FINANCIAL ADVISOR BOB FUGATE HARVESTS GOLDEN NEST EGGS FOR TENNESEE RETIREES
Bob Fugate grew up on a farm, and like any good old country boy, he knows when to plant, when to grow, and when to harvest. That fundamental know-how serves his clients well when planning their retirement incomes and estates. In fact, within the last ten years, his company, Retirement Financial Solutions in Knoxville, Tennessee, has over 400 clients – and, except for death, has lost very few of them to other advisors or investment brokers. “That tells you my clients are happy,” says Fugate, “because we’ve had a market in those years that would have taken unhappy clients away.” In 2005, Bob adopted the endowment model of diversification established by David Swenson, CFO of Yale University’s Endowment Fund. Bob believes in the diversification of this endowment model and he uses it with his clients. Since 2005, the clients that used this approach-Swenson’s endowment model- have seen little or no negative returns in their total account value, including 2008 which was a hard year for many investors. It’s an impressive track record, a record which has been won with down-home values like honesty and old-fashioned common sense.
When talking about his business, Fugate says “We’re East Tennessee people, we know how to do asset protection and income planning,” as if those skills were as naturally acquired as baking an apple stack cake for a rural wedding. His approach to financial planning is simple and unpretentious, but his strategies are carefully researched and designed specifically for his clients, most of whom are near retirement or already retired. But just because Fugate is old fashioned, doesn’t mean he approaches building his clients’ portfolios as if it were 1995.
These days, his financial strategies are especially conservative – the market is too volatile for anything else. However, helping retirees shift their investment goals to more secure models is more challenging than one might think. While many retirees, especially those whose nest eggs cracked in 2008, request that their retirement funds be allocated to products at limited risk to market fluctuations, too many others are still investing in the stock market the same way they always have. The Bull economy that lasted for much of their working lives has lent undeserved credence to the “buy and hope” model of investing. Unfortunately, economic indicators for the next decade are not optimistic, which means retirees who remain in the same types of investments they had while working stand to lose in both the short and long-runs.
Switching your investment strategy from accumulation to conservation requires more than a shift in mindset – it also frequently requires making a complete change in who handles your money, from a broker to a retirement specialist. For one thing, brokers are focused on making money through investments that are subject to higher risks, which works well until you stop actively earning an income. Another, possibly more pressing, reason to switch is that most brokers don’t have access to the products that are among the best options for retirees. If a rock-solid retirement plan requires using the right tool for each job, the tool box of the average broker is missing key pieces.
Brokerage houses usually don’t offer fixed annuities and non-traded real estate investment trusts, which are foundational in many retirement income strategies. Fugate explains that since brokers, in many cases, are encouraged to sell products offered by their companies, they may be limited in how much they can help their clients. “I used to be a broker, and the problem I had as a broker was that my responsibility was to the firm, not to the clients. I had to sell the higher commission deals, rather than sell what was best for the client. That’s why I became independent, so my fiduciary responsibility is to my client,” says Fugate.
Fugate steers his clients away from risk whenever possible, though his approach depends on each client’s individual ability and desire to take risks. When all fundamental needs are covered under a holistic plan that includes a 401K or pension, Social Security, and insurance-based products not vulnerable to the market, he’s perfectly willing to gamble with what’s left over if that’s what the client wants. But protecting life-long income is his first priority. “It’s important to remember that more conservative retirement plans only have a portion of the assets invested in the stock market. Other allocations should be set aside for more conservative investments and secured income contracts,” he says.
For Fugate, the most important part of his job is making sure his clients know they’ll have the income they need for the rest of their lives. “There’s a lot of ways to do it. Position the amount of money it takes to generate what you need above your pension and social security where you’re not going to lose it, no matter what happens,” he says, adding that the amount is different for everyone. The rest of the money can go into what he calls “some risk investments.” Not the stock market, or bonds, though he does use shorter bonds on occasion. As always, the proof of his advice is in the pudding – “We have one account, he’s made 5.64 percent after fees on average over the last ten years. In 2008 – the worst year we’ve had since the Great Depression – he only lost .29 percent after fees.”*¹
Retirees who relish having a little skin in the stock market game should limit their market portfolios to 20 percent of their funds, at most, says Fugate. A relatively safe investment strategy would put 20 percent in the market, 30 percent in “some risk,” investments, and 50 percent at no risk in either bank instruments or fixed index annuities. “The percentages are based on what you need, what you’d like, and what you’d have fun with,” says Fugate. Alternately, there’s no reason to gamble with any money at all.
For the most conservative of investors, annuities provide an opportunity to guarantee income almost like a pension. But, as Fugate points out “annuities are like siblings – they have a lot in common, but are very different. People hear about a bad annuity and think they’re all the same. And right now, if you do a survey of all retirees in America, ‘annuity’ is like a bad word to them.” There’s no such thing as a bad annuity as far as Fugate is concerned, just annuities that aren’t used correctly. Again, it’s all about having the right tool to do the job. *²
While there are many branches in the annuity family tree, one of the options most frequently presented to retirees is the Single Premium Immediate Annuity, which essentially acts like a pension for a certain number of years. Traditional fixed annuities, which run 1 to 2 percent higher in interest than CD’s, offer security, but provide little more income than holding money in a savings account. Variable annuities, which have the worst reputation, put money at market risk due to how they are invested and they come with fees that may or may not be clearly disclosed. Fugate says that while variable annuities might work for young people who “have time to wait for the market to bounce back up,” they’re absolutely the wrong choice for retirees. “A retiree can’t wait until the market comes up. The market normally goes in 15 to 20 year cycles, and retirees need their money today,” he says.*²
Fugate says his clients want to know “how they can invest the money they have, but they’re afraid of the stock market. Their money is sitting around in money market accounts. I tell them, you’re losing money safely, because inflation is more than the interest you’re getting.” His favorite type of annuity, and the one he recommends to his clients, is the Fixed Index Annuity, which addresses that problem along with many others. “No one in America has lost a dime of principal in fixed annuities,” he asserts. The features that are so appealing, he says, are that “You can’t lose money, and the growth comes from getting a percentage of the Dow Jones or S&P 500 growth. You’re not invested in the market, and the insurance company actually gives you a minimum guarantee. You get the increase when the market goes up, and you don’t lose money when it goes down.” *²
Of course, you can’t build your retirement plan without taking taxes into account. “The problem with brokers is that they won’t talk about taxes because they cannot give tax advice. While I’m not a CPA or an attorney, I’m happy to show clients how repositioning money may be able to reduce their tax rates.”
While Roths aren’t the only tax reducing strategy – by any means – Fugate suggests that everyone eligible should look into them in order to pay the least in taxes. The most important aspect of deciding on a Roth or regular IRA is knowing when to place your bet, “Taxes will likely rise in the future, so unless you think there’s a good chance you’ll be in a lower tax bracket later, get that Roth today while the taxes are lower. Are you going to be at a higher tax bracket now or when you take the money out? That’s how you determine whether to go with an IRA or a Roth.” While he stops short of giving tax advice, he readily acknowledges the interconnectedness of income and retirement planning with tax planning. The two sides have to work together.
Incorporating tax strategy with income strategy becomes especially important when planning how, and when, to transfer wealth to heirs. Ultimately, retirement planning, tax planning, and estate planning are all part of the same big picture: directing where you want your money to go. While retirees’ cite their number one concern as outliving their money, their second concern is often how best to help their children and grandchildren, as well as plan for charitable giving. An un-sung, yet vitally important part of Fugate’s business is to get to know families as a whole, learning about each generation and teaching the children how to manage the wealth that’s coming to them.
Disclosing personal finances is deeply private business. With your wealth management advisor, you have to uncover not only your dollar-amount worth, but your investment decisions and your mistakes, your family dynamics and personal history, and your deepest hopes for the future. Retirees are asked to place as much confidence in their advisors as in their doctors, and Fugate says he feels very privileged to have gained his clients’ trust. For him, the relationship has to start with “100 percent transparency. I’m not a California surfer, or a Philadelphia attorney. I grew up on a farm and I mean to be a good old country boy. And we want to help people. We want people to see who we are and that we care about them.”
Old-fashioned values, country manners, and the trust that comes with building relationships, not just clientele, set Retirement Financial Solutions apart. But all the Tennessee charm in the world wouldn’t make a difference if they weren’t also dedicated to staying on top of the ever-changing economic climate. So much has shifted in the market within the last decade, and attitudes towards investing have changed along with it as more people retire. Bob Fugate stands ready to meet the demand for increasingly secure, yet profitable, retirement strategies.
*¹ Global Financial Private Capital DIAS Portfolio Historical Performance brochure dated 10.19.2012
*² Results are not guaranteed and are based on the insurance company’s ability to pay and early withdrawal may cause a loss of principal due to withdrawal charges. Purchasers may experience fees and expenses, included withdrawal charges, market value adjustments, rider premiums, etc. which will affect contract values. Interest credits are based on a formula that takes into account the performance of an index. Purchasers are not investing in the index and will not experience the same returns as the index or a related index mutual fund. Purchasers will participate in only a stated percentage of an increase in an index, as the annuity imposes a “cap rate.”
*³ Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Global Financial Private Capital or GF Investment Services.
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