“Better Buckets” Introducing the Sequent Income Model™ By Joe Elsasser , CFP ®with Dan T rumbleeSEQUENT Retirement Outcome Planning & Management SM Copyright of and xclusive to: To oer your eedback the Sequent Income Model™ join the Better Buckets Beta Group on LinkedIn® (www.BetterBuckets.com)
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Sequent [adj.] - Characterized by continuous succession
Executive Summary
There is a shit underway in the nancial planning industry. As the Baby Boomers approach retirementage, ecient weath distribution is replacing aggressive wealth accumulation as the primary ocus
among ncancial advisors and their clients. Driving this shit are two main actors: 1) 76 million
Baby Boomers reaching retirement age in the next 10 years; 2) The millions o retirees who suered
catastrophic losses during the recession. Both o these groups are looking or guidance and, above all,
protection or their nest eggs.
Is your practice prepared to meet the resulting spike in demand or Retirement Income Planning
services? Wealth distribution is, without question, more complex than wealth accumulation. Once a
retiree “turns on” the income stream they are immediately exposed to multiple new layers o risk. It is
no longer enough just to say you’re going to earn x% on your portolio and withdraw y% or income.
Retirees need an advisor who can help them insure against these additional layers o behavioral risk,
sequence risk, longevity, taxes, infation, the list goes on.
One Solution: Buckets
The spectrum o services that have sprung up to meet these wealth distribution needs can be called
Retirement Income Planning. One well-known strategy involves providing a steady income stream oryour clients by separating their assets into distinct “Buckets.” I you’ve ever been to a tree arm and
noticed how the growth o the trees is staggered—some o the trees are ready to harvest now, while
the rest are given time to grow to maturity—then you understand the concept behind buckets.
Money allocated in one bucket (or buckets) is set aside or immediate and near-term income. The
remaining assets are placed in a separate bucket and allowed to grow untouched in a stock or und
portolio or a predetermined number o years. Separating assets in this way allows an advisor to
accomplish dierent goals with dierent dollars and diversiy risk in a way that protects the client’s
near-term income, while giving market a chance to do its work over the long term.
That said, the old bucket models have some inherent weaknesses in their design and execution:
» Low Internal Rate o Return » No “smoothing” o withdrawals
» Increasingly Aggressive Over Time » Some Market Timing Required
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A New Solution: The Sequent Income Model™
In response to the faws inherent in most bucket models, we have developed a new method o
allocating assets or income called the Sequent Income Model™. Sequent Income™ utilizes a unique
method o asset allocation that allows you to build an income plan that does more than just takeadvantage o the best case scenario; it perorms well in all possible scenarios, allowing your clients to
capitalize on the “ups” as well as weather the “downs.”
Sequent Income™ uses a combination o insurance products and equities to manage and insure
against a variety o retirement risks and build a more ecient income engine or your clients. And
it’s simple. The Sequent Income™ Sotware runs all the calculations or you so you can determine in
minutes how to allocate your client’s assets. How does this dier rom other bucket plans? It oers
solutions to the problems we outlined above (details on page 13):
» Simplicity and Utility » Increased Rate o Return on Income Stream
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Why Talk About Buckets Now?
The number o investors looking or the type o protection that Sequent Income TM
oers has grown
dramatically since the recession and continues to grow.
This is due to two movements currently underway in the personal nance industry:
1. The much talked about shit in ocus rom wealth accumulation to wealth distribution. As
previously mentioned, transorming a retirement portolio into a stable income stream requires
specialized planning. The old rules you lived by during the accumulation phase no longer apply.
Bucketing has great appeal as a distribution strategy because it oers an organized, systematic process
or getting your client’s retirement savings rom a 401k, IRA, stock portolio, etc. to his wallet in a way
that minimizes taxes and protects against market volatility while leveraging the market as a hedge
against infation.
2. Shit in investor attitudes toward risk. I you think about how the most popular income strategies
might be arranged on a spectrum o risk, Sequent Income™ targets those consumers who are
comortable somewhere in the middle. Or, even better, someone who started closer to the more
aggressive side, but has since moved closer to the middle ater sustaining losses in the market.
These are the ideal candidates or a bucket plan because they believe in the long-term upside potentialo the market, but at the same time they recognize the threat that volatility poses to short-term
income.
They realize that ups and downs in the market cannot be timed and thereore want to shield their
income rom that risk. It is our position that the number o investors who t this risk prole has
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Why Buckets are Better with the Sequent Income Model™
The unique construction o Sequent Income™ gives it several advantages over more traditional bucket
models.
Simplicity and Utility – Sequent Income™ allows you to use simple, easy to understand products
in Buckets 1 and 2—respectively a SPIA and a Fixed Indexed Annuity—and achieve similar principle
protection and better potential internal rate o return than CD and bond ladders seen in other bucket
plans.
Avoids Market Timing – With other systems there is always conusion on when to rell Buckets 1 and
2 and by how much. Do you try to time the market and rell Buckets 1 and 2 when stocks are up? As
much as we as proessionals like to believe we are able to use technical and undamental analysis,
along with good risk management principles to make better decisions than other market participants,
the act remains that we have all been blindsided at least once in our careers. This system takes the
guesswork out by giving you a structured ramework or drawing down and relling allocations.
Regular Rebalancing – With Sequent Income™, you’re never removing unds directly rom the market
and placing them in a purely xed product. That’s the beauty o the Bridge Allocation. By using a FIA as
the bridge between the market and an immediate annuity, the unds still have some market exposure
and thereore a chance to recover some o the lost value i you liquidate stocks when the market is
down. Further, since no one can tell you with certainty when a bear market is or will be over until wellater the act, we will have established an insured “foor” under the amount liquidated rom the growth
allocation.
Increased Rate o Return on Income Stream – By using a blend o an immediate and indexed annuity
to provide income, Sequent Income™ can achieve a better internal rate o return or your clients on
their “sae” money without substantially increasing risk. As a hypothetical example (rates current at the
time o this writing) we might see an internal rate o return on a six-year period certain SPIA in the 2%
range. At the same time, the xed rates inside many indexed annuities are in the 3.5%-4% range. I 1/3
o our income is generated via withdrawals rom the xed account o the indexed annuity, we could
have boosted the internal rate o return on that income stream by up to 33%.
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Given all o that, it is dicult to argue that a plain vanilla FIA with a short surrender period—which we
use in the Bridge Allocation—could not be a valuable part o an overall retirement plan. We welcome
your comments on this topic and the opportunity to urther make the case or FIAs as a viable tool or
retirement income planning.
We also examined some alternatives for the Bridge Allocation:
Variable Annuities: A variable annuity could work well in the bridge allocation. There are our
requirements or the VA product to use it in this model.
It must have a 6-year surrender schedule (multiple leg lengths will be available in uture models)1.
Principal (at least) must be guaranteed in lump sum at the end o the surrender schedule2.
It must oer at least a 10% ree partial withdrawal provision3.
Free partial withdrawals must be principal protected, i.e. i the subaccounts are down, the ree4.
partial withdrawal must trigger a dollar-or-dollar reduction against the principal guarantee, not as
a proportional reduction.
Structured Products: Structured products, including structured CDs and Structured Debt instruments
held promise, but Lehman Brother’s deault on its structured products portolio reminds us that the
value o an insurance company in the mix substantially reduces the risk o deault that is inherent with
any individual security. Further, the lack o a solid secondary market means questionable liquidity and
imputed interest means these products are not terribly tax ecient. I am certainly open to the utureo structured products as a viable component o the model.
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About the Authors
Joe Elsasser, CFP® has been involved in the insurance and nancial services industry since 2001 as both
a producer and a marketer. Since 2006 he has served as the Associate Director o Annuities or Senior
Market Sales, Inc. In late 2008, Joe launched his own nancial planning practice to implement many o the concepts he had been developing in his prior role. A Certied Financial Planner®, Registered Health
Underwriter and licensed Investment Advisor Representative, Joe specializes in helping middle market
retirees maximize resources in support o their nancial goals. Currently, Joe’s ongoing responsibilities
with Senior Market Sales include preparing strategies developed or his practice to be used by agents
and advisors aliated with Senior Market Sales.
Dan Trumblee is an Omaha-based writer who specializes in content or the insurance and nancial
industry. The articles and white papers he writes or Senior Market Sales cover a broad spectrum o
topics, including retirement income planning, insurance marketing strategies, Medicare, lie insurance,