Why You Should Ladder Annuities…

June 22, 2012 By Annuity Guys®

When your financial advisor starts to talk to you about laddering, realize that they are talking to you about using financial products with varying maturities and that they are most likely not thinking about a trip to the hardware store.

In today’s low interest rate environment laddering annuities allows clients to potentially capitalize on increasing rates without forgoing returns that can only be obtained by committing to a longer maturity period. Laddering provides an opportunity for conversion of shorter maturity annuities to better options if they are available earlier – then the maturities continue to provide that option on a regular ongoing basis.

Perhaps the best option to ladder annuities is by staggering deferred hybrid annuities for future income. By laddering hybrid annuities you can create a income stream that will combat inflation and provide for added flexibility with future income. It can also be an excellent strategy for financial security should you live a longer then expected life.

Eric and Dick break down some of the pros and cons for laddering annuities.

[embedit snippet=”video-specialist-button”]

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.

See how Scott Bulmer and Kevin Hedstrom address this same topic in a recent issue of Life Health Pro.

Customize Annuity Options With Laddering

As an agent who has worked with hundreds of clients to help them build and protect their retirement nest eggs, I am now faced with helping my clients make the dramatic shift from the wealth management phase (gathering and growing assets) to the income management phase (preserving and distributing assets). With 78 million baby boomers racing toward—or already in—retirement, the need for retirement income protection has never been greater.

It’s been well documented that since Jan 1, 2011, about 10,000 baby boomers have and will continue to turn 65 each day. This demographic phenomenon forces our industry to be the catalyst in moving clients’ mindset from accumulation to income distribution strategies. Our retiree clients now need to draw down their assets to generate a reliable, secure income stream that will allow them to maintain the lifestyle they so desire during their retirement years.

With the latest gyrations in the stock market, historically low interest rates and the economic turmoil here and abroad still fresh in their minds; clients are looking for less risky solutions to creating a secure retirement income combined with growth potential. Those clients nearing or in retirement can’t afford to weather another pullback in the market as was experienced several years ago. They just don’t have the time horizon or risk tolerance to recover unless they want to continue working throughout their retirement. In addition to market shifts, we are dealing with traditional safe money alternatives, such as CDs, money market funds and saving accounts, that may be out of favor due to these low rates.

Fixed indexed annuities as a solution

All of these forces—demographic and economic—pose an interesting challenge to agents. The major risks facing senior clients today are:

Market risk—The ongoing volatility in the stock market
Inflation risk—The erosion of one’s purchasing power
Longevity risk—The increase in life expectancy

The average individual’s lifespan has increased markedly over the last 50 years, and people now have to worry about running out of money before they run out of time.

A product solution to mitigate these risks that I’ve incorporated in my practice is the fixed indexed annuity. Since their introduction in 1995, indexed annuities have given people the opportunity to participate in the upside of being linked to an index, such as the S&P 500, without having to worry about losing money. Clients are very receptive to the dual nature of this product, which, at its core, is an insurance contract. They get the opportunity to partake in the upside potential of the stock market, with the **guarantee they won’t lose money. In addition, over the years, these products have performed as they were designed to. [Read More…]

Annuity Guys® Video Transcript:

Dick: One of the things that Eric and I find ourselves involved in a lot of times with annuities is laddering those annuities.

Eric: Right. It’s a technique or a strategy that we employ that uses multiple annuities with basically different maturity dates. So you would start with perhaps a three-year or a five-year or a ten-year, different layers.

Dick: I think a lot of folks, Eric, are familiar with CDs. You’re familiar with CD laddering. You may not have called it laddering, but staging your CDs over a period of time.

Eric: Staging or staggering.

Dick: It works very well for annuities for different reasons.

Eric: Right. Well, what are some of those reasons? Safety because you could use three different companies.

Dick: Diversification helps with that safety.

Eric: Right. Then you’ve also got return.

Dick: If you’re wanting to grow your money. We’re in a very low interest rate environment. So what do we think is going to happen maybe over the next three to six to eight years?

Eric: We expect interest rates to rise because they’re at all-time lows. They’re almost at zero in the case of the Fed rate.

Dick: Sure.

Eric: So we expect to see growth. But what do you do now? In order to get the biggest return right now, you have to commit to seven, eight, nine, or ten years.

Dick: It’s a pretty long period of time. Right.

Eric: Is it a smart decision to say, “I want to put all my money in a ten year product right now,” knowing that rates are likely to go up in say three or four years?

Dick: It probably isn’t if you’re looking for growth.

Eric: Right. But are you willing to sacrifice three years of growth just waiting?

Dick: Well, the alternative to that though, Eric, is if we don’t do anything, we get no return at all.

Eric: Well, actually we lose money.

Dick: We lose money because of inflation.

Eric: Inflation.

Dick: Exactly.

Eric: Yeah, exactly. By looking at, in the case of return, staggering those things. Monies are coming due at various intervals. It gives you that. The one thing I like to use annuities for in laddering is the income riders and the income **guarantees.

Dick: Right, which is a completely different way of looking at annuities and using them, but it’s been very effective for our clients.

Eric: The strength of an annuity right now, especially the hybrid annuities, is the **guarantees for income and deferral. You still have the five, six, or seven percent out there that you can get in a deferred for income. If you use a stage one annuity, perhaps turn income on right away knowing that you’ve got this **guarantee in deferral, your stage two or the second rung of the ladder you can turn on.

Dick: This helps us to offset inflation, because we know that, initially, we can start off with an income that would be adequate for that time period, but that we’re going to need to supplement that income five years, eight years, or ten years down the line. The next annuity kicks in at that stage, which is laddered.

Eric: Exactly. The it’s even nice to have an optional rung that may sit out there that you may never even anticipate turning it on. But if you have longevity that you don’t either anticipate or something happens, you’ve got that third one out there that’s in deferral getting those **guarantees. So it becomes that additional rung.

Dick: Right. It can pass on to the heirs, or you can turn it on if you need it. One of the things that we really don’t know right now is what is going to happen to certain pensions, what cutbacks or things might happen with Social Security. So it’s nice to have that contingency, that annuity out there that’s going long term.

Eric: Right, and it’s nice to have one that’s especially geared for growth. You know that it’s going to be at this level here, this level here, and this level here. The **guarantees, having those **guarantees out there.

Dick: When would it maybe not make sense to ladder?

Eric: Not use a ladder? Well, obviously if you have limited assets. There are just times when there are minimum deposit requirements, and if you have limited assets, you may only have an option of one annuity. That’s one.

Dick: Sure. When we say “limited assets,” maybe $100,000 or $200,000, somewhere in that neighborhood? I guess it depends on the income that you need. It depends on the growth that you need.

Eric: Right, it depends on all that.

Dick: I do know that the more money that you have, folks, especially when you start getting up there in the $400,000 to a million or a million plus, it makes a lot of sense to ladder and diversify as compared to maybe below $400,000. There can be some good reasons to still ladder and still diversify, but you have to look at it a little closer.

Eric: Right. One of the things we run into a lot is much of the time you’ll see one specific annuity that performs best for somebody’s situation, and there’s just not another comparable piece that does the same thing.

Dick: So the tradeoff is to get the diversification, the safety, and the laddering that maybe you’re looking for, you have to take considerably less in benefits.

Eric: It’s simply deciding to take a pay cut. If you value the other things you get in the willingness to take a pay cut, that’s what that balance is.

Dick: Then there are, again, some annuities out there, on the growth stage where it’s not just income or the pay cut, where they give a really nice death benefit. On top of that death benefit, they will give a nice return, so that you would maybe have the potential to see somewhere between a 6% to a 10% return from a very safe position with your assets. It may be a situation where a person would say, “Hey, because I want this to go onto my heirs, I don’t really need to ladder it,” depending on the amount of money.

Eric: It’s the **guarantees. You are getting a contractual **guarantee in this case from an annuity that is superior to something else that’s offered by anybody. It’s if you’re willing to take less and go here and split them, that’s an option. If you know your best circumstances lays right here, sometimes you’ll decide not to ladder.

Dick: I would say, just for folks as we kind of wind things up here, that in most cases the laddering is a good thing, works, and should be looked at. Occasionally, though, it’s not. I mean occasionally you’re going to want to go with one company that gives you the greatest benefit, and it isn’t going to make as much sense to ladder.

Eric: The best way to say this is, “You know what? Sit down with someone who can run the numbers for you, talk to them about what the pros and the cons are, and then ultimately you get to make the decision.” Now, I think it should always be one of the things that’s part of the consideration and part of the discussion. For most advisors, that’s exactly how they’ll present it: Here’s option one, here’s option one and two, and here’s how that works out.

Dick: Right. What are you comfortable with?

Eric: Exactly. Where is your comfort level? You’re in control.

Dick: Right. Pick what’s best for you.

Eric: Exactly. Thanks for checking us out.

Dick: Thank you.

Never Place an IRA in an Annuity? Wrong!

June 8, 2012 By Annuity Guys®

One question that seems to come up on a regular basis is “should I use my IRA/401k dollars to purchase an annuity?” As financial advisors and planners we have to take a “big picture view” prior to answering, because it really depends.

What benefits or options are you seeking to get from your annuity that you could not get from an IRA placed in another financial vehicle?

Many CPAs have a blanket answer when questioned about IRA dollars being used in annuities – it goes some thing like this “No. Your IRA already has tax deferral so their is no advantage to obtaining an annuity with your IRA dollars.” That answer for many retirees is incomplete at best! What about safe asset growth, income **guarantees, or income for life – not to mention a potential IRA “tax trap”?

For more insights into the IRA/Annuity question check out this short video.

[embedit snippet=”video-specialist-button”]

**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.

This is a question that has been debated many times… check out this MarketWatch article by Robert Powell from 2005 for more insights into this discussion.

Do annuities belong in an IRA?
BOSTON (MarketWatch) — It is, without fail, one of the all-time great debates in the financial-services industry. Do annuities — variable, fixed or index — belong in an IRA? The answer, unfortunately, depends on who you ask.
Firms that manufacture and distribute such products, not surprisingly, say yes. And consumer advocates, also not surprisingly, say no, citing among other things a suit filed last week alleging that a major insurer improperly sold variable annuities^# for use within an IRA.
Consumer advocates and industry experts point out it’s unwise to invest solely in a tax-deferred product, an annuity, inside an IRA which also offers tax-deferral. “Since money invested in an annuity grows on a tax-deferred basis, I’m not a big fan of using them in IRAs,” says Ken Little, author of “The Idiot’s Guide to Annuities.”
Others, including the National Association of Securities Dealers, agree. Don’t invest in a variable annuity^# inside an IRA solely for its tax-deferral is the upshot of one notice the NASD sent to brokerage firms it oversees. And insurers don’t dispute that advice. Heather Dzielak, vice president of Lincoln Financial Group’s annuity business, says this: “If (a person’s) primary goal is tax deferral, variable annuities^# within IRAs offer no additional tax advantage over the IRAs inherent tax deferral feature.”
But Little, the NASD and others do leave the door open for investors to put their money into such products for other reasons, especially if they understand the costs associated with the benefits they are buying.
For instance, some experts say investors who want, in addition to tax-deferral, certain **guarantees — **guaranteed interest rates, a death benefit, or what insurers call living benefits (**guaranteed minimum accumulation benefits, **guaranteed minimum withdrawal benefits, and **guaranteed minimum income benefits) — and don’t mind paying, in some cases, about 2 percentage points for those **guarantees might consider using an annuity in an IRA.
[Read More…]
Annuity Guys® Video Transcript:
Dick: Eric, frequently, we see articles from the investment industry, from CPAs, just financial magazines, and they talk about an IRA not belonging in an annuity.
Eric: That’s good. We’ve had clients, even the last couple of months here, they’re retiring. They’ve got 401Ks. They have these qualified buckets. It’s time to start spending these dollars. That’s their savings for retirement.
Dick: All these years, they’ve put this money away for their retirement to produce an income.
Eric: They’re starting to think about spending down their 401Ks or their IRAs.
Dick: What do their CPAs tell them?
Eric: “You’ve already got tax deferral in an IRA and 401K.”
Dick: Why would you want an annuity with tax deferral? That is the standard argument that’s used. What’s wrong with that argument?
Eric: You mean you can’t have double tax deferral?
Dick: Why would you need double tax deferral?
Eric: You can’t get that.
Dick: You don’t need an annuity. Is that why people buy an annuity? Is that why people use that for a portion of their portfolio? For tax deferral?
Eric: No. That’s what we always say. There’s no universal answer, but when it comes to tax deferral, do you need a double tax deferral? No. What are the other benefits that they really offer to you?
Dick: The reasons why, right.
Eric: You have IRA dollars; you’re saving for retirement. You’re now going to start to spend your retirement. What does an annuity do for you?
Dick: Safety, security, income **guarantees. In a down economy, in a volatile economy, it’s a sense of knowing where you’re going to be today or 5 or 10 years from now.
Eric: Just because I have an IRA it doesn’t mean I automatically get income for life?
Dick: No, you do not.
Eric: But I have tax deferral.
Dick: Unless everything works out perfect or you have an annuity. In no way do we advocate with our clients or to those who listen to our videos that you put all of your money into an annuity.
Eric: No. When we hear CPAs automatically discount an annuity for IRA dollars or qualified dollars, we have to pull our hair out and see we’ve been doing this a lot lately, because it can be poor advice in a universal sense. You can’t just universally say, “No, you should never put IRA dollars or qualified dollars into an annuity.”
Dick: It makes more sense when you’re younger to think that way, when you’re in that accumulation portion of your life, where you’re growing your dollars. It wouldn’t make a lot of sense to buy an annuity when you can have your money invested where it can potentially earn more and grow. No, that portion, but what happens is that same argument that’s used during those years doesn’t get carried over into the retirement years. It actually gets carried over instead of that transition where things change. Let me ask you a question here to get off the subject a little bit; where are taxes going?
Eric: Taxes?
Dick: Are taxes going down or up?
Eric: Let’s see here. If I had to be a betting man, I don’t think Vegas would give me good odds on this, but I would guess they’re going up.
Dick: I think you might be right. I think most of the folks that are watching this will agree with us. If taxes are going up, then what do I have if I have a pile of money I’ve never paid tax on?
Eric: You got a good deal, because you never pay tax on it.
Dick: What’s going to happen to it?
Eric: Is the government going to make me take these dollars and pay taxes?
Dick: Do you think maybe I have a trap here that I’m caught in, a tax trap? That’s what I see an IRA is, it’s very much a tax trap because we are likely to see increasing taxes as time goes by. Wouldn’t it make more sense to systematically be removing some money from that IRA, using it for the intended purposes of creating income and getting some money out of there so that it’s not all taxes in one large amount?
Eric: That sounds logical, but what would your CPA say? I’m making fun of CPAs right now.
Dick: What do CPAs do? In reality, when you think about it, they’re very, very good at saving us money on taxes in the year we’re going to file our return, or looking forward to the next year. Looking at the 20 or 30 years, a lot time . . . Folks, if you have one of those CPAs that looks 20 years down the line and projects things out for you, and look at ways to save you money, you have one of the rarest CPAs out there; they’re in the top 1% or 2%. Nothing against CPAs, they do a great job; they keep us legal, they save us money on taxes, but a lot of times, they’re looking at what can we save today. They’d rather defer some dollars from tax, not really thinking in terms of what’s happening with potential tax rates 10 or 20 years from now and getting that money out.
Eric: From a CPA’s standpoint, they’re thinking about tax now. Yes, if the answer is there a difference between a tax-deferred scenario between the IRA and the annuity? Of course not. If you’re saying, “What about the other benefits” Then, yes, that’s where the annuity, using qualified dollars makes perfectly good sense.
Dick: It does. When we say, “Never move IRA money into an annuity. Never buy an annuity with IRA money . . .”
Eric: Wrong.
Dick: Not.
Eric: Wrong. Take your personal situation and apply it. Basically, no, there are times when it does make sense.
Dick: There are. But everybody’s situation is different. They need to get a good advisor for that, a good local advisor. Thank you.
Eric: Have a good day.

Should I Plan to Live to 100?

May 2, 2012 By Annuity Guys®

In “The law of Averages: Why We Underestimate Risk in the Face of Uncertainty,” Stanford management-science professor Sam Savage illustrates the folly of planning using averages by recounting the tale of the statistician who drowns crossing a river with an average depth of three feet. The rub, of course, is that while the stream is shallow near the shore, it’s 12 feet deep in the middle.

The idea of using your average life span for estimating how long your savings will have to last in retirement is similarly all wet — and could leave you in the unpleasant position of having no savings but a whole lotta living to go.

Video: Dick and Eric comment on the CNN/Money article and attempt to answer the “100 year old question,” Should I plan to live to 100? Should annuities be part of my retirement plan?

Review 3-Best Retirement Annuities for Your
GROWTH, INCOME & SAFETY!

Life expectancy isn’t an estimate of how long you are likely to stay alive. It represents the average number of years a person of a given age is expected to live. These days, the life expectancy of a healthy 65-year-old man is another 20 or so years, while for a woman of the same age, it’s an additional 22 years.

[Read the rest of the article By Walter Updegrave at CNN/Money…]

Five Retirement & Annuity Calculators

Best Advanced Retirement Income Calculator - Free

Using OutCome Based Planning™ for Your Retirement

We practice and recommend a "Holistic - OutCome Based Planning™ process when considering annuities." This approach has the effect of balancing your overall portfolio so you can meet your retirement objectives by "first identifying the least amount of your investments or savings (if any) that should be considered for annuities." OutCome Based Planning™ analyzes and models multiple outcomes so you can clearly identify your best income and growth opportunities.

"The Annuity Guys will only call if you request help". Hence, when you are ready for specialized help we will be available.
"Working with an Experienced Fiduciary Financial Planner can help you Avoid a Trial & Error or Risk Based Retirement"

This type of approach does take considerably more time, effort and analysis which will show you mathematically the successful possibilities by comparing various outcomes rather than trying to sell or convince you of that "so-called one best solution." Clients frequently tell us that this process removes some of the confusion and emotion to help them objectively identify a better retirement plan; rather than just ending up with the most convincing salesperson or advisor.

When requesting help you can be assured of working with an experienced Annuity Guys' Retirement Planner who is independently insurance licensed and securities licensed as a fiduciary financial planner having access to the vast majority of annuity companies in helping you choose the best annuities using a holistic-outcome based planning approach. We consider the high quality advisor recommendations we make to our website visitors as a direct reflection back on our commitment to serve all client's with a high standard of excellence in financial planning for retirement.

Based on survey feedback on advisors from our website visitors, we eliminated about two-hundred local advisors and now only recommend a few that we consider experienced vetted Annuity Guys' Fiduciary Advisors. Many local advisors continue requesting us to recommend them as a vetted advisor. However, our reputation and future business is driven only by satisfied website visitors. So, unfortunately we've had to tell the vast majority of local advisors no, since we changed our business model four years ago. At that time we stopped trying to satisfy everyone with local advisors, we now primarily work with individuals who are comfortable using today's internet technology to their fullest advantage by working with a select group of vetted, experienced and knowledgeable Annuity Guys' Fiduciary Planners.

Get Full Video Access & Our Library Edition - Annuity Reference Book

Is Your Annuity Advisor a Salesman or a Fiduciary?
2024 Advisor Report

Priority Mail - Free Shipping!

After confirming your request for help and shipping address by phone, we will immediately send your FREE personally signed Library Edition of our popular Annuity Reference Book "The New Retirement" plus Fact-Filled, Full Video Access!

Learn the 3 Best Annuities to Help
ASSURE YOUR RETIREMENT'S SUCCESS!

Selecting the Best Annuity & Retirement Income Advisor

Are you willing to work with one of our retirement and annuity advisors based on their experience and expertise as a first priority rather than being limited by a local or regional area? The good news is that technology has forever eliminated our geographical limitations and leveled the playing field for everyone! As a result of today's technological advances, all of us can now work confidently with experts in any field including personal finance. We are no longer confined by regional or local boundaries limiting our choices and ultimate success. A high quality advisor is now as close as a click or phone call away.

Video:"Choose a National or Local Advisor"?

"There is no room for trial and error when it comes to choosing MarketFree® Annuities or a Successful Retirement Planner."

When you think about it, your money is almost always in some other state with a custodian; whether invested in the market or with an annuity insurance company, the advisors competence is primarily needed when positioning your money initially. So working with a specialized expert in a financial discipline like investments or retirement planning is imperative. There are no undo buttons in retirement! Once the annuities get set up correctly, it is customary and more efficient for owners to benefit by having direct access to the issuer instead of having to go through the agent. And, of course any reputable advisor, local or national, is more than willing to assist their clients if needed after they are implemented.

Video:"Why These 3 Types of Annuity Advisors are Not Created Equal"

"There are no undo buttons in retirement so it is vitally important that you do it right the first time!"

We are fortunate to have a select few who we believe are truly the highest qualified advisors out of about two hundred licensed insurance agents that we eliminated. Your survey feedback is what helps us make these tough decisions. Our advisors have an independent financial practice, specializing in annuities and retirement planning, which helps ensure that you are given the best options available for your retirement planning.

Video: "How Much of Your Money Should You Consider Placing into Annuities"?

"It takes an experienced expert to know how to structure annuities for income, inflation, growth, return of principal, and tax advantage."

"Anyone can sell you an annuity; however, it takes a truly qualified and experienced advisor to know how to structure them for income, inflation, growth, return of principal, and tax advantage. Typically, there is not just one that can accomplish all of these objectives. It is how an advisor structures multiple annuities in balancing your total portfolio that makes it possible to achieve your most important retirement objectives."

Video: "How to Choose a Great retirement Advisor"?

Why Searching for the Best Annuities on Your Own Can be so Frustrating...

Almost everyone nowadays turns to the internet for answers on everything - from buying new widgets to researching just about everything under the sun; and finding the best annuity is no exception!At first, it may seem that researching will be straightforward but the more time you spend researching them, the more frustrating it can be. Why is this? First of all, it does not take long to realize that gimmicks abound - such as warnings and alerts from salesmen who just want your attention so they can sell you one or the "too good to be true" claims of 8% to 14% **guaranteed interest and of course the claim that you can get the full market upside with no downside risk! If you have done any research you have heard all of these claims in advertising which are mostly half truths and not fully explained.So how can you find the best annuities on the internet? The truth is... you can't! And what is even more frustrating is all the conflicting points of view from so called experts. There are well over 6,000 different annuities - all designed for different reasons, so is it any wonder that the deck is stacked against the average researcher or do-it-yourselfer. Add to that the fact that they pay high enough commissions to attract a plethora of both good and bad agents. This does not make annuities good or bad; they are simply a financial tool that truly benefit those who use them correctly.How can you find the best annuities for your unique situation?

Use the internet cautiously;
Work with a vetted and experienced specialist;
Do not settle for that one dubious best plan. Compare multiple Outcome Based Plans to decide on the one that is truly best for you;
Be keenly aware of scare tactics and hyperbole - avoid those advisors and websites;
Avoid websites that are focused on rushing free reports, rates and quotes to get your contact information they are rushing you to speak with them, instead, take your time and choose someone you are more comfortable with that works on your time-table;
Know the Five Vital Factors (listed above) that an experienced specialist must answer before helping you select the best options for your situation;
Watch this telling video "Avoid Annuity Gimmicks, Amateurs and Charlatans"...

Video: "Avoiding Gimmicks, Scams & Charlatans"

^** 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. Annuities are not FDIC insured and it is possible to lose money.
They are insurance products that require a premium to be paid for purchase.
Annuities do not accept or receive deposits and are not to be confused with bank issued financial instruments.
During all video segments, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

^*Retirement Planning and annuity purchase assistance may be provided by Eric Judy or by referral to a recommended, experienced, Fiduciary Investment Advisor in helping our website visitors. Dick Van Dyke semi-retired from his Investment Advisory Practice in 2012 and now focuses on this website. He still maintains his insurance license in good standing and assists his current clients.
Our vetted and recommended Fiduciary Financial Planners are required to be properly licensed in assisting clients with their annuity and retirement planning needs. (Due diligence as a client is still always necessary when working with any advisor to check their current standing.)

Site Terms & Disclosure

All tools, videos or information visible on this website's pages, television, or other media are for educational and conceptual purposes only.
Tools, videos or information are not to be considered investment advice, insurance recommendations, tax or legal advice.
It is recommended that site visitors should work with licensed professionals for individualized advice before making any important or final financial decisions on what is best for his or her situation.
Website comments are not considered investor testimonials those shown only relate to an insurance agent referral service, customer service, or satisfaction with the purchase of insurance products and are never based on any investment or securities advice or investment or securities performance.
Please be aware that your feedback and compliments may be shared with our visitors or those that may be interested in our services we will never give out your full name or full address or phone number without your permission. By sending us your feedback & comments you agree to allow us full use in sharing your comments with others in public forums. Thank you for sharing.
Media logos are not any type of endorsement, they only imply that one or more of the Annuity Guys have written for, been quoted by, or appeared on the listed news outlet, broadcast or cable channels, or branded programs for non-advertising and/or advertising purposes, to offer educational and conceptual information about retirement issues.
Income is guaranteed by annuitization or income riders that may have additional costs or fees.
http://www.annuityguys.net & http://www.annuityguys.com forward to https://annuityguys.org. - Further all disclosures and information are to be considered as one and the same for any and all URL forwards, and these same disclosures and information also apply to all YouTube videos featuring Dick & Eric where ever they are viewed.
MarketFree™ Annuity Definition: Any fixed annuity or portfolio of fixed annuities that protects principal / premium and growth by remaining market risk free.
Market Free™ (annuities, retirements and portfolios) refer to the use of fixed insurance products with minimum guarantees that have no market risk to principal and are not investments in securities.
Market Gains are a calculation used to determine interest earned as a result of an increasing market related index limited by various factors in the contract. These can vary with each annuity and issuing insurance company.
Premium is the correct term for money placed into annuities principal is used as a universal term that describes the cash value of any asset.
Interest Earned is the correct term to describe Market Free™ Annuity Growth; Market Gains, Returns, Growth and other generally used terms only refer to actual Interest Earned
Market Free™ Annuities are fixed insurance products and only require an insurance license in order to sell these products; they are not securities investments and do not require a securities license.
No Loss only pertains to market downturns and not if losses are incurred due to early withdrawal penalties or other fees for additional insurance benefits.
Annuities typically have surrender periods where early or excessive withdrawals may result in a surrender cost.
Market Free™ Annuities may or may not have a bonus. Some bonus products have fees or lower interest crediting and when surrendered early the bonus or part of the bonus may be forfeited as part of the surrender process which is determined by each contract.
MarketFree™ Annuities are not FDIC Insured and are not guaranteed by any Government Agency.
Annuities are not Federal Deposit Insurance Corporation (FDIC) insured and their guarantees are based on the claims paying ability of the issuing insurance company.
State Insurance Guarantee Associations (SIGA) vary in coverage with each state and are not to be confused with FDIC which has the backing of the federal government.
This website is not affiliated with or endorsed by the Social Security Administration.
*"Best” refers only to the opinion of Dick, this site's author; or the opinion of Dick & Eric in videos and is not considered best for all individuals.
*"APO” refers only to the Annual Pay-Out of annuities in the guaranteed lifetime income phase. *APO is NOT an annual yield or an annual rate of interest.
AnnuityRateWatch.com, is only a linked to subscription service, which is not affiliated with this site, it supplies and updates all Annuity Rates, Features Ratings, Fees and Riders. AnnuityRateWatch.com's information is available in the public domain and accuracy is not verified or guaranteed since this type of information is always subject to change.
Dick helps site visitors when help is requested. Dick may receive a referral fee as compensation from an advisor for a prospective client referral. This helps compensate Dick for time spent assisting site visitors and maintaining this educational website.
Eric Judy is both insurance licensed and securities licensed. Eric offers securities as an investment adviser representative through Client One Securities, LLC.
Eric purchases prospective client referrals from Annuity Guys Ltd. and may be compensated by commission for helping prospective clients purchase. Eric may also recommend these prospective clients to an advisor and earn a referral fee or a referral commission split.
Vetted advisors refers to advisors that are insurance licensed and recommended based on referral experience from satisfied clients.
Any recommendation of an advisor is only one aspect of any due diligence process. Each site visitor must accept full individual responsibility for choosing a licensed insurance agent/advisor.
In the event that a recommended licensed advisor/agent is not considered satisfactory, Eric will make reasonable efforts to recommend other advisors one at a time in an attempt to satisfy a site visitors planning or purchasing needs.
Dick is the website author and editor, Annuity Guys Ltd. is the website owner; Eric is a guest video commentator. Videos gathered from other public domain sources may also be used for educational and conceptual purposes.
There is NO COST to site visitors when they are given an advisor referral or recommendation.
By giving the us your contact information such as email, phone number, address and etc. you are giving your permission to be contacted or sent additional relevant information about annuities, retirement and related financial information. We have a NO SPAM policy.
Accuracy of website information is strived for but is not guaranteed.
Freedom from virus or malware is strived for but is not guaranteed. Website visitors accept any and all risk associated with damage to any computer for any reason when using this website and hold this website harmless from any liability.
Use this website like the vast majority of websites at your own risk. No risk or liability of any type are accepted by any business entity or any of the information providers for this website.

Is Social Security an Annuity?

April 27, 2012 By Annuity Guys®

It is important to understand the way that Social Security was designed to function. By commercial standards, this is the ultimate lifetime annuity. The definition of an annuity is basically exchanging one’s money with some entity in return for a reliable income stream over a period of time based on a predetermined agreement. The strength of the annuity in this case is the full backing of the US government which is considered to be the safest financial haven of the entire world. With this, Social Security’s ultimate annuity aspects are:

Full Backing of the US Government
Tax advantaged – 0 to 85 percent is taxed based on income
Inflation Protection – cost of living increases (COLAS)
Income for life – eliminating longevity risk
Spousal, Family and Survivor benefits
Priced less than commercially available annuities

What did retirees do before 1935 when Social Security was not available? What about those less fortunate who had no supplement for their retirement income to survive? There was more family and church involvement on behalf of the poor and more hardship for certain. Here are some recent statistics from www.SSA.gov that demonstrate why Social Security, like it or not, is likely to be continued to a large degree as part of what it means to be a Social Security entitled US citizen.

In 2011, nearly 55 million Americans will receive $727 billion in Social Security benefits.
Social Security is the major source of income for most of the elderly.
Nine out of ten individuals age 65 and older receive Social Security benefits.
Social Security benefits represent about 41% of the income of the elderly.
Among elderly Social Security beneficiaries, 54% of married couples and 73% of unmarried persons receive 50% or more of their income from Social Security.
Among elderly Social Security beneficiaries, 22% of married couples and about 43% of unmarried persons rely on Social Security for 90% or more of their income.
Social Security provides more than just retirement benefits.
Retired workers and their dependents account for 69% of total benefits paid.
Disabled workers and their dependents account for 19% of total benefits paid.
About 91 percent of workers age 21-64 in covered employment in 2010 and their families have protection in the event of a long-term disability.
Just over 1 in 4 of today’s 20 year olds will become disabled before reaching age 67.
67% of the private sector workforce has no long-term disability insurance.
Survivors of deceased workers account for about 12% of total benefits paid.
About one in eight of today’s 20 year olds will die before reaching age 67.
About 97% of persons aged 20-49 who worked in covered employment in 2010 have survivors insurance protection for their young children and the surviving spouse caring for the children.
An estimated 158 million workers, 94% of all workers, are covered under Social Security.
50% of the workforce has no private pension coverage.
31% of the workforce has no savings set aside specifically for retirement.
In 1940, the life expectancy of a 65-year-old was almost 14 years; today it’s almost 20 years.
By 2036, there will be almost twice as many older Americans as today — from 41.9 million today to 78.1 million.
There are currently 2.9 workers for each Social Security beneficiary. By 2036, there will be 2.1 workers for each beneficiary.

Low Interest Rates Hurt Seniors

April 20, 2012 By Annuity Guys®

The Federal Reserve Board has not formally relaxed its intention to keep interest rates low through the end of 2014. And there is little new to say about the way non-existent interest rates on savings accounts, certificates of deposit, and U.S. Treasury securities have hurt all savers, particularly risk-averse investors.

Retirees are, of course, the poster children for risk-adverse investments, and their nest eggs have been hammered by the Fed’s policy. The Fed has said that low rates help the economic recovery. So it argues, in effect, that investors should enjoy the solid stock market returns and that savers should display a stiff upper lip. [Read More at US News…]

4 Ways New Annuity Rules Will Help Retirees

The White House last week strongly endorsed annuities as a needed but missing piece of Americans’ retirement plans. Insurance companies and annuity trade groups had something nice to say about Washington regulators for a change. And the new rules just might set in motion some interesting retirement-plan changes.

Among financial products, annuities have long been a very hard sell. It’s easy to understand the appeal of buying Apple stock or getting in on the ground floor of Facebook’s IPO. Understanding annuities and their benefits, however, is not on the minds of many investors.

The premise of an annuity is easy to state: Give some money to an insurance company and it will make **guaranteed payments to you for the rest of your life. The money can be paid now or in the future. The payments can begin at any time the investor chooses. And the lifetime stream of income promised by an annuity can augment Social Security and help put to rest a person’s fear that he or she will run out of money before they die.

[Read More at US News…]

Annuity Guys® Video Transcript:

Dick: One thing that really gets our blood boiling, and I would have to say a lot of the folks that we speak with, is this low interest rate environment that is really being penalizing to retirees.

Eric: The unfortunate thing is you’ve got a government who is forcing low interest rates down our throat.

Dick: Why would that be to our government’s benefit, Eric?

Eric: Let’s see here. If I print cheap money, and if I don’t have to pay it back at high interest rates . . .

Dick: If I owe $16 trillion, and there’s a way I can actually manipulate and hold interest rates low, that might be a good thing for me?

Eric: Just borrowing free money. We’ve been propping up the banks and propping up and, supposedly, economy by keeping these rates low, but the return effect is we’ve taken our retirees and our savers, and we’ve thrown them under the bus.

Dick: We’ve penalized them in a major way. When you look at the financial institutions that these interest rates were put into effect, supposedly, to help and to shore-up, these financial institutions are all passing their stress tests.

Eric: They’re making money.

Dick: They’re making money; they’re coming back. There’s a few that are having a challenge, but overall, our financial system at least gives the appearance that it’s been restored to some degree.

Eric: What they did is they designed this to basically push money into the economy to make it better to borrow. Borrowing helps the economy; that’s what the theory is here.

Dick: Stimulating the economy.

Eric: If you want to borrow money right now, it’s a great time, but if you’re getting close to retirement and you’ve already saved up everything, you’re now earning next to nothing on most of your major options or your safe money options: Your CDs, your money markets, the FDIC-insured options. You’re being forced to look at other alternatives.

Dick: Our corporations are cash-rich. The banks have a lot of cash that they don’t know what to do with. The demand isn’t there to borrow the money, even though the rates are extremely low. What I believe that this is leading up to, and I think, Eric, we’ve discussed this, is that there is no short-term fix.

Eric: No. In fact, Uncle Ben Bernanke has promised us that we’re going to keep interest rates at this level at least until the beginning of 2015. We’re sitting here, years away now, and people are saying, “Are rates ever going to increase?” The crystal ball in front of us says no, because we’ve got a **guarantee, or a pledge, to keep rates at a hyper-low level.

Dick: Our government’s motivation isn’t there to stimulate and raise the rates for savings, which encourages savings and that type of thing. The more that consumers spend, the more that they borrow, the more that drives the economy, and it has that other side effect of holding the government’s borrowing costs down. When we look at Japan, we go back to 20 years of very, very low interest rate environment, and the savers over there have had . . . who knows if we’re really following that model or not, but there are some similarities there.

Eric: I’ll be honest, and Dick’s heard me say, I don’t care about Japan. I’m worried about what happens here at home.

Dick: What happens to our clients right here in Central Illinois, United States.

Eric: That’s right. We’ve got people that are constantly walking in the door. I’ve had umpteen people that are typical CD borrowers, who walk in with their hands in the air, and they go, “What can I do? What are the alternatives?”

Dick: We’ve been pretty fortunate. We’ve been able to establish at least the foundational portion of many of our clients’ portfolios in annuities, and we’ve been able to ladder those annuities and get 8% **guaranteed growth on the income base anyway. Maybe the cash accumulation isn’t growing at 8%, but their income base is growing, that they can draw their income off of. It will have a tendency to outpace or stay ahead of inflation.

Eric: Just real quickly, when we talk about laddering annuities, what we’re talking about is basically having different start-points for annuities. You may turn on Year-1 and you may wait 5 years before you turn on another, and another 10 years before you would turn on a third.

Dick: You’ve got this 8% or 7% compounding year-after-year. The longer you can stretch it out, the better. You may need some income immediately or income in 5 years, and then income in 10, in 15.

Eric: To turn those on after those have been in deferral so they have a greater compounding effect.

Dick: The other choice that we have if somebody needs income right away, is to setup some type of an immediate annuity or a hybrid annuity that will actually have some cost of living adjustment built into it.

Eric: The one thing with [inaudible: 05:11] the immediate annuities, if you start them with a cost of living adjustment, they usually start a little bit lower than those that just have a normal life expectancy.

Dick: Similarly on some of the hybrids, but there are some hybrids that will actually start about the same point and still have a cost of living adjustment built into them.

Eric: That’s what we always talk about with the client: What’s the longevity expectation? If you have a longer than normal life expectancy in your family, that’s especially the time to look at those things, because that’s [inaudible: 05:39].

Dick: You can really come out ahead. Our goal is never to do out and beat up on the insurance company, but when it comes down to . . . Eric says, “Yes we do.” When it comes down to the client or the insurance company, we’re for the client.

Eric: That’s exactly right. We want you to make the most money possible back.

Dick: If you can win against the insurance company, then obviously, longevity is one of those variables, those wildcards.

Eric: Our goal is for everybody to win. I say that facetiously. I don’t want to take the insurance company down, but that being said, I want all my clients to benefit.

Dick: To benefit in the best way possible. We really come down to, Eric, a low-rate interest environment. It’s affecting retirees all over the country, and their choices aren’t that many.

Eric: No, very limited. I don’t want to say ‘in closing,’ necessarily, but in summary . . .

Dick: It’s okay. We can close.

Eric: Look at your full range of options because of the interest rate environment. It’s not the time to be sitting on the fence, unfortunately. People keep on saying, “If I wait.’ I’ve had somebody out there waiting for 3 years now, waiting for rates to increase, and the opposite has happened.

Dick: It lost ground, and they don’t have the same options they had a few years ago.

Eric: How long can you sit in a 0.5% CD?

Dick: With 3% inflation.

Eric: Exactly. You’re losing money by putting yourself in a . . .

Dick: You’re going backwards at 2½% to 4% a year, probably.

Eric: In summary, yes. Low interest rates hurt retirees, they’re very painful, but it shouldn’t stop you from taking action and making a progressive retirement plan.

Dick: Yeah, making a good decision. Use a good financial advisor and just weigh all the options. Thank you.

Understanding Immediate Annuities

March 22, 2012 By Annuity Guys®

Today, people are living longer than ever before. While the idea of living a longer (and hopefully healthier) life is appealing to most of us, the tradeoff for many people is the fear of outliving their retirement savings.

On top of that, the immense costs of healthcare today––along with constantly rising inflation––continue to compound an already stressful situation for many. However, there is an option available to retirees that can help ease the stress of outliving their savings while providing them with an income stream almost immediately upon funding it. That financial vehicle is an immediate annuity.

While many annuities are created to build up the account value for retirement, an immediate annuity is actually designed to provide income immediately to its holder.

[embedit snippet=”video-specialist-button”]

Immediate annuities are insurance products that pay their owners a regular income––monthly, quarterly, or over another desired time frame––for as long as the annuity holder lives.

These products are essentially a contract between the annuity owner and an insurance company. They are typically purchased with a large cash lump sum by retirees in order to pay living expenses in a reliable pension style INCOME over a long period of time. In exchange for this lump sum deposit, the insurance company will provide them with a regular income for a specified time OR long as they live, regardless of how long that may be.

Plus, if it is a lifetime annuity, this benefit will continue for as long as the single or joint annuitant is living. Therefore, an immediate annuity actually pays for living a long life instead of the emphasis being on heirs receiving a large payout when the immediate annuity owner dies. It is possible for the immediate annuity owner’s heirs to receive some of the deceased owners intended income if he or she should die prematurely.

Immediate Annuity Features

Throughout the years, there have been some modifications to the original immediate annuity design. Many of these annuity features, which may or may not be available on all immediate annuities, or offered by all insurance companies, are discussed below:

Inflation protection: With this option, the immediate annuity income payments offer some form of a hedge against inflation. Here, the annuity owner may choose to have his or her income payments increase by a certain percentage each year, typically around 3 percent. Another choice may be to have the annuity income payments actually tied to an inflation rate by the use of a consumer price index. When this option is chosen the initial payout of the annuity starts lower.

Refund, liquidity, and withdrawal options: The traditional refund feature on immediate annuities has typically been either a cash refund or an installment refund that ensures after the annuity holder’s death that the beneficiary will receive an amount of money that represents the difference between the initial deposit amount and the amount of the income payments that the annuitant received during his or her life. This, however, reduces the amount of the systematic payout when comparing to life only with no beneficiary benefit.

There are several different ways to structure an immediate annuity with regard to the income payment options. These options include:

Life only: A life-only immediate annuity can also be referred to as a straight life annuity. This means that the annuitant will receive annuity income payments for the rest of his or her life, regardless of how long that duration may be. The payments will cease and all of the unused initial premium will be to the insurance company’s benefit or detriment based upon the annuitant’s actual death and life expectancy underwriting calculations.

Certain period: This structure is not considered to be a life annuity. Rather, the annuity payments will only go on for a fixed period of time, such as for ten years. Even if the annuitant is still living at the end of the stated time period, the annuity payments will cease at that time. However, should the annuitant pass away within that time period, the beneficiary will continue to receive the payments until the period of time has expired.

Life with period certain (or certain and life): This type of immediate annuity payment structure is a combination of both the life and the certain period structures, meaning the annuity will pay income benefits to the annuitant for as long as he or she lives. However, if the annuitant passes away during a specified period of time, say ten years, then the beneficiary will continue to receive income payments from the annuity until the end of that ten-year time period.

Life with cash refund: This can be considered a money-back **guarantee annuity. The income benefit payout is for life. However, if the annuitant passes away before the payments that total at least the amount of premium paid, then a lump sum payment is made to the annuitant’s beneficiary.

Life with installment refund: This, too, can be considered a money-back **guarantee annuity. This immediate annuity payout option is similar to the life with cash refund option, except the annuitant’s beneficiary will continue to receive the monthly annuity income instead of a lump sum until the full amount of the premium has been paid out.

Joint and survivor: This annuity income payout option will **guarantee that the income payments will continue for the lives of both annuitants. Along with this, period certain options can also be added. This particular payout option is typically used with married couples in order to provide income as long as either one of them is still alive. In some instances, the income benefit may drop when the first spouse passes away.

COLA SPIA: This annuity income payout structure has payments that increase or decrease by a floating percentage which fluctuates when tied to a consumer price index, each year. In this case, however, the initial income benefit will likely be lower than those that are non-COLA (cost of living adjustment) annuities.

Annuity Guys® Video Transcript:

Dick: Today, we want to talk about immediate annuities and do a little comparison with immediate annuities and why you might consider an immediate annuity.

Eric: One of the things we often hear, in today’s world, where you have this hybrid annuity, which gives you lifetime income as well as some other bonuses/extras, why would you ever want to actually look at using an immediate annuity, where you’re going to give up your assets?

Dick: Right. That is the difference, Eric. When we think about the hybrid annuity, it’s kind of your cake and eat it too annuity, where you can get your lifetime income, but you don’t have to give up your asset. Yet, there is a place for an immediate annuity.

In fact, let’s do a little history lesson. How about some trivia here? When we think about an immediate annuity, it literally goes back to the early Roman Empire. They called it the “annua,” and that’s where the word annuity comes from. So it is a very early form of an annuity, and it has really gone through the test of time, spanned the centuries.

Eric: So next time you have your toga on, you’ll know to get your annua language out. Exactly. It’s an old standard. It was the first kind of annuity out there, the standard lifetime annuity. You gave up a lump sum, and you got a lifetime income stream.

Dick: It is probably the truest pension-style income. In fact, immediate annuities, a lot of companies will offer a choice of a lump some or an immediate annuity.

Eric: I talked about immediate annuities with a lot of clients, when they were saying, “Hey, I’ve got a 401(k). I want a lifetime income. What can I do to get my own personal pension?” That’s kind of how we think of it. The thing is you’re usually giving up that 401(k) in exchange for that lifetime income stream. Now, the big thing here is you realize that none of those dollars are going on to heirs.

Dick: Yes. Well, in a true pension, there’s no money in a pension, as a rule. When you have a pension, when you pass, the money ends, or if you’ve chosen a survivorship option, you’ve probably taken a little bit lower payment on your pension, and then some of those payments will go on to perhaps a spouse.

Eric: Exactly. When I grew up, my parents were educators. So they had a traditional kind of benefit program, where they have a retirement that’s there as long as they live. The bad thing is, once they’re gone, nothing goes on to me. Being a little self-serving here now. The 401(k) plan . . .

Dick: Why didn’t they get a hybrid annuity?

Eric: Exactly. Why can’t they get a hybrid annuity? So when they’re looking at it, that’s the old style. The hybrid, on the other hand, allows you to pass some of those dollars on to heirs typically.

Dick: Right. So, really, where the immediate annuity fits, let’s just give some examples. Someone who really wants to start income right now.

Eric: With an traditional immediate annuity, typically you’re going to get a higher payout than you would with a hybrid. You’re going to start with a little bit higher. . .

Dick: Typically. But we have seen a few instances where . . . you’ve got to run some illustrations to know.

Eric: Exactly. So that’s one of the things that when people are going that direction, that’s usually the reason.

Dick: General assumption is you’re going to get more income.

Eric: A little bit more. A higher percentage to start with.

Dick: Right. Then the other key factor would be that, perhaps, if you’re going to use an immediate, you really aren’t as concerned about giving money over to heirs.

Eric: Right. Are there ways to get money on to either survivors or heirs? That’s one of the things we . . .

Dick: With an immediate?

Eric: An immediate annuity. You can structure it so that it’s a joint lifetime payout. So if you and a spouse purchase an immediate annuity, you can set it up so that it is the lifetime of both of you or either of you. Whoever lives the longest, those payments will continue. There are little tweaks that you can even do there, where you can set it up so that once one passes, it sometimes reduces by a percentage.

Dick: A percentage, so they only get three-quarters or one half of the annuity.

Eric: Right. The other way that you can somewhat pass on dollars to heirs is there are a couple of things. You can do a period certain, where it’s lifetime with a certain number of years **guaranteed. A lot of times you’ll see somebody do a lifetime annuity with 20 years **guaranteed. So that 20 years of payments is **guaranteed.

Dick: So if I pass in 5 years, somebody is going to get another 15 years of payments. But what does that do to my income?

Eric: It’s going to reduce your payments. You have to realize going in, if your goal is the highest payout possible, you don’t want to add any of these other pieces. But if you’re wanting to try to pass on money to somebody, that’s a way of **guaranteeing basically that some of that comes back. One of the things I always look at is either the installment refund or the cash refund, which says once you purchase the immediate annuity, if you haven’t gotten back at least what you paid in principal wise, that amount will be refunded either to your heirs or to your estate.

Dick: Well, isn’t that the installment refund?

Eric: The installment refund keeps the payments coming back to your return of principal.

Dick: Okay. So you’re talking about the full lump sum.

Eric: Yes, just a refund of whatever you’ve put in, so it’s either a lump sum or installment refund.

Dick: One of the biggest vulnerabilities that Eric and I look at with our clients, and what we think you should be concerned about, is inflation. That is probably one of the biggest vulnerabilities we face. We have had historic inflation the last 4 decades of over 4%. We believe that the stage is really set for some higher inflation over the next two or three decades, which is going to cover most retirees. So if we would happen to go through a stretch of 4% or 5% – I’m not talking about runaway hyper third world country inflation – but if we’re talking 4%, 4.5%, 5%, 6% inflation, that makes that immediate annuity, if you have no inflation cost of living adjustment, a COLA on it, it really puts you at a disadvantage.

Eric: Yes, especially if you’ve got longevity in what you’re looking at. You realize you’re taking a level payment and you’re stretching it over your lifetime. So your purchasing power is going to diminish with inflation.

Dick: Right. So one of the things that we do suggest, very strongly, is that whatever type of annuity, whether it’s an immediate annuity, a hybrid annuity, a deferred annuity where you’re deferring it for a long time, that you’re really taking inflation into account. There are different ways to structure for inflation, but if you’re not taking it into account, you’re really setting yourself up for a bad situation.

Eric: Right. That’s another aspect that you can add to an immediate annuity. Some of them you can add a cost of living adjustment. Others have a fixed percentage.

Dick: Tied to a consumer price index or a fixed percentage.

Eric: So those are things you can add, but you realize you’re going to start lower.

Dick: Your payments are going to start lower. Right.

Eric: So it’s all about the tradeoffs.

Dick: I love the idea of a real cost of living adjustment. So if things get carried away and we start seeing 5% or 6% inflation, we’ve covered a major vulnerability in a retirement plan.

Eric: Yes. That’s what we’re looking at here. When we’re looking at immediate annuities, we’re looking at you creating your own personal pension.

Dick: Yes, that’s right.

Eric: If you’re into this marketplace, where you’re going to create a personal pension, and you have that magic number you know that you need to hit and you can anticipate the growth, that’s where this product really comes in.

Dick: So if we’re to kind of wind up this discussion on immediate annuities, being a true pension-style income, where would we summarize that this is going to fit? What type of person should buy an immediate annuity, should really consider it for their retirement portfolio?

Eric: I always say it’s someone with no heirs, that doesn’t have to worry about passing on dollars to somebody in the future. They’re not worried about that. They want the highest payout now, and that’s really the person that I start with.

Dick: Right. I think that, in winding this up, we just want to say, do a fair comparison. You may be the ideal person for an immediate annuity, but get with a professional advisor, run some illustrations, compare it. We have actually seen situations where a hybrid annuity can right off the bat outperform an immediate annuity. It’s not often, but it does happen.

Eric: Yes. Very good.

Dick: Thank you.

How Much Income Can You Withdraw Safely in Retirement?

March 16, 2012 By Annuity Guys®

A Reuter’s article hit our desk recently. It’s based on a “safe withdrawal rate” during retirement (safe being relative since we’re talking about the stock market) and how that percentage is trending down.

Here’s a direct quote from the article:

“Some financial firms have considered lowering their recommended withdrawal rate to 3 percent but have found it hard to gain traction. That’s a safer rate, concedes T Rowe Price spokeswoman Heather McDonold, but it may be difficult and unrealistic for some folks.”

We might even agree with T Rowe Price’s statement for those individuals who are fully invested in the market. However, some of the other statements have us really “steaming,” not because they are lies necessarily, but they could be disastrous advice for some retirees.

[embedit snippet=”video-specialist-button”]

The article quotes a “pioneer of the safe withdrawal methodology,” William Bengen who goes on to state that retirees can increase their withdrawal percentage to 4.5 percent if they include small stocks in their portfolio. He does not discuss volatility or the increased risk associated with this strategy. Failure to address risk or proper allocation could lead consumers and readers down an unrealistic and tumultuous path.

One of the biggest oversights of the article is the failure to mention the use of annuity allocations to **guarantee a larger withdrawal percentage than what can typically be done safely with a portfolio consisting of stocks and bonds.

Annuities typically offer withdrawal rates in the range of 4 to 8 percent depending on age; and the income from these products are the result of contractual **guarantees on lifetime income.

By utilizing annuities to secure the foundational income amount needed individuals and couples can then afford to take more risk with their discretionary dollars to capture higher potential returns. Retirement planning to accomplish goals and secure a safe secure income should be done with the assistance of a financial professional who can help you examine your assets and guide you in the process.

Failure to Plan is most likely a Plan to Fail!

Annuity Guys® Video Transcript:

Dick: Well, Eric, we’ve got a fun topic today.

Eric: Fun for some. If you’re that close to retirement and you’re starting to think about, “Gee, how much can I pull out?”

Dick: Right. Well and that’s really one of the jobs that we have as financial people to help our clients know what they can spend, and so that you don’t feel guilty about it and you know what you’re secure spending.

Eric: What’s the magic number? There are the old standards and when you start talking about withdrawal rates in retirement the old standard is 4.0%. I should say that’s been the standard since I’ve been in the business. At one point in time, I know it was 5.0%. Now it’s down to 4.0%

Dick: We’ve recently been backing it down to about 3.50%.

Eric: Now the chatter is, “Oh, maybe 3.50%.” There’s an interesting Reuters article that highlights it. In fact, they even mention here that there’s somebody that says maybe 1.50% in this low interest rate. How do you pick what’s that magic number, so that you can make sure you don’t outlive your income?

Dick: I think Eric, one of the things that we want to establish is that there are really two– there are probably more than two ways, but there are two, kind of obvious, different ways. Let’s call one the Wall Street way.

Eric: The “oops” method.

Dick: Yeah, “oops.”

Eric: And I kid, but there’s nothing better than your broker calling you up and saying, “Oops, we ran out of money.” I’m not saying that’s likely, but when you’re invested in it…

Dick: Or it’s dropped so much that you better back off on income for we don’t know how long.

Eric: The annuity method is more of a foundational plan. That is not to say that it’s the, be all and end all, but it’s a great way to protect the base line of what your income is.

Dick: So incorporating annuities, we look at in our planning, as more of a foundational part of the overall income plan, and yet when I read this Reuters article, I think we should spend a little more time on that and talk about it. I think, folks you want to look at that article and read it, because it does have some enlightening aspects to it. But they’re taking the Wall Street way and there is no mention at all of the possibility of using annuities for the foundational portion of your portfolio. It’s all in on securities and the right mix of securities and different strategies for pulling money out.

Eric: I find there are certain things in this article that I’ll be honest, actually frustrate me a little bit, because when it comes to, when people read something they tend to believe it, because it’s in print. There’s a guy here and I don’t know William Bengen, pioneer of safe withdrawal rate methodology. And one of the things he talks about is utilizing smaller stocks, small cap stocks to increase return, so that you can withdraw more of your money. Now my understanding of the market and small cap stocks, they tend to be a bit more volatile. There’s definitely the potential for that growth, but there’s also that potential for that drop.

Dick: Right. So you’ve got a corresponding risk and we would tend to think, when a client is in that type of an investment, that they’re taking on more risk. So when I look at, in all fairness what he’s suggesting in this article is that you pull back when your stocks are down and you increase what you take out when your stocks are up. But that doesn’t seem to work for our clients I mean as a whole. We might have a couple of clients that are in that discretionary where they could just be that flexible, but most people have a budget.

Eric: Yes. They have a minimum living standard, that they have that meet their basic necessities and if you can’t beat/meet those basic necessities, this doesn’t work. That choice doesn’t work. I think the best bet is truly a blending of the two methods, using a foundation building piece, whether it be an annuity or Social Security. Something that **guarantees that coverage across, and usually it’s a combination of multiple pieces that gets you there, and then you can use an equities based model, to increase and use that for a hedge for inflation, perhaps.

Dick: That would be your discretionary money. You know when I look at AARP, they put some information out on this but they also, in what I’ve read, they’re taking more of a Wall Street methodology in terms of without looking at annuities, saying take out a 4.0% rate of withdrawal. When you start looking at that, if you’re pulling that out at the wrong time, you’re going to have what’s called an unfavorable sequence of returns and you can really get into trouble.

Eric: We always talked about dollar cost averaging, when you’re buying in. You’re more likely to hit buying in at more low times over the course of a period of time, than you are high times. So it’s advantageous to keep doing it in regular intervals. Well, guess what? When you start making withdrawals, the same is true. You’re more likely to hit those consistent low periods, so you’re actually hurting yourself when you start pulling money out during those low periods.

Dick: Right. You have to be very, very careful. I know I’ve run some scenarios, and some modeling of you know, if you were pulling money out during certain years and sometimes just missing it by a couple of years. Like, if you started your withdrawals back in 1975, and you were pulling out a certain amount over a certain period of time, your portfolio would tend to look pretty good over an extended period of time. But if you just started in 1973, when there were a couple of bad years unexpectedly, you would have wiped your portfolio out in a much shorter time, 15-20 years.

Eric: Especially early on, when this unfavorable order of sequences or returns rather, is early on in your retirement those things can be devastating. I think what we’re looking at here as well we’re saying, guidance. Its take some of the guesswork out. Know that you’ve got a piece there that takes care of it. The standard bearers here for the market methodology, they’re giving you guidance, but you have to decide if you need to be more conservative or more aggressive or if you need a blend of the two to make yourself feel comfortable.

Dick: Eric, when we go into annuities it’s a completely different world, because we’re looking at contractual **guarantees. There’s no market fluctuation in the income side with contractual **guarantees. So we can help a client not only know what they’re going to have. But we can typically get a much higher withdrawal rate than what AARP and Reuters and certain financial advisers out there are recommending, and people are somewhat surprised by that. When we initially show them what they can pull out of their account, and pull out safely with contractual **guarantees.

Eric: That’s all about preserving your lifestyle, your standard of living. Knowing that you’re going to do it regardless of how long you live. I think those are the pieces that for me, I take solace when I’m working with somebody, knowing that we’ve protected a lifetime of foundation. I love working with people in the market, but we realized that they were going after potential gains, you know?

We’re not getting **guarantees, those are not contractual **guarantees. There are things that we’re doing, typically to combat inflation, get some of those consistent gains. We’re talking about asset allocation, not just being in the equities market, so obviously when we see somebody advocating for small cap stocks, it gets my blood a little boiling, because it can be a piece of it but you don’t…

Dick: It sounds good just to read it, but when you actually look at that and look at the possible negative side of that, it’s not very pretty. So again one of the things, I think that we want to stress Eric, and just for you folks to give a little better understanding of what’s possible with contractual **guarantees. Typically when you’re around 60-years-old, we can get out kind of on a minimal basis for joint income, for a husband and a wife, somewhere around 4.50%, if it’s a single person, maybe closer to 5.0%. Then add to that, there are some ways to structure annuities so that you can get an inflation hedge, and if that is done properly we’ve been able to show illustrations right from the company, where after 20 years they’d be pulling out what, Eric?

Eric: We’ve actually seen withdrawals as high as 9.0%.

Dick: Right, in that range.

Eric: Obviously caps have changed, and things are a little bit more– not quite as the participation rates and those things have pulled things back, so we don’t anticipate if things stay where they are today you would necessarily get that, but…

Dick: But it could still be up in the 7.0-7.50-8.0-8.50%. So again, what we’re talking about here is that you start off with, say half a million dollars, and you start off by pulling out, say $25,000 a year and within 20 years to maybe, within 30 years-time, you’re pulling out almost double that, so instead of $25,000, you’re pulling out nearly $50,000.

Eric: Each year.

Dick: Right and so you may have used all your money. You may have spent it.

Eric: It’s not a plan that is designed for giving money to the heirs.

Dick: Giving a lot of money back to the kids, unless it’s the early years. The early years you could die unexpectedly, the kids could get a lot of money.

Eric: Right, so it is that. But we like this a lot for hedging against inflation, and basically taking care of your standard of living, that gets those bumps each year.

Dick: Right and that protects other assets, if you’ve got that foundational income, so those assets can grow and go on to the kids. So yeah, there are a lot of things that you can do. You don’t have to look at the annuity way, as the only way. You don’t have to look at the Wall Street way, as the only way. The best is to blend those into a very balanced allocation strategy and balanced portfolio.

Eric: Yes, it’s all about planning. You know you have to plan to succeed. What’s the saying?

Dick: If you don’t, if you plan to, I can’t even say it now. Plan to fail or fail to plan.

Eric: If you fail to plan, you plan to fail and I guess that’s the summary statement for today.

Dick: Yeah.