Selecting the Best Annuity & Retirement Income Advisor

Please don’t think that we are anti-pension. We love pensions and the **guarantees they offer; however, lately we have been talking with people who were counting on pension benefits to be there when they [continued below video…]

 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.

[continued]…retired – yet are now fearful that due to “unfunded pension liabilities”, they may not receive the benefits they worked so long to achieve and now feel forced to take an unfair lump sum buyout.

Pensions are **guaranteed nationally by the Pension Benefit Guaranty Corporation (PGBC) and they help advise employees impacted by lost or failing plans. It should be noted that most pensioners receive their full benefits even when they are administered by the PGBC. So, why the concern? The PGBC is currently running over a 60 billion dollar deficit due to the number of recent bankruptcies. Congress is expected to try and close the gap by increasing the premiums due to the PGBC, which are charged on a per participant basis; however, many suspect that increases in those premiums will just continue to increase the number of companies dropping pension plans and programs altogether.

So, what happens when a solvent company wants to drop their pension program? The company typically has two options; they can offload the liabilities of the pensions to an insurance carrier to fulfill the obligation or they can offer a lump sum payment that covers pensioner’s benefit.

Just because you are offered a buyout does not mean you should jump at the option solely because of the risk of the entire system. Most pension benefits are “richer” than what is typically available from an insurance company issuing a new annuity in the commercial market. Thus, when you are offered a buyout, you have to examine the whole package and ask yourself a number of questions, such as;

• What are the benefits offered versus what is available commercially?
• What is the financial status of my company’s pension fund and why are they offering a buyout?
• Do I need additional benefits for my family or spouse not covered under my existing plan?
• What happens if the PBGC takes over my benefit?
• When do I need the money?
• Would I rather have more flexibility and manage my own money with securities, or annuities, or both?
• Do I want a benefit/lump sum that could be passed onto my heirs? (Especially if you have a short life expectancy due to health)

If you determine that accepting a buyout is the best move, you still have the option of purchasing a level or increasing  now or in the future from an insurance company. We believe that highly rated insurance companies offer a higher degree of safety and stability than most financial instruments offer due to the high level of assets and reserves they are required to maintain. Also, with annuities, you have a number of options available that allow for income **guarantees combined with the flexibility of still maintaining full control over the majority of your dollars at all times.

In summary, if you are offered a buyout, take the time to carefully consider your options so that you can make the best decision possible. It would be wise to consult an advisor with experience and expertise who can help you carefully balance all the possible pluses and minuses prior to taking a lump sum buyout.

Here is an exerpt from Kiplinger’s that is a great read for anyone interested in more info on this topic.

Put Your Pension to Work

By Sandra Block, From Kiplinger’s Personal Finance, January 2016

How you decide to take this endangered asset may be crucial to a secure retirement.

Fretting about how to manage your pension is like complaining about the cost of winterizing your beach house. Lots of people would love to have your problem.

Only about 18% of private-industry workers have a defined-benefit pension. Less than one-fourth of Fortune 500 companies offered a defined-benefit plan to new employees at the end of 2013, down from 60% in 1998, according to Towers Watson, the human resources consulting firm. The number is much larger for public-sector workers; about 80% of them have a traditional pension.

If you’re eligible for a traditional pension, you’ll be faced with important decisions that could affect your financial security, and they’re usually irrevocable. That means when you retire, you’ll need to do more than turn in your security badge and wait for the monthly checks to roll in.

Backing away from defined benefits

The move away from traditional pensions reflects several trends. Employees are living longer, which increases the cost of providing a lifetime monthly payment. Low interest rates have reduced pension funds’ investment returns, requiring com­panies to put more money into their plans to avoid a shortfall. Government regulations designed to protect pension participants have increased the cost of offering and maintaining defined-benefit plans. Finally, companies used to view pensions as a way to attract and retain good employees. But these days, a benefit that rewards longevity is a lot less valuable because workers change jobs every 4.6 years, on average, according to the Bureau of Labor Statistics.

Even if you’re among the minority of private-sector workers covered by a pension, you’re not immune from efforts to reduce pension costs. AT&T, Boeing and IBM have joined other companies with big pension obligations in switching to a cash-balance plan. These hybrid plans combine features of a 401(k) and a traditional pension. Benefits from a traditional pension are typically based on a participant’s salary during the final years of employment, but with a cash-balance plan, benefits are accrued evenly over time. When a company converts, participants are usually entitled to the benefits they’ve earned to date under the traditional formula, with future benefits based on the cash-balance calculation. For longtime employees, the shift can result in a big cut in benefits.

Other companies have frozen pension benefits. The number of plans with frozen benefits rose from 10% in 2003 to 32% in 2011, according to Russell Research, a financial research firm based in East Rutherford, N.J. Many companies have cushioned a pension freeze by providing higher contributions to workers’ 401(k) plans. That could pay off for young workers who haven’t accrued much in the way of pension benefits, but a freeze can be costly for mid-career workers. Their future raises and years of service won’t be factored into their pension, and they’ll have less time to make up the difference by contributing to a 401(k), even if it comes with a generous employer match.

In the past, pension participants could count on the payouts they were promised once they started receiving benefits, but that’s changing, too. A new law allows multi-employer pension plans to cut benefits for current and retired workers. These plans typically provide coverage for union members who work for different companies, usually in the construction, manufacturing and trucking industries. Because of a decline in employment in those sectors, the plans have come under severe financial stress. In October, the Central States Pension Fund, a multi-employer plan that covers more than 400,000 participants, proposed cutting its benefits by an average of 22%. Some retirees will see their benefits cut by up to 60%.

A nice problem to have

Carin Hoch, 58, vice president of real estate for NuStar Energy in San Antonio, vividly recalls a meeting she and her husband, Ron, had about five years ago with their financial adviser to discuss financing a retirement home. After reviewing their salaries, retirement savings and other assets, the adviser turned to Ron and said, “She’s a keeper.” The reason: Hoch will retire with a traditional pension.

Hoch hasn’t decided whether she’ll take her pension as lifetime payouts or a lump sum when she retires. The Hochs have other sources of retirement income, including 401(k) plans, but having a pension in the mix has given them options they wouldn’t otherwise have. It has made it possible for Ron to retire at age 59 so that he can help care for Carin’s father, who is 93. It will allow Carin to retire in four to six years. It even helped them get a lower interest rate on the mortgage for their retirement home because it showed “financial stability.”

The couple plan to use the income from Carin’s pension and Social Security to pay for their living expenses. They’ll spend money from their 401(k) plans on travel and other discretionary items. Considering what can happen in the stock market, Carin says, having a pension “really gives us a comfort zone.”

Not only that, but retirees like the Hochs can invest money in their retirement accounts and other savings more aggressively, which offers the potential for higher returns. A monthly annuity payment “is like a bond portfolio,” says Charles Sachs, a certified financial planner in Miami. “You can buy riskier assets because you have this cushion of dollars coming in.”

Lump sum versus lifetime payout. If, like Hoch, you’re covered by a pension, this decision may be the most important one you’ll face when you retire. As employers look for ways to rid themselves of costly pension liabilities, they’re increasingly offering to pay departing employees a lump sum in lieu of a lifetime annuity payout. Figuring out which option is right for you will depend on a number of factors, ranging from the size of the lump sum to how long you expect to live.

See more information and details at Kiplingers.com

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If you are a prospective annuity buyer you should consider this new strategy for good reason. First and foremost, these are uncapped indexes with seemingly unlimited upside potential; however, before any irrational exuberance kicks in… [continued below video]

Video: Annuity Guys Dick and Eric discuss the pros and cons of the new low volatility indexes.

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. 

and you sign the next annuity contract you see, please understand that each of these volatility control indexes does have some limiting factors. One such limiting factor used to increase upside potential is the result of a mathematical formula that works similar to a tactically managed investment account that moves in and out of market allocations based upon predetermined triggers. For example: in times of higher volatility these indexes will often move more toward a safe money strategy of weighting more of the index in a cash or bond position. Conversely, when the volatility is low the index will be weighted more toward the equities side.

Another limiting factor of these uncapped indexes is the ability for the insurance company to apply a standard fee or a spread charge. The spread charge/fee is the most common cost associated with these uncapped indexes. It allows the insurance company to take the first few percentage points of growth (typically 2-4%) and then credit your account with everything above that amount. For example: if the spread is 2.0% and the index gains 8.0%, your account will be credited 6.0%. What makes these spread fees more attractive than other charges? If the index has a down or negative year, there is no charge or cost to your account. Just to be clear, with all fixed index annuities your principal is protected and if the index finishes negative, your account will be credited at 0% – it will never reduce your account balance.

Not all of these uncapped indexes were created the same – some are easier to track and have ticker symbols and locations you can find online. Others appear to have been created just for the insurance company and the only research available on them is available through the insurance companies brochures.

Perhaps the biggest warning we can share with these uncapped volatility indexes is the need for realistic expectations. We have seen the historical numbers showing annual gains of 15-20% and they look wonderful, but don’t be wowed by the outlying numbers. Realize that these indexes were designed to provide modest gains that should allow you to share in a portion of the success of the index in the good years while protecting you from losses in the bad years. If you enter an annuity contract expecting stock market type returns, you will likely be disappointed.

This strategy is the current “rage” in the industry. It seems like every insurance company has released a new annuity or a new indexing strategy which utilizes an uncapped low volatility index. So you need to understand how these newer indexes work and if this strategy fits your risk profile.

As annuity guys, we appreciate this innovation and this strategy because it is easier for most clients to understand and grasp than explaining participation rates and index cap limits.

The post Can a Hybrid Annuity Uncapped Index Pay Higher Interest? appeared first on Annuity Guys®.

Watch as the Annuity Guys® examine the proper use of a 1035 exchange.

**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.

Before we proceed any further, we do want to make sure everyone realizes that we are not advocating for exchanges of annuities. Annuities are long term products designed for retirement and replacement of annuities can mean a loss in benefits and potential to incur surrender changes and fees. Consequently, we would recommend working with an annuity specialist who can provide you with specific benefits and shortfalls needed to be considered  prior to exchanging an annuity.

The most common time a 1035 exchange is employed is at the end of the contract term which typically runs concurrently with the surrender period. If the insurance company has reduced the benefits or **guarantees on the annuity, consumers will oftentimes solicit new quotes to see if anything better exists. If they are so fortunate as to find a new annuity with better benefits, the account owner can transfer to the new company without incurring any tax consequence by utilizing a 1035 exchange.

A 1035 exchange is typically completed by filling out the appropriate transfer paperwork with the new carrier.

Lastly, not every transfer qualifies for tax shelter under the 1035 Exchange. You, for the most part must transfer the same insurance product type for the same insurance product type. This means you can swap an annuity for an annuity or life insurance cash value for an annuity but you cannot trade an annuity for a life insurance policy since life insurance is tax free and not just tax deferred like annuities.

Should You Exchange Your Variable Annuity?

Courtesy FINRA

If you have a life insurance or annuity contract, you may have been approached to exchange it for a new model, one with better or the latest features. You need to know that even though tax law makes the exchange income tax free and the new contract may sound better for you, you may be losing—not gaining—if you make the exchange.

We are issuing this Alert because we have found investor confusion about variable annuity^# exchanges, and we have brought cases where investors were investing in variable annuities^# that were not suitable for them.

This Alert will give you information on how to determine if an exchange is right for you, and how you can find out what you need to know to make a smarter decision.

Some Background

You may know that an annuity is a contract between you and an insurance company where the company promises to make periodic payments to you, starting immediately or at some future time. You buy the annuity either with a single payment or a series of payments.

You should also know that annuity contracts come in three flavors: fixed, variable and equity-indexed. Fixed means that the earnings and payout are **guaranteed by the insurance company. Variable means that the amount that will accumulate and be paid will vary with the stock, bond, and money market funds that you chose as investment options. Unlike fixed contracts, variable annuities^# are securities registered with the Securities and Exchange Commission (SEC). Sales of variable insurance products are regulated by the SEC and FINRA. Equity-indexed annuities (EIAs) have characteristics of both fixed and variable annuities^#. Their return varies more than a fixed annuity, but not as much as a variable annuity^#. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity^#. [Read More from FINRA]

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Eric and Dick examine one of the most unknown or misunderstood aspects of annuities available today’s market.

**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.

Definition of ‘Free Look Period’

A period where a new annuity owner is able to terminate their annuity contract without penalties or surrender charges. A free look period often lasts for 10 or more days (depending on state law and the insurer’s terms), allowing the contract holder to decide whether or not to keep it; if he or she is not satisfied, the contract purchaser can receive a full refund effectvely releasing them from the annuity contract to re-consider or choose other alternatives.

Investopedia explains ‘Free Look Period’
During the free look period, the purchaser can continue to ask the insurer questions regarding the contract in order to better understand the policy. If refunded, the amount given back may equate to the value of the account at cancellation or to the amount of purchase payments, depending on the state.

Annuity Guys® Video Transcript:

Dick: Eric, you know most people don’t realize they actually have a 100% money-back satisfaction **guarantee on an annuity.

Eric: That sounds awfully tempting. Now you have to explain does this last forever for as long as I own the annuity? Oh okay, so the 100% money-back…

Dick: No, there’s a catch. You have a window of opportunity.

Eric: Could this be the free look period?

Dick: This is the free look.

Eric: Okay, so now when you say free look, now we have to explain free look.

Dick: Well, the states each state has decided that this is too big of a decision to not have a time to look at your contract, your annuity contract. A time period where you can look at your annuity contract, you can reassess your decision, and have that time period they call that free look.

Eric: Okay, so I’ve decided I want to purchase an annuity. My friendly agent shows up at my door. Mr. Van Dyke here is your policy. Congratulations, you own an annuity. So is that when the clock starts ticking?

Dick: That is when the clock starts ticking, and folks what you’ll typically have is a delivery receipt that’s signed, and when that delivery receipt is signed from that point forward, you have this period of time that’s **guaranteed by every state. That time period will vary. Each state has its own limitations on that.

Eric: Minimums, the minimums are…

Dick: Ten days are the minimum.

Eric: I don’t think I’ve seen one less ten days.

Dick: Not less than 10, but some up to 30. I don’t believe they go beyond 30. Now a lot of states will have a say 10 day, but yet the company will give 30 days.

Eric: Right, so sometimes the company’s **guarantee is better than what the state minimum is, so that provision that allows us to review the policy at our discretion, we’ve taken ownership of it; it’s in our hands, we can then truly go through it; without any penalty or ramification other than I get my money back.

Dick: Correct, and the importance of this Eric, we’ve found in our own practice so many times people have hesitation from different viewpoints. Sometimes it’s a hesitation just to get started, because their afraid once they get started and they start moving down a road, they like something, they start to question if they should move forward.

But what we’ve really been able to help our clients with is understanding that they actually do have this 100% money-back **guarantee, so that they can actually move forward with confidence. That even at the point where they’ve made their decision, the money has transferred, the company has it, they now have their contract, we can still make changes.

Eric: Right, you can still undo.

Dick: It can be completely undone, right.

Eric: It’s the major undo button, and that’s what I think works to the consumer’s advantage.

Dick: Yes, it does.

Eric: So it’s an understanding that even once you’ve made the decision, you’ve got the policy in front of you, and that’s I think the key thing. You’ve actually got what the insurance company is going to present you with. All the details, the documentation those things should be explained within the documentation.

Dick: True.

Eric: So as the agent goes over it with you, if for some reason there’s something you don’t like, you have that opportunity to still get out of that initial decision. Some people have buyer’s remorse, and we always talk about it. This is your return. Typically, you only get to do it once, so you should feel comfortable about all those decisions.

Dick: A good understanding about what you’re doing and know that your comfort level is pretty strong.

Eric: Right, and so if you’ve gone in. You’ve got the policy. You’ve asked the questions and for some reason you don’t feel good about the answers or whatever, you’ve got a period of time to either one, do some additional research, make some additional calls or to back out.

Dick: Eric, I do have to say that there are what, I guess I would call bad advisers or bad agents that don’t like this provision, because basically they’re closers. They want to go in and close an annuity and sell an annuity, and they’re not so concerned about what the clients getting. They’re more concerned about their own benefit.

But a good adviser, a credible, serious financial planner or retirement planner will actually take their time and they actually like the free look provision, because they want the client to be very comfortable, with whatever it is they are deciding.

Eric: For people like us that take pride in our practice, in what we do, we want to make sure you fully understand everything you have. Everything has pros and cons.

Dick: Right, there are tradeoffs in everything.

Eric: It’s all part of the understanding process. We’re not saying you can eliminate the cons by using a 100% money-back **guarantee in the free look provision. It’s just understanding what you own and that you’re comfortable, with all of the aspects of what you’ve purchased.

Dick: Right and when we even look at our own practice, we go back over the last seven years or so, how many free looks have we had? One; and that was just changing life circumstances that caused this person to have to rethink what they had decided, but it really can really help relieve some of the stress, from the client being able to make that decision, and at the same time make a good decision.

Eric: Yes.

Dick: So is there really, when we really think about it, is this really a 100% money-back **guarantee?

Eric: It is, because you can undo. Now the big caveat there is the time frame. You have to do it within that provision. Knowing you have at least 10 days I think for every state, but understanding that’s that your time frame. You’ve got it. Look at it. That’s your time. Once those days are gone, so is that provision.

Dick: And there’s nothing wrong, folks with asking your adviser right up front, how long would I have to look at this, before I would actually have to pretty much, stay with my decision. And that doesn’t mean you are going to free look it. It just means that you really want to know what your rights are.

Eric: Right, you want to understand everything that’s there. I think we’ve covered it.

Dick: Yes, we have. Thank you for joining us today.

Eric: Have a great day.

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On the most basic level, a hybrid annuity is a fixed index annuity with an income rider attached to it.

Hybrid annuities can help to resolve the concerns of retirement income by offering **guaranteed annuity rates for growth on annuity income accounts. They also such as long-term care funding––while still providing one with a regular income. These annuities have the potential to solve several types of needs in retirement.

A hybrid annuity essentially works the same way that a regular annuity does, in that making an allocation begins by choosing the hybrid annuity that meets key retirement objectives and then funding the hybrid annuity contract with a licensed agent is the final step.

Dick and Eric look at the Hybrid Annuity in this short video explanation.

**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.

Annuity Guys® Video Transcript:

Dick: And folks as you can see at this point, we’re going to go into one more type of annuity here, which is really no annuity at all. It’s a combination of all the above, but as you can see, every annuity has so many different aspects and there are good aspects to each annuity that you really want to think this through.

You want to put some real thought into it. You want to work with an expert that can help you think through all of the variables, and the possibilities and really zero in on, what really is going to work best for you, what’s going to be most suitable. And maybe, as Eric said earlier, it’s no annuity at all.

However, annuities do answer some important questions to secure retirement, securing retirement income and one of the things that we want to talk about here, to just kind of wind it up is something that you’ll find terms over the internet and different ones that are talking about it, and that is a hybrid annuity, and what is different about a hybrid annuity? Eric, I’ve been talking here again. I’m getting you starting on everything. Go ahead let’s start off on a hybrid.

Eric: The hybrid annuity and again, we’re building here so you’ve got your fixed index chassis. Now when you start adding income riders onto a fixed annuity. . .

Dick: Right. And I think that’s, I just want to kind of zero in on that point you made, and that is that it is a fixed annuity. So first of all, we’ve got safety. It’s a fixed annuity then it’s indexed, so we add the indexing option.

Eric: That’s one of the options. You can also take that **guaranteed number. . .

Dick: Just a fixed…

Eric: … is just a fixed return. So those are all pieces, it’s that fixed annuity chassis, and then you’re going to add on top of it, usually the key component is the income rider. So we’re adding an income rider which gives us some of that immediate annuity flavor.

Dick: An income rider **guarantees.

Eric: Right, so what’s the one thing we love about an immediate annuity? It’s that income **guaranteed for life. Now wouldn’t we like to get that for life, without having to give up the lump sum?

Dick: Yes.

Eric: And that’s where the hybrid comes in. It’s that contractual income for life **guarantee, but without having to give up access to the whole.

Dick: Eric, and in our experience and I’m just going to throw the question to you. I could answer it, but in our experience how close can we come with the hybrid annuity, to matching the income of an immediate annuity, where we’re **guaranteeing it for life.

Eric: We come very close typically. There’s usually a couple percentage points difference. Where that fudge factor comes in per se is how long is it going to be in deferral? How long are you going to live?

Dick: What’s the age of the person?

Eric: Right, there are unknown variables that come into play, but the nice thing is we are able to **guarantee, typically a lifetime income higher than you would get, if you just left your money in liquid assets…

Dick: Oh, absolutely

Eric: … that you pulled out, because with a degree of certainty with an annuity you’re going to get that lifetime income. With the liquid assets you have to kind of take the ups and downs of the market and have that little bit more uncertainty. So this income rider…

Dick: You don’t have the contractual **guarantees that the annuity will give.

Eric: … will still give you access to the cash, the majority of your cash. I would say is probably the best way to think of it, with also using those life terms.

Dick: And that’s what I kind of say, is having your cake and eating it too, because with the hybrid style of annuity you can not only **guarantee income for life, but you can pass a lot of money on to the next generation to your heirs, if you haven’t used the money all for your income. And that depends on how long you live, and how much money that you actually take out of the annuity, where with an immediate annuity you’re going to leave very little, if any to the next generation. With the hybrid annuity you could leave the majority of it depending on life expectancy and that type of thing and you can still **guarantee your income for life. So if you happen to live a long life, now it is true if you use all of that money up, because you live a long time, then you really aren’t going to have—your income is going to continue as long as you live.

Eric: It’s an annuity, long time income.

Dick: But you won’t pass money on, because you’ve used it up.

Eric: If you spend all your money, if you drained all your savings accounts, in this case if you drained the annuity of the cash they will still pay you that income for life or whatever that contractual **guarantee amount was. Now you will not have anything to pass on to heirs, if you live long enough.

Dick: And you spend it, but they’re income will continue.

Eric: And that’s the best **guarantee you could have. You won’t out

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