Animal Spirits Podcast - Talk Your Book: Rethinking the 4% Rule

Episode Date: May 2, 2022

On today's Talk Your Book we spoke with David Lau and Wade Pfau about spending down your assets in retirement and why it's one of the hardest concepts in financial planning.   Find complete shownotes on our blogs...‍ Ben Carlson’s A Wealth of Common Sense‍ Michael Batnick’s The Irrelevant Investor‍ Like us on Facebook‍ And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.‍   Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by DPL financial partners. Go to DPLFP.com to learn how you as an advisor can help your clients with insurance products, long-term care insurance, life insurance, annuities, DPLFP.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Batnik and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rit Holt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits.

Today's Talk Your Book. We had a returning guest, David Lau, from D.P.L. financial partners has been on a number of times, but also Wade Fow, who is, I guess, kind of a rock star on the retirement income space, if there is such a thing. Totally. He's written a lot of books on this, a lot of research papers, very sharp guy, so it was very cool to talk to him. This is something that it feels like we're plugging our business here when you say that

like this is a problem that people need solutions for, but we've been talking about this increasingly in recent weeks about the fact that you have all these people who are retiring. And then they get to that stage and they don't know what to do with their money because it's like building up the money, obviously for some people, saving isn't easy. But once you figure that out and you start setting money aside, the people that can, going from that shift from I'm a saver to I'm a spender is really difficult. And you get like one chance of this. I don't think you can model that.

I think that's why you need to have either a really good financial plan, a really good handle on your spending, or a financial advisor who can, tell you, help you along the way to plan and be like, give you permission to do something and say, this is how much you should spend. Or alternatively, you need to cut back a little bit because you've been spending too much and the market hasn't kept up. So I think you need those sort of guideposts a long way to help you. There are ways to make for certain people, obviously, listen, if you have $40,000 at retirement, there's nothing you can do. Unfortunately, you're going to be relying mostly on Social Security. But for people that have been good accumulators, there are

ways to, I don't want to say bulletproof your retirement because things happen, but there are ways to ease a lot of worries. And there are a lot of them. And it's complicated and obviously financial advisors. This is one of their huge value ads. This is what our advisors spend all day doing is making sure that we answer the questions that are hard for people to answer on their own. We can't model that. Wade was talking about risk tolerance questionnaires. I made this tangent. I think the best risk tolerance questionnaire is just tell me what you did in the last bear market. What did you do in March 2020? What are you doing in GFC?

But even that's not really great on a go-forward basis because how you reacted in March 2020, if you were, I don't know, 39 years old, tells you nothing about how the 58-year-old version of yourself is going to react to the next one when you're 20 years closer to retirement. It's also why this is so cliche almost, but financial planning is not like an event.

It's a process. So, like, you can do a three-ring binder for your whole financial plan that tells you, here's where you are, here's where you're going to be, here's your goals. But it's kind of useless like the day the papers printed because the whole thing is markets are going to change, your spending is going to change, your outlook on life and your goals are going to change, all that stuff. It's an ongoing process. And that is what we spoke about today is the guy who literally created the 4% rule is not sticking to his asset allocation, which is not an

diamond on him. Things change, circumstances change, your feelings change. But the point is, it's messy. Life is messy. It's hard. It's difficult. All right, let's not step on any more material. Here is our conversation with David Lau and Wade Fow. On today's show, we're joined by David Lau. David is a returning guest. He is the founder and CEO of DPL Financial Partners, and we have a new guest that we're excited to have on. Wade Fow is a professor of retirement income at the American College of Financial Services. He's written 37 books and is featured all over the place when it comes to retirement spending, which we're going to get into. Gentlemen, thank you for coming on today.

Thank you, Michael. Good morning, Mike and Ben. A good place to kick this off. There was a juicy headline in the Wall Street Journal the other day, which is, cut your retirement spending now, says creator of the 4% rule. Not exactly what he said, but it's the jumping off point for the, we're going to rip this apart. So, David, you actually had a piece in the journal, like a sort of a quick little sister piece

or bottle, whatever we want to call, and I'll quote you as a place to kick off this conversation. So Bill Bangan, for context, is the 4% creator. He created this in 1994, I believe he was a financial advisor. And what that simply states is a 4% withdrawal in retirement, adjusted with inflation, has never failed over any 30-year period going back to the Middle Ages. Now, David wrote, Mr. Bengen admits to being so uncomfortable with the markets and retirement that he is violating his own rule is remarkable. Financial advisors often tell clients to stay invested, but retirement brings new risks,

worries, and emotions that can't be fully appreciated while working and taking home a paycheck, end quote. So maybe let's start there. There, obviously the 4% rule is very spreadsheet oriented. But David, to your point, when we actually live in the real world, and that's where all of us live, we're not slaves to a spreadsheet. When I saw the piece in the journal, and that's not news to me. I mean, you see this update to the 4% rule all the time. It's higher, it's lower. Every year, every six months, every quarter, whatever, there's updates, updated takes on the 4% rule, but what struck me in the article, I thought it was kind of the bigger news of it, was this notion about Bill Bangen, and it's not to criticize Bill at all, is that he's moved away

from his 4% rule in actually managing his own retirement, because a critical piece and assumption within the 4% rule is you need to stay invested in the market, at least 50% into equities to help fund that 4% inflation-adjusted withdrawal rate. And he admitted, in the article that he's currently invested 20% in equities, 10% in bonds and 70% in cash. And what that speaks to is what you were just saying, Michael, is retirement is not this laboratory. It's not clinical. It's not spreadsheet oriented. And it just so happened that I was getting on a call with Wade right after I had read that and said, Wade, did you see this? And he's like, oh, wow, that is actually pretty big news that Bill is not adhering to the 4%.

rule. And it just brings up the topic of emotion, psychology in retirement above and beyond numbers and data and spreadsheets and basis points and all that stuff. That's a good place because I wrote a piece a couple weeks ago about why it's hard for some people to spend down their portfolios in retirement. So there was this EBRI study in 2018 looking at like how much people over 20 years of retirement actually spent down to their portfolio. And for a lot of people, it was shockingly low, like less than 25 percent of their savings in a lot of cases. And And I put this out there, and I got a lot of feedback from people who just retired. And the feedback was overwhelmingly the same.

And it was, it's really scary because I don't know what returns are going to be. I don't know what inflation is going to be. I don't know what health care costs are going to be, all these things. And guess what? You don't get to do a Monte Carlo in your life and try 10,000 different paths. You have this one chance. And if you happen to have a bad opportunity where you have a market crash at the outside of retirement. And so, wait, I know you've done a lot of work on this.

Like, how do you get people from a psychological perspective? to become comfortable actually sticking with their plan or having a plan that they know gives them a high probability of success. Yeah, that's really been an important issue for me, just as part of my job, as Professor of Retirement Income, just needing to be agnostic about different retirement strategies. And so this sort of, the Bill Bingen, he's the heart and soul of what we call the total returns approach when we look at retirement styles. And it requires certain assumptions and preferences. In part, Bill Bingen had said retirees should be 75% stocks in retirement and in no circumstance less than 50% stocks. And that's something you see when you do these kind of Monte Carlo simulations on investment strategies. The bond market is not going to get you a 4% rule, especially in today's interest rate environment. And even in the historical data, a bond portfolio had about a 2.4% safe withdrawal rate. So we have to,

to consider, if someone wants to use that type of investment strategy for their retirement, do they have the kind of psychological preferences in mind that associate with that? And what was really revealing about that Wall Street Journal article was just this idea that Bill Bingen may not have been suited for the strategy that he's most known with. By going to 20% stocks, by being 70% cash, he's revealing that he's not comfortable relying on the stock market to fund his retirement. And there may be other strategy, well, there are other strategies out there that he can consider. And that's where I think so much of this is missing the point. What you referred to, Ben, was it's the retirement consumption puzzle that people are not spending

their assets in retirement. And I'm concerned a lot of that is because so much of financial services is pushed towards this total returns retirement strategy. And in the research I've done with Alex Mergea looking at a nationally representative sample of Americans, it looks like only about a third of people have the psychological makeup and to be able to be comfortable with that type of total return strategy to fund their retirement spending. Bill Benin probably would have counted himself among those prior to recently. We all do. We're all in that. I think that was the big revelation to me. It's not really the 4%. Is it safe? Is it safe? Because I think it went from, well, actually, 7% historically was safe.

No, it's 4.7, all that sort of stuff, whatever. That's all spreadsheet stuff. To me, the big revelation was, holy shit, he's in 20% stocks. Now, I understand things change. The environment's challenging. Stocks are historically expensive. Inflation is running ahead of bonds. I get it.

This is not an indictment on him. It's really just like a window into all of us that we could plan and have comments. But life is messy. It is really hard to stay invested. Especially post-retirement. To make it a little light, it reminds me of a quote from the great Mike Tyson, who says everybody's got a plan until they get punched in the mouth. It's when reality comes into play, what are you going to do? And that's hard to replicate in the spreadsheet. What's interesting

is in terms of market returns, we haven't been punched in the mouth. We've gotten a 15% the year over the last decade in the stark market. Yeah, I know the S&Ps off 13% and bonds have had a really lousy start to the year. But getting punched in the mouth, in this case, I think, is even tired nine years ago, but for most people, I would imagine the psychological adjustment to seeing a paycheck come in and no longer having that is a complete game changer. And I don't think you could replicate that. I don't think you can know how you're going to feel once the money stops coming in. Even if you have $700,000 or you have $7 million, it's still a psychological hurdle that you have to get over.

I mean, wait, what have you seen here in terms of people like climbing this wall? Like you say, it's a spreadsheet thing where you look at the historical data and see what worked. And so a lot of people, including myself, have been concerned for a while with low interest rates, with high stock market valuations. Can you expect the kind of stock market and bond market returns in the future that you need to fund something like 4%. Folks like Bill Bingen always said, it should be fine. The probability speaking, it's going to work out. And I think now what's really changed his outlook was the inflation. And low inflation, which we've assumed over the long term, maybe a 2% inflation rate, that was a saving grace for something like the 4%.

percent rule. And now that inflation is picking up as well. I think that's what probably changed his outlook to now be comfortable saying interest rates are low, stock market valuations are high, and now inflation is also high. I'm now concerned that maybe the historical data is not providing the full story about what the 4% rule can do. I think that's probably the factor that's changing his outlook as well as other people who are becoming increasingly concerned with this idea of projecting historical tight market returns over their retirements in the future. I think one of the hardest challenges for people is if you set something with the 4% rule and just stick with it. Obviously, no one is robotic enough to do that, I think. So there's obviously

going to need to be a little flexibility or course corrections along the way. But Wade, do you think that it's more important to have those course corrections come in your portfolio as things change in the markets? Or is it better for people to be more flexible in their discretionary spending and how much they spend, whether they front load all their travel earlier in retirement and maybe slowly spend less, like, how do you see that changing where people's spending habits change? And maybe that's a better way to think about this. When things are going really well, maybe you can spend some more or save some more, I guess, for those times when things aren't going well. How does that fit into it? Yeah, and to be clear, so that flexible spending

idea is really important because actually the 4% rule maximizes what we call sequence of returns risk, which is if you get a market downturn early in retirement, that can dig a hole for your portfolio, and it becomes hard for the portfolio to recover when you're spending from it, even if the overall markets recover. So the 4% will maximize is that because it doesn't have any flexibility to adjust spending. And so if you can adjust spending, if you can cut your spending after a market downturn, that certainly can help manage that type of risk. There are other options, too. You can also think about strategically controlling volatility. So it's not just going into bonds or going into cash, because that's, if you want to spend more than the bond

yield curve can support, you're kind of out of luck in that situation. But controlling volatility in some other way, whether it's with bonds, whether if it's with insurance, I mean, like holding individual bonds insurance, or also something like a buffer asset outside the investment portfolio, not correlated with the portfolio that can provide a temporary spending resource to get through that kind of market volatility as well. There are a lot of other options to build a retirement strategy and to help manage that type of sequence of returns risk. And being flexible with spending is absolutely on the list of options there. Do we see this as an irony or a fact of human nature that now that bonds are offering better returns on a go-forward basis, people are absolutely running

for the hills. It's been a while since basically ever since we've seen sustained bond outflows and we're seeing them now. David, can you speak to this? Like, what do you think is going on here? Do you think this is rational, irrational, somewhere in between? What do you think is going on? If things were always rational, everybody would be millionaires. There's definitely some irrational natures to it. But I think what it speaks to is people have desire for security. And a bond with a particular yield gives a sense of security. I know I'm locking at least this in if I choose to take it. And with markets now, even though we've had a great, as you're pointing out, Michael, a great 13, 14 year bull market, once it starts going down, then everybody forgets about that. So everybody's

like, okay, my portfolio is going down. Where do I go to for some safety within the portfolio and cash is the one option? Bill Bangen took, but bonds now that rates are improving, offers something, at least, in that realm of safety. David, in the past, we've had you on to talk about annuities as a way to hedge this, and especially when bond yields are much lower, it made sense. I'm curious, and I know, Wade, you've talked about annuities for spending and retirement in some of your work. Maybe you can explain to us how that works in a rising rate environment. How long does it take for annuity rates to catch up and rise as well? Is there a lag there?

David, I know you were saying in the past when bond yields were on the floor that annuities were offering a really nice spread and offering you higher yields. Is that happening in the annuity space now as well where those yield pickups are happening or does it take a little longer for that to hit that market? Honestly, it's kind of carrier to carrier. We work with dozens of carriers across the industry. and you have many that adjust their rates weekly. So they're reacting in real time to resetting rates.

So they're kind of keeping up with what the market goes and others where they do it monthly or even quarterly. But in general, you're going to see annuity rates keeping up with the market as insurance carriers are reacting to what's available to them to invest in. The insurance carriers have to love this, to Michael's point about people running for the hills, those pensions and insurance cares,

they have to love the fact that rates are finally a little higher for them, right? It's helpful for sure. We talked about how, and Wade's got great data on this, and he can probably talk to it even better than I can. But in low interest rate environments, annuities are typically even stronger than in higher interest rate environments, but it's really perception. So you look at what is the perception of showing we can get a 5% payout rate versus 6% payout rate. The perception's better, even though the difference between what you might be able to get from a bond starts to narrow. But generally, the annuity is always going to be more efficient. than the bond in generating income. And Wade can speak to that a little bit. Yeah, I mean, if you just think about a simple income annuity where you exchange a single premium for a monthly income for the rest of your life, the insurance company is effectively investing that in a bond portfolio. And so the consumer receives three sources of spending, the return of their principal, the interest, the general interest rates in the economy,

and then this idea of longevity or mortality credits, the subsidies from the short-lived to the long-lived. And those subsidies or mortality credits, they're not impacted by interest rates. So they become relatively more important in a low interest rate environment because the interest rate component of spending is lower. And that's where you see a bigger spread. A lot of times people think in a low interest rate environment, you should hold off on the annuity. But really, if you're in retirement and you need to fund spending, the case for the annuity is

stronger in a low interest rate environment. It remains strong as interest rates creep up. and we are still below historical average interest rates, but certainly as interest rates get higher, yes, it will feed into higher payout rates on annuities, higher yields from bonds, but the differential is still going to be in the favor of the annuity. It'll be a bit less of a differential than before. One of the criticisms that I've heard of annuities and products like these is you're paying yourself.

It's a return of principle as part of the income stream, to which I say, who cares? I understand. I do understand. David, you can correct me in a second. But actually, just correct me now. Go ahead. Oh, I wasn't going to correct you. I was just going to say, yeah. I would love to find the investment that doesn't require you to take your own money. But go ahead, Michael. That's one of the things I heard from a lot of these retirees saying, like, I can't bring myself to paid on my principles. It's like, what's the point of having it then if you're not going to use it? But my point in this is this. There's an ETF call. And Ben, we got asked us a lot. It's the Global X NASDAQ 100 covered call ETF. I think Jason Zweig has written on this, how a lot of times it's just funding return of principle back to yourself. And it's not, I don't want to say made up income stream, because it is a real income stream. But anyway, this strategy has $7 billion in it. And so even if it's like quote

suboptimal, I think what we've learned over and over and over again is people need to hack their own brains in a way. And if it is in a suboptimal strategy that they can stick with, because well, somebody could say, well, instead of using QYLD or one of these things, They just sell a piece every month and return because people don't behave that way. It's really, really hard to maintain the discipline to stick to stuff. So they would rather pay whatever the charges for this and potentially not have the greatest performance relative to some other strategies, but so what? People need predictability, and I totally get that.

Let me tee up Wade for something else that he's been working on that I know. One of the things that you think about in like investing and managing a client's portfolio is Like during accumulation, you have risk tolerance questionnaires. They're ubiquitous. They're everywhere. Everybody does risk tolerance. And by the risk tolerance questionnaire, you kind of dictate how the client is going to accumulate. You can have a 40-year-old who says, I'm deathly allergic to losing money and you've got to invest them very conservatively, even if you think there's a better strategy for them to accumulate.

You can try to manage them through their worries and risk, but it dictates that how you invest them during accumulation. there's really never been a similar tool when it comes to retirement. How do you feel about your income in retirement? How predictable do you want it to be? Are you okay with going back to the 4% rule, a total return approach to it? And that's something that's always struck me, particularly as now retirement becomes a longer horizon, 30 years for the wealthier, healthier set that most advisors deal with. And so how do you start gauging client preferences around how they want their retirement income delivered. And this is something I know Wade's been working quite a bit on and you might want to chime in on. The risk tolerance questionnaire, it's really something designed

for an accumulation portfolio for modern portfolio theory measures risk by your ability to deal with short-term market volatility, which may not be the true measure of risk pre-retirement, but at least you can make a case that that's a reasonable approximation. But post-retirement, people are really worried about different things. They're worried about out-living their money, not being able to cover their essential spending in retirement. They're worried about health care shocks that it could disrupt their ability to continue to enjoy a lifestyle beyond that and so forth. And so when we start to look at, well, what are retirement preferences? We can find that the risk tolerance questionnaire doesn't really address people's concerns for retirement. And so it's not a good starting point

for thinking about retirement. It's really living in this world of modern portfolio theory. So it assumes everyone wants that total return investing strategy for retirement. There are two-thirds of the population that are really looking for something different than being forced to rely on stock market returns to fund their retirement. And I think that's so much of what leads to this retirement consumption puzzle, to people being worried about spending their principal. They're worried about outliving their money, but the total return strategy offered to them, it's hard to make sense of that.

It's like hard to make sense of what bonds are doing, because bonds are just less volatile stocks when you just have a constant duration bond fund and so forth. So they look to these types of behavioral alternatives when they're constrained into this total return investing world. And that's where maybe instead of tilting the portfolio for income, which could be quite suboptimal, there are other effective strategies they might consider

that can allow them to get the retirement spending they need, allowing for other assets to become truly liquid for their plan, to become a source of the reserves for these types of concerns. Like, why do people want to hold under principle? It might be because they're worried about long-term care and they think they need that principle to fund long-term care. Well, if they can better earmark different assets for different purposes, that can give that freedom and flexibility to actually spend and enjoy retirement

and not be forced to hold on to principle because of these concerns about out-living money and this discomfort with relying on the stock market to be able to fund everything that could happen in their retirement. I know it's always circumstantial, and every product is not for everyone, but I know that we've talked to David in the past about it doesn't have to be all or nothing. You have to anewitize a portfolio. You can have it as a piece and trade off with a balanced portfolio. But do you have something of a checklist or rule of thumb where you say, if you tick these five boxes, maybe using annuities for part of your portfolio, whatever that part is, makes sense?

Like, what are the best use cases? Is it a certain asset level, a certain spending level? Obviously, the psychological component. Like, what are the main checkboxes that you see? for people putting annuities as part of their portfolio. For me, when I look at this and really built this out in my retirement planning guidebook, this idea, step one of thinking about retirement is what is your retirement style and what we find with this RISA profile, the retirement income style awareness. Are you more probability-based, comfortable with the market, or safety first, preferring contractual protections to fund the basics?

And then this other primary factor is, do you have an optionality orientation? is like keeping your options open the number one priority or are you comfortable committing to a strategy that will solve your lifetime retirement spending problem? And so especially people who have a safety first orientation and a commitment orientation, that's then maybe an annuity is going to resonate better with them as a starting point for the conversation,

having that sort of psychological makeup. And then you go into the planning process. Do they have a gap? maybe they already have enough social security, and maybe they have a traditional company pension that gives them all the annuity income they really need. So they may not need an additional annuity beyond that. But if they have these preferences that align with wanting this sort of contractual protection and comfort with committing to a strategy, and they have an income gap where there are spending

needs that they view as essential, that they don't want to have to rely on stock market gains to fund, that's then a perfect candidate to start having that conversation about whether an annuity might be a good way to fill that sort of gap. Can we talk about the retirement spending average life cycle, like your peak spending is in, say, your 40s and 50s, and then it goes down, and then you get to a point where you have a couple of paths where you can flatline, keep going down, or you could spike if you get some sort of health crisis.

Can you talk about the potential role of long-term care in people's portfolios? I shouldn't say portfolio in terms of there, because it's like in the protection bucket. How do you think about long-term care as a way for people to ensure? Or do you think that there's a certain level, past a certain threshold where people can self-insure? You spoke about people being afraid to tap their principle because what if. How do you view that as part of somebody's retirement thinking? It's definitely a part of the planning process. It's one of these 12 steps of having a complete retirement plan.

And you're right. People have the go-go, slow-go, no-go years that usually they want to spend and enjoy the most in their 60s to early 70s. And then they start slowing down beyond that. And then, like, David Blanchett talks about the retirement spending smile. So spending declines until around your mid-80s, and then you may have a spike in spending due to long-term care-related events. And so that's where you want to think about how do you want to approach that funding. Now, if your wealth level is too low, it's probably unavoidable that at some point you may need to go on to Medicaid to fund long-term care. But if you have the assets to avoid that, you might really want to avoid that.

And when you talk about, well, at what level do you have so many assets that maybe you just want to self-fund? I don't know if there's really a criteria there because people, they can consider different types of insurance options for long-term care. They may ultimately decide to self-fund, but there could be benefits from having a long-term care policy. Often it includes a care coordinator who will help arrange and facilitate finding the right facility for long-term care. And also, I think a lot of wealthier individuals, if you have long-term care, you have a

license to benefit from long-term care. If you're self-funding, you might start feeling guilty about spending your children's inheritance or whatever the case may be. And so just having a long-term care policy might make people feel a lot better about actually spending on their long-term care needs. What's like the sweet spot in terms of like affordability for people to start thinking about buying that? I like to go through their funded ratio to look at, well, how much assets do they need to fund

their other goals? and then starting to look at reserves, assets not earmarked for their other spending needs. And then depending on how worried they are about long-term care, they might be thinking about, well, if I don't have insurance, I might want to have an extra $300 to $500,000 set aside potentially for long-term care expenses. And then the role of insurance is, instead of having to have this huge chunk of assets sitting on the sidelines, maybe I can pay an insurance premium that then will reduce my out-of-pocket expenses if I have a long-term care need, and therefore I can have a smaller set of reserves on the side.

And so that's how I'd start approaching it. And it's once you have sufficient assets to meet your overall spending your annual budget for retirement, then do you have additional reserves? And do you want to use insurance as a way to offset the amount of reserves you would need to have to feel comfortable funding a long-term care spending shock, which people can think about, what do they want to potentially plan for? Would a three-year nursing home stay be adequate? Do they want to think about five years? It's really just how worried are they about not having sufficient assets? It's too morbid.

David, do you guys have that type of insurance on your platform as well? Yeah, well, I was going to say we do in the form of a hybrid product, because, again, trying to bring it into real world, the real world conundrum around long-term care, And insurance right now is that traditional specific long-term care insurance was poorly underwritten as it was initiated. The carriers underwrote it like disability insurance. And some of them blew up, right? Exactly. Like Jenworth, a terrific example. So because they misunderrode it, because they thought people would use it like disability, when in fact, if you have the insurance, you're going to use it to Wade's point. So what's happened in the market is those traditional

policies have gotten really expensive, number one. Number two is they're underwriting it differently so that if you have something like a family history of Alzheimer's, where you really could probably benefit from that insurance, you probably can't get it. You probably can't get underwritten for that. So when you look at long-term care, the average long-term care stay for a male, I think is like two and a half years, a female like three and a half years. So most advisory clients can afford to self-fund that. It's the catastrophic 10-year, 15-year stay that might be required if you've got an illness like Alzheimer's that can be financially devastating. So what the industry has been turning to is hybrid products, life insurance product with a long-term care rider, or what we favor is an annuity with a long-term care rider that we do have life as well like that.

But still with the life insurance, you've got to get underwritten. So with the annuity, you don't have to get underwritten. the way those hybrid products work is if you take income, your income will double when you can't meet two of the six activities of daily living. So if you think about it, the problem is from a financial point of view, at least, that you need more money. Your expenses have gone up. So we think that's a reasonable product that can help benefit many clients with that kind of concern. Wade, I want to talk about one more piece of like retirement income puzzle that you've written about. I read your book on reverse mortgages, which surprised me.

They seemed shockingly more complicated than I would have assumed. I think the number now is that there's almost $27 trillion in home equity. I think the numbers for the middle class are like that their primary residence could make up something like 60% of their financial assets. So like the home is a huge piggy bank for a lot of people. How do you see that fitting in where people are probably going to have to use their home in some manner to help fund their retirement? Those statistics you said are absolutely right for the average mass affluent retiree. home equity could be two-thirds of their assets. And the default strategy for using home equity in a retirement plan, it's this idea of the last resort that I'm going to leave the home alone.

I'm going to spend my other investment assets. If I ever deplete my investments, then I'll look to potentially a reverse mortgage as a way to continue spending late in life. And all the research that everyone's done in this area and that I've replicated all that and find the same sort of conclusions is that last resort idea is the worst way to incorporate home equity, that if you're thinking you might want to use a reverse mortgage, I mean, we could go into a 45-minute conversation. It has a variable rate home equity conversion mortgage, which is administered through housing and urban development, HUD. It's got federally regulated. It has a growing line of credit. And opening it sooner, letting that line of credit grow, and then using it strategically

throughout retirement can help provide a much better outcome than the last resort strategy, which is, don't ever touch the home. Maybe the home will be my source of legacy, but if I need it for long-term care or something else, I will take advantage of it at that time. That's really the worst way to think about incorporating home equity into an overall strategic, comprehensive retirement plan. David, we're going to end this conversation with you. We've seen a really rapid repricing of interest rates. And I'd be curious, since you are in the center of a lot of advisors, like tools, what are you seeing, how are you seeing advisors respond to the increase in interest rates? Are they changing their strategy? What are they doing? We're seeing a lot of

adoption of buffered annuities, call them RILA's, whatever the term of art is, structured variable annuities are all the same thing. And those products basically give you some level of protection for client assets while investing in an index. So fundamentally, you're investing, say, in an S&P index that will give you a cap of 15 to 18 percent. I think we're seeing in our products right now in a one-year time period being invested in the S&P with a downside protection of 10 percent. So everybody's worried about that volatility, and that's a really appealing product to clients right now. So let's give you something that nobody's going to complain about a 15% return, one-year return in the S&P, and give you that downside buffer of 10%.

And what that means is if that index is down 8%, you lose no principle. If it's down 12%, you lose 2%. Those have become really popular products right now. So last year, for example, they were probably 5% of our overall sales. This year, it's more like 25% of our overall sales. So you're really seeing those get adopted. and the other thing is just fixed annuities. Fixed annuity rates are really competitive right now.

I think our five-year products at 4%, four-year products, 375. Again, pretty easy, compelling products when you're looking at, and those are two accumulation products, not even really retirement income products. But the interest rates continue to make annuities look good, and people are using them not only for income, but for accumulation. Is there a level of interest rates where it becomes too close on the 10 year that like annuities

get ratcheted up? What is the impact of rising rates on annuity income? It's usually because they're just, as Wade was explaining earlier, the interest rate is a component of the payout rate. You've got the principal, the interest, and then the mortality credits. And what happens when interest rates rise, those payout rates just rise because you're not selling them like bonds. There's no secondary market really for annuities. You don't have to worry as much about losing value relative to rising rates. But in historic, Wade was talking earlier about the benefit that annuities bring above and beyond bonds due to those mortality credits. In historic interest rate environments where the 10 years around 5.2 percent, the annuity is going to

be 20-ish percent more efficient than the bond. In low interest rate environments like we were seeing, it's more like 40 percent. The gap narrows, but you're always still going to get a very meaningful benefit from the annuity. Got it. All right, guys, this is so much fun. Really enjoyed doing this. David, thank you. Wade, thank you.

Animal Spiritspod at gmail.com. We will see you next time. Thanks, Michael. Thanks, Ben. Thank you. Good to see you guys. Thanks to David and Wade for coming on again. Thanks to DPL financial partners for sponsoring.

Remember, send us and email Animal Spiritspod.com. Thank you.