Why Most Financial Planning Software Spit Out Garbage Reports

Episode 138 May 17, 2024 00:17:26
Why Most Financial Planning Software Spit Out Garbage Reports
Annuity Straight Talk
Why Most Financial Planning Software Spit Out Garbage Reports

May 17 2024 | 00:17:26


Show Notes

00:00 Financial planning software can create complexity and confusion, requiring detailed input of financial information. 04:47 Focus on identifying and addressing the biggest financial issues faced, rather than getting lost in complex reports and solutions. 08:03 Major financial concerns like excessive portfolio distributions and long-term income gaps should be addressed directly and early in retirement planning. 10:12 Long-term income gaps in retirement can be covered with efficient planning and resource allocation, like annuities, ensuring financial stability over time. 12:58 Consider guaranteeing some elements of retirement income to mitigate market risks and ensure financial security, especially in the early years of retirement.

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Episode Transcript

[00:00:00] Speaker A: Hello and welcome everybody, to the Annuity Straight Talk podcast, episode number 138. I'm your host, Brian Anderson, founder and creator of annuitystraighttalk.com. Western Montana, one of my favorite times of year. It's gonna be probably 75, 80 degrees today, but you wake up and it's about 40. Keep the windows open at night, keep the place cool. And so I gotta wear a puffy jacket because it's only about seven in the morning when I'm doing this. Anyhow, here to talk to you guys this week about the complexity of financial planning software. Whether it is a benefit or not, or if it adds confusion, I'm going to tend toward feeling the latter of those. But you make up your own mind if you want to schedule an appointment to talk about your situation. Top right corner of annuity straight talk.com. Schedule a call. Pick your timezone. Pick your time. Make some notes. I will call you. A lot of people have questions. I didn't know what was going to happen. I'm just, it's just a phone call to start. You don't have to do your hair. Get dressed up. It's not a Zoom call. We can always do that. But you don't have to worry about it. It's an initial consultation where we decide if we have more serious things to discuss. Piece of cake. So I'm going to share my screen, get you to this newsletter, and away we will go. So this is a case that came to me a couple of months ago. I guess I'll start out by saying, I see, I've seen a ton of this stuff. I've looked at it. I've considered having it over the years. Dozens and dozens of them. A lot of people. Hey, this thing's great. You got to try it. Oh my goodness. I didn't think any of them seem worthwhile. Some of them cost several thousand dollars. You can do some good stuff with it, but generates a lot of complexity. And if you're going to do that, it has to be of benefit, not just a bunch of fluff. If you're going to do it effectively, you got to input just about every detail of your financial life. I know some advisors will say, well, tell me how much you spend on groceries. Tell me how much your power bill is, how much your water bill is, all the little things. And it's like, I'll just, I'm just say, tell me what your monthly expenses are. It's none of my business where the pennies go. I don't think so anyway. But if you do, all this, in those software situations, you basically get a book report. There's not a lot of subjective thought put into identifying the risks and solutions, the things that really need to be plan for. There are guys who use it adequately, but it requires a lot of time and extra effort to explain the actual solutions, put that objective thought into the situation, and the reports don't really create that. So what you get, you end up getting. I find this a lot in what I do is I'll talk concepts with one person, hand them a couple of things, and then they go to having to explain it to someone else, maybe a spouse or another person, another professional they work with. They got to explain to them in their own words, and they can't do that. These reports that come out is, are going to be the same thing. Well, look at what we got. So there's a disconnect between what, when I get this one that's put in front of me telling me, hey, what do you think about this? There's a disconnect between what I read in this report versus what he communicated with this other advisor who gave it to him. The reality is you can identify problems or shortfalls or gaps or anything else much more simply and easily. So, I was asked to analyze this case. A guy who listens to the podcast a fair bit. He sent over a report from another advisors, and it did take me a little bit because the report was almost 70 pages long. Here it is. It took me 45 minutes to an hour to redact this, and I'm not really going to use it, but you can see over here in the page counter, 69 pages covering everything. And so when I first got it, real busy time, it was when I was in Arizona, and my energy wasn't quite where it needed to be. I looked through it a little bit. So when I started, when I really focused on it, and this is over last weekend because we got an appointment tomorrow, then you guys are going to see this podcast in the next day or two. It wasn't as nearly as complicated as the length would make it seem. There's not a lot in there. Spending goals in relation to other sources of income, Social Security, pension, debt reduction, how much they need to produce for retirement income. Inflation adjustments were added to scare the living hell out of these people, and an annuity was proposed that produced hypothetical inflation adjusted income that would start nearly 20 years from now. I have no idea why that was part of the plan, because it makes about zero sense. I can't understand why. I can sum up the case a lot more easily and help these guys focus on the real problem. So a solution can be found in short order and it's not necessarily even a solution. Or, hey, I got a product to sell. It's about getting them to focus on the biggest issues they're going to face and dealing with those first. So the couples 59 and 53 years old plan to retire in about three years. The older one's going to be 62 based on their current assets. That is a reasonable goal, but it will help tremendously to find the most efficient way to do it. Here are the inputs we need. Zit expected spend rate, 9000 per month. It's a ballpark based on what they're currently spending and it can be done. Debt reduction. They got a mortgage that's going to be paid off in six years with three years after they retire is going to factor heavily into an income plan, spending plan, all that stuff. Social Security. I'll stick with the previous proposal where the older person is going to claim at 67 and the under younger at 62 totals these guys about 5500 per month. There's an argument, argument and an analysis where you could take it earlier and see how that affects the overall total. But we're, the idea is to simplify this process. So between the two for these guys, because one of them is claiming younger, there's not a whole lot of difference. So we'll stick it with that. I'm going to skip inflation for the time being. It's not shock value and I'm not trying to scare anyone, but that's not the bulk of the problem. It is an issue that needs to be addressed. But if we handle the bulk of the problem, there's sufficient assets left over that you have a reasonable expectation of handling inflation just fine with no concern whatsoever. Long term care was also in the plan. There were, I think, five or six pages dedicated to the, hey, you don't have long term care, okay? They don't have long term care. Again, additional assets can plan for that. They're young and in good health right now, so they've got time to figure it out. And there's some pretty easy efficient ways to do that. If they determine that's a priority. I'm not going to spend six pages showing you, here's how your income is going to be affected. We all know this, it's all simple. And if you want the thump value of a giant report and go ahead. But that's why people ask me, hey, what do you think of this? Because they don't understand it either. And a lot of what I see just doesn't really make sense. So it's going to take a 1 hour presentation from somebody else in addition to this giant report to figure it out. So you better be ready to take a lot of notes so that you can explain it to your spouse or your friend or your CPA or your attorney. So bulk of the problem first, make sure we have enough assets left over. Expect reasonable growth going forward. So I took the planning software, 69 pages, to go all over all of this. I'm going to do it in one page. I do honestly believe that a lot of people in the past have seen the simplicity of my stuff. I feel like I do not put any effort into it, but every bit as much, if not more effort than it takes to generate one of those reports that a computer does. So I'm going to start looking at the first 30 years. It's going to take the youngest person to age 83, will of course plan longer. Again, the bulk of the problems in the early years for these guys, so that's where we're going to cover inflation. And long term care, like I said, will come in addition to other larger problems. And the other key right now is solid retirement planning happens in stages, so it's best to take one thing at a time. I've identified two major problems and maybe you can see them as well. First would be the excessive portfolio distributions in the first five years of retirement. And second is the long term income gap. If these are addressed correctly and directly, then this couple is home free. The rest of it's going to fall into place just fine. So I'm going to click, I just downloaded the PDF. It's a screenshot of a Google sheet. Pretty simple and easy if you're looking at. So it simply says like income or expected spending rate, 108,000. After six years, the mortgage goes away, that takes away 16,000, then after seven years. So in the 8th year, it's got first Social Security coming in, knocks off 41,000, and then in the 9th year. Yeah, in the 9th year, second Social Security comes in, knocks off another 21,000. So if you're looking at this from their portfolio, year one of retirement drawing 108,000, year 2108,000, year 308,000, then 91, then 49,000, until they get to their long term income gap of 28,236. So the two problems identified is that it's going to cost them nearly a half a million dollars to cover the first five years of retirement. And then they get to a long term problem where they want to have that safe and solid all the way through, because everything else, they're never going to get another mortgage unless they, I don't know, second, or unless they refinance and start doing real estate investment or develop a gambling problem, they're not going to. Savers don't become spenders. So, number one, address the issue at the very beginning, the large expenditure in the early years, it can be done, and then figure out how to plan that long term income gap. And you're going to do that with enough money left over that the rest of it's going to fall into place. There's going to be money for long term care, there's going to be money for inflation. There's going to be long term growth in the portfolio. But I have them at a long term income gap over a 30 year period. That's three years of deferrals, 27 years of spending. It's a million, 86,000 is the total gap, which is well within their current asset base. They'll probably spend money for another, or save money for another three years. So they already have the money to cover the next 30 years and they're going to be able to do it. This could be tapped with like a 5% growth rate. You could do that and crush it and have everything you need. Okay. So prudential ran a pretty good series of ads about ten or twelve years ago where they coined the term retirement red zone. Academic studies have shown this has been verified, proven that the greatest risk for retirees is in the first five years or the five years before. In the first five years of retirement. Talked about a little bit before. Whatever. Red zone. Sure. So it's a risky area. So long as losses aren't taken right before retirement or during the early years of distribution, then chances of long term success improve dramatically. Boy, if that doesn't hit these guys square in the head, they got three years to retire, and guaranteed income streams don't start for another five years. Once the mortgage is paid off and Social Security kicks in, they have a modest gap to cover and if done correctly, can likely plan on greater discretionary spending. I think they could enjoy the early years of retirement, travel all this stuff, and probably maintain their current standard of living just fine. They'll have options. I've seen it go both ways. Some people will take that as a sign, hey, we made it, let's just protect it so we don't have to worry about it. And others say, I'm not worried about the risk, it'll be fine. People that aren't worried about the risk. They've got enough money and are able to easily adjust spending if they need to. But when someone says, this is our bottom line right here, I think there should be guarantees in it. There is definitely a case for an annuity here of some way, shape or form. I do not know why. And when I talk to him, ask them, why did that guy put that annuity in there? That's going to. It's one that I don't like. It's one of the hypothetical income payouts showing massive amounts of income. And in large part, that's why the plan worked in, in the software, the rest of the proposal. In this contract, it had 100% assets at risk in the market. They show a hypothetical table with a purely hypothetical table of pluses and minuses over a 30 or 40 year period. But then when they did the calculations, they used a geometric return, which is a static return every single year, not an average of all returns. It's an actual internal rate of return over a period of years. So they quote, 100% market risk with a geometric average return of something that's more like a myga right now. Why not guarantee at least something in there if that's all you're shooting for by taking the risk? So I think it's a company, I don't know this for sure, but I think it's a company that's heavy into investment management. They're projecting these figures based on geometric returns, which is not at all how the market works. Remember, we're only up about 10% in the past two and a half years in the stock market. A myga beats that over the past two and a half years. But I don't know. I also don't know if it's what this company wants or what if the couple prefers. They might have only talked to them once and exchange a few emails. So we'll see what happens and then if it needs a follow up, because we figure out what kind of plan we're going to use to do it. If you asked me, then you have the first five years of retirement need to be covered by very safe stuff. Bond ladders, CD ladders, mygas, something really easy where you can discount the money that you're going to need and have it there. You don't want to risk losing that. And there should be something. I think it's appropriate to set up an annuity that covers the long term income gap, and then you can have a conversation about when that starts, whether you start at three years or whether you start it in eight or nine years, when the bulk of the other guaranteed income sources, then you have, these guys would have $108,000 guaranteed from all sources without touching a significant portion of their portfolio. It's up to them whether that's important, and I don't know. So I have some issues with the other software. It's vague on details. It over explains certain things. Like I said, what I did in a page, they do it in a lot of areas. And over again, that's why it's 69 pages long. It took me an hour to redact their names. Now that's a tedious process, because their names are on every page. And then I'm not. I end up not even going to really use it. I showed you guys some of it, but that's about it. And so we can cover this in 15 minutes. A quick explanation of, hey, identify the problems, risk. We're not talking about the solutions. I gave you a kind of an idea where I think it should go. It's going to depend on their preference. But it was, it's what I would recommend. It's what I would do personally if that were the case. So this has been episode 138. Complexities of financial planning software and the need for subjective evaluation. Things quickly and efficiently, extremely important. Keep your mind focused. Don't add the ten things at once, and think about them in a 70 page document. Find the first one or two that you can handle. Check that off the list. Move to the next one, move to the next one. Move to the next one. Every time I've seen this happen, there's almost no exception where someone sits and looks at the five or six biggest issues they got to figure out in retirement, they end up not doing any of them. That's why sometimes have people make a list. Name the top five concerns you have, and then we take it number one first. And we do that. And sometimes I'll reorder them based on how much of a problem it would be to take care of it. But that's all part of the conversation. That's part of the planning process. That's how we figure things out. So appreciate you guys joining me this week. If you want to schedule a call, top right corner of any page on annuitystraighttalk.com. My name is Brian Anderson. I'll be here next week with episode 139. Go ahead and share this with your friends. Tell somebody about it, because it's helpful information for just about everyone. I appreciate you being here. I will see you next week. Okay. Have a great day. Bye. [00:16:30] Speaker B: You have been listening to annuity. Stray talk the preceding information is for informational and educational purposes only and does not represent tax, legal, or investment advice. Reviews expressed by guests on this program are their own and do not necessarily reflect the views of annuities. Framework talk or its partners. No information presented today should be acted upon without meeting with a qualified and licensed professional. It is important that you read all insurance contract disclosures carefully before making a purchase decision. Guarantees are based on the financial strength and claims paying ability of the insurance company.

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