Annuities vs (IUL) Indexed Universal Life – How do they compare?

January 26, 2013 By Annuity Guys®

What are the differences between a hybrid index annuity and an (IUL) index universal life policy? Wow! Steve, we thought we were about the only ones who ever discussed this. Great question! The answer can typically be found by beginning with the end objective. In other words, what is the end goal for these dollars and when do you need them?

Be aware that:

Cap rates on IUL policies are about 3 to 5 times higher than those on index annuities;
There are IUL policies which allow you to add a rider that will **guarantee lifetime income;
IUL policies if configured properly can generate a tax-free income stream;
An IUL may NOT be the right choice for your **guaranteed lifetime income…

Dick and Eric discuss the differences between index annuities and index life insurance; both have become increasingly popular for retirement planning.

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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.

Indexed Universal Life Insurance Policies: The Perfect Option for Professionals and Business Owners

by Timothy R. Fussell

For a professional such as a doctor, attorney or CPA, the Indexed Universal Life policy is perfect for your retirement needs. Often as a professional, you operate as a P.A. being taxed as a sole proprietor, an S Corporation or a C Corporation, and under the tax codes you are limited to retirement account choices. The SEP IRA, Solo-401k or the UNI-401k, all allow you to save on a tax-deferred basis; but the maximum contribution limit is still the same $49,000.00.

Now let’s explore the IUL (indexed universal life) and why it is a better choice. As a professional of these types, your income level is much higher than average, so you max out your contribution very early in the year. With the IUL, there is no limit on how much money you can contribute—the money still grows tax-deferred, but with a several advantages.

Now comes the great part! In the event of a business need, the money in your tax-deferred accumulation account can be used, through interest-free loans, for the purchase of new equipment, to expand the practice, or just to carry you through a tough time. At retirement the money is paid to you in the form of tax-free loans against your account value. The income would be a lifetime income with of loss in a down market, and at the end of the income, your death, the face amount of the life insurance policy would still go to your heirs as a tax-free death benefit. The tax-free death benefit would, at any time, be the security to your family that their lifestyle would continue in the same manner to which they had become accustomed—a **guarantee the retirement account cannot promise. If, through a consultation with your insurance professional, it is determined that your life insurance needs exceed the desired amount of contribution in the IUL, a term life insurance policy can be added to meet your life insurance needs at a lower cost.

A business owner has many of the same needs but also faces many different challenges. The IUL is even more exciting in these cases. All of the benefits listed above still apply to the business owner, but if you are an S Corporation, you could have the option of making the premium contributions as a draw against the profits of the corporation and avoid the self-employment tax/social security tax, which could add to the benefits of the IUL. That alone is a 13.3% tax savings!

To a business owner with a partner or partners, another issue is presented that makes an IUL a perfect choice. Should a partner/partners die, you would have the need for a Buy-Sell Agreement to determine the value of the buy-out of the deceased partner/partners. The best way to fund the buy-sell agreement is through life insurance policies. The buy-sell agreement would either be a cross purchase buy-sell or a stock purchase buy-sell. These differ based on your corporate structure. Your insurance professional should have a working knowledge of the two types of agreements and work with your CPA and attorney to make sure they are set up correctly. [Read more…]

Annuity Guys® Video Transcript:

Eric: Today, we’re examining indexed universal life and how it would compare to perhaps a hybrid annuity or annuities in general.

Dick: Right. First of all, let’s say, “Thank you,” Eric, to Steve.

Eric: Steve up in Wisconsin for submitting his question. Please continue to submit your questions, and we’ll examine them as the weeks go on. So for those of you that submitted questions.

Dick: We’ve got some already.

Eric: We’ve got some in the hopper, and those of you that have questions, keep them coming.

Dick: Today, in comparing indexed universal life and it’s also called equity indexed universal life or EIUL, but the more technical, correct term would be IUL, very safety-oriented product. It’s a life insurance product and there are a lot of good comparisons we can do with that and annuities, so why don’t we just start off talking about the life insurance part, the IUL.

Eric: We don’t talk about life insurance too much here, so let’s talk about one, why someone would even compare in the sense of I’m going to think of it in terms of, if I’m not going to select an annuity for retirement income would I select an equity or in this case, an indexed universal life policy.

Dick: Or if I was looking at growth compared to… Well, I’m just saying if I was comparing the two for growth. Okay, maybe I’m getting– go ahead.

Eric: You’re good at jumping ahead.

Dick: Jumping ahead of you.

Eric: Darn it. So what we want is trying to grow the policy to the largest amount, so that we can use it for a retirement supplement. Because, really here we are talking about the living benefits of the IUL, in this case, being able to use it as a supplement for retirement. Now what it has is the ability to have a double digit cap compared to with the low, single digit caps, of today on the annuity world or on the hybrid annuity.

Dick: And that’s large Eric, because when we look at the caps on most annuities, the fixed index annuities which are referred to as the hybrid annuity, the caps are down below 5.0%. Some substantially down in the 2.0-2.5-3.0% range, so when we start talking about the IUL, now we’re looking at 10-12-15% caps, even.

Eric: Right, so we have growth potential.

Dick: Potential, right.

Eric: Because here we’re talking about index games, there is not that **guaranteed rollup side. So on the hybrid annuity side you’ve got those income riders that have some of those **guarantees.

Dick: Contractual **guarantees for the future income.

Eric: So that is the one comparison on the caps side. Now what are we going to use for withdrawals on the life insurance side? How are we going to get money out of this?

Dick: Well, if we take actual withdrawals, we’re going to pay taxes.

Eric: Taxes?

Dick: So we don’t want to take withdrawals.

Eric: Well, then why would we even consider this?

Dick: And when we compare it with an annuity, when you take withdrawals out of an annuity, you pay taxes. But there is a really nice aspect to the IUL, and that is you can borrow out of it, and it is just like the old, traditional whole life policies you can borrow out of it and not pay taxes on it and IRS has allowed that. On borrowed money, any time you borrow money from a bank or anywhere, there is no tax paid on borrowed money.

Eric: Now do I have to pay this money back?

Dick: Actually, technically you do.

Eric: But when do you have to pay it back?

Dick: Through your death benefit.

Eric: And that’s the key element here. It’s really part of the death benefit and that’s what makes it, basically you’re going to pay it off at some point in time.

Dick: Right.

Eric: Those dollars that you’ve accrued are going to get paid back at the time, when you’re gone basically, as that death benefit is disbursed.

Dick: Right. One of the things that I want to bring out is that, if you want to use the IUL folks, you cannot use your qualified funds or your IRA money, unless you’re willing to just go ahead and pay the tax on it and move it over. Then you have to do a real analysis on how that might…

Eric: Just as a reminder neither of us are accountants nor tax professionals so we would advise you to consult your tax professional when it comes.

Dick: Although, we work with this every day and constantly talk about the taxes.

Eric: So now is the government going to come in and take my tax benefit away?

Dick: Well, that is a question we are frequently asked. I am asked that on The Raw, I’m asked that on life insurance or life insurance that’s being used in more of a retirement account type situation, and the answer to that is, it can happen. It could happen. However, if we go back and look at other times where Congress has stepped in or the government…

Eric: Screwed us?

Dick: … took advantage of us? Typically, they have grandfathered us, so that if we are in a situation where, in good faith…

Eric: Great grandfather’s covered, I get screwed.

Dick: So if we operated in good faith and set this up, and did it under the current tax provisions and laws and by the way, this is the IRC, Internal Revenue Code 7702 provision same type of thing that the IRC 401k, same area that comes from, it’s the 7702. So if you see the 7702 Plan that’s what they’re talking about.

Eric: He wants to be an accountant.

Dick: It’s very legitimate, it’s very real and it works and a lot of professional people use this, because they can put large amounts of money in. They keep their principal safe. They lock in their gains. They’ve got annual reset. There are some wonderful things about it, but Eric, who’s it going to work best for and at what stage?

Eric: You’ve got to be in your accumulation stage it’s probably the easiest way. So young professionals perhaps, I’ve heard it called a Big Boy Roth, because you can dump oodles and oodles of money into it and let it grow. There is not a limitation to the contribution amount. Now they have to be dialed in the right way and that’s one of the things that…

Dick: A little secret.

Eric: Yeah, strategy wise, usually you have the smallest amount of death benefit that you can have on life insurance.

Dick: Which means you pay the least amount for insurance and the agent makes the least amount on…

Eric: … commission. So you can see how there could be a confliction amongst the person that might be trying to talk to you about this, so usually we see only larger clients.

Dick: I like that word, though, Eric, confliction

Eric: Confliction. I’ve got an ointment that takes care of that.

Dick: Let’s trademark that.

Eric: So yes when your conflicted agent comes in and says…

Dick: Yes, we need to make sure you’ve got plenty of life insurance. Let’s not go too far on this, because there are times when a lot of life insurance is good for heirs and different things. But the way to make an IUL really work well, and again back that original question I had posed and that was, what stage, and I am just going to go ahead and answer it.

Eric: Say 15 to 20 years.

Dick: Yeah, 40 to 50-years-old, that you can really let it sit.

Eric: You’re 15 to 20 years from retirement. You have to have at least that amount of time really, for it to really function well and that’s the key, I think. Because at that point in time, it starts to get the extra dividends, the extra pieces, the extra credits that can make it really hum. Then you can have a rider on there that has a loan provision for life, so you can treat it very much like an annuity, but you have to have the forethought to have done these 15-20 years before retirement.

Dick: Correct.

Eric: So if they haven’t done that, income **guarantee-wise.

Dick: It’s really based more on potential. Yes, now let’s talk briefly, because this is a long video, let’s talk briefly about the annuity and why the annuity would have certain aspects…

Eric: Advantages?

Dick: … and advantages over the IUL, because the IUL is pretty cool the way it works.

Eric: They’re very cool. I love them. I would say **guarantees though, especially **guaranteed lifetime income, for someone that’s nearing or close to retirement is the key. I don’t want to say it’s the singular piece, but it is the first and foremost.

Dick: Because with the IUL I have to have potential for growth, I have the potential for growth, and I have to get the growth through that potential, but with the annuity I have a contractual **guarantee.

Eric: Yes, and that’s the key. We’ve talked about the hybrid aspect, you also have other annuities such as immediate annuities, where you’re going to have payouts of your principal plus, **guaranteed for life. Now the insurance aspect without a rider, you could actually run out of basically, enough account value, because you have to keep the insurance in place long enough to die, because if you don’t die with any insurance left, you haven’t paid off your loans.

Dick: And probably, Eric the best advice that we can give you, beyond the general information we’ve just given you is work with an adviser who really understands how to compare these two, and, maybe it’s not one or the other, maybe it’s some of both.

Eric: Yeah, could be. It depends on your end goal. What do you want these dollars to do for you? So work backwards and work with an expert.

Dick: Steve, thank you for this question, and those of you out there who have questions, we’ve probably caused you in this video to have some more questions. Feel free to send those in to us and we look forward to answering them.

Eric: That’s right. As you can see, we’ll tackle just about any question as long, as it relates somewhat, to our annuities world. Thank you very much.

Dick: Thank you.

Can Annuities Solve the Retirement Challenge?

January 4, 2013 By Annuity Guys®

Why does it feel like everyone is talking about annuities these days? Could it be due to the approximately 10,000 people who are retiring from the workforce everyday and that these new retirees are looking for a safe and secure location to place their lifetime of savings. Or is it because of the stock market roller coaster they have experienced throughout their lifetime.

As Annuity Guys®, Dick and Eric talk about annuities every day – that does not mean that an annuity is the right answer for every retiree but it certainly should be part of the retirement discussion.

In this edition Dick and Eric share their thoughts on how annuities should be viewed by retirees and pre-retirees making financial decisions. One click to play or pause…

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How about these Retirement Factoids….

According to a 2012 report from the Center for Retirement Research, “at Social Security’s earliest retirement age of 62, only about 30 percent of households are prepared for retirement…By age 66, Social Security’s current Full Retirement Age, about 55 percent of house-holds are projected to be prepared for retirement (this figure includes the 30 percent already prepared by age 62)….At a retirement age of 70, about 86 percent of households are prepared for retirement.”
According to a 2012 report on the Transamerica Retirement Survey, “more than half of workers (51 percent) are confident in their ability to fully retire with a comfortable lifestyle including 9 percent who are ‘very confident.’…In 2007, prior to the Great Recession, 59 percent of workers were confident including 13 percent who were ‘very confident.’” (p. 14)
According to a 2012 analysis of data from the Survey of Consumer Finances, “more than half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65.” (p. 6)
According to the 2011 EBRI Retirement Confidence Survey, “28 percent of workers are now very confident that they will have enough money to pay for basic expenses during retirement (down from 40 percent in 2007,” while 12 percent say they are not at all confident about their ability to pay for basic expenses (up from 7 percent in 2007) and another 16 percent indicate they are not too confident (up from 11 percent in 2007).” (p. 8)
According to a 2011 Gallup poll of 1000+ adults aged 18 and older, “63% of Americans say they are worried they will not have enough money for retirement — exceeding the 56% who are worried about not being able to pay the medical costs associated with a serious illness or accident and the 55% who are afraid they will not be able to maintain the standard of living they now enjoy.”
According to the 2010 MetLife Retirement Readiness Index, “just over half of the respondents report feeling prepared overall for retirement. Eighteen percent strongly disagree that they are prepared. The number of those prepared increases by age. Only a third (35%) of the 45- to 49-year-olds feel prepared for retirement, while 64% of the 60- to 64-year-olds and 81% of the 65- to 70-year-olds feel prepared.” (p. 4)
According to a 2010 EBRI analysis, the aggregate “Retirement Savings Shortfall” (RSS) for all ages cohorts in 2010 dollars is $4.55 trillion, for an overall average of $47,732 per individual. Adding nursing home and home health care expense increases the average individual RSS for married households by $25,317. (p. 2)
A 2009 AARP survey shows that “nearly eight in ten (79%) adults have either started to cut back on spending (71%) or started saving more money (28%) in the past 12 months… Almost three in four (73%) of those who are cutting back on spending or saving more are doing so in order to save more money for retirement… Older adults (ages 50+) are more likely than younger adults (ages 24-49) to cite this as a major reason (53% vs. 38%).” (p. 3)
According to a 2009 analysis of data from the Survey of Consumer Finances, there has been a “significant rise in median debt, from $19,697 in 1995 to $40,300 in 2004, and mean debt, from $58,124 in 1995 to $97,363 in 2004. [There has also been] a rise in the proportion of near-retiree families holding debt, from 79.8 percent to 82.7 percent.” Families headed by older individuals (aged 56-61) held less debt on average than younger near-retirees (aged 50-55), with 77.5% of older and 87.2% of younger near-retirees holding debt. (table 1)
According to a 2009 Urban Institute analysis of financial data, “older households typically hold less in stocks and are thus less exposed to market fluctuations than their younger counterparts. Nonetheless, equities account for about half of the assets in the typical account of households age 50 and older.”
According to a 2008 AARP survey, “if the economy does not improve significantly, over six in ten workers at least 45 years old say it is likely they will spend less in retirement (69%), as well as delay retirement and work longer (65%). Far fewer (37%) say it is likely they will save more for retirement.” (p. i)

Factoids courtesy of the Sloan Center on Aging and Work

Stop Annuity Procrastination: New Years Resolution!

December 29, 2012 By Annuity Guys®

Procrastination – or the act of replacing high-priority actions with tasks of lower priority.

We always hear of people who spend more time planning their annual vacations than they spend planning their retirement. An annuity may or may not be one of the strategies you will use to plan a comfortable and secure retirement; do yourself and your family the benefit of resolving to develop a plan for retirement this year.

Watch Dick and Eric in this light-hearted video as they wish you Happy New Years and discuss why we all tend to put off planning for retirement.

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Read More about Financial New Year Resolutions…

This Year We’re Serious About New Year’s Resolutions

NEW YORK (TheStreet) — Americans make all kinds of New Year’s resolutions.

Losing weight, pledging fidelity to faith and family, and/or improving their career all items that are high on the list of New Year’s resolutions.

But this year, money matters may trump all of those self-directed promises.

So says Fidelity Investments, the Boston-based mutual fund^{^} giant.

The investment firm uses this time of year to take a look at American’s New Year’s resolutions, and 2013 should bring renewed focus on personal financial matters, with 46% of consumers interviewed by Fidelity promising to improve their financial situation next year.

At first blush, that sentiment might seem like it belongs in the “master of the obvious” category.

But in actuality, the number of Americans targeting financial issues as a resolution is up remarkably over the past few years. In fact, Fidelity says the number of Americans focused on finances come Jan. 1 has grown 31% since 2009. [Read More…]

By Brian O’Connell of The Street

Annuity Guys® Video Transcript:

Dick: Eric and I would like to first of all wish everybody a happy New Year, and we’d like to help you avoid that procrastination aspect of annuities.

Eric: It’s that time that to start setting your New Year’s resolution. It’s what do you need to do to get your financial house in order, perhaps? I think what we see a lot of times, especially right now with the low rate environment, problems in the economy, people are saying, “I’m just going to wait.” I’ve talked to people now that have been waiting for 18, 19, 24 months.

Dick: 23 years waiting for it to get better.

Eric: It’s going to change. I don’t want to know it now because . . .

Dick: How long have they waited in Japan for it to get better?

Eric: They’re going on 20 years right now.

Dick: I don’t think that we’re Japan. I don’t think, folks, that we necessarily have to use that as a true analogy, but the fact of the matter is that we’ve had 4 years or so of . . . we’ve seen the market rebound and do better, but we’re still in really a secular bear market and our economy still hasn’t gotten up to what it was back in the late ‘90s.

Eric: There’s strategies you can use, especially within annuities. If you’re afraid of making a wrong decision, you can at least make a decision with an annuity that has a return-of-premium aspect. If nothing else, a couple years from now, you start over again. There’s things you can do, strategies out there, and pieces that can allow you to move off the couch, so to speak, and get going.

Dick: The goal isn’t just to go out and get an annuity. Eric and I are not proponents of everybody needs an annuity, or everyone needs to make a quick decision. It’s just the opposite. If your situation, your goal, your objective is for the type of things that annuities can help you with, and you’ve been investigating it; what we call in industry, and it’s used a lot, a term is . . . go ahead.

Eric: Analysis paralysis. It’s my favorite term.

Dick: We see it all the time where, for one reason or another, it’s just easier to put it off.

Eric: The fear of making a bad decision puts you in a position where you make no decision. I’m making no decision because if I make a decision, it’s going to be a bad one, so by default.

Dick: By default, many times, you do make a bad decision. Again, when you’re wanting to get into the annuity aspect, you want to make sure you have weighed everything over to a reasonable degree, done your research. Then if it makes sense, the key is Eric, wouldn’t you agree, that if you’re meeting your goals and your objectives you’ve really solved the problem?

Eric: Yeah. That’s exactly . . . we always talk about working backwards. If you know what you want to achieve in the end, it helps you design and put the pieces in place that help you get there. You have to have a target. I always used to quote Zig Ziegler, and he said, “You’ll never hit a target you can’t see.” That’s true of your financial house. As a financial resolution, perhaps this 2013; start thinking about what your targets are. Where do you want to be? When do you want to be there?

Dick: Once you’ve identified the targets, you’ve identified the solution; it’s okay to move forward. You don’t have to keep analyzing and the paralysis of analysis. There is a certain level of becoming comfortable and making a decision. Folks if you’re anything like the clients we work with and most people that we’ve had experiences with, once you’ve made that decision, you’re going to want to second-guess yourself, you’re going to lose a night’s sleep or part of a night, and yet at the same time, you’ll feel a sense of relief that you’ve made the decision.

Eric: Work with a professional. Sometimes when people log into our site, and they say, “I look at all the annuities out there.” There’s almost 3,000 annuities there. How can I chose?

Dick: Just completely overwhelming.

Eric: What we say is, “That’s where you need to work with somebody that’s a professional because they’ll help you narrow down your selections and give you a much more reasonable pool to work within because they know what you are trying to achieve, and they can pinpoint what the best opportunities to help you get there are.”

Dick: Research on the internet of that nature, Eric, is a great place to start. What it really does more than anything, I believe, is it helps you folks to be able to ask the right types of questions to an advisor, to have knowledge of what you’re looking for in a general sense. That way, the advisor can start to narrow down in a much more specific product or antisense of what’s going to actually solve the problem.

Eric: Resolution: Take action, even if the action is making a plan.

Dick: That’s right.

Eric: It’s your retirement. You get to do once, do it right, but don’t let inaction be the plan, because it doesn’t work that way.

Dick: Exactly. Eric, in this video, we haven’t talked a lot about specific annuities. I think it’s good to have a good general discussion like this, where we just kind of share the holdbacks that we see with different individuals that we work with. Also, I just want to add this to it; we see a lot of folks that make a decision, that have done their research, they’re very comfortable with their decision, and they’re very glad they did. Years later, they’re very appreciative of everything that they’ve accomplished.

Eric: It’s the safety security. When you make that decision, sometimes, you feel like you’re giving something up, but you’re not just giving something, up you’re creating the first step in creating a plan.

Dick: Right. Folks, make that New Year’s resolution, not necessarily to run out and buy an annuity, but to go forward and do something that’s very constructive, that’s going to make a difference this year.

Eric: Sounds good. I resolve to see you in 2013.

Dick: Thank you.

Is the Fiscal Cliff a Threat or an Opportunity for Annuities?

December 14, 2012 By Annuity Guys®

The “Fiscal Cliff” could have profound implications on the economy. Dick and Eric examine the potential impact on retirees and how annuities might be utilized during this time.

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Highlights (or Low-lights) of the Fiscal Cliff

What is the “Fiscal Cliff”?

The “Fiscal Cliff” is the description economists have used that describes the potential situation at year-end 2012 when a number of U.S. tax and fiscal changes are scheduled to occur. This “perfect storm” of change includes the expiration of the Bush income tax cuts at the end of 2012, and starting in 2013 some new taxes and scheduled increases in income and estate taxes. Federal spending cuts are also scheduled to occur in 2013 as part of the “sequestration” results (an automatic form of spending cutbacks in Congress) from the Budget Control Act of 2011.

If lawmakers cannot agree on how to address the pending fiscal cliff issues, trillions of dollars of tax increases and spending cuts will go into effect beginning in January of 2013. Add to that an election year and the fact that all those changes are scheduled to happen at once, the concerns are that those changes could lead to a double-dip recession (a recession followed by a short recovery, then another recession) in 2013.

What is involved with the fiscal cliff?

There are many components to the fiscal cliff. 1. Automatic spending cuts are set to begin in 2013 in the following areas:

Defense
Non-defense areas such as education, food inspectors, air travel safety, etc.

2. The Bush tax cuts expiration includes:

Income tax rate increases
Capital gains rates increase
Qualified dividend rates increase
Child tax credit reduced
American Opportunity Tax Credit expires
Earned Income Tax Credit changes
Marriage penalty relief changes
Estate tax exemption decreases
Gift tax lifetime exemption decreases
Top estate (and gift) tax rate increases

3. Other tax changes include:

An increase in employee payroll tax withholding
Other tax extenders not enacted including the AMT patch
A new 3.8% Medicare surtax
A new .9% Medicare additional withholding

4. Miscellaneous changes include:

Unemployment benefits extension expire
The “Doc Fix” which is a cut in reimbursement rates that physicians receive for treating Medicare patients (which has never been implemented to date)

Information reported by a Major Annuity Underwriter this is not an exhaustive list.

Annuity Guys® Video Transcript:

Dick: Folks, it just seems like you can’t turn anywhere these days without seeing or hearing that we’re going to go off the fiscal cliff.

Eric: It’s doomsday, year 2000, 2000K, the bug; it’s going to swallow us up. The fiscal cliff is the end of the world.

Dick: I think that really when we consider that the economy and our current system with all of the entitlement **guarantees and all of that, the things we have to do to correct our system that we’re in today and the way that we need to cut our spending and bring that down, if we can’t go over the fiscal cliff, we’ve got some much larger problems coming in the future, because we have to make much larger cuts.

Eric: Right. Let’s start with the very basics. For those of you who have not seen or heard about the fiscal cliff and you’ve been living someplace, on another plant.

Dick: Right, under a rock.

Eric: What is exactly entailed in the fiscal cliff? It’s basically . . . I won’t call them Draconian Cuts, but it’s cuts in defense and some other non-defense, such as education, food inspections, air travel. Then the biggest thing is probably the end of the Bush Era tax cuts, which are increases in income tax, capital tax gains going up.

Dick: It really seems like . . . I hate to get too much into the politics of this.

Eric: It’s a political event.

Dick: It is a political event, yes. It does seem like the ball is really in the President’s court; it’s in his favor a little bit. If he wants to allow us to go over the fiscal cliff, he will get a lot of the cuts in military spending that he would like to have, he will get to increase the taxes to the rich, and then he can kind of benevolently appear to give money back to the middle class. It isn’t all bad for him to necessarily go over the fiscal cliff, and yet, it is possible that we’ll come to some kind of an agreement with the Republicans.

Eric: I was going to say, both of them are playing the ‘don’t blink’ game at this stage. We’ve just had the election. Each side campaigned for what they thought was the right answer. Ultimately, neither one wants to blink. We’ll either have a 12 hour broker deal . . .

Dick: Which may not be a good situation, when we force a deal.

Eric: . . . or we’ll get an extension of the current agreement. What does the impact . . . let’s assume the fiscal cliff is going to happen, we’re going over. What’s that mean for the economy? What’s that mean for savers, for retirees?

Dick: Even more so for annuities? Is it going to create a problem if you have an annuity and we go over the fiscal cliff?

Eric: If you already own an annuity you’re probably, actually, in a pretty good place, because it means that even if you’re in an indexed annuity, you’ve kind of taken those bumps out. If you’re in a variable annuity^# and the market tanks . . .

Dick: That could be a problem.

Eric: . . . your principal could be at risk. That could be a potential, but you’ve hopefully got some income riders that are going to protect. You’ve paid for that insurance and those riders usually to protect your dollars.

Dick: I would say that if you don’t have an annuity and you’re considering maybe getting an annuity, I wouldn’t do it just because the fiscal cliff. If you haven’t been thinking about this or planning on getting an annuity . . .

Eric: It’s not like a fire sale?

Dick: I wouldn’t run out for that reason alone and get an annuity. However, if you’ve really been thinking about an annuity and how it will give you more safety, security, retirement income, and you’re fairly close maybe in your planning or you’re thought processes, then the fiscal cliff could make a good reason to go ahead and go forward from the standpoint of avoiding some larger capital gains, taxes that are likely to come later if you were to cash out of some investment, and then put the money into annuities. There could be some good reasons to consider.

Eric: Here, we’re specifically talking about non-qualified dollars.

Dick: Non-qualified dollars, right.

Eric: Qualified dollars don’t really count.

Dick: Your IRAs and 401Ks, and this type of thing that you may want to transfer into it.

Eric: That really doesn’t come into play on what we’re talking about on that side.

Dick: I think really, Eric, the bigger concern does come back to not so much the hype that’s in the media and the fiscal cliff and how we solve that, it’s really what we’re going to do to get our spending under control overall, and get our government on sound financial footing. Just by watching these different gyrations of coming to agreements on budgets and agreeing how to avoid the fiscal cliff, it seems that we’re really in for a rough maybe decade or two of headwinds.

Eric: We know for a fact if Ben Bernake holds to his promise . . .

Dick: Which they just came out with today, saying that the rates are going to . . .

Eric: 2015, at the earliest.

Dick: Until they see unemployment rates drop below 6.5%, they’re going to continue to depress interest rates down to near-zero.

Eric: What’s that mean? If you’re a saver or you’re a retiree depending on that interest, and that’s exactly it. Where are you going to go find the places to park those dollars? That’s where annuities come into play, from a longevity standpoint. If you’ve got these next few years where you’re counting on income, then annuity is an option, and that’s where it does come into play with some of the headwinds that we’re facing.

Dick: You can structure an annuity so that you know from contractual **guarantees that you’re going to have a certain level of income, which is really a pretty good level of income that you can count on 5 years, 10 years 15 years from now, and then you know that once you turn that on, no matter how long you live, you’ve got that longevity insurance aspect that it’s going to keep paying.

Eric: Exactly. That’s where I think you can look at the different aspect of either laddering annuities or some strategies to really deal with the economic climate right now. Then also set some pieces out there so that when you have some flexibility in the future for when things hopefully change for the positive.

Dick: Exactly. Should anybody be worried right now about going off the fiscal cliff?

Eric: Here we go. I would say it’s already priced into the market, we already know it’s going to happen in a sense of that side; so, no.

Dick: Yeah, I agree with Eric, that it’s more of a political event. They will likely do something at the 11th, 12th or 13th hour, and we will go on to our next hurdle which is coming up with some type of budget, a national budget; imagine that.

Eric: We’ll see you on the other side of that fiscal cliff.

Dick: Thank you.

What Percentage of Your Portfolio Allocation Should Be Annuities?

November 30, 2012 By Annuity Guys®

Want to know just how much of your retirement nest egg you should consider for placement into annuities? The U.S. Government Accountability Office (GAO) estimates that Social Security will cover between 33 and 55 percent of most retirees pre-retirement income. How will you make up the difference?

Eric and Dick tackle the question of how much you should allocate to annuities when developing a sound retirement income and estate plan.

One click on screen to play or pause double click for full screen…

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GAO Report Tells Americans: Buy More Annuities!

The U.S. Government Accountability Office (GAO), a non-partisan federal agency focused on reducing wasteful government spending, has released a report entitled Ensuring Income throughout Retirement Requires Difficult Choices. The two most important choices involve:

Delaying the age when you elect to start receiving Social Security payments; and
Converting your cash-balance defined benefit pension into a lifetime income annuity rather than take a lump-sum payment upon retirement.

Social Security is Not Enough for Retirement

For those of you that think Social Security will meet your retirement needs, wake up! Given the massive debt overhanging the U.S. economy, the current generous benefits being paid out to retirees is not sustainable. As the GAO report states:

The cost of Social Security benefits is projected to exceed sources of funding, and the program is projected to be unable to pay a portion of scheduled benefits by 2036. In 2010, for the first time since 1983, the Social Security trust funds began paying out more in benefits than they received through payroll tax revenue.

Due to the long-term fiscal challenges facing Social Security, options for reform may result in lower benefits and reduced replacement rates from Social Security. As a result, reforms to the Social Security system may increase the need for retirement income from other sources such as private pensions.

Even under the current generous benefit schedule, social security cannot be relied on to fully replace a person’s pre-retirement salary. According to the GAO report, for low-wage earners (i.e., 45% of national average) social security replaces only 55.2% of pre-retirement income and for high-wage earners (i.e., 160% of national average) the replacement rate is only 33.9%.

by Jim Fink on April 19, 2012 at Investing Daily

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about what percentage of your portfolio should be allocated to annuities, and the magic number is, get right to the point.

Dick: Exactly 50%.

Eric: There you go, thank you very much for.

Dick: Video over. Wouldn’t that be nice?

Eric: Unfortunately, it doesn’t work that way. Everybody wants the magic answer of what exactly needs to go into an annuity?

Dick: Well, even the GAO which we’re going to talk about here, the Government Office of Accountability did a report last year in June that pretty much hit in July, and actually it’s even on the cover of our book that the GAO is recommending that everyone has more annuities and less securities, so that was the overall assumption that they were making.

Eric: I think it’s looking at the dependence people have on other; when you’re getting to retirement what percentage can you count on Social Security to cover, of your retirement income? The funny thing is you look at low income people in the article we utilized, it’s 55% of low income people, they’re income need is met by Social Security.

Medium wage earners is about a third of their expected income is met by the Social Security income, so how are you then going to supplement; what sources are you going to use to supplement your income and retirement after Social Security? Social Security is not going to do it.

Dick: Right. It won’t cover everything that folks need, so if we take—it’s hard to stereotype, because everybody’s situation is obviously different, but if we take what the GAO report is saying in a summary sense, and say that those folks that are somewhere in that median asset range, where they’re relying more on their Social Security that they would have a tendency to need to put a lot more of their portfolio into a safety and security, that will **guarantee their income throughout their life.

Eric: Right and we talk about this a lot with our clients in talking about the foundational portion of your income, so you take your building blocks. You know you’ve got Social Security, as much as we can count on it to be there. We always like to think of what the COLAs and the things, the increases are going to be.

Dick: Cost of living adjustments.

Eric: Yes, but are we certain that those are going to continue with the way that things are right now? You never know, so if you’ve got Social Security as the base, what do you need to add on top of that each month, to meet your monthly income need? That’s your foundation, a minimum amount, not your trips, not your fancy expenditures, but what’s your basic necessity expenditure need to be? Do we build that with– we always say build it with conservative CDs, annuities.

Dick: If you’re going to do investments, you may have it in bonds.

Eric: Look at the most conservative options out there and utilize those to build that income stream.

Dick: Right and this is where annuities do come in and they work so well, because the one thing that the CDs and the bonds and different things don’t address is longevity and that is outliving our money or another way to say it is, Eric just not dying on time.

Eric: That’s right. When we look at people that utilize CDs, they typically just pull the interest, but if you’re having to utilize the principal to meet those basic necessities that’s really where an annuity comes into play, because it gives you that added layer of insurance that you’re not going to outlive your income.

Dick: Exactly, and so it comes down to the percentage to allocate to an annuity some of this we find, when we’re working with our clients, gets down to that person’s risk aversion. Are they the type of person that’s basically grown their portfolio in a very safe and secure way, and they value annuities for what they do, in terms of safety, security, and controlled growth or are they the type of person that’s been very aggressive with their portfolio, so they’re very comfortable with not having much in safety and security. They may have a very large portfolio, and feel that they’ve got the room to have a very small foundation of safety aspect of corporeal.

Eric: If you’ve got such a large asset base that even if you shock tested it and said, “If we lost half of it and it still is enough to meet your basic income needs.”

Dick: Right, carry us through, throughout our lifetime, right.

Eric: Now for some people when they say, “What’s the percentage?” My answer’s always “The smallest amount that we need to meet that basic need.”

Dick: Exactly, and what we like to do and a lot of the advisers that we’ve worked with, like to do for clients is to look at that objective and figure out what that income need is, and then find the least amount of money that we have to spend to get the proper annuity that meets that need, and that could be Eric, an immediate annuity. It could be a hybrid style annuity.

Eric: Then it’s what options do you want? Immediate may give you a bigger payout, but you’re giving up your asset. A hybrid style may be a little bit less income, but you have a lot more flexibility, as well as some other options with long-term care potentially, or other rider pieces that come into play.

Dick: One thing, folks, that you really always want to keep in mind on anything that you allocate to annuities, especially if you’re allocating for some reason a lion’s share of your portfolio, you always want to keep something available that’s liquid. It should be fairly sizable, because we don’t know what type of emergencies might arise.

Eric: We always talk about inflation, and how are you going to gauge for inflation, and you’re better off to have assets out there that continue to grow, that can continue to work against inflation, especially if you’re set on a level, if you take an immediate income or an immediate annuity and it’s level, how are you going combat increases in expenses?

Dick: That’s one thing, folks where the hybrid style or the fixed index annuity with the income rider works so well. If you can maybe have a portion of your income that, if you need income right away, that you can go ahead and maybe set that up in an immediate annuity or one of your investments or some other area of asset in your portfolio that you can pull money from, while you allow that hybrid annuity to defer over five or ten years. It’s a great inflation hedge to get that income boosted up pretty dramatically.

Eric: I like to call it laddering annuities or laddering and if you haven’t seen that video you can actually look for that afterwards, because there should be one out there. There are strategies to basically, help you as the GAO says here.

Dick: We will put this on the blog site, so that you can see the full report and the article that we’re reading from that addresses Social Security, and again how to maybe, use strategies with annuities for Social Security. Eric, if I ask you the question this week what’s the proper allocation to put in an annuity?

Eric: My answer is the smallest amount that meets your foundational needs.

Dick: I like that. Eric did not say, “Well, it depends.” That’s my famous line, “Well, it depends.” I think you’re right Eric, and I think that it also depends on… Here we go. It also depends on the individual preference for safety and security. We have to always take that into account.

Eric: Yes, it should be suitable for your investment style. Very good; thank you very much for tuning in today.

Dick: Thank you.

Tax Saving Income Tips

November 21, 2012 By Annuity Guys®

As we approach an almost insurmountable debt load likely increases in tax is may be inevitable, we thought it may be a good opportunity to share some useful tax saving tips and strategies. Annuities can work very well for some portions of this strategy.

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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.

Video Transcription

A financial strategy in place that will protect the fruit of your hard work

When you finally retire, it is important to have a financial strategy in place that will protect the fruit of your hard work and make sure that you get the most out of your golden years. One of the most critical parts of your financial plan is how you will draw money from your retirement accounts.

Conventional wisdom says it is best to begin spending your taxable accounts first, so that your tax deferred and tax free retirement accounts have more time to grow. But in the new economy, with lower interest rates and smaller nest eggs, there is a better strategy. By tapping all of your accounts simultaneously and by deferring your Social Security, you can reduce the tax bracket you are in and keep Uncle Sam’s hands off a significant amount of your money. In fact, it is possible to use the Tax Code to make your portfolio last up to seven years longer.

To demonstrate this strategy, consider a couple who decide to retire at 62 with $1 million in assets. These assets consist of $700,000 in a regular IRA and $300,000 in a taxable account. The first step is for them to put off claiming Social Security. This will increase their future benefits and reduce the amount of those benefits that will be subject to tax.

Next, the couple should withdraw about $70,000 annually from the taxable account for living expenses. This will allow them to stay in the low end of the federal income tax bracket of 15%, and, at this rate, the account will support them for about 4 years. Each year they should take advantage of the low tax bracket and also withdraw $70,000 from their tax deferred IRA and convert it to a Roth IRA. There, the money will be able to grow, tax free. Finally, after four years, as the taxable account reaches its end, the couple should begin taking Social Security.

But what has this approach accomplished? Because they are now 66 years old, they will qualify for a combined $44,000 in Social Security, which is 33% more than they would have received at 62. The formula that determines how much of an individual’s Social Security is taxable counts only half of the person’s Social Security income. So, in contrast with a regular IRA, you can receive twice as much Social Security income before you ever trigger a tax on your benefits.

Finally, because money has been moved from a tax deferred IRA to a tax free Roth IRA, when distributions begin, the taxable income that they create will be lower. The withdrawals from the Roth account can supplement income in years in which tapping other accounts would push them into a higher tax bracket.

Given the present financial environment, it is especially important to use the tax code wisely. With a little planning, it is possible to save large amounts of money and protect what you have earned.

If the fog is lifting and you want to know more, simply click the link on your screen.

Is it Unfair to Compare Annuities to Investments

November 9, 2012 By Annuity Guys®

Is comparing annuities to investment choices a mistake? A recent Market Watch article stated that was just one of the three major errors made by both financial professionals and consumers when evaluating annuities.

Eric and Dick examine comparing annuities to investments in this weeks video review.

Three annuity mistakes to avoid

What not to do when evaluating annuities for retirement

By Andrea Coombes

If you’re comparing annuities to other investment products, you’re making a classic mistake—and it’s just one of three major errors that consumers and financial experts make when evaluating annuities, according to a panel of experts at a recent MarketWatch Retirement Adviser event in New York that focused on income strategies.

“Both immediate and deferred annuities have been shown to have a very positive role in an overall retirement-income strategy, but the deployment of these instruments is often hampered by some very fundamental misunderstandings,” said John Olsen, president of Olsen Financial Group, and author of a number of books on annuities, including “Index Annuities: A Suitable Approach.”
The panel, moderated by MarketWatch senior columnist Robert Powell, also featured Farrell Dolan, principal with Farrell Dolan Associates, and David Blanchett, head of retirement research at Morningstar Investment Management.
Mistake No. 1: Unfair comparisons

One such misunderstanding—and it’s often made by financial experts, Olsen said—is to assess the value of a variable deferred annuity as though all of its costs “are nothing but pure overhead.” That can lead consumers to view such annuities as unreasonably expensive. [Read More…]

Annuity Guys® Video Transcript:

Eric: Today we are going to talk about whether it is unfair or fair to compare annuities to investments.

Dick: Eric, I think that it’s the hardest thing in the world for all of us to stay off of comparing annuities to investments, and I think it is unrealistic to think that we would do any comparison; however, I think that’s where we get in trouble.

Eric: It’s the expectations game. So often when people come to us, they’ve been conditioned to talk about return, whether it be from a mutual fund^{^}, savings account, whatever. Everything’s about return. What’s the return?

Dick: They spent their whole life accumulating this money so their focus has always been on that.

Eric: They are trying to figure out how can I get the biggest return rather than mitigating the risk necessarily with an annuity to get the biggest return in dollars, rather than return in rate.

Dick: What inspired us this week, reading this article by Andrea Combs that really gets into some of the things that we talk about on a regular basis; and that is why do we buy? Why do we choose annuities? There’s contractual **guarantees, there is cash flow, and that is what she really gets into, that there’s this transition that we go through that cash flow becomes king. Longevity of knowing that we’ve got money, no matter how long we live, and there is a third aspect which is maybe a little bit more parallel to investment, that is where you require secure level of growth, contractual **guarantees.

Eric: I like the idea of just saying it transfers the risk from me, as the investor or individual, to the insurance company. They are going to take care of doling out my allowance each month, hopefully, and that’s the income stream that I have confidence in. They’re insuring my future income stream, is how I look at it.

Dick: Past wisdom from the investment world has been that if we draw our portfolio down by a certain level, say 4%, 4½, 3½%, everybody’s got their own view of it, that somehow we can continue to do that and be invested. The last decade has shown us that that really can’t be relied upon.

Eric: In an era of 5% CDs, it’s easy to say, “I can pull of my 5% and never touch my principle.” If you looked today, if you can find a 5% CD . . .

Dick: It’s not there.

Eric: I could sell a few of those, if I could find a 5% CD. That world no longer exists, that safety, security aspect of getting those returns, necessarily. This is where if you need those returns that are a larger withdrawal than just pulling out your principle, and a lot of people do today, this is where annuity comes into play.

Dick: I was just going to say, again, talking about not being focused on the return. Unfortunately so many times folks, annuities are sold based on comparing them to investments, and especially the indexed annuity or the hybrid annuity where it’s stated that you’ve got upside potential to a downside risk; there is truth to that. The upside potential is pretty minimal, and the idea that it has outperformed certain investments, certain indexes, S&P 500 over certain time periods in history, it was ever intended to do that.

Eric: It’s not what they’re geared for. We’ve talked about it in the previous videos, in order for you to be happy, you look at the **guarantees. If you can be happy with what the **guarantees are offered through an annuity, then anything that you get above that . . .

Dick: It’s a pleasant surprise. It’s good news. You’ll never be surprised by an annuity by it going the wrong way. I have to qualify that a little bit. We’re talking more about fixed annuities here and not as much about variable annuity^#. Because a variable annuity^# is an investment, and yet, it does have some **guarantees.

Eric: It can have some **guarantees.

Dick: It can have, so there is some aspect about that that you have to say, “Maybe for some people, a variable annuity^# may fit,” but again that’s a whole different discussion.

Eric: Sure. In her last point, she talks about annuitization, which is a really interesting aspect. We’ve talked a lot about hybrid annuities and the fact that you don’t have to annuitize necessarily, to get the same benefit that you would from annuitization. Her focus is on the stream that’s provided from an annuity.

Dick: For all practical purposes, we’ll just assume that her annuitization would also mean turning on income for life; a different terminology. We do find that with clients that . . . what would I call it, Eric? The depression mentality, where we can live off less so we’re going to, and yet, they’ve set this annuity up so that we can turn it on and turn on this income at a certain point of time and relax, enjoy what we have, and know we will never outlive our money. Yet we have these clients who have a tendency to hold back from that.

Eric: I think nobody wants to give up their principle. You worked hard and earned these dollars, nobody likes the idea of just . . .

Dick: Spending it.

Eric: You give it all to the insurance company and you get that allowance. That’s what really annuitization really is; it protects you on the income side. The income rider on these hybrid annuities does something very similar in a sense: Guaranteed income for life, but still allows you to get access. If anything is leftover, that can go on to your heirs. That’s, I think, the aspect about that type of annuity that’s really popular.

Dick: I think it helps people who wouldn’t normally annuitize to go ahead and take their income stream, because they know that they still have some access to the account value.

Eric: I think it’s really one of the things that we are finding really attractive right now because it does allow that flexibility. For people that are used to this return mentality that we’ve talked about, they still have that opportunity to hold on to those dollars a little bit. Not necessarily get the best return, but to get that income stream, have that safety/security.

Dick: Eric, when we talk about comparing annuities to investments, what’s the balance?

Eric: You have to look at the diversification. For me, when you’re looking at those two things, you have to look at protecting the foundation, and that’s where an annuity comes in. After that, hopefully investments can play a part in controlling for inflation and being out there.

Dick: Maybe a healthy way to compare annuities to investments would be in your own portfolio, in terms of what proportion of your portfolio do you want in security and safety for that income foundation or death benefit-type foundation as compared to what portion are you willing to put at risk?

Eric: Exactly. It’s to protect the foundation. How do you want to protect it? Are you comfortable protecting it in the headwinds that we have going on, or would you rather protect it with a rock-solid foundation?

Dick: I agree. Thank you, folks.

Eric: Thanks for tuning in today.

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.

[Read the Full Article]

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.

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.

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.