Tax Free Annuities – Limited Supply!

June 13, 2012 By Annuity Guys®

Tax Free annuities are entirely possible with some planning and knowledge about Roth conversions.

One of the biggest negatives continually re-hashed about annuities is that just like IRAs they are taxed at ordinary income tax rates on earnings. So why not avoid tax all together with a Roth Annuity! Oh, did I mention that when the IRA is converted to a Roth the tax must be paid in full in the next tax year. However, if you think taxes are likely to go up it may make a lot of sense to get the tax paid now when it is lower.

Dick and Eric discuss the many ways to use annuities that are tax free or tax advantaged in this short video.

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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.

Want more Roth & Annuity information? Kelly Greene of the Wall Street Journal authored two articles that look at the impact of Roth conversions.

Annuity Payments Using a Roth IRA Are Tax-Free

As long as you meet the holding and age requirements for a Roth individual retirement account, your annuity payments should be tax-free.

Many retirees are considering immediate fixed annuities these days. Generally, you hand over a large chunk of money to an insurer, which issues you a monthly check for life. The appeal in a recession is that annuity payments could soften hits suffered by your other investments. (The main drawbacks: Once you hand over your money to the insurer, you generally can’t get it back. And your fixed payments might not keep up with inflation.)

As Roth accounts increase in size, using them to buy plain-vanilla annuities might make sense for a portion of conservative retirees’ nest eggs, said Jeffrey Landers, an investment adviser with Wachovia Securities in New York.

A Roth annuity could assuage two of the three top concerns his retired clients have, he said: outliving their income and future tax increases. He suggests addressing the other big retirement worry, inflation, by using 25% to 30% of a nest egg to buy an annuity covering basic expenses, and continuing to invest the rest in a diversified way.

Or, if you are willing to accept a slightly smaller annuity payout, you could buy an annuity with annual raises.

Of course, if you purchase an annuity, payments usually end with your death. Thus, if you use a Roth IRA to buy an annuity, your heirs might not get to enjoy one of its best features — a tax-free inheritance.

To hedge your bets, you could buy an annuity with your Roth that **guarantees payouts for a set time period, such as 10 years. [Read More…]

Why It May Pay To Convert to a Roth IRA

Investors and financial advisers are preparing to take advantage of a new tax law that makes it easier to gain access to Roth IRAs—even if it means breaking a sacrosanct rule about Roth conversions.

Starting, Jan. 1, the $100,000 income limit disappears for converting traditional individual retirement accounts and employer-sponsored retirement plans to Roth IRAs, one of the biggest changes on the IRA landscape in years. Roths, of course, have long been viewed as one of the best deals in retirement planning; after investors meet holding requirements, virtually all withdrawals are tax-free. [Read More…]

Annuity Guys® Video Transcript:

Eric: Today, we are talking about tax-free annuities.

Dick: Better get them while they last, Eric.

Eric: They are in limited supply. When their shelves are empty, they are all gone.

Dick: That is right.

Eric: You better act quickly.

Dick: How about that? Tax-free annuities; isn’t that the opposite of what we’re told? Stereotypically, annuities are taxed at ordinary income tax rates, just like IRAs.

Eric: You know what the CPAs are calling right now, “They are wrong. The tax-free annuity doesn’t exist.”

Dick: Our phone’s going to be blowing up.

Eric: They’ll tell you it doesn’t exist. I have not seen anyone advertise for a tax-free Annuity.

Dick: Here we have a limited supply.

Eric: That is right; we’ve got them in short supply. Dick, you got to tell us, how does one get one of these limited supply annuities?

Dick: Here we go. What we have is no different than what you have, and that is you have your traditional IRA, that IRA can be converted to a Roth, of course, you will have to pay your tax the following year.

Eric: They are not tax-free then.

Dick: You have to pay the tax in the IRA.

Eric: It’s the first, okay.

Dick: Folks, once that you’ve actually converted to the Roth, you can then put that money into an annuity. That annuity becomes fully tax-free. It can give you a tax-free income for the rest of your life; it can pass tax-free to your heirs. It can actually become a retirement account for your heirs. There’s some intricacies to that, which we can talk about. The idea of using a Roth strategy in an annuity is not that well-known, it’s not talked about that often, and it can be a great advantage.

Eric: We say limited supply; why do you say limited supply? We’ve Roth’s for how long? There’s been a recent change though, it used to be there was an income threshold out there.

Dick: In 2010 they wiped it out. If you make over $100,000, it doesn’t matter, you can convert. Limited supply, we’re having a little fun with this, folks, like an annuity sale. The limited supply really comes down to Uncle Sam giveth . . .

Eric: And Uncle Sam taketh away. When someone’s looking for tax dollars . . .

Dick: Our government needs money.

Eric: If you believe taxes are going up, raise your hand. If that is the case, is better to then . . .

Dick: It is likely that Roth could be an endangered species.

Eric: Roth will turn to Moth.

Dick: It could.

Eric: It is going to mothballs very soon.

Dick: Getting poetic.

Eric: Yes, I am trying to rhyme.

Dick: If we’re in this situation where taxes were likely to rise, the government is looking for revenue, the Roth advantage benefit could be closed, tightened up. What we really experienced in the past Eric, with various insurance products and tax advantages, as long as they were entered into legally and under IRS and government-type sanctions, then usually, there was a guy in there who grand fathered in. It’s the new folks coming in that were somewhat penalized.

Eric: usually, they won’t go back and try to take it away from you, usually. Right now we believe that if people get it in before the government decides that this money is too tempting, we’ve got to reach in there and get [inaudible: 03:46].

Dick: We can just let these people this tax-free advantage.

Eric: Or their kids or their grandkids.

Dick: That’s where we go into it is potentially limited supply. Folks, this is something you genuinely want to consider, you want to use an advisor that really understands the Roth-IRA, the tax advantages, and the ways to incorporate that into annuity. Eric, I’d like to point out another thing while I’m thinking about it here; there’s different ways to convert an annuity to a Roth-IRA. We could use an existing annuity that’s an IRA.

Eric: You are saying if I own an annuity that has an IRA wrapper with it already . . .

Dick: You can convert it.

Eric: I don’t have to convert the annuity? I don’t have to go get a new annuity?

Dick: You do not. You can actually convert that annuity in to a Roth. Even better, in some situations where you’re doing proper planning and you know in advance that you’re going to be converting this, you may want to go ahead and convert your Roth inside your present account then transfer the Roth into an annuity, if that was the purpose or the reasoning; pick up that 10% bonus, tax-free, 8% bonus, or whatever you get with the annuity. Again, as maybe you have an income rider. I’m getting too much here.

Eric: I just got a tax-free bonus.

Dick: It is just the whole package of being tax-free, and the fact that if you put an income rider on it, that you’re going to have potentially tax-free income. Even if your account value goes to 0 because you have lived a long, long life, your income will just continue tax-free.

Eric: Obviously, there are standard benefits of the Roth that you don’t have to worry about RMDs; the transfer of wealth tax-free. In many ways, it [inaudible: 05:44] life insurance. One thing that I was looking at earlier was the Social Security Tax aspect. The reason that comes into play, even with annuities with IRA wrapper, a lot of times you are going to take those RMDs that are going to kick that Social Security income level to a level that’s taxable.

Dick: It really can push it up in to that taxable.

Eric: If that is one of the things you can potentially avoid by converting it into a Roth, there’s even sometimes that it’s . . . usually, the rule of thumb used to be you want to be able to pay for that conversion, those taxes basically, out-of-pocket. You don’t want to reduce your balance.

Dick: Exactly.

Eric: Some of the formulas that we’ve looked at actually said, “You can save more on the backend by not having those RMDs force you in to a higher taxable consequence.” Now we’re talking all sorts of fun things.

Dick: I think a lot of it, Eric, gets down to; do we believe taxes are going to go up? If you believe taxes are going up, folks, raise your hands. It’s unanimous, no hold-outs. Most rational folks . . .

Eric: And some irrational.

Dick: . . . believe that taxes have nowhere to go, at least for the next 10 or 20 years, but up. It’s a perfect place to look at Roth and say, “Whether I’m going to use the money or I’m going to pass it to my heirs, I want to protect them from increasing taxes.”

Eric: If nothing else, it needs to be one of the things you consider for your retirement future, is how it will impact. Work with a good advisor, discuss the possibilities, and it should be one of those pieces that’s on the table. Taxes are going up; limited supply.

Dick: That’s right. Get them while they last. Thank you.

Eric: Have a great day.

Never Place an IRA in an Annuity? Wrong!

June 8, 2012 By Annuity Guys®

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

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

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

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

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

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

Are Annuities Best in a Difficult Economy?

May 10, 2012 By Annuity Guys®

Dick and Eric reflect on a email they received this week highlighting a Tony Robbins video (see below) on the National Debt and Federal Budget Deficit. What does it mean for the nation when we have over $15 trillion dollars in debt? and how does that impact retirees and those considering annuities in retirement?

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Tony Robbins Video on The National Debt and Federal Budget Deficit.

Annuity Guys® Video Transcript:

Dick: Today, we want to talk about a lot of the things, Eric, that we hear from all over the nation; folks are concerned about Social Security. Will Social Security be here? They’re concerned about this economy and what if it continues and isn’t a strong economy? How would an annuity fit into that scenario?

Eric: I guess, let’s start with what led us to this topic.

Dick: Okay.

Eric: We were watching . . . we got an email sent to us, had a Tony Robbins video, the motivational speaker Tony Robins, and he took a little time to reflect on the state of the economy, and really, the state of the national debt.

Dick: He really takes quite a bit of time; almost 20 minutes.

Eric: Long by our video standards even. He did a very interesting analogy of . . . when you think about the national debt, you think in terms of trillions, and really, what really what a trillion is.

Dick: How do we fathom $1 trillion?

Eric: How do you wrap your head around it? He starts out by saying, “If you think about a million seconds . . .” we’ll use time in here. If we were to say, “What happened a million seconds ago?” How long ago was that?

Dick: Since I already know the answer; about 12 days.

Eric: 12 days. All right. Then he takes the next step, 1 billion seconds. If you want to go back 1 billion seconds . . .

Dick: You’d think if it was 12 days for 1 million.

Eric: A couple of days, a couple extra months.

Dick: Maybe extra few years or something?

Eric: 32 years. There’s your . . . all right. 1 billion seconds is 32 years.

Dick: That’s huge.

Eric: Jimmy Carter was the president. We were waiting in line for gas then, too. You have this national debt that’s in the trillions of dollars; now trillions of seconds. This gets . . . 1 trillion seconds. How long ago was a trillion seconds?

Dick: If a billion is 32 years, then we maybe think it would be, maybe if we were stretched out, 320 years?

Eric: Keep going.

Dick: 3,200 years?

Eric: How about almost 32,000 years ago. See, when you start to put that in proportion . . .

Dick: That’s just 1 trillion.

Eric: That’s just 1 trillion. We’re in multiple trillion.

Dick: We’re in debt how much?

Eric: Is it $3 trillion?

Dick: $15 trillion. Our national debt . . .

Eric: As you say, just one year.

Dick: Our budget is, I think, $3.9 or something, and then about $1.2 million of that is borrowed money.

Eric: Right. That kind of put the whole what started this topic for us in perspective. There you have it, 32,000 years of seconds.

Dick: Let me just say, folks, we’ll make the video available. We’ll give you a link out to our website with the video on it, and I do think it’s worth your time to watch this, it really puts things in perspective. We wanted to put some things in . . . I can’t quite say perspective.

Eric: I’ll critique it: The first couple of minutes are very good. After that it kind of gets . . .

Dick: It’s a little long-winded, but it’s a good exercise to understand just what we’re really up against. Then from there, Eric and I want to put a little perspective on annuities and investments that people are considering in this day and age.

Eric: Right. When you take into consideration what’s going on with our economy, what’s going on with the world; how many times have we had to sit here and go, ‘What’s Greece doing today?” Are they going to pay their debts? Are they not going to pay their debts?

Dick: How’s that going to affect our market?

Eric: Then all of a sudden the trickle-down is, how many of our banks own bonds in Greece or in Euros? If the European Union falls apart . . . all these things, all this uncertainty into today’s global economy, because we’re no longer . . .

Dick: We look at Greece, how Greece is affecting all of this, and Greece is one of the smallest economies on the earth. Not the smallest, but it’s a very small economy in relation to industrialized nations.

Eric: I don’t want to say this wrong, but I believe someone once told me that if you took all the cash Apple had on hand, they could actually pay off Greece’s debt.

Dick: There you go.

Eric: It gives you a proportion of what Apple is in relation to Greece. Yet, all this turmoil globally is caused by a nation the size of Greece.

Dick: I think that the big question here is with all of the headwinds that we are going to be facing with our country and its debt . . . because we said $15 trillion of deficit, and the other estimates for the unfunded liability such as Social Security and Medicare go as high as $120 trillion; somewhere between $90 and $120 trillion that we owe. We have to decide carrying this kind of debt forward, not just in the United States, but all of the European nations, a majority of the European nations have similar problems. It takes time to deleverage; it takes a long period of time. It’s a sacrifice, its difficulty. If we look at how this might affect the economy over the next 10 or 20 years, how will an annuity work in a person’s portfolio? How much of their portfolio should be in annuities?

Eric: Obviously, we’d always say you have to divide and conquer here. Nothing should ever be all in one spot.

Dick: Correct.

Eric: You have multiple spots for your allocation.

Dick: A good portfolio is well-balanced.

Eric: That’s exactly right. It’s looking at things that are market related and things that are not market related. If you cannot stomach the ups and downs, find your investments elsewhere; that’s the secret. It doesn’t have to be in annuities necessarily; CD’s, money markets, life settlements, whatever that other bucket may be.

Dick: Something that’s a little less correlated with the markets. I do find that when we’re putting together portfolios and balancing portfolios, that the annuity becomes more of the foundational portion. It’s usually more slanted towards the income, future income need, or the potential income need; sometimes, it’s an immediate income need. That is where the annuity seems to be well-suited. Sometimes safety in growth of assets, but less in that area.

Eric: One of the reasons we particularly like an annuity in this kind of market, we believe we’re going to have a boom and bust.

Dick: A lot of volatility.

Eric: Ups and downs. It’s the stair-step approach. If that annuity locks in your gains . . . and here, we’re talking about fixed indexed annuities, we’re not talking about variables. If you lock in a gain, and then the market goes up, you relock in the game at your anniversary date or whatever that period is.

Dick: Typically annually, sometimes further out.

Eric: Bi-annually. Then all of sudden if the market goes down, you’re still on that step.

Dick: You still held where you were that prior year.

Eric: Right. Then we move straight across on that level step. If the market comes up, even though it’s down here, you’re going to step up with market.

Dick: Correct. It’s possible in a flat market, or even a down market, to have increases in an indexed annuity or what’s called nowadays a lot a hybrid annuity. It is a way to have safety, have some growth, and be able to function in a market that really could take a drastic turn for the worse, unexpectedly. I think I’d like to just say, folks, from Eric and I’s point of view, we’re not doom-and-gloom or pessimistic on the economy that we’re going to go into anarchy or everything’s going to fall apart. We do take the outlook just to make it pretty straightforward that we see things being somewhat flat over the next decade or two, maybe up a little, maybe down a little; but somewhere in that area.

Dick: My personal perspective right now is until the economy recovers, people start getting more jobs; rising tide lifts all the boats. In this case, there’s nothing out there. I see the market gaining without a reason for it to be gaining, and it’s the ‘irrational exuberance’, is what I kind of term it. Everybody wants the market to go up, so we’re all kind of wishing and hoping.

Dick: The emotional tide. It’s time for the recovery. There’s been a lot of money pumped into the economy and into the markets, based on quantitative easing and that type of thing.

Eric: Exactly. We’ve pushed it that way, but I don’t see a reason for it to keep going. Unfortunately, that’s my biggest fear right now. I’ve got a lot of people in the market, and my biggest fear is there’s no hope for where we’re going to go future, in the next couple of months, the next couple of years; I don’t see that continuing. Obviously, the election is going to have some kind of bearing as to which direction we go in the economy, but my biggest fear in the meantime: We’re doomed. We’re set for a fall. I don’t want my retirement people that are very close to retirement to experience that. How do you protect their foundations?

Dick: That’s where we do use annuities in that area. I think what you just described is a very good picture of what we’re going to see over and over again, over the next decade or two. That is we’re going to see the market have a rebound, we’re going to see it up, then we’re going to see it drop. What’s the net effect, maybe over a period of 10 to 20 years? We don’t like to think it’s going to be that 50-year history of the market, or 60-year history of 8% average gains. We’ve seen one decade, from ‘99 to 2009, we call it ‘the lost decade’.

We’re just saying that we feel that if this happens, no one can really predict it, but if this happens that we have a pretty flat market, down market, or slightly up market, that a portion of your portfolio could be well served to be in annuity.

Eric: Secure the foundation. With whatever vehicle you do, make sure you’re protecting your retirement. Put it in some place that’s not subject to market risk. If you can’t afford to lose it, don’t put it someplace where it can be lost, and that’s the simplicity of the planning stage here. We’re not saying the stock markets your only other alternative besides annuities. There are lots of options out there. Do your homework, and make sure you’re picking the pieces that’ll basically serve you best for where you want to go.

Dick: I think an answer to our question that we’ve got up on the monitor today: Are annuities best in a struggling economy? I think for a portion of your portfolio in many situations, not all, but in many situations, a portion of your portfolio, it would be best to have in annuities.

Eric: The strange thing is annuities are going to perform better than typical equity-based options in a struggling economy.

Dick: Correct. We haven’t even talked about the contractual **guarantees of income riders. Maybe we’ll save that for another session.

Eric: There you go; a reason to come back next week.

Dick: Thank you.

Eric: Have a good day.

Should I Plan to Live to 100?

May 2, 2012 By Annuity Guys®

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

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

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

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

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

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

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Using OutCome Based Planning™ for Your Retirement

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

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

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

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

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

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Selecting the Best Annuity & Retirement Income Advisor

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

Video:"Choose a National or Local Advisor"?

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

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

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

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

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

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

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

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

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

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

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

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

Video: "Avoiding Gimmicks, Scams & Charlatans"

^** Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. Annuities are not FDIC insured and it is possible to lose money.
They are insurance products that require a premium to be paid for purchase.
Annuities do not accept or receive deposits and are not to be confused with bank issued financial instruments.
During all video segments, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

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

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

Is Social Security an Annuity?

April 27, 2012 By Annuity Guys®

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

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

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

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

Low Interest Rates Hurt Seniors

April 20, 2012 By Annuity Guys®

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

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

4 Ways New Annuity Rules Will Help Retirees

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

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

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

[Read More at US News…]

Annuity Guys® Video Transcript:

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

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

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

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

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

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

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

Eric: They’re making money.

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

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

Dick: Stimulating the economy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dick: It’s okay. We can close.

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

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

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

Dick: With 3% inflation.

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

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

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

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

Are You Too Young or Old to Purchase an Annuity?

April 13, 2012 By Annuity Guys®

What is the best age to purchase an annuity?

There have been a plethora of articles and reports about unscrupulous agents who sell annuities to senior citizens who did not understand what they were buying or the contractual ramifications of their decision. Due to the publicity of many of these unfortunate events there has been a blanket statement made by many that annuities should not be purchased by any over 70….. Hogwash!

In the world of financial planning and investment advising there is a need to have safe money options regardless of age. The key relies on the fact that the financial product should provide a solution to a financial need.

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Annuities by their name are designed to be income producing financial instruments. Yet, they can also be used effectively as estate planning tools. Unfortunately for senior adults insurance companies safeguard themselves from bureaucratic regulators by limiting annuity purchase ages – most companies would rather err on the side of not selling an annuity to someone approaching or exceeding eighty years old than to risk being accused of an unsuitable sale by a regulator even if the annuity would be a great benefit to the purchaser.

Why wouldn’t an eighty two year old on their own or with their families consent buy an annuity when they want safety of principal, a higher growth potential than the local bank, a 5 to 10% bonus and all of the account value to bypass probate and go directly to their heirs with no surrenders or penalties? The main reason is that senior citizens are discriminated against by overzealous regulators that in the name of protection have caused the door to be shut on this legitimate purpose for annuities in estate planning.

It should be noted that the age limiting also applies to younger individuals. We have seen insurance companies pull back on benefit eligibility for younger individuals which seem “to promise to much” based on today’s interest rate environment when these benefits are extrapolated out over a younger person’s lifetime.

So again, what is the best age…

The most common age tends to be between 45 and 65. However, it depends on the type of annuity and your planned retirement age. Our most common experience has been to start utilizing annuities in retirement planning 1-15 years prior to retirement. Annuities excel at keeping retirement dollars safe and secure while providing growth for retirement income. We often discuss with clients that they should consider annuities for their income foundation or “If they cannot afford to lose principal” or if they “do not have the time to recover from losses in riskier financial choices” — then annuities are always prudent alternative for consideration.

It seems that every month or so I see a newspaper and magazine financial writer that writes a column gets asked a question like, “I’m 70 years old and my advisor wants me to by a (fixed, variable, hybrid) annuity, should I do this?” I’m sorry, but no columnist can effectively answer that question in 300 words or less, unless his/her answer is “it depends.” It’s not uncommon for retirees to live into their 90’s – and a 70 year old with a family history of longevity may be a candidate for an annuity if they have a concern about outliving their money. It should be part of the discussion – if it fits the need.

So if I’m in my 20-40’s then I should not consider an annuity… right?

For younger individuals two key elements need to be part of the consideration when discussing if an annuity is a valid option. First, what are they giving up and at what cost? Younger clients who are disciplined enough to make regular contributions into an investment can benefit from dollar cost averaging. Also, they have the advantage of time — the longer the time before the dollars are needed the more likely they are to benefit from the volatile upside of some of the riskier investments. Second, how do they handle the loss of principal? Can they continue to invest into a financial product that may not always consistently grow? If they cannot stomach a loss then other safe money options like annuities should be part of the discussion.

Get Good Advice

In closing, we encourage you to get good advice. Find a financial professional that will listen to your needs and then work with you to find proper solutions. Ultimately it will be you who makes the decision on what to do with your dollars. Do not make decisions based upon a newspaper article or what your neighbor just did that sounds so great. Work with someone who has your goals in mind and you have a much better chance of meeting your retirement target.

Eric: Today, we’re going to talk about what is the best age to purchase an annuity. Now Dick, I see it in the newspaper all the time, “Dear Abby,” well Dear Abby isn’t quite right, but a financial columnist gets the question, “Dear, Dick; I’m 70-years-old. My financial adviser wants me to buy an annuity. Is this a good recommendation?”

Annuity Guys® Video Transcript:

Dick: Absolutely, if you’re 70-years-old, you should never buy an annuity.

Eric: Now 70 and a day, you’re okay.

Dick: Or what about 69 and a half?

Eric: Okay, that’s fine.

Dick: You know really folks; this is the problem with columnists and 300 word articles or whatever. They don’t really take your individual situation into account and where one 70-year-old buying an annuity could be completely the wrong thing, you know Eric we’ve seen that, on the other hand there are other 70-year-olds that have a unique situation, where an annuity could be the exact perfect answer for them.

Eric: Age; we hate to say age doesn’t matter, because really it comes into play in a certain aspect, but it’s all about longevity, expectations, and partly being part of your financial plan.

Dick: Right. If you want to get money over to heirs, maybe your children, you want that money to be safe. You want it to have better earning potential maybe than what the banks could give you.

Eric: Right now, that doesn’t take a whole lot.

Dick: It doesn’t take much. So there could be many of those factors. You want to avoid probate; that could be a good reason to consider an annuity for that purpose.

Eric: Exactly. So the blanket statement to say, “I’m too old for an annuity,” is not the right way of saying it. Now there are certain considerations. I would say as far as liquidity as far as what’s a sound investment, you have to trust the decisions, and that the people you’re working with are giving you good advice. If you ever don’t feel comfortable with any financial advice, get a second opinion.

Dick: And this is where I’ve had taken issue anyway, with some of the compliance regulations and the regulators, which they try to make it one rule fits all, and they don’t really take the individual into account. And I very frequently find that an older person is truly discriminated against, because they cannot choose what is best for their situation. The insurance companies are afraid to sell them an annuity or to allow them to purchase an annuity, because it could be looked at as something incorrect, even though for that person, it would be the very best thing in their situation.

Eric: Yeah, I think part of what happened; this is the historical perhaps side of it. There was a time when annuities were sold and the reflection was that, basically agents were just selling them because of a higher commission level. They were just going to sell them, no matter if they were the right fit or not.

Dick: Yeah, unscrupulous. Not doing the right thing. Taking advantage of people, and yet in every investment that we’ve known out there in the world of investments, there’s been someone that will take advantage of another person. So we have to be somewhat careful, and we can’t change the way the whole world, the investment world is set up. But because of that, I do feel that the protection rules have come down so strongly that now the insurance companies are afraid to sell or allow an older person to purchase an annuity.

Eric: And we’re not suggesting that if you have dementia that you should purchase an annuity. Basically, what we’re saying is that, if you’re of sound mind, and you’re making sound decisions and you understand how it fits.

Dick: And maybe even bringing the family into the decision. But even in the environment that we have now, if the family wants to come into the decision and help their 80-year-old mother purchase an annuity that would be a great thing for the family and for the goals and objectives of the client, they can’t do it.

Eric: Some insurance companies basically tie agent’s hands, based off of age. It depends on the company and what the age cutoff is.

Dick: Right, it seems like, when we get up around in that area of 78-80, in that neighborhood, it becomes pretty minimal what’s available.

Eric: Then of course there are people, I’m going to say in my age group that…

Dick: The much younger…

Eric: They’re also the discriminated against group that some of the benefits, I call them the richer benefits that are available on some annuities, the income riders. We’re actually too young. The benefits are actually too great.

Dick: The companies feel and I think that this should be a cue to some folks that are maybe a little bit more in that sweet spot, which I’m approaching, somewhere in that 50-year- old up to 65-years-old, that some of the **guarantees and that the companies feel are just a little bit too strong to offer to a younger person that could take advantage of that. So we do find this sweet spot to be somewhere between the ages of near 50, up to maybe a little over 65 or pushing 70, where an annuity can be positioned, either to start income immediately or defer it for up to 10 or 15 years.

Eric: I really like that. For me in my practice, those 10 years before retirement, it should be part of the discussion. Even if the decision is no, it should be part of what’s looked at as part of this.

Dick: I can’t tell you how many times, I know you’ve heard it over and over too. That someone has said, “I wish I would have known this ten years ago, five years ago, because why was I wasting my time?” Their money many times, hasn’t done any of the things that it needed to do, to be ready for where they are today, and they could have positioned it with contractual **guarantees, which is what annuities offer and at least that foundational portion of their income or their assets would have produced the income that they needed by this stage.

Eric: Well, and it takes some of the guess work out. If you take a portion of your retirement savings and you position it in a place where you know that you’re this age, your goal is to retire here, isn’t it nice to have predictability of what that income level is going to be at that point, and that is where it becomes part of the discussion.

Dick: So I think that truthfully, getting back to what we were discussing initially and that was too old or too young? I think that we would have to say that it depends on your unique situation. You’re never too old or too young, if it fits what you need.

Eric: That’s right. It has to be a solution to a financial problem and it’s a piece of the puzzle. If it fits it should be part of the consideration. So talk to your financial adviser. Find somebody that you trust and that you feel comfortable with and have the discussion.

Dick: That’s right. Thank you.

Annuities – Liquid or Not?

March 30, 2012 By Annuity Guys®

As advisors who specialize in retirement planning one of the first questions we discuss with clients surrounds the subject of liquidity. We need to insure that our clients are equipped for whatever financial challenges life may present them with and sometimes that means needing access to some cash quickly.

So are annuities liquid financial vehicles? Can annuities be converted to cash? Maybe — depending on the type of annuity and the timing, some annuities can be converted to cash quickly. There is really a scale of liquidity from liquid to illiquid across various annuity types with immediate annuities being illiquid while variable, fixed and hybrid annuities offer many opportunities to access cash with no penalties.

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In a March 2012 article in Insurance News, “Debunking Annuity Objections” Sheryl Moore an objective industry expert addresses the topic of annuity liquidity. Sheryl does an excellent job articulating just how insurance companies keep annuities secure by purchasing high quality bonds whose maturities coincide with the surrender period for the purchased annuity. In addition insurance companies must also have reserves set aside that are determined by the state insurance commissions as adequate. Consequently, if an annuity is redeemed early the insurance company may be required to redeem the underlying bonds prior to maturity resulting in a financial loss to the insurance company. So as a safeguard to their financial stability the insurance companies include surrender charges to maintain their continued viability and safety for all clients involved. Since annuities have to be reliable as long term financial vehicles for retirement, surrenders cause people to think twice before bailing out unless it is absolutely necessary, thus protecting others that remain.

It should be pointed out that cashing out an annuity is not the only way to obtain liquidity. Virtually all non – immediate annuities provide for a portion of the annuity that can be withdrawn each year without penalty – and for most annuities this amount is 10 percent of the value of the annuity annually. In addition, it is typical for annuities to provide for access to funds without penalty should the annuitant be confined to a nursing home, disability or being diagnosed as being terminally ill.

In addition, all annuities offer the option of annuitization **guaranteeing a lifetime income and most annuities pay the account value to the beneficiaries upon the death of the annuitant.

If you use an annuity or series of annuities in your retirement planning understanding how you can get access the account value should be part of the conversation with your advisor. Just know that a full pre-mature surrender is not the best or a preferred option for most annuity owners. A very small percentage of annuities are surrendered in full prior to maturity.

Annuity Guys® Video Transcript:

Eric: today’s topic is annuities, are they liquid or not?

Dick: Yeah, can we put our money into these? Are we going to lose our money or how long is it going to be gone for? How does this work, Eric?

Eric: How big is the vault that you have to put that in? Can you get into the vault? When we start talking about liquidity, and it’s one of the first questions we are typically asked or actually, we address with clients, because annuities typically are long-term.

Dick: They are. They’re long-term retirement vehicles and you shouldn’t look at them as your liquid money, even though there may be liquidity there.

Eric: Right, each type of annuity has kind of a different level of liquidity.

Dick: So let’s talk about first of all, the annuity that has no liquidity.

Eric: I was going to say medium, minimal, yeah, I always give you the little caveat there.

Dick: Minimal, there’s some liquidity there.

Eric: With an immediate annuity, you’re going to take your liquid asset really, and you’re going to give it to the insurance company in exchange for an income stream. So the problem is that lump sum is gone now, if you had to go out and salvage it, if you really think about it.

Dick: Get something out of your annuity.

Eric: You could sell it on the secondary market. You’re going to get pennies on the dollar.

Dick: It wouldn’t be a good idea, unless you really have to.

Eric: That would be a last ditch.

Dick: Effort.

Eric: Uncle Joey’s in prison, I don’t know.

Dick: Let’s not go there.

Eric: I was going to say, so just don’t even consider it as part of being sound financial planning.

Dick: Make a good plan and then you won’t need to cash that immediate annuity in.

Eric: That’s right.

Dick: Let’s talk about some annuities that are more liquid or considerably more liquid. Go ahead.

Eric: The next level is really that fixed, indexed hybrid, which is all built on that kind of fixed annuity chassis.

Dick: Fixed annuity chassis, right.

Eric: The best part about most of those and this is a typical aspect; you’re going to get a 10% after that first year. Your first year is usually for some, it’s 5.0%, for some it’s no withdrawal that first year, but typically, after that point in time you’re able to withdraw 10%.

Dick: At least by the second year, the 13th month you can take 10% out, and the beauty of that is that there’s no penalty and there’s no surrender.

Eric: So it’s actually some liquidity of what you’ve deposited. Some do it based on the account value. Some do it based off of the original deposit.

Dick: Right. So when we’re looking at this type of liquidity, again 10% is a long ways from 90% or 100% of what you actually put into the annuity, yet the idea of liquidity in an annuity is that, when you structure your financial plan properly, you’re not looking for liquidity with an annuity. That’s not the purpose of that money.

Eric: Right. Annuities are geared towards income, you know, or savings?

Dick: Or safety and giving money back to heirs.

Eric: You should know there are ways to get access to some of that cash, if you need it. But just knowing how you’re structuring your whole plan allows you to safeguard those places.

Dick: You know we talk about 10% but then there are some other provisions in an annuity, because folks, these annuities really are true retirement vehicles, and so the annuity companies look at these and say well, what would be a real emergency, a real liquid need perhaps in retirement, and one would be terminal illness. Another would be a long term care need and those all have some provisions for liquidity.

Eric: I was going to say, most annuities have those pieces built in.

Dick: You get all your money back with no penalty or surrender.

Eric: Obviously, the one that we never like to even mention necessarily, because it’s really not liquidity for you, but it’s liquidity for your heirs if you would pass, all that account value would move on to your heirs.

Dick: That’s important to know, because I have frequently sat down with someone who was just investigating annuities initially, and did not understand that those penalties and surrenders are not passed on to heirs. They get the full account value including bonuses, and there are no penalties. No surrenders.

Eric: It is a strength in the annuity system, in the sense of being able to purchase something. You may have gotten a bonus or something right up front. Those things typically, if you would pass even the second day you’ve owned it, that full account value moves on to heirs.

Dick: Now, Eric a lot of people would see this as being very counterintuitive, because I am going to make a statement here, and that statement is simply that surrenders can actually be good, and there’s a reason why surrender charges. Now, Eric says, no, never. Eric, it depends on which side of the fence you’re on.

Eric: That’s right.

Dick: If you’re the person wanting to get some money out, then you think surrenders are bad. On the other hand, if you’re the person that’s got your money long-term in an annuity, and it’s supposed to accomplish your retirement, you don’t want other people pulling their money out prematurely.

Eric: That’s correct. When you understand how insurance companies reserve for annuities and how they’re constructed, you want your company that you’re doing business with to be financially stable.

Dick: Very secure. Remain viable.

Eric: And how these annuities are constructed is once you purchase an annuity, that insurance company is going to take those dollars, and typically run down to the investment bond market.

Dick: Treasuries.

Eric: Buy high-quality bonds.

Dick: Right.

Eric: And that’s what they use to reserve your annuity. Now why is that important? If the insurance company has to go sell some of those underlying bonds early, because you’ve surrendered prior to your maturity time, they’re going to have to sell those bonds on the open market.

Dick: Perhaps take a hit and this is what some of that surrender charge offsets, but it also makes you take pause and think twice before you go cash in an annuity.

Eric: That’s where you look at it as being the surrender fees are actually part of the overall construct of the insurance companies that help them protect the system. It helps protect the entire, basically industry and what you’re protecting the people…

Dick: Ultimately, it protects the people that are insured. They’re relying on their annuity for their retirement.

Eric: So that’s where he is saying it’s a good thing, if you’re trying to get to the liquidity aspect.

Dick: Now another thing that I find very interesting that gets overlooked a lot of times is folks will think, well once that surrender period ends, which is in 10-years and that must be the end of my annuity, but it’s not. No, that’s where you now have full liquidity. You have full control over your money, but they still have contractual obligations to you.

Eric: That’s right.

Dick: When you set up the annuity originally.

Eric: That’s the key thing. The word annuity, typically in my mind, means lifetime. Once you start it, you’re into a lifetime contract. You can decide at some point…

Dick: To end it early, to walk away.

Eric: But you’ve, basically you’ve got a commitment.

Dick: You’ve got them on the hook. That’s what your contractual **guarantees do.

Eric: That’s right. The other thing we didn’t talk about as far as, another way of getting liquidity with an annuity is obviously, annuitization, any annuity can be annuitized. What does that mean? Basically, it means you’re turning it to into a lifetime income stream.

Dick: So you’re really setting a fixed annuity into what would normally be called an immediate annuity, if you purchased it right off the bat, and wanted an income stream. What we found to be very popular lately has been the hybrid annuity. The idea of the hybrid annuity is it’s kind of like you’re having your cake and eating it too. Where you can have your lifetime income, but in addition to that you’ve still have got your asset.

Eric: Dick likes to talk about this, so I’m going to put him on the hook. We talk about majority control, a lot of the times with hybrid annuities, especially. You want to kind of explain a little bit about what—when you talk about majority control.

Dick: When you first start out with an annuity obviously there are surrender charges and the surrender charges are higher in the earlier years. But even in the worst case scenario as a rule, when you subtract the bonus out, because let’s face it, if a company gives you a bonus for putting your money with them, if you take your money out early they want their bonus back. They want their money back.

So when we say majority control, that surrender charge kind of in its worst case is about 10%. So that means you literally control 90% of your principal and then you have a decreasing surrender charge over the years. So you continue to gain a higher and higher majority, until you have 100% majority control, and yet you still have contractual **guarantees that that company has to honor. So this is what we say majority control, which is the opposite with the immediate annuity, because with the immediate annuity, you’ve given up your lump sum and you have no more control over your asset. Did I do a good job?

Eric: That was it. Thank you. I think that helps people a lot of times, because when you’re thinking about, especially with liquidity if you’re looking at a hybrid annuity, really you have to understand, for the most part unless it’s a really weird contract, you’ve got at least 90% control of all the dollars from day one.

Dick: Exactly.

Eric: And so it’s a good way of thinking about it, because I’ve seen the market take a 10% dive and you lose 10% over a period of time.

Dick: Right, sure. Absolutely, and we know that that’s the beauty of an annuity is it gives you that security and safety, and it takes the volatility away of the market, and so for at least a portion of the portfolio we recommend a lot of times that that’s the foundational portion of the portfolio.

Eric: So I guess to try to sum up this topic, we would say just know that when you’re going into the annuity market that one, you’re going to have majority control in situations, and also know there is more than one way to get access to your dollars.

Dick: Yes, there are and as we kind of hinted, it’s important to not think in terms of well, taking all of my money out of the annuity at one time, but taking a 10% or what you really need, and that when you structure that annuity originally that you structure it as a long-term portion of your portfolio. Okay, folks, hopefully we’ve covered liquidity and annuities and I’m sure there is more that we could say, Eric.

Eric: Liquid or not?

Dick: Have we said enough today? We never know how to wind these up.

Eric: Ending is always the hardest part.

Dick: Thank you for watching.

Eric: Have a great day.

Understanding Immediate Annuities

March 22, 2012 By Annuity Guys®

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

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

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

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

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

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

Immediate Annuity Features

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

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

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

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

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

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

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

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

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

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

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

Annuity Guys® Video Transcript:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dick: With an immediate?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Eric: So it’s all about the tradeoffs.

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

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

Dick: Yes, that’s right.

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

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

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

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

Eric: Yes. Very good.

Dick: Thank you.

Are Annuities a Good Choice in a Low Interest Rate Environment?

March 9, 2012 By Annuity Guys®

One of the questions we have heard asked quite a bit lately, “Is it the right time to buy an annuity?”

A prolonged low interest rate environment does impact returns and interest crediting on annuities. Payouts, **guarantees and riders have all been impacted in the annuity marketplace during the last five years. In fact, one recent example showed that immediate annuity payouts were down about five percent from just eight months ago.

So, if you are considering an annuity — is this the right time or should you wait?

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Firstly, proper financial planning would indicate that a balance of assets and asset classes should be utilized in constructing a quality retirement plan. Many financial planners now utilize annuities as part of the fixed income allocation adding additional layers of security by eliminating longevity and credit risk. When it comes to providing income, annuities offer unparalleled combinations of safety and security when navigating through 20 to 40 years of retirement.

Secondly, if you are trying to time the market you may just end up guessing wrong. How can we guess wrong when the Federal Reserve has indicated they plan to keep interest rates at near zero levels until 2014? Only hindsight will be certain, but what are the costs to your portfolio when you park money in an account earning zero or stuff it in your mattress. While you may not lose principle you most likely will lose buying power. Inflation, which has averaged somewhere around four percent for about the last 30 to 40 years is sure to erode your future spending power.

However, nothing could be worse than losing principal and depleting your retirement savings just because you choose to stay invested in riskier asset classes due to a perceived lack of choice.

What is the best plan for when I prepare for retirement – NOW?

Protect the Basics – If you are in or near retirement protect your income by selecting safe money options that provide reliable and steady income. Consider CD’s or annuities for this portion. Annuities are superior for providing income, while CD’s are federally insured.
Spread out your assets – Look at all assets classes, not just stocks and bonds to provide diversification. You can spread out your risk by choosing assets classes than are not as heavily correlated to each other. Consider MLPs, REITs, preferred stock, commodities, currencies, options, carry trades and annuities.
Take reasonable risks – Once you have protected your foundational level of income you can be more comfortable in engaging traditional more aggressive asset classes that can provide additional returns to combat inflation.
Get a second opinion – Ideas and philosophies about financial planning are plentiful. Seek out professional advice and don’t be afraid to get a second opinion. When it comes to retirement planning some advisor are definitely better than others.

Lastly remember you are in charge, too often we hear from clients who say “I did not want to do that but my advisor said I should”… if you don’t like their advice or service. Get a new advisor. It’s your money and more importantly it is your retirement.

Annuity Guys® Video Transcript:

Dick: Today we have with us the new and improved Eric. He’s done a little shaving and he’s got that youthful appearance. Hey, we’re going to talk about annuity timing today and what is the best time to buy an annuity?

Eric: Yeah, it’s really we’re looking at today’s low interest rate environment. One of the questions we constantly get asked is “Is it the right time, or am I better off waiting?”

Dick: That’s the big question and I think that is the good thing about an annuity is that they are structured for income, and they’re not really structured just for the aspect, of treating them like a CD. So they’re more of a potentially, foundational place in your portfolio that can get you the higher income that you’re desiring even in a low rate environment. So I think that that’s just part of structuring an overall portfolio. What would you say, Eric?

Eric: Yeah, it’s about asset allocation, so when it comes down to it, you start with a plan. You can’t hit a target, you can’t see. So what’s your retirement financial plan? And then you start building from that, all right? We always talk about the foundation, taking care of the foundation and if income is part of the foundation, that’s really where annuity makes sense.

Eric: An annuity makes sense for fitting that income foundation portion, securing it so you don’t have to worry about running out of money.

Eric: One of the biggest concerns a lot of people we talk to have is with the rates being as low, you know…

Dick: Yeah, right, when is the right timing? And we do know, Eric. I mean it is a fact, if we keep money in a low-rate environment and we do nothing, put it in our mattress or put it…

Eric: Put it in a savings account.

Dick: When you put it in the bank it’s about like putting it in the mattress. It’s going to earn about the same amount of money, so we know that we’re not going to keep up with inflation.

Eric: Right, we know that zero is what we’re getting…

Dick: We know that our spending power is dropping, dramatically.

Eric: So if inflation’s averaging 4.0%, over the last 30 to 40 years, what are you getting when you put it in a zero-earning environment? You’re losing money. You don’t like to think of it as losing money, but you are.

Dick: Well by contrast, let’s just talk about for a minute, because we hear a lot about it. The hybrid annuity and what makes the hybrid annuity unique in this low-rate environment when it comes to income?

Eric: Well, it’s the income riders. You’ve got that **guaranteed return, sometimes as high as 8.0%, 7.0-8.0%, that those dollars can be used to **guarantee income in the future and that’s a way of securing income.

Dick: Right, it’s another layer of security that we’re really asking the insurance company to take that risk, instead of us taking the risk by going into riskier investments, we’re saying, “Hey, if I can grow my income base in a similar way, if I just put it in the stock market and tried to earn 8.0%, I mean I realize it’s not going into my cash accumulation account.” But if I can draw income off of it on a similar level that I could, if my stock account grew then that’s a way of transferring some of that risk.

Eric: Right and it’s about putting the right pieces or filling the right buckets. You want to have that secure portion taken care of, so then you can add those other allocations that can help you combat inflation, help you earn a little bit higher, because you’re taking care of your foundation.

Eric: So it allows you to take more risk in other areas.

Dick: Exactly, folks. I think that you can kind of understand that. That if you’ve got your income foundation very secure, you feel a lot more comfortable taking risk, or being more aggressive with that portion of your assets that’s more discretionary.

Eric: That’s really what we’re going after, so if you have somebody that you’re working with and, you have to be comfortable with your advisor.

Dick: Yes, you do.

Eric: First of all, get professional advice. It never hurts to get a second opinion.

Dick: No, no.

Eric: No matter, if you’re at the first stage or you’ve been investing and are ready for retirement, for a long time, you’re getting to that stage, ask for a second opinion.

Dick: Well, one of our slogans that we use quite a bit is, “Your Retirement Deserves a Second Opinion,” and it’s true. It’s really true.

Eric: We work with a lot of folks who had a very good accumulation specialist to get them to retirement.

Dick: Good strategy. They’ve earned well.

Eric: But when you get to retirement, you need to work with a retirement planning specialist and that’s where we would encourage people, to get that comfort level with your retirement plan.

Dick: If you do not feel comfortable with what is being proposed or the plan just doesn’t seem to make sense, get that second opinion. Don’t just go along, because how many times have we heard someone come in to us new and say, “Well, my advisor told me to do this.” Well, this is a reciprocating two-way street when you work with an advisor. We want our clients to tell us…

Eric: There has to be a comfort. There’s a relationship that you have to have with your advisor. If you cannot tell your advisor no, you’re working with the wrong guy or gal. Don’t want to be gender specific. But it’s about that relationship and letting them know where you feel comfortable and how you’re going to work to achieve, they’re going to work to achieve your goals, and you have to feel comfortable with that client.

Dick: And yet, Eric, there is that balance that we do know things that, because of our training, because of the way that we forecast, project and look at the way that these things interrelate, that there has to be a mutual level of trust and comfort between us and the client. That’s why they have us. We’re the professional. We know what we’re doing. We have the expertise. But they should never feel forced. You should never feel in some way that you’re being coerced into something.

Eric: Right, and if you don’t agree with the advisor’s assessment get a second opinion. That’s what it’s about. It’s about your retirement.

Dick: Have we fairly answered the question of annuity timing? Is it a good time to buy an annuity?

Eric: Well, I would tell you that it’s always the right time, if it fits the situation. You don’t wait until it’s too late.

Dick: Right, I do agree. I could say a lot more, but why don’t we…?

Eric: That’s a great gag line. Don’t wait until it’s too late.

Dick: That’s right. That’s right. Thank you.