Many advisors are offering industry opinions good and bad. In the news, we hear bad news about Social Security running out of money. Social Security income is just a portion of how most of us are funding our retirement. But if Social Security fails, or our pensions fail or are revised, then we’ll have to rely on our savings. That’s a huge problem because as more people are approaching retirement, or are currently in retirement, they wonder what to do with their retirement funds?
The question everyone has is where they can place their money to have safe growth? The options for most people are the same. We can place our money in the bank, stocks, mutual funds, or bonds. All have advantages and disadvantages. We’re all looking for that balance of growth, risk management, and safety.
BANKS:
Banks are usually safe. Your money is insured up to $250,000. If the bank goes insolvent, only $250K is protected. Any monies over $250K are not insured, are at risk, and subject to unrecoverable loss. From 2008 through 2011, there were 414 U.S. bank failures. More importantly, banks are paying extremely low interest. You’re lucky to find CDs that pay 1.5% interest. That means, you’re losing 2.0% per year on your money because you’re not keeping up with inflation at 3.5%. Don’t forget, unless it’s designated as an IRA, you’re usually paying income taxes on that growth.
STOCKS:
For most people, Stocks have only one good attribute. When stocks increase in value, you receive 100% of the gain (minus the expensive broker fees). Of course, that assumes you liquidate your positions which is the only way to lock in your gains. With the benefit of receiving 100% gain, we all know that you also receive 100% of the loss when they decrease in value too.
As we age, the preservation of our money is more important to us that trying to make a killing in the market. When we earn, it feels great! But when we lose, it feels horrible. It has been said the short term good feeling of gain pales in comparison to the horrible gut wrenching pain from losing our money. It seems that people have short term memories when it comes to the market too. We had two major loss periods in the market in the last 20 years. It takes many years to recover, and most people don’t have the stomach or the time for trying to earn that money back.
MUTUAL FUNDS:
Mutual funds are stocks. Read “STOCKS” above as the advantages and disadvantages are exactly the same.
BONDS and BOND FUNDS:
Most people view bonds as safe. True, they’re safer than equities, but bonds have and do fail. Do you remember Enron? GM? Orange County, California? If you held those bonds when the entities failed, you lost your money.
SOLUTION:
Many people are turning to Fixed Index Annuities (FIA) as a safe alternative for their retirement funds. The best Fixed Index Annuities today have an optional feature called an Income Rider. Many advisors prefer to call them Hybrid Annuities. But essentially, money in the Income Rider grows at such a guaranteed rate per year that upon first hearing about the product, most people find it very hard to believe. That’s quite understandable too. “If it sounds too good to be true, it probably is.” Some companies have growth rates of 7% compounded annually, and others grow as much as 10%simple annually! These rates are contractually guaranteed by the insurance company.
Ultimately, the intention is for you to take advantage of the growth in the form of payments or as a death benefit. The annual guaranteed Income Rider growth will produce an account value from which you can now take a guaranteed payment for life. Again, the payment is for your lifetime meaning you cannot outlive the payments and you can never run out of money. Some insurance companies like Equitrust pay premium bonuses, provide an enhanced death benefit, and/or provide a payment doubling feature to help pay for nursing care or nursing home confinement.
Yes, yes, yes, I know…! This all really does sound too good to be true, right? Well, keep in mind, that in today’s low-interest environment to offer those kinds of growth rates, there will definitely, and without a doubt come with restrictions and conditions. It is VITAL that you understand those restrictions and conditions thoroughly. Make no mistake, the annuity with Income Rider provisions are NOT for everyone. But they might just prove to be a safe alternative to risking your retirement money in the stock market or subjecting your money to low-interest growth at the bank. Annuities may not be right for all of your money, but it is quite easy to make a compelling argument for a portion of your money!
By Robert Scott, The Annuity Post
Frequently, I have a client who approaches me with the desire to buy an annuity. My job to provide an annuity is generally much easier when the client comes to their own understanding of why they’re considering a re-positioning of their important retirement monies. I commend them on their decision, but I like to ask what are their reasons for making a move from their current risk strategy to the safety of fixed indexed annuities? The response is usually they’re tired of worry and risk, the wild fluctuations of their market securities, want safe growth, and the guarantees that are common with annuities.During the process, clients might strike up a conversation with their brokers (appropriate name because they often make you broker) about their impending move. The broker, eager to protect his considerable income tries to conserve his business by trying to convince the client to look at bonds because they too have been traditionally safe. There’s a fallacy to that statement. While bonds are traditionally safer than say stock market equities, bonds of any type (municipal/corporate/foreign) are never guaranteed. Bonds can and do fail, and people lose their money too. Hardly a prospect that seems wise for retirement monies that don’t provide you the time to regain once lost.Do you remember Enron, GM, and Orange County California? All failed bonds! Then the client rationalizes that the bonds they’re looking at pay a dividend. That’s fine, but again, like the bond, the dividend is not guaranteed. Another point to consider about foreign municipal bonds is they are also subject to currency fluctuations so the dividend you may receive can change radically depending on the economic conditions of the country from which they represent.No credible advisor would tell you bonds are bad. That would be untrue. Nevertheless, the fact is Fixed Index Annuities provide the safest alternative available for your retirement nest egg.I’m going to give you a challenge. Try to Google a single incident of someone losing their money in a Fixed Indexed Annuity! Guess what? You won’t find it. That’s because, it has never happened…. EVER! Now do the same exercise for bonds! You’ll easily find them! This raw fact serves as a testament to the financial strength of insurance companies and the safety of fixed indexed annuities.The current vogue of the best FIA annuities has an income rider provision, which enables you to receive a guaranteed income for life! They often have enhanced death benefits for heirs, and also provide the flexibility that will enable you to pull cash from your annuity if you need or want it. The growth of the income account is astounding and even in today’s low-interest environment; companies are offering as much as 7% compounded growth and 10% simple growth. That’s after you’ve received a premium bonus too!This isn’t a recommendation to now start liquidating all of your stocks, bonds, and mutual funds, and putting them all into Fixed Indexed Annuities! No one would do that as they certainly have a viable place in your portfolio! But, annuities certainly deserve to be part of your financial portfolio just as other financial products are. What percentage you allocate will depend on your financial goals and needs.
By Marty Johnson, Licensed Annuity Advisor
It is an obvious truism. Annuity advisors provide annuities. Considering all of the guaranteed benefits annuities offer, one would think that every client we encounter would always make a purchase. After all, fixed and fixed index annuities provide enormous advantages.
Fixed and Fixed Index Annuities:
Despite all of these guaranteed advantages, some clients elect not to purchase an annuity and say “no” to the advisor. If fixed and fixed index annuities perform so well with all of these advantages, and since some clients still do not purchase, it begs to ask the question…… “WHY?”
Admittedly, it is a perplexing conundrum for the advisor. After all of the wondering by the advisor, after all of the soul searching, after all of the minor peripheral reasons why the client did not purchase are peeled away, it comes down to only one true answer.
The answer: LIQUIDITY
Even more to the point, it is the perceived lack of liquidity. From the perspective of the client, a more succinct way of framing it is “I don’t want to tie up my money.”
The final answer is clients do not purchase because of a perceived lack of liquidity in their annuity. Please note, I used the word “perceived” lack of liquidity because we have two issues to explore with the conversation of liquidity.
Everyone has a perception of his or her money when it comes to liquidity. Do you perceive you need access to 100% of your money because you anticipate a future expenditure that will require a substantial portion or all of your cash assets? On the other hand, do you perceive you need liquidity because you are concerned there may be some emergency that will require the use of most or all of your cash assets? It is essential to have a frank and honest exploration of those questions to understand how much liquidity is truly necessary for your financial situation.
There is no standard answer, as everyone’s financial condition is different. But a question to ask is, are you not purchasing a valuable financial product like annuities because you have a perceived fear that your money is tied up when in reality, it provides you an assortment of liquidity flexibility and options?
As an advisor, to provide the best consultation, at the minimum, it is important to understand these two annuity liquidity questions of the client.
They are:
Question #1:
If the answer to that question is “yes” and you truly need access to the entire amount you are considering for an annuity, annuities are probably an inappropriate product and definitely not for you. For example, if a client were to explain that they have $200,000 earmarked for an annuity purchase but they also intend to use the $200,000 to make a lump sum cash payment on income property in 2 – 3 years. In this scenario, it is important the client understands annuities are not a viable option for them as the need for cash liquidity is essential. However, if they have $600,000 in financial assets, and they want to purchase a $200,000 annuity now and income property in 2 – 3 years, then we can continue talking. In this scenario, they still have $400,000 in liquid assets that will enable them to make a $200,000 cash purchase of the income property.
It is important to note that almost all Fixed and Fixed Index Annuities enable a 10% free annual withdrawal of the entire account value. They can do this every year throughout the surrender period. For example, if your annuity has an account value of $250,000, then a cash withdrawal of $25,000.00 is available without any penalty, fees, or cost. The 10% free withdrawal is available every year during the surrender period, which is usually 7 to 14 years for most annuities. When the surrender period has expired, then you have 100% unrestricted access to entire account value money. That means you can withdraw any amount, whenever you want, without any penalty, fee, or costs.
Also, Great American Insurance Group an “A” rated insurance company, which provides a free withdrawal of your entire initial premium without any penalty, fees, or costs. It’s called “Cash Refund.” For example, if you buy an annuity with $100,000, at any time, you can withdraw the entire $100,000 and do so free of any penalty, fees, or costs. This is a particularly useful feature for those who think a major purchase may or may not be in their near future. If they need the money, access is available penalty fee. However, if they don’t, then the benefits are intact, and the annuity is working for them.
Question #2:
“I’m sorry, but I’ve decided not to buy an annuity.” As an advisor, this is a client statement we live with and the final answer that is a frequent reality. Over 90% of the time, the real reason the client elects not to purchase is that they do not want to tie up their money. The client perceives the need to have access to most of all of their money in case of unanticipated emergency. The clients are not wrong, either. They are absolutely correct too, and every one of the reasons they give COULD happen! However, realistically, what are the percentage chances that their fearful reasons are likely to occur?
We all know, other than the old adage of death and taxes, in life there are no 100% absolute guarantees of anything! Everything we do is a measurement of risk. We could slip in the shower and injure ourselves, but we still take showers. We could be hit by a tomato truck while walking on a sidewalk, but we still venture outdoors. All of these things could happen, but we still go about living our lives. When a client elects not to take advantage of all of the enormous advantages of the safety and guarantees of annuities, it is almost always because they are afraid of some unlikely and unrealistic future financial Armageddon scenario. Unfortunately, when clients reason some infinitesimally small chance of a perceived unlikely emergency will require the use of all of their annuity money, they may be doing more harm to themselves than good.
With rare exception, you would never devote 100% of your money into an annuity. Fixed and Fixed Index Annuities have many positive benefits! Even still, with all of the inherent built-in safety and guarantees, it is still prudent to have diversity in your financial portfolio. It is wise to have a mixture of cash savings with a bank, stocks, bonds, and annuities. Again, annuities should be a part of your portfolio but not 100% of your portfolio. How much you allocate to an annuity is based on your age, income, risk tolerance, other cash assets, and other factors.
Consequently, in the very remote possibility that a client would have a financial meltdown that would require utilizing all of their money, they would access more liquid assets first. Bank savings, stocks (or mutual funds), and bonds would be the first assets targeted for liquidation. If necessary, annuities would be the last asset to liquidate into cash. The good thing about annuities, that if this kind of financial emergency were to occur, it probably is because you are facing a life-ending medical condition. In that case, almost all fixed and fixed index annuities allow access to 100% of the monies free of any penalty, fees, or cost! The result is the perceived need to access all of the money is an unnecessary concern.
These are examples of why it is vital to thoroughly explore and understand the perceived need for liquidity versus a real need for liquidity. So often clients miss out on the enormous benefits of annuities because they harbor an unrealistic perceived need to have access to all of their cash. Guaranteed growth, safety, and other benefits are lost when in reality only a much smaller margin of safe access is needed to their cash assets.
A better question is, did you lose money during the last economic downturn in 2008? The answer for most people is an emphatic “YES!”
Did you lose money during the downturn of 2000 – 2003? Again, the answer for most people is again, an emphatic “YES!”
Did you lose money during either downturn in your Fixed Index Annuity? And the answer for every single person who had money in Fixed Index Annuities is an emphatic “NO!”
Well, based on that answer, every person in the country should immediately run out and purchased a Fixed Index Annuity, right? The answer to that is also “No”.
Although Fixed Indexed Annuities are fabulous products and guarantee no loss of principle or interest earned, they are not for everyone. It is important to understand that most annuities impose surrender fees if you need access to your entire account balance. Insurance company annuities don’t prohibit you from accessing your money, but the insurance companies discourage access by imposing fees if you go beyond the traditional 10% free withdrawal provision. A good advisor will recommend that you maintain ample cash assets in other financial vehicles for immediate use. You should only allocate money to an annuity that you can afford to allow sit for an extended period of time.
Did you know that it’s possible to have a legal tax free income? No, it isn’t doing something marginally legal or radical like creating off-shore accounts. Instead, there are very basic, standard, and legal processes available for all of us via insurance company products with a Fixed Index Annuity or Indexed Universal Life Insurance policy.
The most common is converting your Traditional IRA or 401K plan into a Roth IRA. There are a variety of methods available to execute an IRA conversion, but once you do, any income or gain comes to you income tax free… forever! It’s an extremely valuable and commonly used tool that your annuity advisor can assist you with.
Another method is purchasing an Indexed Universal Life policy or IUL. It’s quite suitable for people between the ages of 21 and 55. Indexed Universal Life grows in an index just like a fixed indexed annuity. They usually have higher cap rates (enhancing potential growth) and they allow tax free tapping into the cash value at any time without consideration or worry of the 72T rule. An illustration provided by your advisor will demonstrate some pretty incredible tax free payments that are guaranteed to you until you reach age 100. An additional benefit is that you also receive a generous death benefit. Even if you elect not to purchase the product, the enormous potential benefits are definitely worth looking at to determine if it should be part of your overall retirement plan.
This is a common question among people seeking to receive immediate income from an annuity. The simple answer is… there really is not a simple answer!
Single Premium Immediate Annuity (SPIA) is a product where you as the annuitant give the insurance company a lump sum of cash. In return, the insurance company promises you a payment that you cannot outlive. For many, the comfort of knowing that if you live to be 115 years old, you’ll still receive a check from the insurance company. The calculation is based on the amount of premium you give the insurance company, your age, and what period of time you want to receive payments.
You also have an alternative method too. Instead of receiving a payment for lifetime, you can select to have payments come to you for a certain period of time. In the industry, we call this “period certain.” As the annuitant, you can usually select any period of time less than 25 years. There are many variations and combinations of payment periods you can create and select.
A common question from potential buyers of a SPIA is, “what is my interest rate going to be?” The answer is, any payment you receive once your initial payment has been recouped must be considered “interest.”
For our hypothetical example, let’s use a 62-year-old male, with $250,000 to deposit into a SPIA. Let us also assume the lifetime payment will be $20,000 per year. At $20,000/year, in 12.5 years, the $250,000 he allocated toward the annuity will be repaid. Consequently, every payment he receives after 12.5 years is his “interest.” If he lives 23 years (age 85), then his total payment will be $460,000 and that means his net interest will be $210,000 or 84%! The longer he lives (and receives his $20,000 payment) the higher his “interest” is going to be!
The uncapped crediting strategy is becoming the most compelling and interest crediting strategies to the Fixed Index Annuity (FIA). The reason for the attractiveness that is garnering a lot of interest is based on the ability for the annuity to earn more robustly than with capped strategies. Capped strategies limit the growth up to the cap rate or ceiling. The most common are Point-to-Point (P-T-P) either using an annual and/or monthly strategy.
The annual uses an index that begins with the annuity anniversary date and then looks at the growth 1 year later. If the cap was set at 6% and the index actually grew 10%, the annuitant would earn 6% because the cap creates a ceiling on earnings. If the index did less than the cap rate of 6%, then the annuitant would receive all of the percentage earned. Of course, FIAs guard against the burden of loss so if the index ended in the negative, the owner of the annuity would hold on to its current value and would not suffer the loss to the annuity account value.
Monthly cap rates work similarly but look at the annuity anniversary as its index starting point and then looks at the index one month later to calculate the growth. In today’s economic climate, monthly cap rates are usually under 2%. However, using that rate as our example if the index grew at 3% during the first month, the account would earn 2% as that is the monthly ceiling. If the account grew 2% every month, the most the annuity could credit for the year would be 2% x 12 months = 24% annual maximum interest credit. However, it is important to understand that all 12 months are considered in the annual calculation and positive months with a gain and negative months with a loss are factored into the annual crediting for the year. So when the positives and negatives are added, and the account ends up negative, the gain for the year will be 0%. On the upside, if it is zero that almost always means the securities market took a loss which could range from 1% to 100% loss. Like most FIAs, it resets every 12 months and gains are locked in and receive principal protection! In 2013 I had clients that earned as much as 19.5% in a single year! And I would be remiss if I failed to mention that gain was achieved with no risk to the principal or previous interest earned!
However, getting back to the exciting uncapped strategy, they have the potential of more and higher double-digit returns in good years while protection of original principal plus any gains earned in bad years. There are two crediting methods using uncapped strategies. Those methods are via Participation Rate or an Administration Margin or Spread.
The Participate Rate simply means the account is credited as a percentage of the growth. For example, an index grows at 10% for the year with a Participation Rate of 90%. It is simple math to conclude that 90% of 10% = 9%. Therefore, 9% would credit to the account. If the Participation Rate is 85%, then in that same scenario 8.5% would credit to the account.
The Administration Margin or Spread Rate is an assessment that receives its assessment first with any earnings. Using the same 10%, if the Margin or Spread is 2%, that is collected first, and 8%is credited to the account. If the Margin or Spread is 2.5%, then 7.5% would credit to the account. Margin and Spread are only assessed when there is a gain in the index. Since it is not a fee, they are not assessed in years where there is a loss. And once again, since we’re talking about Fixed Index Annuities, in years of a loss, 2018 for example where the market recorded about a 10% loss on average, the annuity holds on to all earnings and the loss is zero.
In 2017, annuities that had uncapped crediting strategies as an option enabled my clients to enjoy very robust returns earning 15%, 16%, and even higher! The highest earning number I saw using these strategies was in the 19% range! What’s truly remarkable is these numbers were achieved without risk to principal or previous interest earned in their accounts! And no, it would be foolish and unrealistic to think that those kinds of returns should be expected going forward. However, it’s fair to note, it did happen but was during a unique year where the market was seeing 25% to 30%! As the saying goes, “High tide lifts all ships.” Annuities were no exception, and the annuity luxury ocean liners were sailing along quite nicely during the high tide of 2017!
Common indices are the Bloomberg US Dynamic Balance Index and the Pimco Tactical Balance Index. Those are provided by Allianz with the very compelling Allianz 222 annuity leading the pack for popularity.