Annuity Guys Video Archives

How to Get Rid of a Bad Annuity

September 28, 2012 By Annuity Guys®

Do you think you made a bad decision on an annuity purchase in the past? Do you think you’re stuck due to surrenders and penalties? What are your options?

Dick and Eric examine the options that most annuity owners do not know about to possibly move out of an annuity that was misrepresented or one that no longer fits their financial objectives.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

It should be noted that prior to surrendering or replacing any annuity, careful consideration of all features, penalties and financial goals of the consumer should be evaluated — this is not a decision to be taken lightly.

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about how to get rid of a bad annuity. Well Dick, is there such thing as a bad annuity?

Dick: Unfortunately, Eric, there are some bad annuities.

Eric: Oh no, don’t tell me that.

Dick: Just like any other investment you can make a bad decision. You can buy a bad annuity. The best way I’ve found, to not have to get rid of a bad annuity, is just not to buy one.

Eric: If you don’t make the mistake upfront, you don’t have to suffer the consequences.

Dick: Right, right, right. So folks do you research, watch our videos, watch other videos. Just read, look at what’s out there, and just use some good judgment.

Eric: Well, that’s a nice summation. Are we done?

Dick: That’s the video.

Eric: Well, I guess we should define when we talk about bad annuities; it’s really a personal situation. It’s you end up with an annuity that doesn’t fit your financial goals or your objectives.

Dick: And it is possible that your financial goals or objectives change, so maybe the annuity wasn’t bad originally.

Eric: It’s just bad now.

Dick: It’s bad now and the other thing that we find happens, not so much recently as over maybe the past few years the annuities, folks, have went through quite an evolution, and we believe have reached kind of a level.

Where they’ve; I won’t say they’ve plateaued, but they’ve come out with these innovative riders, income riders; they’ve become very competitive with each other and we’ve kind of seen what would seem to be a leveling off of what we could expect for any of these annuities.

Eric: Yeah, and the nice thing is its innovation.

Dick: Yes.

Eric: You’ve got companies, there’s competition for your dollars, they want to design the best product that one, creates a need or satisfies a need for you, and those strategies make you money, make the company money, and that’s really what they’re designed for.

Dick: And unfortunately, if you were one of the early ones in, buying the annuities that were available four or five years ago and you compare it to what’s on the market today, with the contractual **guarantees, you may be a little disappointed.

Eric: It’s buyer’s envy I guess, so if I own one that I bought five, six, seven years ago and it’s not meeting my needs…

Dick: Or let’s say it does meet your needs somewhat, but not as good as some of the newer generations.

Eric: All right, so you want to tackle all these? So I’ve got one of these, how do I go about deciding what’s the next step? First of all, can I get out of a bad annuity?

Dick: Well, the answer to that is always it’s your money and it’s your decision.

Eric: And it may depend on your annuity, if you bought an immediate annuity most of the time…

Dick: That’s true, that’s true, yes.

Eric: That’s my one caveat, that if you own the immediate you pretty much…

Dick: You’ve given up your lump sum, so it is your annuity.

Eric: And that’s why we always talk about that being a make sure that’s the right decision, because usually that’s it.

Dick: So if it’s a deferred annuity there could be some extenuating circumstances, first of all. If it was really genuinely a situation, where that annuity was truly misrepresented to you; it was not what you thought you were buying; there could be some aspects of going back to the company, going back to the agent, but again, this has to be fairly well-documented. That it was misrepresented. So in those situations if it was truly not suitable, it was misrepresented, it is possible that the company would allow you to get out of the annuity with no penalty, also the possibility of litigation, that type of thing, or going through the state insurance department if it was misrepresented, but let’s just say that it was not.

Eric: It was just what was available at the time and it’s it sounded good at the time. How many times have we made a decision based off of this sounded like a good decision at the time and it might have been the best available at the time.

Dick: And now interest rates are low. Maybe your interest rates have dropped on the annuity. The cap rates have dropped. You didn’t get one of the income riders that are now available, so you don’t have those contractual **guarantees. Well, one of the things that I think that you want to look at first of all is how close are you to maturity? Will that annuity be maturing, and all of the surrender charges will be gone soon?

Eric: Now and when we talk about maturity and this is always an interesting thing when I talk about it with consumers, because they say “Well, do I lose my income at the end of that contractual, that maturity period?” Really, it’s a surrender time frame typically is what that contract. You can continue past that surrender schedule period. That annuity’s designed to keep going and going and going until…

Dick: Right, they still have contractual **guarantees in place for the client, even though the money is available surrender and penalty free.

Eric: Right, so when we’re talking about maturity in this case we’re talking about when there are no more penalties that will be incurred by basically, surrender charges.

Dick: So if you feel that your annuity is not what you really wanted, you’re only maybe a year or two away from being out of surrender charges, you may want to wait until that couple of year’s passes. You’ll also have some other alternatives. Even if you’re fairly new into the annuity, within a few years or so into the annuity, there’s things that you can look at, which could be an offset to the annuity that you have, and the surrender penalties, if the new annuity that you were looking at has a bonus or a market value adjustment.

Eric: Now and this is where market value adjustments are really kind of an interesting not well kind of…

Dick: Not well understood.

Eric: … understood. Even by some agents. I mean we’ve seen people that have had problems with understanding them and really they work in two ways.

Dick: Yes.

Eric: They can be and basically they work as an offset, for the insurance company in case of the change of rates, so what we’ve seen is they can either be, in addition to the contract at the time of surrender or a subtraction. Now if the interest rates have gone up…

Dick: They’re typically then going to add to your surrender charge.

Eric: Right, and if the rates have gone down, then we’ve seen here in the last few years…

Dick: Then you would have a positive MVA, where your surrender charge is actually reduced by a fairly large amount on the MVA.

Eric: And I know personally we’ve seen this happen. So it actually creates an opportunity for some people at times, when they’ve had an annuity that they’re not real happy with, and if things have gotten you think, surprisingly if they’ve gotten worse, there’s usually sometimes an opportunity to offset that surrender with that MVA, and the MVA is not the Motor Vehicle Association.

Dick: No, it’s not.

Eric: It is a market value adjustment, which is a mouthful.

Dick: And not all annuities have market value adjustment, so you have to look at the type of annuity. When I say the type of annuity, an indexed annuity, a fixed annuity, all of those can have market value adjustments, but not all do.

Eric: Right, so when we’re talking about this in relationship usually, it’s on a fixed or a fixed index and that’s because of what they’re using to reserve. So they’ve purchased bonds and that’s sitting behind it, and so if they have to sell them early that’s the reason usually most insurance companies use them, market value adjustment.

Dick: And the reason, another reason folks, why they have the market value adjustment is the annuities that do not have a market value adjustment on the annuity, typically cannot pay as high a rate or have as many **guarantees, as the one that has a market value adjustment. They have more latitude in terms of getting higher rates or better **guarantees, so that’s a good reason to use an annuity with a market value adjustment.

Eric: Sure. So there is one way to get rid of a bad annuity possibly, even that still has a surrender involved, because you still may have an offset from an MVA.

Dick: Exactly. Another is the new bonus or a bonus from a new annuity. So that if you have a considerable bonus from the new annuity that can help to offset some of the surrender, combine that with an MVA and the advantages of the new annuity if it makes financial sense, then it can be worth doing.

Eric: And that should be qualified. We’re not suggesting you would transfer from one bad product into another bad product.

Dick: Of course.

Eric: It’s got to meet your financial needs and this would only be something we’d recommend, if you’ve got something that’s not working, it doesn’t fit, this is an area where you can explore some options to basically, see if there’s something better out there.

Dick: Right. Unfortunately, it is a possibility that someone, Eric, would get involved in a bad annuity, and so there has to be different ways that someone could go about alleviating that situation.

Eric: Right and one of the things we’re talking about is using, usually a transfer of an annuity. We’re not talking about doing a withdrawal, and then rolling it into another one, though those are all options, but to avoid bigger taxation penalties even, we’ll typically look at transferring from one annuity company to another. So those things will keep you out of taxation penalties.

Dick: Yes, so I think that probably the best way to really avoid a bad annuity in the first place is to buy a good annuity. Do your research. Make certain that it is going to meet your objectives, and then, even if the newer generation annuity does come along, and does have a few additional advantages, if the original annuity that you set up met your retirement objectives, then there should still be some merit there and some good basis for why that was chosen.

Eric: Exactly, and you don’t want to just throw something. You don’t want to throw the baby out with the bath water I guess is the saying, and so make sure you’re not making just a rash decision to get something else.

Dick: That’s right.

Eric: And that’s why these annuities do have surrender charges, they do have these pieces, because they are designed to be long term, lifetime income generating products.

Dick: Make you think twice about messing up your retirement by ending your IRA or your annuity and that’s why these penalties are there.

Eric: Right, so as we say, you usually only get to do retirement once, so do it right.

Dick: That’s right. There are no do-overs in retirement. Thank you.

Eric: Thank you.

IRA / 401k to Annuity Rollover Concerns

September 21, 2012 By Annuity Guys®

Many of the concerns people have with moving an IRA or 401k into annuities revolve around misconceptions with how the IRS treats these transfers. As long as these transactions follow some basic rules there should be no additional taxable consequence or penalty.

Dick and Eric examine the IRA to annuity transfer process and discuss some of the challenges and misconceptions that they have encountered when speaking with clients.

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401K, 457 & 403B to IRA ANNUITY ROLLOVERS
RULES CHANGE for IN-SERVICE 401(k) ROLLOVERS
401k, 457 & 403B to Roth rollovers are now possible before age 59½.

A new possibility. Sometimes employees want to pull money out of a 401(k) before they retire. It isn’t always because of an emergency. Some workers want to make an in-service non-hardship withdrawal just to roll their 401(k) assets into an IRA. Why? They see lower account fees and greater investment choices ahead such as combining the safety and growth of a Fixed Annuity with the tax free benefits of the Roth IRA.
As a result of the Tax Increase Prevention Reconciliation Act (TIPRA), tax laws now permit in-service non-hardship withdrawals from 401(k), 403(b) and 457 plans to traditional IRAs and Roth IRAs before age 59½. Of course, the employee must be eligible to take a distribution from the plan, and the funds have to be eligible for a direct IRA rollover.

This option may be very interesting to highly compensated employees who want the tax benefits of a Roth IRA. The income limits that prevented them from having a Roth IRA have been repealed, and they may have sizable 401(k) account balances.

Does the plan allow the withdrawal? Good question. If a company’s 401(k) plan has been customized, it may allow an in-service withdrawal for an IRA rollover. If the plan is pretty boilerplate, it may not.

The five-year/two-year rule also has to be satisfied. IRS Revenue Ruling 68-24 says that for an in-service withdrawal from a qualified retirement plan to take place, an employee has to have been a plan participant for five years or the funds have to have been in the plan for two years.

401(k) plan administrators may need to amend their documents. Does the Summary Plan Description (SPD) on your company’s 401(k) plan allow non-hardship withdrawals? If it doesn’t, it may need to be customized to do so. This year, plan administrators nationwide are fielding employee questions about rollovers to Roth IRAs.

401(k) plan participants need to make sure the plan permits this. An employee should request a copy of the SPD. If you ask and no one seems to know where it is, then call the toll-free number on your monthly 401(k) statement and ask a live person if in-service, non-hardship withdrawal distributions are an option. In some 401(k)s, an in-service non-hardship withdrawal will prevent you from further participation; be sure to check on that.

If this is permissible and you want to make the move, you better make an IRA rollover with the assets withdrawn. If you don’t, that distribution out of your qualified retirement plan will be slapped with a 20% federal withholding tax and federal and state income taxes. Oh yes, you will also incur the 10% early withdrawal penalty if you are younger than age 59½. Additionally, if you have taken a loan from your 401(k), any in-service withdrawal might cause it to be characterized as a taxable distribution in the eyes of the IRS.

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Annuity Guys® Video Transcript:

Dick: Eric, I say here we go again.

Eric: Sounds like a song title.

Dick: This is something that we continue to work with clients on, and that is the question of IRAs and just the concerns they have about moving an IRA into an annuity. There are a lot of practical things, whether or not it’s a 401k or an IRA that someone wants to go into an annuity. There’s a lot of questions that come up. One is, does it even make sense to move an IRA or a 401k into an annuity?

Eric: Right. Obviously, yes, because the annuity is designed for lifetime income, and that’s usually when people are saving from their 401K or IRA. The goal is to get money to retirement, and that’s what an annuity does. There are a lot of common misconceptions, I should say, with when those transfers happen when you’re moving from one qualified product, like and IRA or 401k, and moving that into an annuity.

Dick: Many times, folks, I’ve had different ones ask me, believing they were going to have to pay tax if they put their IRA or their 401k into an annuity.

Eric: The misconception is because they think they’re taking a withdrawal. This is where terminology gets so complicated with financial lingo. You’re withdrawing from your IRA or your 401K.

Dick: It’s actually like a lateral move.

Eric: Right, it’s like a transfer, is the more appropriate term, because you’re actually transferring from . . .

Dick: Moving it from custodian-to-custodian or rolling it over.

Eric: Which is not the guy at the gymnasium at the high school.

Dick: Or the janitor, or the 60-day rollover which is popular. You can do it either way and both ways have some advantages and disadvantages. Let’s talk about those, but first of all, let’s just touch on what is a custodian?

Eric: It’s the guy, or in this case the institution, who is charge of the paperwork. They’re in charge of making sure what gets filed with the IRS is appropriate. They’ve got your qualified dollars, and they’re reporting for you. They’re telling the IRS this is what you took out, [inaudible: 02:20].

Dick: They have accepted this responsibility that’s put on them by the Federal Government if they want to be a custodian.

Eric: Right. In order to manage qualified dollars, it has to be a custodian who’s in charge of the report.

Dick: The next thing that we probably want to talk about is a 60-day rollover versus a transfer.

Eric: A 60-day rollover is basically the timing. When you have one IRA, if you’ve made a distribution, you have 60 days, basically, to put it into another product, so it’s a timing aspect.

Dick: Right. The transfer; we’re talking about just going from one custodian to the other custodian. There’s some pluses and minuses to both of these, and let me try to be fair to both of these. You can fix me.

Eric: Each of us has a preference. My preference has always been the custodian-to-custodian transfer.

Dick: Right, and mine has been the 60-day rollover.

Eric: I like the custodian-to-custodian because the paperwork, basically, is handled by the custodian. Their job is to make sure all the numbers match up, so when they’re reporting from one custodian to the next, that gets taken care of.

Dick: Unfortunately . . .

Eric: They’re two big institutions; typically they’re big institutions. It typically takes longer, you have more people involved, so you have to have a good flow of communication to make sure there aren’t any glips, clips, or mistakes along the way. It’s worked well for me; I haven’t had a problem.

Dick: What I found, because I have done both and do both, is that with the transfer process, it does take quite a bit longer. Typically, I hate to say this, but you’ve got usually two clerks working from one company to the other. You got a lot of paperwork, and a lot of times, there are just different things that happen along the way that delay or postpone.

The 60-day rollover, if it’s applicable, it’s not always applicable to do this, but the nice thing about the 60-day rollover is that when the client calls the company where the money is at, has the check made out to their name. When I say ‘to their name’, to their client’s name, then the check will go directly when they receive it, usually sent some type of overnight delivery, so they’ve got a tracking number. Then that check will be sent directly to the company; pay to the order of the company. Typically, that process takes about a week, week and a half, and the client knows every step of the way where the money is, what’s going on, but there is a little additional reporting at the end of the year. You have to notify the IRS on your tax return that you did a rollover.

Eric: What has happened is you’ve technically made a withdrawal from Company 1, and then did the rollover process manually. You have to, or your accountant, needs to report on your tax return exactly that that process took place. Occasionally, the IRS will come knocking at your door if it wasn’t filled out properly. That’s one step that I . . .

Dick: You want to have some documentation. You want to have the date on the check, when you received the check, and you want to have the date on when the money arrived at the new custodian.

Eric: Both are basically ways that you can do it.

Dick: Sometimes, it just comes down to personal preference, and what the client is comfortable with. What are some other concerns that we run into quite a bit?

Eric: I shouldn’t say the concerns, but there’s how people are able to move dollars, and when they’re able to move dollars. A lot of times, people aren’t aware that, especially the new plans have the opportunity to do an in-service, distribution withdrawal. You have the opportunity to actually move money out of a 401k plan.

Dick: If you’re still working, yes.

Eric: What’s typically common for a lot of 401K plans, they don’t give you a whole lot of more conservative options.

Dick: Right. They don’t have that variety; they don’t have the pension-style income that the annuity provides.

Eric: Some people want that comfort level of being able to take a certain amount of dollars out, put them in a product that they know when they turn it on for retirement, it’s going to give them a number, and they’re more comfortable with that than having those dollars in the market area at risk. That’s one aspect, the in-service withdrawal.

Dick: Another thing that I would like to bring up about 401K, which is different than the IRA, when you call the custodian on the 401K, if you would like to do a rollover on that, you actually can do a rollover, but unfortunately, they want to withhold 20%. The IRS makes custodians withhold 20% of 401Ks. It really is better, I found, in all cases to do a transfer on a 401K, even if it does involve delays or takes longer.

Eric: What we’re seeing more and more commonly now is because people are changing jobs more frequently, when you’re leaving one company’s 401K, they usually don’t want you to park your dollars there, so they want you to move out because they’re paying the administrative fee.

A lot of times, you’ll see people moving from a 401K to a self-directed IRA. You’ll have those transfers going on and that is usually, in my experience, more easily done with a custodian-to-custodian transfer of paperwork. As you said, then you don’t have to worry about the withholding or any of those issues.

Dick: Exactly. Another thing that we run into is RMDs.

Eric: Yes. For those of you who do not know what RMDs are, it’s not some kind of weapon of mass destruction, it’s what it sounds like, but they’re required minimum distributions.

Dick: Withdrawals that are required at a certain age.

Eric: Yes. This is one of the things that . . . with 401Ks, you do have withdrawal requirements at age 70½, unless you’re still working or . . . and this is a new one for us we’ve been talking about, you’re over a 5% owner of the company. Then you still have to have that RMD. That’s the little tweak there.

Dick: Tricky little laws here. Folks, we’re not, Eric and I want to make it very clear, we’re not accountants.

Eric: No. We don’t play them on television, despite the size of the screen here.

Dick: We don’t give tax advice. What we’re giving here is a general overview and understanding of how annuities generally, conceptually function with IRAs and 401Ks.

Eric: Correct.

Dick: One think that I’ve run into, Eric, a couple things on RMDs I should say, is that if someone is at that age; they’re at 70½ or past that age, had their first birthday after 70½. If they haven’t had the RMD taken out at the present company, then they have to make that that money gets taken out of the IRA at the new company. They have to make a decision; does the company where it’s at presently take it out or does the money move over, and then come out at the new company? It’s fair to do it either way.

Eric: Right. It’s just a matter of reporting. Of course, with IRAs, you don’t have to . . . if you have multiple IRAs in different locations, you don’t have to take it out of each and every one. You can choose to take it out of just one location versus all the others.

Dick: You figure what’s owed in your RMD on each annuity or each IRA account, and then you can add it all up and take it all out of one account.

Eric: I think this is where people say, “How much am I going to owe?” We should say RMDs are calculated based off of the end-of-year of the prior year, and then it’s based off of your age and a percentage; the formula the IRS puts us out there.

Dick: It’s in Publication 590, the unified tax tables, and there’s 3 different tables, depending on the age of your spouse and that type of thing. One thing that I found, Eric, that a lot of times it’s a misconception on the RMDs, a lot folks believe that once they turn this magic age, about 71-years-old, that they have to take large amounts out of their IRA and pay the tax, or they have to take it all out, which is really a misconception that I wouldn’t think would be out there, but I hear it quite a bit. The fact of the matter is that your initial first RMD is about 3.65%. We always say 3.5%, but it actually is about 3.65%, when you figure it, and then it graduates up from there. I’ve always said, “If the IRS has a choice . . .” folks, what do you think they’re going to do? You think they’re going to make the formula very simple, like just tell you the percentage, or do you think they’re going to make it complicated and make you do math with a divisor? They give you a table, a divisor, and that withdrawal rate goes up with your age, so that each year you’re taking a little more out, a little more out. By time you’re up in your 90s you’re getting your IRA pretty well depleted.

Eric: This is where that custodian comes into play. When you’re working with a company that you have an IRA with, if you have questions about the amount you need to take out, contact the custodian because they’ll do the math for you, because they want to keep you in compliance, as well.

Dick: What I want to go back to, Eric, is does it really make sense to move your IRA into an annuity?

Eric: For me, I like the idea of taking IRAs and 401Ks that have basically . . . they’ve been saved for the purpose of retirement income.

Dick: In many situations they have.

Eric: That’s what I’m saying, if they’ve been saved, and that’s the intent for these dollars, what does annuity do? It gives you lifetime income for that portion of your money. Are we saying move all of your IRA dollars or all your 401K dollars into an annuity? No, not necessarily. It’s taking what you need for that foundational aspect.

Dick: That has to be determined.

Eric: Create your own personal pension. Everybody likes the idea of having **guaranteed life time income. I don’t think anybody’s ever said, “That sounds awful”.

Dick: Most people choose it when they have that option and they’re leaving employment.

Eric: I have a family of educators; they all fight for their pensions. They love their pensions. That’s one aspect that people miss now in this 401K world, they don’t have that pension. The responsibility’s on you. This is one way of taking some of that responsibility and making it shared by having insurance on your life; you’re **guaranteeing your income.

Dick: When someone chooses to put their IRA into an annuity, one thing that they should be aware of, and that is you’re not doing it because you’re looking for tax deferral. You already have tax deferral. You’re doing it for other reasons: You’re doing it because you want security; you want a , perhaps some type of a hedge against inflation. That’s the reasons why you would do it; the sound reasons why you would do it. I believe that the idea would be to put as little as possible into an annuity to create the foundational income that’s necessary. It’s good to be able to calculate that out, forecast your cash flow needs, and know that you’ve got this portion of this portfolio setup for your income.

Eric: Right, it’s covering that foundation so that you’re comfortable. You know you’ve got that covered. Sounds like an excellent choice.

Dick: I agree. Thanks for joining us, folks.

Eric: You have a wonderful day.

Annuity Scams – Fear Factor or Reality?

September 14, 2012 By Annuity Guys®

The Internet is full of warnings and alerts about annuity scams that create the appearance of industry run amok with fraud. Should you be fearful of annuities and the people who sell them?

Dick and Eric delve into annuity scams and alerts in this weeks blog entry.

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For more information on Avoiding scams we have provided and excerpt from Dick’s book – The New Retirement.

Avoiding Scams

The SEC also offers advice on how to avoid scams. In the financial services industry, there are many scams. And unfortunately, every year a great many individuals fall victim to these frauds and lose some – or even all – of their savings. So, here are some of the things that investors can do that may help in preventing them from falling victim to a scam.

Ask questions and then verify the answers to those questions. Many scam artists will rely on the fact that a great many people simply do not follow up or investigate important information prior to placing their money in an annuity, investment, or other financial opportunity. It is simply not enough to ask the advisor for more information, as it would only be more of the same fraudulent “facts.” Instead, check out the information from other sources, verify then trust. Take some time to really research the investments and other products that are being offered in order to make sure they are what the advisor has said they are.

Research all companies before investing in them. Prior to investing in a company’s stock or other opportunity, one should fully understand that company’s business and its products or services. Before purchasing any shares of stock in particular, be sure to read over the company’s financial statements on the SEC’s website. It is possible to also contact each states securities regulator. Most companies are required to file financial statements with the SEC and states they are doing business in.

Know the advisor. As mentioned, spend some time doing research on any financial services representative before doing any investment of any money at all. This includes finding out if the advisor is correctly licensed and if he or she or the firm has had any disciplinary issues with regulators or clients.

Be skeptical about unsolicited offers. Should one receive a call or an email from an advisor out of the blue regarding any type of investment, be sure to research both the advisor and the investment opportunity offered.

Remember, if it sounds too good to be true, it probably is. Compare any promised returns with actual current returns on well-known stock indexes.

There is no such thing as **guaranteed returns in securities, so be careful. Even the safest of investments or financial opportunities carries with it some degree of risk. Typically, this will correlate with the return that can be expected on the investment. In other words, if money truly is perfectly safe, then it is likely headed for a lower return. Likewise, just the opposite is true as well; if high returns are promised, there is probably going to be a great deal of risk involved, too.

Pretty marketing materials do not mean that a firm or advisor is legitimate. Pretty websites and brochures are fairly easy to make in this day and age. In fact, a nice looking simple website can be created in just a few hours. Therefore, just because a company or advisor has nice-looking marketing materials, it does not mean that they are offering legitimate financial opportunities.

Do not cave in to pressure to invest immediately in a “great opportunity.” Scam artists will often tell their victims that they are offering a one-time-only opportunity and that if an investment isn’t made immediately, the client will lose out forever. Here again, research the “opportunity” prior to investing any money.

In any case, being an educated investor or consumer will be the best defense against scams. So take the time to do homework before putting money anywhere. It will be more than worth the effort to do so.

Annuity Guys® Video Transcript:

Dick: Eric, our topic today is one that I’ve been thinking about for a long time.

Eric: You trying to figure out the best scam you could run on somebody?

Dick: Well, when we start talking about annuities and folks, a lot of you found us by going on the internet, and you did a google search and you searched some term, and you brought up our website. So when you did that you probably, since you’ve been out there looking into annuities and things about annuities, you probably experienced a lot of material that, I would say an inordinate amount of material that warn can you about scams. Scams on annuities and this type of thing, and we’d just like to talk about that.

Eric: Yeah, if you’ll look at the sidebar, up and the ads around the thing when you search for the term annuity. They’re like, “Alert! Scam! Beware!”

Dick: Senior alerts, retirement scam alerts.

Eric: Everybody wants to pile on the negative, and you know why, because you click.

Dick: Right, it gets your interest.

Eric: It’s like everybody who wants to watch the car accident as you drive by. For some reason, negative sale sells and in this case scams; alerts are what draws people in so it’s a marketing term.

Dick: It is true that there really are scams, so it’s not as if we want it say, that you don’t ever have anything to be concerned about, but on the other hand you kind of want to understand, what’s really the driving forces, behind the information that you see on the internet.

Eric: Right, and financial services have gotten a black eye a lot lately, because you’ve got Madoff, you’ve got these big name accounting, not accounting firms but…

Dick: Investment firms and the like.

Eric: That people have run off with the money, millions of dollars.

Dick: Right and let’s be really frank. These large schemes that people put over on unsuspecting victims literally, they’re not that easy to discern. They’re not that easy to know, what’s really going down, underneath. I mean if you were to look up Madoff’s character at the time when he was flying high you probably wouldn’t find any fault with him.

Eric: One of the most respected guys in the investment world at the time. Unfortunately, they have all studied Ponzi schemes and that’s basically what they’re doing, they’re taking one person’s money and passing it off up the chain.

Dick: One thing Eric, that you and I have frequently told our clients, it’s just a standard theme. Always beware if an adviser asks you to make a check out with their name on it, so Madoff, a lot of people were making out checks to Bernard Madoff and his investment company directly to him. He had more or less full custody, full control over their money, and so at least there should be some red flags going up.

Eric: In fact one of the things when we’re doing paperwork here in the office, I’ll tell the person, “If anybody ever tells you to make a check payable to them, you run as fast as you can.” Here, you’re working with a company. And I don’t want to throw company names out there necessarily, but you’re making the check typically payable, to the insurance company or the investment company. Those are where those checks should be going not to the individual, even though that person is your adviser and you have complete trust in them, you still don’t make the check payable to them.

Dick: It’s a safeguard. Its checks and balances, and so now, if we switch gears from a lot of the big Ponzi type schemes, and the investment company scams that take place, and we switch over to annuities. Annuities are highly regulated by state insurance departments. These are companies that are perhaps 50 to 100 years old.

Eric: Most of them are…

Dick: Older.

Eric: Have significant time spans that they’ve been in existence for.

Dick: There are third party ratings that you can look at, folks that will tell you following them over a long period of years, how they have fared, how well they have done. It’s really a different realm when you get into annuities with the protections and the regulation that’s involved, and yet there have been some accusations of scams with annuities.

Eric: By whom?

Dick: Well, primarily what we run into and what we read in the news are those that go after the older people, the senior citizens.

Eric: The unsuspecting person that should never have bought an annuity.

Dick: In the first place.

Eric: The scam there is basically, it’s the suitability of the product for the individuals. It’s somebody taking advantage of somebody’s, I don’t want to say diminished mental capacity perhaps or just not understanding the product and how it works. That’s one of the things we stress a lot. You buy what you know and what you understand. There is nothing wrong with needing to understand how a product works before you purchase it.

Dick: Right, equip yourself. Do your research. Understand how third party rating agencies work. Look at the background of the annuity company and then you have to have a certain mind about your own finances, in the sense of how much do you put into an annuity.

We often say if an adviser tells you, you need everything in annuities you should run the other way. So there’s this balance of allocating the proper amount. In fact, you want the least amount in annuities as a rule that will produce the maximum amount of income that you need.

Eric: We talked about the foundational aspect. You know having a secure foundation. That’s what we utilize. We don’t want to put more in than you have to, but we want to protect a certain amount.

Dick: And on the other hand, there are reasons why folks use annuities. It could be for avoiding probate or just safety of the money and a reasonable growth on that money to get it over to heirs. You just have to weigh over what your purpose for that money truly is, and not let somebody talk you into something that is not going to be good.

Eric: Right and in the scam aspect with annuities, oftentimes we hear the things that really if you hear them on their face, they’re too good to be true; you know **guarantees of unlimited potential.

Dick: And no downside risk. I mean we do agree there is no downside risk, but when you couple that with unlimited upside potential, it’s not true.

Eric: Right. When you hear something that sounds too good to be true, it often is, is the rule of thumb. Somebody that doesn’t play out for your, layout rather, both the positives and the negatives of a product, really isn’t giving you the full picture. We all like to paint a rosy picture of what you can do on this side, but there is a reality of what actually will happen, and you need to understand all those, when you’re working with an annuity and any financial property.

Dick: Right and you know something that probably many different ones that have experienced or been invited to these free lunch and free dinner seminars…

Eric: Oh, those scams? Free food scams?

Dick: Are those scams?

Eric: Of course, they are.

Dick: What if it’s good food?

Eric: Well, then it’s good food, but still, nobody buys an annuity over dinner.

Dick: I would think it might be a scam, if I was really going to buy an annuity over dinner.

Eric: Never sign the check if it’s if the know that it’s free. No, when you hear about the free food and the free dinner aspects we always laugh, because from an advisory standpoint it’s a way of getting people and talking to a room of people, and that’s why you see them out there. It should be really thought of as an educational seminar, but it’s just like when you get that call to go see a time share. “Oh, we give you a free weekend in this great sunny…” The expectation is you’re going to sit through the sales presentation.

Dick: Right and that’s what you’re getting with the free dinner or free lunch. You may get some valuable knowledge about something, you may have a nice meal, but you are going to be asked to set an appointment.

Eric: Right, it’s the expectation. When you get something you’re expected that law of reciprocity, that see people want something back from you, and so don’t be surprised when you’re asked.

Dick: Yeah, and I think, folks that there’s really nothing wrong with that, when it’s done correctly without that scam aspect to it, where someone is trying to do something that is not legitimate, sell something that is not legitimate or talk you into something that is not suitable or just target people over 70, or something of that nature, because they’re easier to sell an annuity to. So I think that as long as you’re aware, that you look at both sides of the equation. You do a little research then your potential for being scammed in these situations is greatly minimized.

Eric: That’s right. It’s all about educating yourself, being realistic in what you’re getting. Going back to what we said, “If it’s too good to be true, it probably is.” The same goes for somebody sitting through any presentation, whether it be annuities, investments, whatever. We’ve all been sold that bridge that goes to nowhere, right?

Dick: Folks, never tie up more money than you can afford to tie up in annuity. Make sure you have liquidity. If somebody comes along and starts talking to you about the mortgage on your home to buy an annuity, reverse mortgage, this type of thing, it would be the rarest of occasions that that would have any validity. So you want some red flags to go up and think about it. That would go for any investment you know, “Hey, mortgage your home and here’s an investment.” I mean there may be certain situations where that would be warranted, but it would be very rare.

Eric: And let us tell you there are places that you can go online and the internet is a great tool to investigate if you think something is a scam or you’re concerned about the broker, the company, there’s ways of researching all of those pieces.

Dick: Let’s just reiterate just a little bit about what we started out talking about, and that is that many times on the internet, you’re going to see a lot of stuff that talks about scams and the real intent is just to sell you an annuity. So you have to see that thinly-veiled marketing aspect and it’s everywhere. It’s very pervasive.

Eric: People are just trying to get in front of you is really what they’re trying to do. Take your time, educate yourself. One of my favorite sayings is, “You only get to do retirement once, so make sure you do it right.”

Dick: No do-overs. You know I just might mention that, for any of you that would like, you can go on, you may have already had access to it, but you can get my book, which does have some interesting chapters in it that talk about annuity scams and talk about [unintelligible 00:12:04] and the SEC and how they can help you, also about advisers, the different types of advisers.

Eric: The broker-check pieces, and how you can investigate an adviser, excellent.

Dick: So, use that.

Eric: Thank you for visiting today. Have a good day.

Dick: Thank you. ‘Bye, now.

Annuities – The Best Financial Product No One Wants!

September 7, 2012 By Annuity Guys®

Why would an insurance actuary call annuities the best financial product no one really wants? And why would he go on to say that in retirement he might not even purchase an annuity himself even when he knows they make good sense?

Dick and Eric discuss why individuals purchase annuities – even though they don’t want to…

Annuities: The best financial product no one really wants

“Annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life”

People who save through RRSPs have a choice to make when they retire. They can transfer their RRSP balance to an RRIF and draw it down at their own pace (subject to a minimum) or they can buy an annuity.

The simple fact is, an annuity may be a great idea, but hardly anyone buys one.

It is easy to blame low interest rates, which depress the amount of annuity income one can buy these days. But annuities were not in vogue even when interest rates were much higher a dozen years ago.
‘Let me be honest. When I retire, I am unlikely to buy an annuity myself, even though I’m an actuary and know all the advantages’

Economists have come to refer to this phenomenon as the “under-annuitization puzzle.”

Buying an annuity seems like an elegant solution since it removes the risk of outliving one’s assets (what actuaries like to call “longevity risk”), it eliminates the hassle of making investing decisions after retiring and the income stream it provides is super safe (it really is, at least in Canada). So why are they so unpopular?

In recent years, however, the economics of annuities have improved greatly. Annuities in Canada now generally return 95% to 100% of premiums paid. In fact, with the recent fall in long-term government bond yields, annuities now return more than 100% return of premiums paid in many cases. The economics, then, can no longer be blamed.

Another often-cited reason for not annuitizing is that the retiree wants to leave a large lump sum to a survivor in the case of early death. This argument, however, does not hold up on closer examination.
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Even when people have little or no interest in leaving assets behind for their heirs, they tend not buy annuities. Moreover, annuities can come with generous survivor income options, if one is prepared to pay for them. Another excuse shot down.

There are other explanations for this puzzle, including: The desire to have money on hand in retirement for a rainy day; the recognition that income needs might vary and the fixed income from an annuity might not match up well; and a reluctance to give up the chance to do better by investing in equities within a RRIF if stock markets do well.

Let me be honest. When I retire, I am unlikely to buy an annuity myself, even though I’m an actuary and know all the advantages.

I would be the first to admit this reaction is not entirely rational. The reason, plain and simple, is that annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life. [Read the Full Article from Fred Vettese at the Financial Post]

Annuity Guys® Video Transcript:

Eric: The topic is annuities. The best financial product no one really wants.

Dick: Can you imagine that no one would want an annuity, Eric? Is that a true statement?

Eric: No, the people I talk to every day, everybody wants an annuity.

Dick: But that’s different. Folks, the people that we talk to may be someone like yourself that’s actually went to our national website, as Eric likes to remind me, international website.

Eric: International website.

Dick: But goes to our website and they’re already in the mindset of annuities.

Eric: Right, they’re doing their research. They’re doing the background on why this might work for them.

Dick: So we might be just a little bit skewed, do you think?

Eric: We’re taking it based off an article, and interestingly enough, it was written by an actuary who works for an insurance company. His comment and I love this, “Annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life.” Well, that sounds pretty pathetic, if you ask me.

Dick: I do have to say that, before I knew much about annuities, many years ago that never entered my mind, never crossed my train of thought. Would I rather have a new car, a new house, or an annuity?

Eric: Rather than an annuity. That’s not fair. Everybody would rather have a new car or a new house.

Dick: That’s right, and really when you think about it, and that’s a lot what this article gets into is we built this money up. We accumulate this money and we like the idea of hanging onto it, controlling it, investing it, whatever we choose to do with our money, but to hand it over to an insurance company and let them give us money back, it’s kind of a transitional state that we go through to make these types of decisions, and there has to be a pretty good reason behind it.

Eric: I come from a family of educators. I’ve talked about that before.

Eric: You know right now in Illinois, we’re fighting. They’re fighting to maintain their pension. Well, what’s an annuity really?

Dick: It’s a pension-style income.

Eric: I mean for today’s 401k investors they’re basically, when you get your retirement you’ve got this lump sum. Do you want to keep the lump sum or would you rather have a pension?

Dick: The vast majority of retirees before they retire and they have this choice, not all companies give this choice; but there are a lot of corporations that will give the employee the choice of a lump sum or a pension. Now the vast majority choose the pension. They’ve worked their entire life.

Eric: For the seemingly stingy income for life?

Dick: Yeah, and yet, even those that would take the lump sum, in many cases will turn right around with that lump sum, and buy a commercial annuity that they feel is a better option, than maybe the pension the company was going to offer. So we tend to get it when it comes to that lump sum that comes from the employer, but yet many times we’ve worked all of our lives, built up all of this money and what’s the purpose of it?

Eric: It’s mine. I want to keep it.

Dick: What’s it supposed to accomplish?

Eric: That’s exactly it. It’s just future spending. It’s not savings. Its future spending is what we’ve save for, but we don’t think of it in those terms. We think of it as “This is money I saved. I don’t want to give it to somebody and then have them, give me a seemingly small allowance.”

Dick: Right, and that’s where the insurance company’s job, their job is to look at risk, to manage risk, to know what’s realistic. You’ll have to read this report, folks and kind of get the gist of what this person’s saying, because he actually is an actuary and he’s really laying out that these insurance companies don’t always win on this stuff.

Eric: And he talked about annuities are much better—the design and what they payout in today’s era, is much better than they were 10-20-30-years ago.

Dick: Right, a lot’s changed.

Eric: You really do have an actuarial advantage to buying an annuity and he admits that, even though I know this advantage exists, I’m not so sure.

Dick: I might be standoffish when I first retire, but maybe as my age advances I’m going to be more apt to do this. This kind of brings me back to a lot of the buzz that is out there and things we talk about with the hybrid annuity but one of the things that appeals so much to folks, on a hybrid-style annuity is that they are able to control that lump sum. What we call majority control the first 10-years or so of an annuity. You have some surrender charges, so you control about 90% of it during that first 10 years, and those surrender charges decline, so after 10 years, you control 100% of it and you still have a lifetime income. And yet, if you haven’t used that money in your account, it can all go on to your heirs, your spouse, whatever is important to you.

Eric: Exactly. In his life point, I guess in summation here he talks about you know what? Everybody has, even if you have that lump sum investment you have, usually a portion that’s in equities and you have a portion as you get closer to retirement that we should all be moving into those fixed payments, bonds, CD-style. What would be wrong with taking those more conservative assets, turning that into an annuity and then just truly letting your equities run, and knowing you have that **guarantee that income coming on?

Dick: Well, Eric obviously this is what we talk to our clients about. We talk to them about balanced allocation. Not putting everything into annuities, not necessarily having everything in the market. Finding that balance that works for each individual, and so to me, he’s right along the lines of what we continue to explain to people.

Eric: Exactly, yes. He takes care of the foundation very well.

Dick: So Eric, would you say that an annuity is something that no one wants?

Eric: All right, there are a few people that want annuities.

Dick: Well, folks we’re not saying that an annuity is going to be the end-all and the be-all or exactly what you need, but you do want to look at it closely and determine where it might fit into your overall financial picture. We really appreciate you spending the time with us, today.

Eric: You have a great afternoon.

Why are Hybrid Annuities so Popular?

August 31, 2012 By Annuity Guys®

What made fixed index annuities and hybrid annuities the fastest growing annuity type on the market according to a LIMRA report? Why would you consider a hybrid annuity when planning your retirement? Dick and Eric look at hybrid annuities and what makes them so special.

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What are Hybrid Annuities?

Hybrid annuities, also referred to as hybrid income annuities, are essentially a type of insurance contract allowing the account owner to allocate his or her assets into a fixed annuity with a market benchmark component, having an income rider or riders that give substantial present or future **guarantees to secure a variety of retirement objectives.

These annuities refer to a combination of several unique aspects of various types of annuities that have been combined. Technically, a hybrid annuity is a fixed index annuity with an innovative new generation income rider attached to it.

Some hybrid annuities can help to resolve the concerns with regard to other needs in addition to asset growth and retirement income––such as long-term care funding or wealth transfer to heirs––while still providing one with a secure income. These annuities are considered by many to be the answer to satisfying a combination of retirement objectives combined into one solution, thus having the potential to solve several issues in retirement.

Obtaining a hybrid annuity essentially works the same way that you choose any annuity, in that making an allocation begins by choosing the hybrid annuity after comparing rates, features and ratings that meet key retirement objectives and then funding the hybrid annuity contract with a licensed agent as the final step.

With some hybrids, if funds are required for needs such as long-term care, with certain hybrid annuities, owners can have access to withdrawals for that purpose by way of an accelerated cash account payout or a **guaranteed increased income payout, in some cases for as long as it is needed. However, if they do not need the funds for that purpose, they will receive their lifetime **guaranteed retirement income just as it was structured or use the annuity for moderate growth as a secure asset foundation to balance their portfolio.

Annuity Guys® Video Transcript:

Dick: We’re going to talk about hybrid annuities today. We’ve have a lot of different subjects, and a lot of times, Eric, we touch on hybrid annuities. But let’s talk about why they’re so popular and maybe, before we actually get into that, let’s talk about what they are.

Eric: Oh sure. I was ready to talk about why they’re so popular. What is a hybrid annuity? People call up and say, “Well, I’ve been talking to this guy about a hybrid annuity.

Eric: Then the first thing I do is I say, “Stop,” because hybrid unfortunately has become a marketing term for a lot of individuals.

Dick: A hybrid annuity, to us, is the fixed index or fixed annuity, usually with an indexing component, and then it has a rider typically that **guarantees income for life. These are like the newer, more innovative income riders. I know you run into this. I run into it. Folks will start describing a variable annuity^# to me, and they’ll start saying it’s a hybrid. They may have just confused it with a hybrid, or they may have been told it’s a hybrid.

Eric: In all fairness to the variable annuity^#, it was really the first one to have those riders that would give income for life.

Dick: That’s true.

Eric: So if you think of just that rider being that contextual piece that makes it more of a hybrid. Well, in my mind those pieces were always part of the variable. They weren’t part of the fixed. So the fixed has kind of morphed its way, to use a different term I guess, into that variable.

Dick: How long has it been that fixed annuities? I’m going back I would say . . .

Eric: I’m much too young to know.

Dick: I would say that it was about somewhere seven years ago that the riders on the fixed annuities really started to pick up steam. And like you say, on the variable annuities^#, they’d already been kind of a mainstay for the variable annuities^#.

Eric: Right. I think what they saw was the variable annuity^# market had a lot of traction. People really appreciated for life without having to give up their assets.

Dick: Without annuitizing

Eric: Right, annuitizing. And that’s where we always talk about the immediate annuities, that’s the component they have. You can get income for life, but you have to give up your assets. So why people are attracted and what makes hybrid annuities so popular is that aspect of, basically, income for life **guarantees without having to give up your assets. You can still pass on money to heirs. You can still change your mind. You have majority access as we like to say.

Dick: Yes, or majority control.

Eric: Majority control. So the aspect of the hybrid annuity is actually very popular for those specific reasons right now. The other thing I see right now, especially in today’s economy, when you look at where rates are, as far as what’s being paid on the growth side, not extremely attractive.

Dick: It’s not very good. It kind of goes back to the bank CD rates, savings rates, and money markets are all effected typically by the ten year Treasury, and we have that same effect on the annuities. If we said they’re paying double what the banks pay, it’s still not very much.

Eric: No. Two times nothing is still nothing.

Dick: Exactly. So you might be looking at a 2% to 3% range maybe on a fixed annuity or even a fixed index annuity. And yet, on a recent report, Eric, that we were just talking about, the LIMRA Report, it showed that people purchasing annuities, those sales are down pretty dramatically, except for the fixed index, which is what we consider the hybrid.

Eric: Which is the base of the hybrid.

Dick: Exactly. And let’s just say that for the sake of conversation, folks, in today’s annuity world, the mainstream hybrid annuity is considered the fixed indexed annuity with one of the newer income riders on it. So just for the sake of clarification, when you’re speaking with people, you really have to clarify terms. Ninety percent of what’s talked about on the Internet and what’s talked about, advisor to client and advisor to advisor, is a hybrid annuity is a fixed annuity with a newer, innovative type income rider on it.

Eric: That’s right. And those are the pieces right now that are for the upcoming retirees, basically or near retirees, as I like to think of them. That’s what makes it really attractive, because those companies are still providing some of those **guarantees in deferral for the growth component on those hybrid annuities.

That’s the other aspect of that income rider usually. It’s I’m going to **guarantee a certain percentage of growth in deferral. Right now, we’ve got in the range of 4%, 5%, 6%, 7% still available in that deferred growth. So for somebody who’s thinking about retiring in the next five to seven years, if you’re uncomfortable with what you think is going to happen in the market necessarily and you want that **guarantee, it’s **guaranteed and predictable. Those are two aspects that give near retirees comfort.

Dick: Well, and this is where, when we go back and we compare it to the variable annuity^# and we say sales are down in variable annuities^#, and yet they’re up in indexed annuities, there’s not as much potential on an indexed annuity for growth. People aren’t interested today so much in potential and growth as they are in **guarantees.

Eric: Safety and **guarantees.

Dick: Safety and **guarantee of principal, and I also say there’s one more factor that makes these so popular and that is cash flow, because we spend our life, our careers building our money up and saving, and we look at growth. So we’re accumulating net money. But what are we accumulating it for?

Eric: To spend it.

Dick: We need to spend it, effectively and efficiently, and that’s what the hybrid annuity does, is it allows you to know what type of cash flow you’re going to have throughout your retirement, to ladder it, stage it, cover some inflation hedge aspects. I believe that’s what’s driving the popularity of this hybrid annuity.

Eric: Yes, I would agree. I would say 90% of the questions I get about annuities are about hybrid annuities. When I talk to people, I say the best thing about a hybrid you work backwards. Tell me what income you want and when you want it, and I can use a hybrid annuity . . .

Dick: And we’ll tell you the least amount of money to put in to get there.

Eric: To get there. People are like, “Yes, that’s what I want. I want that predictability, reliability, and **guarantees, those contractual **guarantees.”

Dick: So, folks, we hope that this has cleared up some of your concerns and potential misconceptions, or confirmed the things that you already know about a hybrid annuity. It’s very much a part of the financial planning community today and what’s being used and what’s effective. Anything that we can do to give you more clarity and maybe some direction on these hybrid annuities, we’ll be glad to do it.

Eric: And hopefully we explained why they’re so popular right now.

Dick: Yes.

Eric: Thanks for tuning us in.

Dick: Thank you.

Study Finds Near Retirees Get Crushed! Can Annuities Help?

August 24, 2012 By Annuity Guys®

A recent headline from the Yahoo Daily Ticker caught our attention – American Incomes Are Falling And Near-Retirees Are Getting Crushed: Study.

The report was based upon findings from Sentier Research, a data analysis company, and (to the surprise of no one who works with individuals in or nearing retirement) they found that the inflation adjusted incomes of those age 55-64 were down nearly 10 percent from December of 2007.

Dick and Eric examine how interest rates hovering near zero have impacted savers and near retirees, in addition to discussing how annuities can be utilized in these situations.

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An excerpt of the Yahoo report.

Annual incomes in the United States have dropped sharply in recent years, and near-retirees are getting hit the worst.
That’s the conclusion of a new study by Sentier Research, which looked at the trend in median U.S. household incomes since 2000.
Twelve years ago, after adjusting for inflation, the median household in the United States earned about $55,000 per year, reports Catherine Rampell of the New York Times, citing Sentier’s data.
Now, the median income has fallen to about $51,000.
The two age-groups that have been hit the worst in this period are households led by those in the 55-64 age group and those in the 25-34 age group. The incomes of the near-retirees have fallen by nearly 10% in the past three years.
This data explains why our economic recovery is so sluggish. [Read the Full Article]

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Annuity Guys® Video Transcript:

Dick: Today Eric, we’re going to talk about a subject that . . . we’ve just looked at a study, and this study basically talks about those folks that are near retirement just being crushed by all of the negative economic factors that have happened; their income, their assets, and different things. I guess this is something that you and I have experienced our own practice with this age group.

Eric: In fact I just talked to a gentleman earlier today who talked about, the last 12 years in his 401K, it’s just now back to where it was 12 years ago. Here’s a generation, he’s in his mid 50’s preparing for retirement, what’s he going to do? He is literally grasping, because what he anticipated having and what’s reality right now just aren’t happening.

Dick: When you look at the way 401Ks have been affected; IRA’s, 401K’s, all of this qualified money, you look at the property values, retirees, or those near retirement in that age group, and this age group we’re talking about is about 55 years old to 64. They don’t have that equity in their home anymore.

Eric: We all approached homeownership. For a lot of us, it’s our biggest investment. We put dollar after dollar into our houses anticipating when we get to retirement the equity is there. With the depression in the housing market, boom, that option for a lot of us has gone away. Not only do we not have the amount of equity, in some cases, we don’t have any equity.

Dick: It can be negative equity.

Eric: It’s been just devastating. The study talks about, the [inaudible: 01:51] Research Study, they’re talking about declines for this 55 to 64-year-old households are age range, the average income. When you factor the median adjusted income, so you’re looking at it at inflation-adjusted number, incomes dropping since December 2007 to now; almost 10%.

Dick: Pushing 9.7%, I believe it was.

Eric: If you think about the cost of gasoline, the cost of food, the things that impact our lives, I see it, I feel it, so you know as you get closer to a fixed income . . .

Dick: You start to sense the old idea of stagflation: Inflation is increasing, and yet, the incomes are decreasing. We find ourselves in a position of saying, “Where do we turn?”

Eric: You’re traditional, ‘I am going to put it in my [inaudible: 02:40].’ As you’re getting closer to retirement, you’re supposed to become more conservative, you don’t want to lose money; you don’t want to go backwards.

Dick: Based on our fed direction right now.

Eric: We’re all going to be saying, ‘We were Bernake’d.”

Dick: We’re being penalized if we’re in this age group, because the savings rates are so poor.

Eric: We keep on saying we’re trying to boost the economy; we’re trying to get the engines fired.

Dick: At the expense of what? Our retirees

Eric: We’re killing our retirees. The headline was ‘Crushing the Retirees’. They are literally getting crushed by 0-returns in their options.

Dick: When we turn even to annuities, and that’s our headline up here, ‘Can annuities help?’ Annuities are affected by these low interest rates.

Eric: Yeah. Let’s be honest, these insurance companies utilize investment vehicles as they hedge.

Dick: Bonds, treasuries, and the like to . . .

Eric: To take those dollars, they grow them, and that’s how they return those dollars back to those retirees. They’re getting the same level of constraints placed on them as many of these individual retirees.

Dick: Eric, one thing that I’ve seen and I think it’s unfortunate; I’ve seen some retirees, or those that are near retirement, they panic a little bit. I can understand why they panic. They want to make up, maybe for lost time or they want to make up for market losses. Whatever has caused this, sometimes they’ll tend to take more risk on than what maybe they should.

Eric: That’s the black/red syndrome. If you keep betting red, it’ll hit red sooner or later, won’t it? If you’ve given away all your chips, you can only spin the wheel so many times before you’re done. It’s the gamblers mentality. Like the guy I talked to, 12 years to get back to where we were 12 years ago. He’s not where he thought he’d be.

Dick: You really have to start where you’re at. We have seen those folks that were fairly-well positioned, that came through the financial crisis very well, but those are few and far between as compared to those that were following some of the traditional methods of investment and found themselves not doing so well.

Eric: They always say, ‘There’s something that makes money in every economy, for somebody.”

Dick: Timing.

Eric: The hard thing is, as we’ve got people in this age range, what’s been my . . . if we look at an annuity that’s going to be a potential for some of these folks, I like for someone who still has over 5 years of, basically, working years left.

Dick: Before you’re going to need to turn on that income stream.

Eric: Let’s look at hybrid annuities, because they have those **guarantees that it will roll up and defer.

Dick: They increase your income dramatically if you can leave them alone.

Eric: Right, and that’s the key. You have to be able to leave it alone. Let it set in deferral. For people that are panicking because they’re getting close and they don’t want to sit in the market and have another 12 years of 0 gain . . .

Dick: Or go backwards.

Eric: . . . it’s an option. It’s an option for a portion of those dollars. As I say, we talk about the foundational aspect of income. You’ve got Social Security in a pension, and then if you can stack a . . .

Dick: That’s going to get you to that number that you need.

Eric: Your basement, cover the foundation.

Dick: It’s going to cover the basic needs of life.

Eric: That hybrid is one of those options; it works well in that situation. If you’re a little bit closer to retirement, there’s other options in the annuity world. It’s the immediate annuity; it’s your self-directed pension plan. You can turn it on, you can set them up so that you get little bumps in your income, or you can set up so that you just turn it on, you can set and forget it. It’s there as long as you are. Then there’s, of course, the pre-issued side if you’re looking for . . .

Dick: With the pre-issued I think that a person would look at maybe just taking the yield off of the interest that’s coming in off of it and preserve that principle to reinvest into another pre-issued annuity or some other financial vehicle that’s available at the time, that’s a better choice.

Eric: It’s the old CD mentality, when you’re going to take your interest earned and use that as your income stream.

Dick: The big difference right now between the pre-issued and the CD is about 5% or 6%. It just depends on the situation.

Eric: Those are annuity options, and obviously, there are other investment options out there, as well. You have to balance: Guarantees, its risk/reward. That’s why we like annuities for that foundational aspect; it takes a little bit of the risk out.

Dick: Exactly. Eric, when we start to think in terms of retirees getting crushed, and what is the answer, I think we, folks, we want to state pretty clearly that there really are no silver bullets; there’s no perfect answers. There’s different financial vehicles such as annuities or could be bonds.

Eric: Paying stocks.

Dick: That are going to be the best in your situation. That’s where it really takes a good advisor to help determine what is going to best in your situation.

Eric: It’s weighing your options. We’re not a big proponent of putting all your eggs in one basket. We like asset allocation, diversification of assets, and asset classes. Look at what’s available to, and then make that decision based off those factors.

Thanks for tuning in today.

Dick: Thank you.

The Love Hate Annuity Relationship

August 17, 2012 By Annuity Guys®

Every financial product has negatives and positives, how these products are presented or utilized by companies and advisors can lead to a vast array of emotions and opinions…. Hence, annuities are no stranger to this love/hate relationship.

Dick and Eric discuss some of the rumors that annuities face that often lead to the conflicting opinions among individuals considering an annuity in retirement.

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Below are some excepts of an article by “Coach Pete” D’Arruda president of Capital Financial Planning and host of Financial Safari Radio broadcast the stimulated the idea foe this weeks commentary. [Full Article]

Annuities Have a Negative Perception

Despite their benefits, annuities have received negative attention over the years for a number of reasons, including rival products seeking to discredit them, poorly constructed products in the space and inappropriate sales of the products. It is imperative potential annuity investors have all the right information on hand to make an informed decision.

While annuities are not for everyone, those who can benefit from them should not let common misconceptions dissuade them from using an annuity as part of a comprehensive financial plan.

The Top 5 Rumors About Annuities

Every issued annuity is a variable annuity^#.
The impact of inflation is too great for fixed annuities.
With penalties and surrender charges, annuities are just too expensive.
Never use your IRA money to invest in an annuity.
With a big name comes a better return.

Remember that securing **guaranteed retirement income in this volatile, low-rate environment is difficult – but not impossible. Do your research, tune out the conflicting opinions and don’t be afraid to ask the tough questions of your financial planner. It’s absolutely possible an annuity should be part of your financial plan. Get your hands on an Annuity Owner’s Manual before purchasing an annuity and learn the good, the bad, and the fine print before you ever invest your money. [Read the Full Article]

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about the love/hate relationship that people have with annuities.

Dick: Why does that happen? I mean what is this love/hate relationship? But it really is there.

Eric: It is. We were reflecting on an article by Coach Pete, who’s on radio in the financial safari down there in North Carolina.

Dick: His radio station is really picked up all across the nation too, so a lot of people hear him.

Eric: He gets questions occasionally. One of the questions was, “What’s the true story?” Talking about the negativity of some of the annuities. Really, it’s looking at why annuities are so negatively portrayed in the media and these attempts to discredit annuities sometimes by their rival products.

Dick: I think it’s also important to recognize that there are these positive articles about annuities. There’s a lot of emphasis, even from the federal government, now that annuities could make a big difference. But yet we get a lot of negative press.

Eric: Sure. If you think about it, annuities compete for the same slice of the pie as mutual fund^{^}s, stocks, bonds, and CDs. I mean all those pieces are options for people when they’re trying to determine where to put their retirement dollars.

Dick: Do you think that some people just might try to color it, I mean the wrong way, for personal gain?

Eric: I have never seen a mutual fund^{^} company advertise ever. Well, maybe . . . You have to realize there are competing opinions, and everybody wants to think that theirs is the best. Yes, insurance companies compete against investment companies and the such. So there are conflicting opinions and approaches. You see sometimes people tend to go negative. We’re in the political campaign era. We don’t see any negative campaigning going on. I think that’s part of or one of the reasons that some people have such a negative opinion about annuities. That creates that hate relationship.

Dick: From our own perspective, when we’re working with folks that are just kind of entering that realm of understanding annuities, many of their questions center around variable annuities^# because that’s all they’ve read about in the press. They don’t know the difference between the variable and the fixed and the immediate. They pick up this negative connotation that’s continually put out there by the press.

Eric: His first point was, yeah, every annuity is a variable annuity^#. Well, that’s not true, but a lot of people confuse especially the variable annuity^# and the fixed indexed annuity.

Dick: Correct. They have some similarities.

Eric: Exactly. If you use the S&P as a benchmark, well the S&P is an investment product, right? So they think that it’s invested in the S&P.

Dick: Yet a fixed annuity is just what it says. It’s fixed. It’s safe. Your principal is **guaranteed, which is the opposite of the VA.

Eric: Exactly. In a variable annuity^#, your principal can go up and down with the performance of the underlying sub-accounts or the investment accounts.

Dick: Where with a fixed indexed, you’re not really invested into that index. You’re just using it as a gauge of rising and falling.

Eric: Exactly. That’s where the confusion comes in. It’s not necessarily a fixed return that you’re going to get with an indexed annuity. But the safety aspect of every fixed annuity out there, the worst you’ll do is a zero on the return.

Dick: Your principal is always protected.

Eric: It’s protected.

Dick: The other thing, Eric, that we run into a lot with the VAs is the idea that, “Hey, aren’t these annuities all high fees?”

Eric: Right. With a fixed annuity, everything’s built in. It’s what you put in is what goes in. There’s no load fee. That confuses the mutual fund^{^} aspect. “Well, what’s the load I have to pay? What’s the upfront cost?”

Dick: Sure. Right.

Eric: With fixed annuities, it’s all factored into the performance of the product. What you put in actually goes into your annuity.

Dick: I do find that from folks that are just setting up an annuity that they are kind of amazed. “Okay, so I give you $100,000 or I give this company $100,000 and then they give me a bonus. I start off with $105,000 or $110,000 in this annuity. And I don’t owe you anything?”

Eric: Yeah. “How much do I have to pay for that?” The insurance company has already factored that into the program.

Dick: Right. Yet, it is a little different with the variable annuity^#, or a lot different, we should say. I’m just saying in the sense of the fee structure. With the variable annuity^#, the fees are going to be right there on your statement. For the most part, you’re going to somewhere from 3% to 5% maybe, depending on the riders.

Eric: Depending on the riders. I mean you could get one of the barebones ones that have very low fees. But most of them, if you’re really looking at the income **guarantees or the death benefit **guarantees, you’re going to have significantly higher fees.

Dick: Yes.

Eric: All right. Rather than just focusing on the variables, we can talk about some of the other misconceptions. What about inflation? Can a fixed annuity combat inflation?

Dick: I think the answer to that is obviously yes.

Eric: Why is that obviously yes?

Dick: Well, there are different ways that you can either defer a fixed annuity with a very high rollup rate, high growth rate for future income. You know that when you turn that income on, that’s going to be an offset against inflation. Yet, there are also ways to actually have cost-of-living adjustments.

Eric: The other aspect that combats inflation is if you’re looking at something that’s going to be in the equities market, you have risk involved with the volatility of the market. That’s one of the things. You don’t have to worry about inflation on the side of you haven’t worried about taking a loss.

Dick: Yes. A lot of times there’s just this automatic assumption that if your money is in the stock market, it’s going up 8% a year. If we look at the last 10 or 12 years, you’ve made virtually nothing. There’s also the possibility that your money goes negative. Now how well does that keep up with inflation?

Eric: Oops.

Dick: Not good.

Eric: No, not good at all.

Dick: It’s not good for sleeping at night.

Eric: We’ve talked about, in previous videos, strategies for addressing inflation with annuities, whether it be through laddering. There are tools out there that can help you combat inflation with annuities.

Dick: Right, and I would, folks, recommend that you go back and look at some of the other videos that we’ve done on laddering annuities and various aspects of inflation.

Eric: Sure. All right. The third point he makes is with penalties and surrender charges, annuities are just too expensive. He points out that this is partially true. There are surrenders. There are penalties. Depending on the annuity you select, I mean it can have surrenders. I can think of one off the top of my head that has a 16 year surrender. So they are out there. There are surrenders.

We’ve talked about this also in previous interviews. Why are there surrenders built into it? It’s because these are not short-term products. If you’re buying it for the wrong reason . . .

Dick: Well, these companies have to secure the clients’ money. The money goes into long-term bonds, very high-quality investment vehicles, and US Treasuries. The idea is, to protect everyone, these surrender charges have to be there.

The key to setting up an annuity properly is making sure that it does meet the objective, that it meets the long-term objective. Then you’re not going to be in a situation where you’re going to suffer a penalty or a surrender if it’s done properly.

Eric: Exactly. I think that’s the key. If you look at something that has a ten-year surrender, it’s typically a long-term product. It’s been designed. Annuities are designed for lifetime income. They are safe, secure vehicles that have longevity, basically, as part of the quotient of what they’re built on.

Dick: I think the idea of the 10 years or 12 years or 8 years, whatever the surrender aspect of the annuity is, gives the client a sense of, “Well, if things change or I would change my mind, I have this escape.” But most folks that set up an annuity really look at the benefits way beyond 8 years, way beyond 10 years or 12 years. They want this to carry them through their entire retirement. It truly is a long-term solution to a long-term problem.

Eric: Exactly. That is really the solution it should be solving. It’s not a vehicle where you are going to trade in and out of different annuities each and every other year. If that’s your intent, you’re looking in the wrong spot.

Dick: Right. Go ahead. I was going to say let’s talk about what makes people love their annuities.

Eric: Well, they take out volatility of the market performance. If you’re concerned about volatility, people typically do that. The income aspect, you have for life. There’s a novel idea. Those are the two big ones that jump into my mind right off the bat. So **guarantees . . .

Dick: Safety. I can say this, Eric, from experience with clients, many times going into it the thought of, “Should I do an annuity, shouldn’t I do an annuity,” there’s hesitation. There’s this love/hate because of all of the negative press and propaganda from all directions.

Eric: What’s coming in. Yeah.

Dick: Correct. Yet, what I find is that those folks that actually have an annuity, that have had it for several years, especially those that have come through the financial crisis, that they’re very satisfied. There is an appreciation and a love for that decision that they’ve made. Very seldom is anyone not satisfied.

Eric: I would agree. If you buy it for the right purpose, if it fits like a glove because it satisfies what your need was, then you’ll be happy. That truly is where people who have purchased it and got what they wanted and are happy. If they educate themselves going in and understand what it’s going to accomplish for them, then they will be pleased with an annuity. Most often, you’ll love the fact that you’ve made that decision because, in some ways, it’s sleep medicine.

Dick: Yeah, it is. It’s sleep assurance. It’s sleep insurance in many ways. I know that we could end it right here, but let’s hit it on the other side of it. Let’s talk about the hate. Why would you hate an annuity?

Eric: You bought for the wrong reason. You thought you were going to buy it now thinking the rates were awful, and all of a sudden rates go up higher. “Oh, if I would’ve waited, I could’ve gotten a better rate.”

Dick: Or you like maybe living on the edge a little bit, you know?

Eric: You like volatility.

Dick: You like the up and down of the market, taking that calculated risk, hoping for the best.

Or you’ve got this discretionary money that you could put into the market. It wouldn’t hurt anything. You stuck it in an annuity, and now that annuity isn’t performing at the high level of the market.

Eric: Right, you have an annuity. You have the safety **guarantees. You’ve eliminated the risk. All of a sudden, everybody else is talking about how the market is doing . . .

Dick: They’re making all this money.

Eric: Oh, I’m making so much. You missed out. Timing is everything. But, you know what, the timing of an annuity is you’ve taken that **guarantee, and you shouldn’t have to worry about it.

I guess I’m not being negative enough.

Dick: Well, thanks folks for tuning in today. We hope this helps you in your overall decision to kind of balance all of this information out there, both positive and negative.

Eric: Well, we hope you don’t hate us, but I don’t know if you’ll love is either. Thanks for coming in.

Dick: Bye-bye.

28 Risks Retirees Face – Part 2

August 9, 2012 By Annuity Guys®

What are the risks everyone will face in retirement? We recently received a list of retirement risks prepared by the financial planning team at Global Financial Private Capital. This list comes as close to encompassing all the risks that retirees face as we have seen. Annuities do not answer or alleviate all of these risks, but they can control a significant number of the risks retirees have to consider.

This week Dick and Eric discuss the last 14 risks retirees face and how an annuity can be utilized to address some of these potential concerns.

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Tax Risk – Significant tax increases or elimination of tax benefits.
Loss of Spouse Risk – Planning and financial hardships that arise upon the death of the first spouse.
Unexpected Financial Responsibility Risk – When the client acquires additional unanticipated expenses during the course of retirement.
Liquidity Risk – The inability to have assets available to financially support unanticipated cash flow needs.
Legacy Risk – The inability to meet the philanthropic and/or bequest goals that the client has set.
Financial Elder Abuse Risk – An advisor or family member preys on the frailty of the client, recommends unwise strategies or investments or embezzles assets from the client.
Reemployment Risk – The inability to supplement retirement income with part-time employment due to tight job markets, poor health, and/or care giving responsibilities.
Home Maintenance Risk – The inability or unwillingness of clients to continue household chores and activities that they once handled themselves, which may require financial resources to pay for these outsourced activities.
Timing Risk, also known as Point-in-Time Risk – Considers the variations in sequences of actual events beginning with different time periods.
High Debt Service Risk – Clients retiring with significant mortgage, student loan, and/or consumer debt that may erode the resources needed for retirement spending.
Procrastination Risk – Clients started saving for retirement too late.
Retirement Saving Opportunity Risk – Working for an employer that did not provide a retirement plan.
Inadequate Resource Risk – Clients have not saved enough to provide adequate retirement income.
Unrealistic Expectation Risk – Client makes poor choices because he/she was not properly educated, or remained unaware, about the consequences of insufficient retirement income planning.

Read the 28 Risks Retirees Face – Part 1, here.

Annuity Guys® Video Transcript:

Eric: Today we’re talking part two, of our 28 risks to retirees. We left off on number 14, so we’re going to tackle the second half here and start with number 15.

Dick: I’m ready for number 15.

Eric: All right, and its tax risk. It’s basically what happens if they eliminate certain tax benefits or if perhaps maybe, the tax brackets increase.

Dick: Let’s take an informal survey here, Eric. How many people think taxes are going to be going up in the future? How many people think taxes are going to be going down in the future?

Eric: So there is some tax risk out there especially when you’ve got things like IRA’s, which are not being taxed now, they’re going to be taxed when they come out on the other side.

Dick: Right. Well, we’ve got Roth’s, which offer a great tax benefit and there’s always the possibility that that could be taken away.

Eric: Right, that was with our public policy risk from last week, and if you don’t know what we’re talking about, I encourage you to check out last week’s video.

Dick: Life insurance. That’s another one. It has a lot of great tax advantages.

Eric: They’re tax-free, tax deferral, [unintelligible 00:01:14].

Dick: Annuities, so as we face all of these possibilities one thing we’ve told our clients, because they’ve asked us the same question, “Well, if I go ahead and go forward with this plan, what assurances do I have that the government won’t change the rules and disallow this for me?” Well, there are no assurances, but one thing that we have been able to say with some confidence, is that in the past, the government has grandfathered those that acted in good faith, and were using a viable strategy that was allowed by the IRS, but the new folks trying to get into that strategy…

Eric: Right, it goes away, usually. I guess what we’re saying on tax risks don’t wait for the rules to be changed, because then it is too late.

Dick: Exactly.

Eric: Interesting, the next one here we had a little too much fun probably with this; loss of spouse risk.

Dick: Yes. Well what can annuity do to replace your spouse, Eric?

Eric: Well, in this case replace the spouse…

Dick: I don’t think that’s what they’re talking about, do you?

Eric: It’s not go out and get yourself a new one, but it’s the financial. Each spouse brings a financial benefit hopefully to the arrangement, and what happens when one is gone?

Dick: It makes a big difference, and many times it’s not factored in properly, and usually there will be one spouse that will be in a better position, if they lost the other spouse financially, than the other spouse would be, because it would create a great hardship. So you’ve got to determine which one is, maybe at the greatest vulnerability in the plan.

Eric: And pension factors, social security impacts, what happens. And you hate to sit there and do the math on it, but you have to know what the impact is going to be if one spouse is gone, and how it’s going to impact, not just the financial aspect, but then there’s also replacing some of the service aspects and things that they do around the house. Little things go a long way, here.

Dick: Right, number 17?

Eric: Unexpected financial responsibility risk.

Dick: Where something blindsides you, and you’re caught unaware with a huge bill.

Eric: Yes, I always think of the kid that is going to move back home with me or the parent that’s going to move back in with you.

Dick: Or the child or grandchild that had an unexpected health need, that wasn’t going to be covered by insurance.

Eric: Right, what happens when the unexpected happens?

Dick: And you need to get your hands on that money when you need to spend some of it.

Eric: So it’s having that bundle, so to speak of dollars, available for that unanticipated need.

Dick: Right, right. And in some ways that isn’t a job for an annuity, so you really have to think in terms of an annuity, how can I position this money and leave it alone, so that I’ve got additional money for those unexpected things that may happen.

Eric: It’s having that resource though. Then we have liquidity risk, so by liquidity risk we mean having basically, cash on hand. It’s that ability to go get and take and walk away.

Dick: Which goes back to what we were saying, don’t put too much money in any one area without having some liquid money. Another good example of that area could be stock.

Eric: Right, stocks. It’s even annuities.

Dick: Sure.

Eric: If you over-obligate too many of your dollars into resources where, if you’re going to have to go get them out, and take a penalty for having to go get them.

Dick: What happens if the markets fall?

Eric: Well, you’re buying high and selling low, so you’ve just reduced your principle.

Dick: So you don’t have the liquidity, unless you want to shoot yourself in the foot.

Eric: And the same thing, if you’ve spent too much on a CD or an annuity, you’d have to go in and get it out early and there’s a surrender or a penalty. Those things can impact you negatively, as well. It is having the right amount in liquidity in place, and the flexibility in your plan to be able to go get those assets.

Dick: Another risk concern, it doesn’t really affect everyone but we do have clients that it is important to, and that is their legacy. They want to leave something behind.

Eric: Yes, charitable giving. I see hospital wings with people’s names on them.

Dick: A scholarship, some type of a benefit that they want in their memory.

Eric: That they want to leave money for this. Well what happens, if what you think you’re going to leave is depleted by either poor market returns, living too long, I mean sorts of legal things. So how is your legacy going to be impacted by [inaudible 00:06:32]?

Dick: And if it’s important to you, then you have to consider how you’re going to make that real.

Eric: Yes, so number 20 here is very interesting, financial elder abuse risk. Now we were talking a little bit about little known laws, that require children to provide for their parents.

Dick: Yes, yes. In many of the states; and I was just reading this recently and maybe we can do a little bit more of an expose on it in future videos; but that a lot of the states have laws on the books that actually require the children to take care of the financial responsibilities of the parents, if the parents cannot handle. So a few of the states have tested this a little bit, and some children have been called into play and even, may potentially face criminal activities, for not supporting their parents’ needs, when the parents thought that their poor planning or poor decisions would not affect the children.

Eric: Right, and then it goes back to more, I would say the more common aspect, where the children don’t make good decisions, or they have a financial adviser that takes advantage. Things that happen along the lines to basically deplete the resources, thus abusing the parent/child relationship, financially abusing it.

Dick: Number 21, in the time period that we’re in, with employment numbers the way they are, for retirees they do face the challenge if they would lose a job, a part-time job, a full-time job. Maybe it was supplementing their income. Will they be able to get reemployed?

Eric: Right, we joke somewhat and the Wal-Mart greeters are going to be…

Dick: Yeah, replaced by security cameras, and…

Eric: The jobs that you think you are qualified for as a retiree, sometimes you’re over-qualified, and it’s tougher to find those jobs. A lot of people didn’t really anticipate having to go back to work, and things have changed. So that reemployment risk or needing to be reemployed…

Dick: It can be serious, if you’re relying on it.

Eric: Number 22, is home maintenance risk, which if you’re a homeowner, you know what it takes to maintain it right now. Well, as your resources are depleting, all of a sudden you think your house is paid for and everybody talks about “my house will be paid for by then.” But will it need a new roof? Will it need a new furnace?

Dick: Right and another area of vulnerability on this Eric, that a lot of times folks don’t look at are reverse mortgages. A lot of folks say, “Well, I’ll get a reverse mortgage. It’ll take care of me. Give me that equity, out of my home.” But then you still have to maintain that home. If you cannot maintain that home, then you could be in default on the loan.

Eric: True, if it goes into a state of disrepair and the other aspect of even being elderly is being able to maintain, if you’re physically not able to do the chores. The lawn mowing, the upkeep, those things come into play, because you have to hire those things out, a lot of the time.

Dick: Right. Well, timing risk, that’s another thing in terms of what catastrophic things that might happen.

Eric: Yeah, I think it’s the actual events that impact all of us financially and some of them are unpredictable. A tsunami wipes out the entire town, an earthquake.

Dick: Tornadoes.

Eric: They can take away your business. They can take away your home.

Dick: Are you properly insured, this type of thing?

Eric: Exactly, and it’s that you can control and things that you can’t control. What’s going on in Europe right now is an actual event that’s happening that’s impacting our ability to earn and save, because of a financial crisis that wasn’t of our doing.

Dick: It all gets down to some point in time, that we have no control over, and so if timing is in our favor it goes very well, and if timing’s not, we can’t afford that in retirement.

Eric: Right, it’s just the times we live in, basically. You can’t change the time. All right, what about number 24 here, high-debt service risk.

Dick: Well, I think that most retirees want to say they’ve got their home paid off. They own their cars. They’ve got some money in the bank, and obviously we’re very fortunate ourselves but also a lot of the clients that we work with, that have gotten themselves in a very good position financially. But we do talk with some folks occasionally that will have some pretty sizable debt going into retirement. This can turn around and bite you, especially if you’ve got a variable rate mortgage or something of that nature.

Eric: Variable rate mortgages, buying that new house right before retirement sounds, “Oh, it’s beautiful. It’s what you always dreamed for,” but it comes with a new price tag. I always talk to a lot of clients especially in their 40’s, about spending money on college. Well, those college loans, they let you defer, defer, defer well all of a sudden, your son or daughter who’s the doctor now and 12 years of accumulated college loans that you’re on the hook for. You can pay them off over the next 20 years. Well, you’re in retirement now and you’re paying off your kid’s college loan still. How much of your retirement dollars, have you put into paying off those pieces?

Dick: Exactly, you’ve lost the time value of the money earning and growing. So I do think that when we look at the high debt situation, that we do have to also, recognize that there are way that you could have debt, and yet have the money set aside to service that debt. To pay that debt off in full and you could be earning some arbitrage, making some money on your money, and so there are ways to do that effectively. We don’t want to just say that everything has to be paid off. There are smart ways to be in debt.

Eric: Yeah, there’s strategies, if you don’t do number 25, which is procrastination risk.

Dick: There you go, I like that. Nice segue.

Eric: Yeah, we planned that very carefully. We hear this all the time, the rates are too low. The rates are going to improve. I’m going to wait til next year.

Dick: I can think of dozens of examples dating back to 2008-2009. “I’m just not going to do anything. I’m going to wait.” Well, how well has that worked for you?

Eric: What’s the impact on your retirement on waiting, starting too late? We always talk about, if you’re going to save for retirement if you put the same amount of money in between the ages of 20-28 and then stop; is the same as putting it in from the ages of 28 to almost age 60; so it’s just because of the compounding out there and my math’s probably off a little here, but it’s truly what you’re putting away. What it costs us to wait.

Dick: It’s what you can put away and how long you can let it grow and compound, so procrastination is probably the greatest enemy to achieving your objectives in retirement. Even though you might think, “Well, I’ve only got five years or ten years,” there are some wonderful things that can be done and annuities can accomplish a lot of these things with **guarantees, so that you know that you’re going to have, at least a certain reasonable income.

Eric: Right, right. All right 26, retirement savings opportunity risk. So in simple standard language it’s working for an employer that doesn’t have a retirement plan.

Dick: Or you just didn’t contribute much to it.

Eric: Well in this case, I think they’re blaming the retiree. It’s the employers fault, because if they were supposed to take care of me and provide for retirement.

Dick: Things have changed.

Eric: Yeah, if you don’t take the onus on yourself that really does impact.

Dick: Right, if you haven’t saved enough it doesn’t really matter if it’s the employer’s fault or your fault you haven’t saved enough.

Eric: And I think what we’re seeing is a generational change, from that defined benefit plan where you worked for an employer, and part of their obligation is they were going to give you a retirement that took care of you, for as long as you lived. That was going to be your benefit for working there for so long. Now we’ve got these 401k programs that are really more an individual’s responsibility.

Dick: Which really ties us into 27, which is the same thing, inadequate resource risk, you just don’t have enough.

Eric: And this is the speech we have with 401k participants, because their thoughts, “I’ll put in the minimum and the employer will put in this much, and I’ll be fine for retirement,” until they start running numbers.

Dick: Yeah, exactly. There’s no silver bullet. If you don’t have enough money set aside, you’re just limited in what you can produce for an income.

Eric: Well, you’re going to have to step down your living. Your standard of living is going to go down, because you haven’t put away enough resources, and it’s tougher to do later in life. That’s that procrastination thing.

Dick: Well and, this is a good place to wind things up. We’re on number 28 and that’s having unrealistic expectations of retirement, and what it’s going to produce. What the results of that retirement are going to be, based on what you’ve saved. The old saying, “We have champagne taste and beer pocketbooks.” That’s a job that an adviser has to help the client a lot times, understand.

Eric: It’s hopefully what we’re doing here with these videos. Talking about and making you aware. We’re trying to educate and present the scenarios here, but you have to take responsibility for going out there and answering some of these questions. You’re now aware. You’ve been educated. You’ve been asked, but you have to make the right decisions going forward. You may not have saved enough to maintain your lifestyle. You’re going to have to make changes.

Dick: Right, you’re going to have to cut back a little bit.

Eric: Your expectation was here, well reality is here, and you don’t have any time left to make it up.

Dick: Or maybe you saved a much larger amount of money than you really need, and you have discretionary income and you can have some in the market. If you lost it, it wouldn’t be the end of the world. On the other hand, you’re in a very good position financially, and you need someone to help you understand how to spend your money.

Eric: And if all of this is overwhelming to you, and you don’t know which way to go, that’s the time to sit down with an adviser. Get somebody that can ask you these questions, if you’re not sure how to answer them, to present you with these scenarios.

Dick: We’ve spent 30 minutes doing these two videos probably, and realistically this would comprise hours and hours and hours of planning with most clients.

Eric: Yes, so we encourage you to sit down, take the time, start working through these if you haven’t already done so. Hopefully you’re working with an adviser that is asking you these questions, and setting the scenarios for you so that you can be prepared. Our goal is for everybody to have a safe, secure comfortable retirement, so these are some of the risks that we hope that you can avoid, and basically have abilities to deal with.

Dick: Absolutely. Well, thank you so much for spending your time, looking at these different risks that retiree’s face. They’ll be on the website, so you can check them out, and read about them. Take them to your adviser and do some serious, good planning.

28 Risks Retirees Face – Part 1

August 2, 2012 By Annuity Guys®

This week Dick and Eric discuss the first 14 risks and how an annuity can be utilized to address some of these potential concerns.

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Longevity Risk – Outliving retirement resources by living longer than planned.
Excess Withdrawal Risk, also known as Portfolio Failure Risk – The depletion of retirement assets through poorly planned systematic withdrawals that lead to the premature exhaustion of retirement resources.
Inflation Risk, also known as Purchasing Power Risk – When the price of goods and services increases in such a way as to impede the client’s ability to maintain his/her desired standard of living.
Long-term Care Risk – When dementia and/or physical impediments restrict a person from performing the activities of daily living and may require him/her to outlay significant resources for custodial or medical care.
Incapacity Risk – As a result of deteriorating mental or physical health, a retiree may not be able to execute sound judgment in managing his/her financial affairs and/or may become unable to conduct his/her financial affairs.
Health Care Expense Risk – Not having adequate medical insurance.
Investment Risk – Losing money in the financial markets.
Asset Allocation Risk – Losing money in the financial markets due to inadequate diversification.
Market Risk – Events cause all stock market prices to fall.
Sequence of Returns Risk – Receiving low or negative returns in the early years of retirement which will lead to a long-term negative effect on the ability of the retirement portfolio to provide the needed income.
Reinvestment Risk – As higher-yielding fixed income investments mature, the client may be forced to reinvest that principal in a lower-yield fixed income investment.
Forced Retirement Risk – Work ends prematurely because of poor health, care giving responsibilities, dismissal by the employer, lack of job satisfaction, or other reasons.
Business Continuity Risk – The employing business closes and the client is unable to amass the appropriate amount of retirement resources.
Public Policy Change Risk – An unanticipated transition in government programs such as Medicare and/or Social Security that were embedded in the retirement planning process to the point where they will not provide sufficient protection during retirement.

Annuity Guys® Video Transcript:

Come back next week to see the next 14 risks people with face in retirement.

DICK: Eric, there’s so many risks that we face in retirement and I know that you’ve put this list together. You didn’t actually put it together.

ERIC: With the help of some certified financial planners.

DICK: Right, that’s right; and amazingly, and we’re not saying this is exhaustive but it would appear exhaustive; 28 reasons– 28 ways that retirees are at risk.

ERIC: Yeah.

DICK: And I don’t think that there’s any way we can actually get through this in one session, so let’s call this part one.

DICK: Hopefully, we’ll get it done in part two but these, folks these are important. We’ll go through these one at a time. Annuities do not answer or solve each one of these.

ERIC: Not all of them.

DICK: But there are several that an annuity can…

ERIC: Impact an end player. Yeah, there are at least 11 of them, by my count. Basically annuities have the ability to negate or assist with and there’s a few more that there are options that you can add to an annuity that would help take care of some of these things.

DICK: Right. Let’s start off with number one here, Eric, longevity risk.

ERIC: Okay, and longevity risk is the first and foremost one that annuities take care of, because when you purchase an annuity you’re looking for lifetime income, typically.

DICK: So when we talk about longevity risk we’re talking about living too long.

ERIC: Too long. Yeah, living longer than you planned. Oops, I’m still here, right?

DICK: You’d have had enough money if you would have just died on time.

ERIC: Right, yeah. So that number one risk that longevity risk is really the one that fits hand and glove with annuities, because you don’t have to worry about outliving your money.

DICK: Right, which can be accomplished through immediate annuities, hybrid annuities even a variable annuity^# can be annuitized.

So really virtually any form of annuity can solve longevity risk, if you have enough money and you’ve positioned it in the right way.

ERIC: Sure.

DICK: And we would contend that this is like a pension plan.

ERIC: Exactly, you’re self-directed pension, basically. So, all right, should we move on to number two?

DICK: Let’s go.

ERIC: Okay, excessive withdrawal risk, also known as portfolio failure risk.

DICK: Can you say that again?

ERIC: No, I have to read that.

DICK: Portfolio?

ERIC: Portfolio risk.

DICK: Okay, so what we’re really talking about here is actually not having enough money, for the amount of money that you’re pulling out.

ERIC: It’s very similar to longevity risk in the sense of you think that you put yourself on the clock, you have five years-worth of income.

DICK: I’ve got a half a million dollars, Eric.

ERIC: I can spend, I can spend; I can spend. And you’re just basically outspending what you’ve saved. Right. Your expectations…

DICK: So you really don’t have a plan. You’re just spending, because you feel that you’ve got quite a bit of money. And so that’s—you know, there’s some other things we need to talk about on that, but we’ll be coming up to that in a little bit. Now we look at number three here, this is one that I think everyone is concerned about in general terms and that is inflation risk.

ERIC: Yeah.

DICK: Losing our purchasing power and let’s talk about that, and how annuities might make a difference.

ERIC: Well, obviously, there are ways to structure annuities to give yourself an increase in income. Some of them have a staged series, where you can take a 3.0% increasing income across your life.

DICK: Right.

ERIC: Others have options that tie to an index, and there are even options now to tie it to the CPI or a version of the CPI, consumer price index. So those are ways to help guard against inflation with an annuity.

DICK: Right. So let’s just say, maybe in a simplified way, when it comes to using annuities for inflation that there are probably a couple of variations. One is an immediate annuity that will give you– or annuitization of a deferred annuity that will allow you to have some kind of a **guaranteed increasing income or there is another way to offset inflation and that is, you don’t need the income now so you can defer it and you can get a very high rollup rate, maybe in the 7.0% range that will allow your money to grow for future income needs

ERIC: Yeah, we call it, laddering is basically laddering annuities, so that you’re saving some out there. You may hope you never have to turn them on, but they’re there, in case the cost of living grows so much that you’ve outlived your income, so you need more.

DICK: Right. Okay, long term care.

ERIC: Oh, it’s only number four. Yeah, so long term care risk. I mean and people I mean none of us want to think about losing, the kind of the physical…

DICK: Sure. Going into some institution…

ERIC: And we talk about the activities of daily living, you know?

DICK: Right.

ERIC: Being able to button your shirt, being able to do the small things. There are things that if you all of the sudden you can’t do all those things on your own, how do you adapt so that your ability, and bring those resources in to take care of that situation so you can still have a comfortable, you know.

DICK: Well, I’ve seen these situations with clients where—I mean the first thing that we think of is being institutionalized, nobody wants to be institutionalized. And yet, many times that’s not the even the bigger concern, sometimes it’s just home health care. How do we get someone to come into our home and be able to afford them? Because that can actually be, sometimes even be more cost prohibitive, because it’s 24/7 care in your home.

ERIC: Sometimes.

DICK: Sometimes or it could just be a supplement. You’re right.

ERIC: Right, but it’s paying for that resource. Did you anticipate having to take care of that need?

DICK: And long term care with annuities there are different ways that we can provide some long term care benefits, supplement or maybe even, a full long term care plan with an annuity.

ERIC: Right, so there are pieces, riders typically, that you can utilize in annuity to basically make those kinds of contingency plans if you need them, but that’s one of those risks that’s out there that really needs to be addressed quite often.

DICK: Right.

ERIC: The next one, incapacity risk, now that sounds really deadly when you, but it’s– I have a family with a history of Alzheimer’s so it’s the mental, losing that physical, the ability to make the decision. We don’t say that the annuity takes care of this but what happens, if you can’t make those financial decisions?

DICK: You have to have planned in advance, because if you can’t make the decision, a decision’s going to be made for you and it may not be the person you want making it or the decisions you want made, so a little advanced planning can make a big difference.

ERIC: Right, so the financial matters, it’s not having the physical mental capacity, to take care of your own financial matters.

DICK: Health care, number six, health care expense.

ERIC: I think this is becoming more and more of an issue that’s coming into the forefront, with everything that’s going on. It’s what medical insurance going to cost? How much are we going to have to expend out of our pockets, especially as an aging community?

DICK: And this is one of the things that I have frequently discussed with clients and that is that they will inevitably say, “You know, I’m going to need more money in the beginning, because I’m going to be traveling and I’m going to be doing this, that and the other thing. So as I age, I won’t need as much.” But what they’re not counting into it many times is the cost of health care, and that’s the wild card. There are more and more things that are becoming electives that you have to pay for out of your pocket, so if you want a high quality of life, you’re going to pay for some of these things yourself in the future.

ERIC: Yeah, you don’t think about—yeah, you may be on an 80/20 plan, which seems like a great thing well, all of the sudden your portion of that 20% is getting to be a lot more expensive as you age.

DICK: Right, so I think that health care expense is a big risk that retirees face.

ERIC: Yes. So our next one here is investment risk which is obviously, if you’ve got money in the markets, the risk there of losing money in the financial markets. So a lot of people will put a portion of their money out there, still leave it in the equities. Well and there’s a chance that the market’s going to go up and the market’s going to go down.

DICK: Well, in a very general sense, Eric, the way that we like to discuss this with our clients in general, is if you have discretionary income, money that you can afford to lose. Then you may want to have it in the market or some in the market. But when it comes to that portion of your money that you want it to be secure and safe, annuities can be very effective in this area.

ERIC: And we talked about foundational income, protecting, having your covering your basic needs and basic necessities, with the foundational level of income. You know stuff that’s in the market you don’t have the time, sometimes to recover. It’s a risk-reward aspect, you have to realize those are higher risk, higher reward settings. You may not have the ability to recover as a retiree.

DICK: Yeah, these next couple here, Eric. Number eight and number nine are somewhat tied into the same risk area. One is asset allocation risk, having inadequate diversification.

ERIC: Yeah, and when we talk about asset allocation usually most people in the equities think, small cap, large cap, bonds, exposure. There are really more safe money positions, in addition to that, but it’s allocating across multiple places and making sure that you’re not having all your eggs in one basket. It’s simple. Don’t use that silver bullet. It may work very effectively for a big growth, but then all of the sudden it comes crashing down.

DICK: Right. You know when we look at annuities, there’s a lot of talk about non-market correlated assets, and annuities are very much non-market correlated, and you’ve also got an additional level of security and protection because annuities are basically secured, many times with very high grade investments and bonds, even government treasuries. So you’ve got the claims paying ability of the insurance company, actually even **guaranteeing another level above those bonds, which you don’t have if you buy the bonds directly.

ERIC: And here we’re talking about fixed annuities.

DICK: Fixed annuities, right.

ERIC: We should always be, the caveat there, if you’re in a variable annuity^#, you’re going to have…

DICK: You’re going to have the investment risk.

ERIC: Exactly, and then market risks, which is of course…

DICK: Stocks fall.

ERIC: Yeah, it’s events that we’re looking at things right now. You look at what’s going on in Europe. It’s causing our market to fluctuate both up and down.

DICK: A lot of things that are out of our control. In the sequence of returns risk, this kind of ties back into one of the early ones that we had talked about and that was excess withdrawal risk and that’s when you’re…

ERIC: But it is tied into the market, as well.

DICK: Yes it is.

ERIC: We talk about a dollar cost averaging. Well, this is the reverse of that. When you’re putting in you’re going to buy more at the low times than at the high. Well, the same happens when you’re pulling out, by odds you’re going to pull out more at the low times. Well, you’re reducing your principal more quickly then, and so it’s that sequence of returns.

If you actually get negative returns while you’re pulling money out, you don’t get the advantage of compounding. So it really does become a much bigger impact when you’re using equities, as that safe storage place for your retirement plan, and so you have to be careful about sequence of it, and you can’t control it.

DICK: You cannot control it and there’s unfortunately, long periods of time where the market does go in a negative or in a flat position and you can really get yourself in a bad situation, especially when you’re in or near retirement. When you’ve got a lot of time ahead of you, and you can wait things out, it’s completely different then when you’re in retirement, and you’re very vulnerable.

ERIC: The next one’s kind of an interesting aspect, and its reinvestment risk. And we’ve had a lot of it lately especially with the people we’re talking to, and it’s basically, when your investments mature.

DICK: Like CDs?

ERIC: Like CDs right now. I don’t know how many people I’ve talked to that said “Hey, my CD was at 5.0%, it’s coming up due, and they’re offering me 0.8% for five years.

DICK: They’re in shock.

ERIC: Yeah. So, you thought you were getting a good deal when you did it, and by today’s series you did, and then, all of the sudden, it’s at maturity. Well, if you were living off that interest, that 5.0%, you were just pulling that interest to live off. Now it’s matured, what do you do?

DICK: Well, and this is where an annuity properly positioned, the right strategy, could even be a pre-issued annuity with a high yield, so there’s a lot of things that annuities can solve in this area, especially really when there’s no yield to be found in the banking instruments.

ERIC: Yeah, you usually think of things—you always hope will be higher when you come out. In this case, what happens if they’re lower?

DICK: You know this number 12 here, forced retirement risk, now you run into this quite a bit where someone maybe is relying on a younger spouse that’s working or maybe the two of them are healthy, and they believe that they have this many more years to work and then they’re forced into retirement.

ERIC: Right. Well and it can be their own doing. It could be the business’s doing. Something happens to them, that they have poor health. One of them gets injured on the job, all of the sudden, having 15 more years of anticipated work, turns into 2 or zero and now you don’t have that income or that level of income, to basically continue planning or preparing for retirement.

DICK: Exactly

ERIC: It’s become a lot more prevalent with how companies are kind of moving and downsizing.

DICK: Well and this is where with the flexibility of a deferred annuity, you can actually have your money earning and preparing for that day, even though, you don’t know what day that’s going to be. There’s enough flexibility, if it’s set up right that you can turn that income on when it’s needed.

ERIC: The business continuity risk is really what I was kind of alluding to in that, what if the business closes? What if you work for a small business and it doesn’t have to be a small business. You can look at what just happened with GM, we were on the verge of hundreds of thousands of people being out of work.

DICK: And then there’s been, is it Ford or GM that’s just recently done the…?

ERIC: Well, they both did. The pension change…

DICK: The pension changes, right. They forced people into choosing new options and foregoing what they thought they had.

ERIC: Right, so you think you’ve got your retirement taken care of and in this case, it’s still stable but your options change. How they’re funded it changes. What you expect to happen from the business being able to fund your retirement.

DICK: Hey, Eric. We’re kind of about halfway through here. Maybe we’ll call this our part one, but let’s take on number 14. I think this is a big deal. I think we’re in a lot of flux right now and that’s public policy change risk.

ERIC: Yeah, what do you do if the government changes the rules on you or basically, it could be the insurance companies, I guess too, but in this case we’re usually talking about the government?

DICK: Or forcing insurance company rules, you know to change, so we’re got, right now we’ve got our health care.

ERIC: Health care. Social security is in flux.

DICK: Medicare. State Medicaid programs.

ERIC: That’s right.

DICK: And then just all of the tax, which I think we’re going to get to that in part two, but all of the public stands that are being taken in what’s going to be taxed, what isn’t going to be taxed. How investments are going to be handled, capital gains, how insurance will be treated.

ERIC: Exactly.

DICK: Roth’s everything’s on the line.

ERIC: I mean here in Illinois we’re having problems with public employees. Their pensions are basically going to go away.

DICK: Right.

ERIC: And that’s the threat anywhere, of what’s going on here.

DICK: Exactly, and throughout the United States to various degrees.

ERIC: Exactly, so what happens if a public institution changes the rules, on how things are going to have to happen?

DICK: So again, all we can work with is what we have in the present, and know that in many instances especially going back, those that have entered into something in good faith, such as certain life insurance policies, and that type of thing that had tax benefits, they typically were grandfathered in, and then those new ones trying to get in were disallowed.

ERIC: Right, you have to plan based off the rules for today and you hope that the game doesn’t change.

DICK: Folks, this has been more of a little bit serious time of reflecting, on the various risks that retirees face. These are very real risks and Eric and I, deal with these on a regular basis with our clients and so we really wanted to take this in, kind of a serious sense, and take our time on them to some degree. So these first 14, call it part one?

ERIC: I think that’s probably, this is probably a good stopping point, but we’ll continue to go through this list next week.

DICK: Yes, talk about them individually.

ERIC: Because these are things, I think as you’re planning your retirement, these are questions you have to ask, ask yourself. I mean hopefully, your financial adviser that you’re working with, is asking you these questions as well, but you have to have a plan, or at least the ability to say “What are we going to do if this happens?” And so it’s a good strategy for us to, kind of go through all these pieces, lay them out there for you and give you some options to prepare your own answers.

DICK: Right, very important exercise. So thank you for taking your time with us and look for us next week and we’ll go over some other details on risks to retirees.

ERIC: That’s right, 14 more coming next week.

Top Five Reasons Not to Buy an Annuity

July 26, 2012 By Annuity Guys®

What are the top five reasons not to allocate funds to an annuity? Based on many years of experience and an informal office survey the top five reason are…

Too old or too young.
A lack of sufficient assets.
Expectation of an unrealistically high return.
Probability of needing annuity dollars prior to maturity.
Missing a reasonable understanding of how annuities work.

Dick and Eric examine these five reasons in this weeks commentary.

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Annuity Guys® Video Transcript:

Dick: We have an empirical study. Is that correct, Eric?

Eric: The Top Five?

Dick: The top five reasons why a person should not buy an annuity.

Eric: Yeah, that’s right.

Dick: And where’d this empirical study come from, Eric?

Eric: Well, we did a survey here in the office.

Dick: Of you … and I…

Eric: That’s right, the two of us.

Dick: So we have a slight margin of error.

Eric: It’s plus or minus five.

Dick: Five, yeah. We don’t know why five.

Eric: The five reasons that you shouldn’t buy an annuity.

Dick: Yeah, but we do really run into some very legitimate reasons. Why folks should not buy an annuity and people should know about that.

Eric: That’s right.

Dick: Reason number one, too young.

Eric: Too old.

Dick: Or too old. Age, that’s right. Let’s take the extreme ends, let’s say, too old. How old is too old?

Eric: Too old is when you start to lose benefits, so it’s age 81.

Dick: They’re gone, basically.

Eric: Basically, very few choices left.

Dick: Right, a few companies will give you a little bit, but usually the yields are low and there are no additional riders or benefits, this type of thing. One real exception to that now, on the 80-year-old, is if we find that they have a younger spouse.

Eric: Okay, and then that makes it a good deal, because the spouse is…

Dick: The spouse can get a lot of benefit, by putting the annuity in their name.

Eric: Right, so really they’re still within the guidelines of getting some of those benefits.

Dick: Right, so that does work well. Let’s go to the other extreme. Let’s talk about the younger. When’s it too young?

Eric: Well, definitely before, I would say age 25, but anything younger than that…

Dick: 16-year-olds, no way.

Eric: It’s obvious, but most of the time there, you’re in your stock accumulation stages.

Dick: Right, you might make a case occasionally, for someone in their early thirties, but probably somewhere in your mid-thirties to early forties, before it starts to make real sense, depending on your risk aversion, I would say.

Eric: Most of these income benefits are usually set for a 10 or the maximum I’ve seen, is a 20-year period, so really it’s the 20 years prior to retirement. So if you think of 65 being the logical retirement age, really your mid-40’s; when you get to 50, you definitely should be…

Dick: Yes, you should be moving in that direction or have a plan.

Eric: So really before that it’s another bucket, you’d probably not fit. So that’s reason number one, reason number two…

Dick: You don’t have enough assets.

Eric: You don’t have a nickel to rub.

Dick: I mean really, folks, and Eric and I were discussing this prior to going on camera here. If you’ve got less than $100,000 dollars in overall assets and we’re not talking about your home, or your furniture, or your car. We’re just saying if you’ve got less than $100,000, realistically you just don’t know what’s going to come up. You don’t know what kind of an emergency situation you might have, and it’s probably wise, not to put that money into an annuity.

Eric: We call it the liquidity issue. You don’t have enough liquid assets, to be able to do and take care of the things that may come up, and you definitely don’t want to put all of your eggs in one basket.

Dick: Correct.

Eric: So when you’ve got limited assets…

Dick: Right. It’s really iffy, and there’s always an exception. There’s going to be some exception that’s going to come along, where someone has lots of income and they may not be worried about needing liquidity.

On the other hand, I’ve seen a few situations where someone had so little income that they needed an annuity to produce enough income, just so they could live on and know that they weren’t ever going to run out of money. So there is this balance. You have to look at each person’s situation and evaluate it to be fair.

Eric: But largely, basically you have to have, typically $100,000.

Dick: Or more, and then I guess the other caveat to that, though I would say is a lot of people may only want a $75,000 dollar annuity or $125,000, but they’ve got several hundred thousand dollars in other assets.

Eric: Right, it’s an allocation.

Dick: It’s an allocation.

Eric: So we’re not saying you have to use $100,000 up. We’re saying if you don’t have at least $100,000 available, then that’s not a wise choice.

Dick: Right, moving on.

Eric: Number three, expectations of unrealistic, high returns. Annuities are a safe, stable allocation.

Dick: That’s right.

Eric: So if you don’t get, if you don’t have high risk, you don’t have high reward. You have more of a level, safe, stable…

Dick: Right. Your reward is sleeping securely at night. Sleep insurance, and knowing that you’re not going to be affected by the ups and downs of the market or of a Japanese-style situation, where the market loses 75% of its value and it doesn’t return over a 20-year period.

Eric: Right. As long as you expect, if you’re using it for income, primarily it’s a great vehicle.

Dick: You don’t have of longevity risk. It doesn’t matter how long you live, right? So it’s great for the pension-style income.

Eric: Yeah, perfect.

Dick: And growth, growth can be reasonable.

Eric: We always talk about beating the bank, by a couple percentage points.

Dick: And then if we wanted to pre-issue annuities, it could be maybe higher than that, so maybe we’re beating the bank by thre3.0-4.0%.

Eric: Yeah, so it’s expectations. If you want your cake and eat it too, this is not the vehicle for you. Because I’ve had people ask me, “I want the cake-and-eat-it-too annuity.”

Dick: Right.

Eric: Well, you have to pick and choose, and it doesn’t exist in the double-digit community.

Dick: Well, and this is where I find that people have a lot of unhappiness with the annuity they purchased, when an advisor has told them that they’ve got this unlimited upside potential and no downside risk, and they’re expecting something pretty close to a stock market gain, when the market’s going well and they don’t have it and they’re disappointed, because they were over-sold, overstated, under-delivered.

Eric: No, so don’t buy an annuity if you have unrealistic high-return expectations. All right, so number four, the probability of needing annuity dollars prior to maturity.

Dick: Well and when we say probability, there’s always a possibility for anyone that they could need the money, but if we talk of it in terms of probability we have to use some reasonable assumptions. And if you’ve got plenty of income, you’ve got other assets then the probability when you put your money in an annuity should be very, very low that you’re really going to need this money for anything.

Eric: Right, I mean if you go into it with the expectation of saying, “I’m going to go buy a new house in three years, I might use that money.”

Dick: I might use that money.

Eric: Don’t put the money there to begin with.

Dick: No, it makes no sense.

Eric: It’s not a good decision. So that one pretty much stands on its own.

Dick: Yeah. And number five, this is probably my favorite.

Eric: This is my favorite. It’s truly the number one reason not to buy an annuity and that’s that you don’t have a reasonable understanding of how annuities work.

Dick: Right. Before you can make an intelligent decision on an annuity, and there is a certain degree of perplexity and sophistication to an annuity, you need to really work with an advisor that gets it. That has access to multiple annuities. That has a great understanding of these annuities. How they work, how they inter-relate and function, and someone that can help you to understand. Not that you’re going to have the same knowledge level that the advisor has.

Eric: And I don’t think they have to understand how every annuity works. You have to understand how what you own works, the ins, the outs.

Dick: And that it’s going to meet your objectives… your stated objectives.

Eric: I talk to clients about working backwards. You work backwards from the goal and then find the annuity or the pieces that fit that goal. But you have to understand how it works and how that piece works as part of your goal. If you don’, and if you’re not comfortable, don’t do it.

Dick: Yeah, you shouldn’t do it. You’ve got to be careful. There is a point sometimes where you do rely on the advisor’s expertise, because you do have certain stated objectives, so there is this balance that you have to hit, but you do want to at least a cursory understanding of what it is you’re doing, why you’re doing it, how it works.

Eric: Right. Don’t spend more time planning your vacation than you spend planning your retirement.

Dick: That’s right, or understanding your annuity. So folks, these are the five top reasons that we’re aware of.

Eric: And based off our empirical survey.

Dick: Yes, yes, and so we think that this will give you a good basis as you’re considering putting money into an annuity, doing an annuity allocation. If these don’t really apply to you, then an annuity may be a good choice.

Eric: Good deal, I think we’ve hit the top five.

Dick: Next week, maybe we’ll talk about the five least reasons not to buy an annuity.

Eric: We’re having too much fun, we’d better go.

Dick: Thank you.