"Annuity? Never!"

Not five minutes into the meeting with Marissa, Scott appeared to fully understand her twin priorities: Protect Marissa's nest egg and provide monthly income that will last for the duration of her retirement.

"I recommend an annuity," Scott said.

'How does it work," Marissa replied?

"Well, you purchase an annuity with a lump sum of money. In turn, it provides you a monthly paycheck, The payments can commence immediately, or they may be deferred until a later date. If there is a deferral, the amount of the payments you receive will be higher."

"Are the payments guaranteed? asked Marissa.

Scott replied, "Guaranteed? No. But there is a high probability that you will receive the payments for your entire lifetime."

"High probability? What does that mean?"

"Well, said Scott, "My computer printout indicates that you would have a 95% probability of receiving these payments for as many as 30 years. That would take you several years past your life expectancy. So, there's a margin there."

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

"A high probability," Scott reiterated. "95% is really high. That should give you confidence."

It didn't. Marissa's inner voice told her that she should speak with another financial advisor. The following day, Marissa called her friend, Jamie, and asked if Jamie could recommend a financial advisor. "Well, my husband likes a guy named Ben."

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

"Ben, 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, let's say I live a really long time, say, to 94, like my mom, or even to 100, will these payments from the annuity continue for that long?"

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

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

"Yes, Marisa, that is correct. But seventy-seven percent is a pretty high rate. It should give you confidence."

The following day, Marissa 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 income with a 90% probability of lasting for 30 years."

Marissa asked the advisor, "Is there no annuity that guarantees income to 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, "But there's a 90% probability, and that's really high. Really, really high! That should give you confidence."

Several days later, Melissa met her friend Wendy for lunch. She told Wendy about her experiences is with three financial advisors, and how each of them had recommended an annuity, but also that each recommendation varied when it came to what she considered to be the most important part, her income.

"Okay, so 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 his 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 Marissa. "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 in this annuity approach, but there's nothing that I can hold on to that is certain. I mean, this annuity they suggest makes no guarantee of anything! "

Marissa continued, "Look, I watched my mother in retirement. God knows, I took over the job of paying her bills. It taught me, Wendy, 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 didn't need to be said out loud. Finally, Wendy spoke: "I question whether these three men actually heard you when you described what you wanted. You asked that your money be protected, and that you have income be guaranteed for life. They responded by recommending an uncertain approach. And then they actually asked 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, and then just recommend what they want to sell you?"

"I think it's probably the culture," said Wendy. I tell you I won't do business with that. I'll look for a woman to work with, or a man who will actually hears me. Assuming I can find one! Haha!"

"And, Marissa 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 depending upon whom I speak with. These people just don't get me. So, they won't get my money. My search continues!

"Annuity? Never!"

* * * * *

Consider, again, the story above. But this time, substitute "Monte Carlo simulation" for "annuity." This will reveal what is wrong with the most commonly used approach to retirement income planning. Do you see why the use of Monte Carlo simulation in tandem with a 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?

If I had the power to do so I would ban Monte Carlo simulations in the context of retirement income planning My reason is sensible: In practice, Monte Carlo is used as a proxy for safety. It is not a proxy for safety: Read why here: Why Monte Carlo Simulations For Retirement Income Should Be Banned (fa-mag.com) Or hear me explain why here: Banning Monte Carlo Simulations & More With David Macchia (thatannuityshow.com)

To advisors and planners who remain steadfast in their opposition to annuities: Give it up! All of 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? Are you not legally bound to be competent? Start embracing no commission/no surrender charge annuities. Charge your AUM fee on them. You deserve to be paid for the recommendation. It's easy. Today's annuities appear in your portfolio management system just like any investment position does. There are no valid excuses left.

Postscript

I want to be clear that 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. Specifically, when it creates a false sense of confidence. In those instances where clients, especially women, are denied longevity protection because of a Monte Carlo simulation indicating a "high probability" of continuing income, the result will be shame clinging to some advisors for a long time to come.

Sheryl Hickerson, FLMI?Sheryl J. Moore?Michelle Richter-Gordon?Niki Clark, FPQP?Sara Grillo, CFA?Peggy Haslach, CFP?,CLU??Linda Wittich?Kathi Balasek, MA?Christine G. Russell, QPA, QKA, AIF, RMA?Tom Hegna?Gary Mettler?Ted Bernstein?Laura Fallbach?Marcia Mantell?Tyrone Clark?Rick McClanahan?Patricia Ross, Ph.D?Alan Gappinger?Neal Angel?Massimo Young, CFA?Robert Huebscher?Antoinette Rodriguez, MBA?Jason Ray CFP? Focused on Retirement Income?Andy Sheen?Mark Williams Niki Clark, FPQP? Jean Statler Insured Retirement Institute (IRI) Kathi Balasek, MA Curtis V. Cloke, LUTCF, CLTC, RICP Cathy Mendell Gaby Cheng Mechem Lori G. Laura Fallbach Deb Newman

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