them so you can help your clients figure out the right fit and figure out the portfolio, because we also said earlier, it’s not one size fits all, you may need two different types of life insurance contracts, or one for one objective and one for another. So you want to make sure that you understand sort of underneath the hood and understand the details so that you’re prepared to answer those questions. And I’m sure there’s someone who can help you answer them if you don’t understand the questions when you first get them.

Gillian: [0:53:03] One of the great advantages of life insurance is that you can take tax free loans out against the policy, but that can backfire, what are the circumstances under which that’s a good idea and when can it create a liability?

Stephanie Sherman: [0:53:13] So like anything, a life insurance contract is a contract with the insurance company. And you both have to sort of uphold your end of the bargain. So if you have an insurance contract for example that has a lifetime guarantee component, that lifetime guarantee actually in every contract I’ve ever seen really may … well, will be impacted if you (a) stop paying your premiums, or (b) start borrowing against the policy. So it doesn’t mean you shouldn’t borrow against the policy. But you should absolutely understand what you’re giving up or what changes to the contract may be in play if you start to take those withdrawals out. And sometimes when you purchase the contract, the economy is one way and the illustrations in the policy reflect something and then 15/20 years later, it’s a whole new world. So you always want to make sure that you get what’s called an in force illustration and understand with each policy before you borrow, before you change perhaps the character of how a dividend is treated, before you stop paying a premium, what that impact would be. Because you do have a lot of flexibility with a lot of the permanent policies, whereas for example, if you didn’t pay the premium it doesn’t mean the policy will lapse, but you really want to work with your clients as an advisor to understand what each decision means. So it might not always make sense, but you certainly want to explore it and understand the pros and cons at that time.

Gillian: [0:54:26] And last but not least, a common criticism might be that sometimes life insurance policies can be costly, how do you address that?

Stephanie Sherman: [0:54:32] Like anything, it’s what you value and what is your number one priority at the time. And I think the cost is always relative to what. So if we knew that not buying it would perhaps


bankrupt your family because you might not have any assets, because all the things that could have gone wrong in the economy relative to your retirement, even though you did everything right, left the surviving spouse with very little assets and a long life ahead. Then I think everybody, hindsight is 2020, we’ll look back and say, “Gosh, that didn’t seem like a lot. It seemed like a lot of money at the time, but relative to not having money when I need it most, probably was a bad decision.” So I think we have to as advisors really help our clients put it in perspective. What’s a lot of money? What do you value? What’s the fee structure? What’s the premium? What’s going to the investment or accumulation inside the policy? What’s going to the cost of the life insurance? What will this policy do for you? And revisit it to make sure that it always makes sense to continue with the policy as opposed to maybe cashing it in, maybe the need is no longer there. But yeah, I think you have to understand the policy and your client and understand how they work.

Gillian: Great points. And I can’t believe it but we’ve actually gone through all of our derailers, so we’re here Stephanie for you to take us home. And first of all, of all this information that we’ve taken in, what do you think are the really key points that we need to bring home with us?

Stephanie Sherman: I think everything has been a key point. But I think the most important thing is to look through a wider lens than historically we’ve been asked to look through. You know, it used to be very easy for retirees, buy the CD, buy the bond and live off the interest and life would be fine. And live as long as you want off the interest, you know, you’re going to be healthy but you’re also not going to live as long, so it’s all going to work out. And we’ve heard today how challenging all that can be. So I think it’s really important for advisors to, you know, go through a wide angle lens here and really understand for each and every client, the impact, any one, if not all of these things happening at the same time, what the impact will be to your clients. And try to structure a portfolio and provide some safety nets, some plan Bs if you will. It’s not just how big the portfolio grows to, it’s not how do you turn on the income stream in a low interest rate environment. Will a high interest rate environment, perhaps it’ll certainly help get interest on those bank accounts, which clients are so pained to keep the money in the bank today or, you know, buy the CD at .00, whatever. You know, they’re very, very frustrated. Our seniors are getting priced … I mean they’re getting income cuts every year. You don’t expect a pay cut in retirement; you certainly expect at least a level pay period.

But I think the challenge is to broaden our perspective. Understand how life insurance can play a very important role, much more so today in 2016 than it ever has in the past and really challenge yourself to have those conversations with your clients, regardless of what area of financial services you’re in, these are really important conversations to have with your clients. And I think your clients will really appreciate it, because nobody else is asking them the tough questions. You really can differentiate yourself and ask those tough questions. You know, what is your plan if, you know, something were to happen to you? And many times, you know, they say, “My children will take me in.” Well, I also encourage clients; have that conversation with your children because it doesn’t always play out the way you think.” And I know it’s very challenging to have conversations with our parents, especially if we grew up in an era where we didn’t openly discuss finance. It makes it even that much more challenging and it’s probably a different show altogether. But I think if you can at least challenge your clients to really understand, and as an advisor get educated on all of this and see how it can fit. I think you’ll be very surprised to see how critical and how important and how much of a utility player, if you will, life insurance can be within your retirement planning and retirement structure. And help your portfolios, take the pressure off your portfolios a little.


I wouldn’t want to be an advisor where their assets have been depleted and the surviving spouse sits across the table from you and says, “Well now what?” And you have to say, “Well, listen, we didn’t really think about taxes as much as…” I’m not going saying that out loud, but you know, thinking of themselves, gosh, I didn’t think taxes would be 70% or 50%. I didn’t think the estate tax would be reinstituted or whatever the change may be. I didn’t think the economy would still be a challenge. And instead I’d rather say, “Well, listen, we planned for this. And although the portfolio’s down, we now have some life insurance proceeds that we can add to it and replenish so that you don’t have to worry.” And that to me puts you as an advisor in a great position. But your client is really going to be the one that’s happy. I mean you just don’t want to run that risk I think.

Gillian: [0:55:01] Well, thank you all so much. This has been a fantastic discussion. I have learned a lot and I’m sure that our viewers will too, so thank you for taking the time to share your varied perspectives with us. And for those of our viewers who want to learn more at home, please visit prudiential.com/addmorelife. From our studios in New York, I’m Gillian Kemmerer. Thank you for tuning into Asset TV Masterclass.


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