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Is an Annuity the Wrong Choice for You?

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Should I or shouldn’t I – that is the question.

Many of our site visitors struggle with the decision to choose an annuity for a portion of their retirement. No one wants to make a poor decision regarding their retirement security yet the volume of commentary on how to structure retirement is overwhelming.

How do you know if you are making the right decisions?

If you are considering an annuity for a portion of your retirement income or safety of principal, we would encourage you to focus on the **guarantees. If you can be happy with the **guarantees, then anything above the or **guaranteed growth is icing on the cake.

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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.

Insider Owners Manual

This week we are sharing with you one of our new annuity tools that we are  making available in our premium section – The Annuity Owners Manual. This concise brochure summarizes the types of annuities and the type of person who might consider these different annuities. Also, it poses a few key questions that you want to get answered prior to sitting down with a local advisor. Click here or on the booklet for your copy.

Dick and Eric discuss highlights of the Annuity Owners Manual and why you’ll want a copy for yourself.

Why do Wives Prefer Annuities?

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Before everyone starts yelling gender discrimination, we know that husbands can prefer annuities too.

However, it is not uncommon for us to have a conversation with men who let us know right from the get go, “I don’t like annuities,” but I have to do something to take care of my wife if I’m gone. As guys, we typically think of ourselves as providers and view it as our responsibility to provide for our families. This should not be construed as being a denigration of  women (although my wife would tell me I’m digging myself into a hole right now) but rather a somewhat stereotypical view of men and stereotypes can have some basis in fact.

So why would many wives like annuities? Well, it’s not actually the annuities but rather what they offer that appeals to most wives. Annuities offer a stable lifestyle by providing a stable, safe lifetime income. Annuities are as close as we can come to a “set-it and forget-it” retirement.

Watch Dick and Eric explain to husbands why their wives prefer annuities.

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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.

Read the article that prompted this weeks entry.

Guess what? Your wife loves annuities

Recently, I was speaking in front of a national gathering of individual investors and traders about a topic that most of these market mavens cared nothing about … annuities.

Because this event was located in a tropical location, these future Gordon Gecko’s were accompanied by their wives, who just happened to be sitting by their loving masters of the stock universe during my presentation.

As it always happens when I speak at these events, as soon I start pointing out that annuities should be in place for lifetime income, lifestyle, and a worry free retirement that doesn’t involve the stock market, wives start elbowing their husbands as a reminder of who wins all arguments.

My 14-year-old daughter’s friend, Eloise, pointed out in a recent shuttle service I provided to their dance class, “every time my mom and dad argue about anything, it seems like my mom wins … so I think my mom has all the power.”

As my daughter immediately agreed and said that it’s the same in her house as well, I turned to Eloise and said that no truer words had been spoken, and that she is way ahead of the game with her insight.

As you know, your wife could give a hoot about finding the next great stock or guessing the future price of gold. Your wife cares about one thing and one thing only … lifestyle. Lifestyle to her is not a five-star mutual fund^. Lifestyle to your wife is knowing that she will have enough money to live comfortably if something happens to you. It’s being able to go see the kids and grand kids. Lifestyle to your wife has nothing to do with the Dow Jones or anything related to Wall Street. The only thing that she cares about (if she told you the truth, and might have already) is having enough money coming into the checking account for the rest of her life.

Here’s where the love affair with annuities comes in. When you add up your pension (if you are so fortunate), Social Security payments, and other investment income, there might be a gap in the amount of required that needs to be filled. Annuities are the only strategy that can provide a lifetime income stream that you and your wife can never outlive. When I mention that statement, that’s when your wife’s elbow hits your rib cage as a subtle reminder that this is the only type of investment she cares about. [Read more from MarketWatch on why Your wife loves annuities…]

Will a Collapsed Dollar Harm Annuities?

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Jack in CA asks; If the dollar goes into a nose-dive,  how safe will it be to own an immediate, fixed or hybrid annuity?

In figuring out how to best answer Jack, we have to speculate on the level or severity of the collapse – if we have total anarchy or a Zimbabwean type of inflation, the paper dollar would be worthless and so would most investments. Do we feel that is likely to happen in the near future? No. Now, that being said, common sense says that if you spend more than you make, eventually you will go broke and our government has to figure out a way to meet its obligations and payoff its debt.

Annuities; just like equities, bonds, and commodities; to name a few, can have a place in a well structured portfolio. Dick and Eric examine the potential effects that the collapse of the dollar would have on the annuity industry and address annuity strategies that are best suited for this particular situation.

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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.

Considering an inflation adjusted annuity? Check out this recent USA Today article from John Waggoner

Should you get an inflation-adjusted annuity?

An inflation-adjusted annuity aims to solve the problem by giving you an automatic cost-of-living increase every year. But the cost is steep.

Most people still have nightmares about math word problems: “If Nate has 37 red gumdrops and Hope has 43 blue feathers, what time will their train reach Altoona?”

If you have a 401(k) plan, you’re being asked to solve a similarly impossible problem: “Assume that R is the amount of money you’ll need to retire, X is the number of years you’ll live, Y is your rate of return, and Z is the rate of inflation. You have no idea what X,Y, or Z is. Solve for R.”

One solution is an inflation-adjusted annuity, which promises to pay you a sum that will rise with the cost of living every year until you die, much as Social Security does. Should you try one? Only if you expect to live long — and even then, you’d be better off waiting until interest rates rise.

The rule of thumb with 401(k) withdrawals is to start by taking out 4% of your portfolio the first year, and adjusting that amount upward for inflation each year. Most times, it’s too conservative: You’d need a $1.25 million portfolio to get an initial $50,000 annual withdrawal. But when the first few years are down years in the stock market, your withdrawals can simply aggravate your losses and increase the chance you’ll run out of money.

Because the stock market is unpredictable, to say the least, some people use an immediate annuity to smooth out some of the bumps in a portfolio. An immediate annuity is a contract between you and an insurance company. You pay the company a lump sum, and they agree to pay you a set amount per month for the rest of your life. If you live to 120, you win. If you join the Choir Invisible the year after signing the contract, you lose, and the annuity company pockets your investment.

The payout is based primarily on an interest rate — what the company expects to earn on your lump sum. As a simple example, suppose you want to invest $100,000. According to Immediateannuity.com, a 65-year-old man could get $548 a month for life — a 6.58% payout rate.

The 30-year Treasury bond yields about 3%, and insurance companies are not magic yield-making wizards. Some of the extra yield comes from the money left on the table by annuitants who have gone to the great field office in the sky.

The rest comes from the insurance company’s own investments, which is why it’s good to choose a financially strong annuity company. You want a company that can still pay, even during economically stressful times. States do have **guaranty associations backing annuity policies, typically to at least $100,000, but it’s best to avoid shaky companies entirely.

While the annuity’s payout is decent, it’s fixed. Let’s assume that inflation averages 3% — the average inflation rate since 1926, according to Morningstar. The effects of inflation are cumulative: After 30 years of 3% inflation, your $548 will have the buying power of $220. Unless you plan to live on toasted plaster, you’ll have to find a way to offset inflation, and a fixed annuity won’t provide that.  [Read More…]

Annuity Guys® Video Transcript:

Dick: Today, we want to give a shout out to Jack in California.

Eric: You don’t know Jack.

Dick: I do know Jack. In fact, this is for and Jack and Sharon. Jack, hey, we appreciate the question. The concern today is what happens if the dollar collapses, what does that do to annuities?

Eric: Right. What’s it going to do to fixed index annuities and hybrid annuities? Excellent question. Now, we first have to define the collapse of the dollar I guess. If we look at it in a Zimbabwean sense . . .

Dick: Or Germany.

Eric: . . . where they’ve had, basically, a decimation of their currency . . .

Dick: Anarchy in the street.

Eric: . . . then the honest answer is nothing can save it.

Dick: Nothing’s going to save it.

Eric: In all honesty, it wouldn’t save the country. Social Security would be messed up. Your pension would be gone.

Dick: Right. Even having gold, you’d need to hire the A-Team to protect your gold.

Eric: Your interests.

Dick: I think that we’re all looking for that answer that is somewhere in the middle. We’re facing a lot of headwinds in our economy. Our government does not look very reliable, at this point, to make the right decisions.

Eric: Right. Peter Schiff is one of those guys that’s been calling for the collapse of the economy because of, basically, the overspending. I don’t think anybody would deny that, as a country, we’ve maxed out the credit cards. Until we start paying them down, we’re kicking the can down the road. We haven’t had a budget in, what, three years on a federal level.

Dick: The debt just keeps rising and rising, and it’s going to have to be paid back. The alternatives aren’t very good. You can raise taxes, which is political suicide, or you can devalue the dollar, which looks like everybody just raising their price. But really the value of the dollar is dropping.

Eric: Right. So your buying power is going kaput. Now, if I own an annuity, am I better off than if I don’t own an annuity?

Dick: Well, I’m going to answer that, but before I do, let me just say this, folks, the topic that we’re on today is complex. It is a very big concern that we talk about regularly with our clients. It’s very important that you do work with a good local advisor, somebody that actually gets it, works from a point of safety and diversification. That’s what we’re really going to talk about today. Your question, Eric, in terms of, if I have an annuity and the dollar starts to devalue, my question would be, same as yours: How far is the dollar devaluing, and did I set my annuity up to offset inflation?

Eric: Right. There are annuities that exist right now, hybrid style annuities, where the income rider is tied to something called the CPI or the Consumer Price Index.

Dick: Right. And immediates will . . .

Eric: They have the ability to, basically, be indexed to that. So those products exist right now if that’s one of the things you’re concerned with. You can set it up. Now, you’re going to start a little bit lower, typically, than you would if you took a level payout.

Dick: When you turn your income on, it’s going to start at a lower level. Yes.

Eric: Right. Now, depending on inflation or that index, you’ll get bumps in your income as those things increase. There are ways to dial in from that, but you’re making a choice to trade, perhaps a higher level now for future safety and security if those things do happen.

Dick: The other aspect of that for those of you that have means, that have the assets to work with, annuities may be one small portion or one moderate portion of your portfolio. It is not the end all and the be all.

Eric: No. We you always talk about asset allocation or diversification. You don’t want to put all your eggs in one basket. It’s really that simple. So having some hard currency. We’ve talked about if you’re worried about the economy as a whole and our domestic crisis, and you think companies here are going to be impacted, you may make the decision to make some investments in companies that are either multinational or overseas.

Dick: Right.

Eric: There are lots of options in securities, bonds, hard currency, gold, silver, platinum.

Dick: Take care of all of it. I don’t want to say in summation, but should we avoid buying annuities with the current economic situation and if the dollar is going to start to see this impact?

Dick: Well, Eric, I think that as we look at this whole situation, I think we want to always be cognizant of how long annuities have actually been around. Annuities go way back to the Roman Empire. That’s where the word comes from, “annua,’ annuity.

Eric: I “annua” that.

Dick: You “annua” that. Then, as we move forward into our modern times, we have annuity companies that have existed for 300 years. Do you think they have seen some devaluing of currencies?

Eric: Oh, yes.

Dick: Do you think they have seen some revolutions? The answer to that is yes, and even those that are quite plentiful in the United States, that are in excess of 100 years old. Insurance companies have a proven record of being able to withstand deflation, inflation, world wars. Not that in a total collapse, an anarchy type collapse that they’re going to be unharmed, but are they worth a diversification in your portfolio to have an allocation towards annuities? I think that any reasonable prudence would say yes.

Eric: Yes. It’s worth considering for a portion of your portfolio.

Dick: Yes. Hey, Jack, thank you for the question. The rest of you out there that maybe now have more questions, send them in, and we’ll get to them as soon as possible.

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

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

Be aware that:

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

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

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

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

by Timothy R. Fussell

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

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

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

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

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

Annuity Guys® Video Transcript:

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

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

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

Dick: We’ve got some already.

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

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

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

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

Eric: You’re good at jumping ahead.

Dick: Jumping ahead of you.

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

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

Eric: Right, so we have growth potential.

Dick: Potential, right.

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

Dick: Contractual **guarantees for the future income.

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

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

Eric: Taxes?

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

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

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

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

Dick: Actually, technically you do.

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

Dick: Through your death benefit.

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

Dick: Right.

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

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

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

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

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

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

Eric: Screwed us?

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

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

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

Eric: He wants to be an accountant.

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

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

Dick: A little secret.

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

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

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

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

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

Dick: Let’s trademark that.

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

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

Eric: Say 15 to 20 years.

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

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

Dick: Correct.

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

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

Eric: Advantages?

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

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

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

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

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

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

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

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

Dick: Thank you.

 

 

What do Annuities Really Earn? No Hype…

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Apples and oranges – what do they have in common? Both are fruits!

Why would we start a discussion about annuity earnings with apples and oranges? When people start looking at annuities, they invariably want to compare them to mutual fund^s or other securities. Commonly, they will start the discussion about the merits of a particular annuity by asking about the “upside” or growth potential. Let us state this clearly – thinking of annuities as accumulation products by comparing them to securities is just plain wrong in the vast majority of scenarios. So let’s not mix apples and oranges.

Do annuities have growth potential? Sure, but do not decide to purchase an annuity expecting high single digit or double-digit gains, especially with today’s economic conditions.

Annuities are safety and security products that should be viewed in the light of their **guarantees. Dick and Eric examine what annuities really earn in this weeks 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.

In addition to your questions, this weeks inspiration came from…

Behind the indexed annuity curtain

By Stan Haithcock at MarketWatch.com

We all saw the original Wizard of Oz movie when they went to see the powerful Oz and were totally in awe until the dog, Toto, pulled the curtain back to show that it was just some goober running a sound board.

That curtain needs to be pulled back on indexed annuities as well because “the show” is getting to be a little overwhelming on the lunch seminar circuit and with the increasingly aggressive online annuity promoters.

First of all, let me explain the details of an indexed annuity (also called an equity-indexed annuity, fixed-index annuity, hybrid annuity). An indexed annuity is a fixed annuity with a call option on an index, usually the Standard & Poor’s 500 Index. The vast majority of the call options are one year in length, but can be as long as five years. The S&P 500 index represents over 90% of the index option choices even though other index selections (Dow, Nasdaq, etc.) can be found in some product offerings. These call options allow you limited participation in the upside of the index (not including dividends).

When indexed annuities were developed a couple of decades ago, they were designed to compete with CD returns, not market returns. They were never put on the planet to be a pure growth product, even though they are sold that way by agents and the online annuity spammers. Realistic and historical (yes agents, these are also called facts) return expectations for indexed annuities should be around 3% to 5% annually. Those annual gains, if any, are locked in at the contract anniversary date, and then a new index option starts.

Please understand that indexed annuities are complex products, and the majority of agents are unable (or unwilling) to properly explain them and usually just focus on a few sizzle points. Below I have listed some of the positive and negatives of indexed annuities and where they might work within your portfolio.

Positives

  • Used with Income Riders for target date income planning

This is how I use indexed annuities for my clients. I also attach contractual death benefits or confinement care benefits when that is the ultimate goal.

  • Downside protection

Because your potential gains are attached to a call option, if the markets go down and the call option expires worthless at your contract anniversary date, then you will not lose any money. Agents use the phrase “Zero is your hero.” That’s a pretty goofy way to put it.

  • Gains locked in

This is a very good feature of indexed annuities. If you have gains from your index option, that gain is locked in permanently, never to go below that amount. Just remember that your upside potential is very limited, regardless of what your agent tells you.

  • Possibility to capture market dips

As an example, if the S&P 500 index goes from 1,300 to 900 in one year, your index option for that year would not credit any gains, but you would start the next index option year at 900 on the S&P 500.

  • Higher actuarial payout for income

Most indexed annuities, when used for lifetime income purposes with attached income riders, have a higher actuarial percentage payout than similarly structured variable annuities#. [Read More…]

Annuity Guys® Video Transcript:

Dick: Today we want to talk about annuities, and we want to get all the hype out of the way, Eric.

Eric: The hype? There’s hype in annuities? Oh my gosh.

Dick: Well, this was inspired by Richard out in Massachusetts, one of our folks that had used the website and we had given him a referral. He sent in a question that basically said, “You know, I’ve been looking at different blogs on the Internet, and they’ve talked about the return, and the annualized return doesn’t seem to be that high.” And that’s true, isn’t it?

Eric: This is where people have the challenge. When they first start looking at annuities, they’re coming from a world where they’ve been focused on accumulation.

Dick: Right.

Eric: When we look at the mutual fund^ industry, everybody talks about, “I did this return, 20%, 30%.” “Oh, I beat the S&P.” That’s the accumulation world. The focus there is on numbers, the return I’m getting.

Dick: Exactly. Right. Is there a little hype in that world?

Eric: Oh there’s a lot of hype. You know, glossy pages with the charts that go like this. Oh my gosh.

Dick: Well, and we can look at DALBAR studies that talk about the individual investor and what they actually do earn, and it’s down below 5%, considerably below 5%. So it’s all over the board.

Eric: But must people have been conditioned to focus on the return.

Dick: Of accumulated money. Right.

Eric: Yes. I’m making this much. I’m making this much. I’m getting this much. That’s not what an annuity is about. It’s not about taking and trying to grow the asset so much as preserve it, because you’ve already done the saving part.

Dick: You’ve already done the work. You’ve built the nest egg.

Eric: What’s the goal of saving? It’s future spending. Saving is really, in this case, future spending.

Dick: Right. So would it be fair, Eric, to say that an annuity is more about security and cash flow?

Eric: Yes. Yes, it would. I would say that would be fair.

Dick: So if we were to boil it down and just get rid of all the hype, and when I say “hype,” I mean the way its presented, it may not really be hype, but it does sound good. We talk about 7% rollups on the income account and 8%. W talk about 5% payouts and 6% payouts. But if we really got down to the life expectancy and drawing the income off an annuity . . . well, first of all, let’s just talk about an immediate annuity. What would the real internal rate of return be on an immediate annuity overall?

Eric: One, two percent.

Dick: Max. One to two percent.

Eric: My thing, when we start talking about annuities, and we’re doing it now, talking about rate of return, first question I have to ask you is: When are you going to die? Then I’ll tell you what your return is going to be.

Dick: Exactly. The insurance company has this figured out statistically, and they know that, overall, your rate of return on this annuity in a statistically generalized averaged sense is going to be in the neighborhood of a couple of percent on an immediate annuity. Right now, with today’s rate, even a little less than that. Yet billions and billions of dollars of immediate annuities are sold. Why do people do that?

Eric: Safety, security, cash flow. We’re going to repeat ourselves a lot here. If you’re going to be focused on return, don’t go here.

Dick: Exactly. I know we both have got a lot to say here. But one thing that comes to my mind is all of the sure bet things that are out there in the investment world, the things that you are told you cannot lose, such as Enron, Lehman Brothers. What are some others?

Eric: Well, GM was always the . . . I grew up in a world where they always said buy GM stock, and you never have to worry.

Dick: Right. Enron? Madoff? So these are things that all look good, but those are all followed by this caveat of past performance is no indicator of future results. We tend to gloss over that and say, “Oh, they just say that.” But that’s there for a reason.

Eric: Right. But it’s a risk-reward aspect. You’re chasing the reward there and are willing to take some of that risk. What we talk about when we look at annuities, we want to take that risk and diminish it significantly so that you have that safety, you have that **guarantee.

Dick: Yes.

Eric: And that’s what we’re focused on with annuities.

Dick: And that’s not for all of a client’s money.

Eric: Not all of your money. That’s right. Asset allocation, spreading the baskets out.

Dick: It’s a further diversification, another layer of protection and safety completely. And now if we get into the very popular indexed or hybrid annuity, there are a lot of things to talk about in terms of that income rollup and how it gets your income up to a certain level by a certain age, which would not be **guaranteed if you were in the market. You maybe couldn’t take that big of an income without depleting your principal much faster. So there is that aspect. But if we just talked about the overall rate of return of that hybrid annuity, we took it like some of these guys do, and they’re very good at their math and their spreadsheets. They spread it out and they show if you start a guy out at 60 years old and you defer him for 5 years or 10 years, with this 7% rollup, you turn it on, and he lives to age 90. What’s his return going to be?

Eric: Like two, three, four, five percent, perhaps. That would be on the high end.

Dick: On the real high client.

Eric: It depends on when you start.

Dick: Two percent on the low and maybe, like you say, four to five on the extreme high, but more like two to there percent would be like the max. They’re are part of the rule.

Eric: Part of what we’re looking at is we’re looking at pieces in today’s environment. Caps right now are structured around what today’s caps are.

Dick: Right.

Eric: So when we’re looking at things, we like to today’s numbers. Now, we expect caps will increase in the future. Can we **guarantee it? No.

Dick: No.

Eric: And that’s what, when we work with annuities, we really like to talk about **guarantees. Because if you’re satisfied with the **guarantee, then anything above and beyond is good.

Dick: That’s right.

Eric: And the same thing is true on the indexing side of these components. Look at what the **guarantee is. That indexing component offers a little bit of a bump. But, focus on the **guarantee.

Dick: Right. Well, folks, I think for today’s topic we want to thank Richard. Thank you Richard for that good question. Eric and I added something at the first of the year that you may not have seen on the blog site. So when you’re through with this, if you’d like, you can actually ask us a question.

Eric: That’s right. We’ve put it out there in a couple different spots. We encourage you . . . as we come up with topics, sometimes it’s nice to know what you want to actually hear about.

Dick: Right. We tried to dispel the hype here and get down to the real rate of return is and then talk about the real reason that you do an annuity and choose an annuity.

Eric: No hype, just answers.

Dick: Thank you.

Are Annuities Improving With The Economy?

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Annuities have been on a significant growth upswing since the equities market started tanking in 2008. So if annuities were more popular when the market dropped, will they lose favor if the economy improves? Don’t tell the mutual fund^ industry, but it would appear that increased annuity allocations are here to stay. Since 2008, consumer surveys of retirees have shown over and over that sentiment has shifted… retirees are no longer focused on just maximizing returns but rather **guaranteeing that their retirement savings will last as long as they do. Dick and Eric look at some of the changes in the annuity marketplace and what those changes mean for you.

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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.

Read the “Annuity Perspectives” Article by Jack Marrion, that inspired this weeks entry.

The End Of The Beginning

In recent months I’ve been looking at the fixed annuity space; from new products to changed older ones, at recent surveys showing how consumers feel about and are using annuities, at census data and at how economic variables are affecting everyone from the individual consumer to the carrier to the global economy. I’ve also talked with people in the annuity world that are disheartened by the events in 2012 and pessimistic about the future of the industry. And yet as I did more research I became more optimistic. In fact the phrase “the end of the beginning” kept resurfacing in my thoughts.

In the early days of World War II Britain experienced a series of defeats. However, in the fall of 1942 they defeated Erwin Rommel’s Afrika Corps at El Alamein and Egypt was saved from invasion. Shortly thereafter Winston Churchill gave a luncheon speech at the Lord Mayor’s house in London. In the speech Churchill said this victory did not mean that the war was ending or even that it was the beginning of the end, but that it was, perhaps, the end of the beginning of the bad times. Now, I am not trying to equate the struggle of wartime Britain with recent difficulties in the annuity industry. What I am saying is that I believe the annuity industry has faced and is working through its problems. While the fixed annuity sector may not quickly soar back to the previous heights we are at least almost done falling – it is the end of the beginning of the bad times. I’d like to share why I believe this to be so.

Bond Yields Have Bottomed

Bond yields reached their cycle low at on 7 December 2012 at 9:43 AM. Well, I might have gotten the time wrong, but there are indications that bond yields have fallen as far as they’re going to. Two indicators of interest rates, yields spreads and leverage, show that financial conditions are much looser than they have been. When the St. Louis Financial Stress Index and the National Financial Conditions Index are positive it indicates there is stress in the financial markets and lending is tight. The charts on the next page clearly show the tension during the 2008 financial crisis. However, for the last several months these indicators have been negative showing that money is available. Indeed, November 2012 was a record month for corporate bonds issuance showing that corporations believed that there would never be a cheaper time to borrow money than now [The Economist, 8 Dec 12. page 74].

Even though the Federal Reserve Board stated in December that they would keep short-term rates low until unemployment is substantially reduced, the reality is the Fed had already shot their bolt and this announcement will have little additional effect on rates. The driver for increasing bond yields is an improving economy. The economy will improve as 2013 progresses and bond yields will also increase. Another factor helping overall rates is that yields on U.S. Treasury bonds and notes are abnormally low relative to corporate debt yields – a hangover from concerns stemming from the 2008 crisis. Even if overall bond rates stay the same Treasury yields will move up as investors realize they priced too much risk into corporate bonds. As long as the U.S. avoids a full-scale recession bonds will pay more interest as 2013 progresses. [Read More…]

Annuity Guys® Video Transcript:

Eric: Today, we’re looking at whether or not the annuity world is improving at the same pace the economy is.

Dick: Well, that depends on what we want to judge the economy’s pace.

Eric: Is the economy improving? I guess is the first question most people would ask there.

Dick: I think generally speaking, folks are optimistic right now about the economy coming back somewhat.

Eric: Here we’re really foreshadowing into 2013. We’re looking, as we expect things to improve if our projections are right and the band aids get applied. We have that nice new skin that we’ve now in the economy.

Dick: Eric, one thing that’s prompted us this week, is this article that we have here by Jack Marrion and he’s looking at different aspects of annuities and how they’re affected by the bond market and by consumer sentiment the popularity or the supply and demand.

Eric: First of all we should talk about how insurance companies make money. It’s pretty basic. They take in and they buy an investment, they get it here, and then they have to pay you out, whatever they make between what they have got there.

Dick: Between a bond yield and their expenses.

Eric: The expense of the annuity payment is where they make their money. They make their money on the spread. What we had seen in the last couple of years is the pull back of benefits. Boy, they really tightened down the minimum **guarantees and all those pieces, almost to the point that some people are saying there is no benefit at all.

Dick: Maybe they even overreacted, that’s what Jack said.

Eric: That’s what Jack is saying here. Here’s the good news. Even if the bond market does not change much or if we do not have that much improvement in the economy, we’re likely to see an improvement in the annuity world, solely because some companies pulled back further and tighter than they needed to. That’s not saying every company did.

Dick: One thing that excites me about this is that obviously, when it comes to new annuities we like to see new benefits or new or better earning possibilities, but what really excites me is that those folks that already purchased a hybrid or a fixed index style annuity as things loosen up, their caps and ability to earn will continue to increase and improve.

Eric: And a lot of people do not grasp that concept. Those cap rates are not set for the life of the annuity.

Dick: Exactly.

Eric: They adjust on an annual basis, typically. Some of them are a biannual, but you’ll see adjustments in those caps. So yes, some people get mad when things go down or lower than when they started, but they also have the potential to go higher than when you started. So if you are a new entrant in the last couple of years, don’t panic. There is a good chance that those caps will increase with you.

Dick: That’s right. Really what’s more important for most folks, like our clients that we have worked with, is really the contractual **guarantees on the income, is more important than the caps or the cash accumulation.

Eric: We always say the **guarantee is what you hang your hat on, so if you can live with the **guarantee and that’s not going to change. Those **guaranteed pieces don’t change.

Dick: For those of you who already have your annuity, your contractual **guarantees are probably even better than what’s going to be there in the future.

Eric: The other change that may not be so positive in a sense, is that a lot of these rollups and ratchets we’ve seen in the last couple years 7.0-8.0%. Those are the things that make…

Dick: They’re now thinking about pulling those back.

Eric: Because those are long-term pieces.

Dick: They’re liability. Folks, a lot of times and we’ve sat and talked with different ones that have been a little skeptical. Like “Well, the insurance company’s making money. They’ve got it all figured out and they can afford to do this 7.0% or 8.0% or whatever.” Well, when they sit down and they work the numbers out, sometimes they have to pull back on those, because it is too generous.

Eric: So if you’re looking at one of those hybrid styles right now. We do not want to tell you to wait to look for something better, because the better may already be here on that side.

Dick: Right, on the contractual **guarantee side.

Eric: What we’re hearing is kind of what the expectation for the changes in the upcoming year may be more cash values, more increases in cash potential and benefits, based off of actual cash, rather than these **guaranteed withdrawal benefits.

Dick: Right, which is really the pension aspect of the annuity that so many people use effectively.

Eric: And talking about pensions. Jack talks about the changes in people’s perceptions. Ten years ago, when people were actually offered company benefits about half of them would take the pension style and the other half would take the lump sum.

Dick: Right. It’s changed a lot.

Eric: Today, almost 90% of the people or about 90% of the people are taking the pension benefit, so what’s that saying?

Dick: They’re saying “I want the annuity.”

Eric: They want the **guarantee and I think that’s the aspect that their attitudes are changing. They’re not worried about accumulation, so much as worried about having money that’s around as long as they are.

Dick: Well, even annuity owners in the studies that he mentions in here, and folks we will put this out on the blog, so that you can look at it.

Eric: It should be down below, portions of it anyway.

Dick: But one thing that Jack points to from one of his studies, is that of the people who actually own annuities, about 73-75% of those people actually, feel that that’s a very important part of their retirement plan. It’s a strategic allocation to their overall retirement strategy.

Eric: It’s not going to be part of what we are talking about here, but I just read another study that talked about the inclusion of a fixed indexed annuity in a retirement plan and the probability for success and having money at the end.

Dick: Right, I was looking at that also.

Eric: Your probability of success when it includes a fixed annuity versus, either a variable annuity# or just using stocks and bonds or mutual bonds, your probability of success is greatly enhanced, when you had a combination of those pieces. We’re starting to see more and more people consider annuities as a replacement for bonds.

Dick: For bonds right, for that portion of their portfolio.

Eric: Because it takes that degree of risk from the increase in the bond prices or the change in the bond prices.

Dick: Well, there is another layer of insulation, between the bond market and the investor and the consumer.

Eric: You put that portion of liability, really on the insurance company to manage.

Dick: It also gives another aspect which is of protection, which is the longevity aspect the insurance company takes on the longevity risk.

Eric: The last point that I want to make, as far as what Jack talked about. He talked about so few consumers truly understand how annuities work, and that’s probably why you’re sitting here listening to us at this stage, is you’re wanting to learn more about how annuities and how work and how they function. With all these innovations and these changes, the one thing we always say is work with a local financial advisor, because they’re the ones that keeping up on the innovations. It’s their job to take what you’ve learned now, and enhance your ability to pick the right product and right solution for your needs.

Dick: According to the study, less than half of the people feel like they have any knowledge about annuities that are all in this retirement group. It’s the largest group of retirees that are facing retirement that we’ve ever seen. Less than half of them have any real knowledge and only about 5.0% feel that they’re very knowledgeable, so there’s just a lot of room, folks to learn about annuities and know how they’re going to fit.

Eric: So can annuities be part of a successful retirement plan in 2013?

Dick: Absolutely and I do think that as the economy improves that these annuities will take their place and continue to innovate and improve and also very fortunate, for those who already have an annuity that it’s going to be able to keep up.

Eric: Good deal. Thank you very much, for tuning in today.

Dick: Thank you.

 

Can Annuities Solve the Retirement Challenge?

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

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

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

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**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.

How about these Retirement Factoids….

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

Factoids courtesy of the Sloan Center on Aging and Work

Stop Annuity Procrastination: New Years Resolution!

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

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

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

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**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.

Read More about Financial New Year Resolutions…

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

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

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

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

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

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

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

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

By Brian O’Connell of The Street

Annuity Guys® Video Transcript:

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

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

Dick: 23 years waiting for it to get better.

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

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

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

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

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

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

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

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

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

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

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

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

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

Dick: Just completely overwhelming.

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

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

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

Dick: That’s right.

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

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

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

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

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

Dick: Thank you.

Annuities and Christmas – Do They Have Anything in Common?

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Only Annuity Guys® like us would sit around the office and discuss topics like this… Annuities and Christmas – what do  they have in common? Are there any good annuity Christmas Carols? You have probably never heard some of the songs we think up in our office like “All I want for Christmas is my two fun annui-ties”, “Hark the Herald Angels Bring – Income for Life”. Ha-ha all in fun folks!

Watch Dick and Eric’s short video and enjoy a little holiday humor as they express their appreciation and thankfulness to each of you.

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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.

Annuity Guys® Video Transcript:

Eric: Today we’re looking at what does Christmas and annuities have in common?

Dick: Do you expect me to answer that, Eric?

Eric: No, I expect you to tell me. I expect you to know the answer.

Dick: Well, it’s not Santa Claus, but I would say its **guarantees.

Eric: Okay, it’s not getting clean the chimney sweep.

Dick: No, I think that the thing that they would really have in common is that we know that every year what’s going to happen, Christmas.

Eric: Christmas, and it’s going to start coming, about 30 days beforehand.

Dick: And if we have annuities, what’s going to happen every year?

Eric: You’re going to know the check will be there in 30 days.

Dick: The check’s going to be in the mail. Yeah, folks we just want to say thank you, to those of you that follow our videos, and maybe you’re just watching us for the first time, but Eric and I enjoy this. We have a lot of fun and we just want to take this time to appreciate you and those that follow us.

Eric: Yeah, we really do enjoy your comments when we have a chance to have a discussion with you. It’s nice to hear that what we’re doing truly is maybe, our gift to you, in this Christmas season and how we’re able to kind of impart our knowledge, in what we learn about annuities, and try to give it to you in layman’s terms, so that you truly do understand kind of how these things work.

Dick: Well, it makes a big difference with our clients also, when we work with clients over the years and we go through ups and downs of the economy and we see clients that have very stable portfolios and situations they’re very happy with. It just gives us something to really be appreciative for when we have those meetings.

Eric: Yeah. I’ll tell you what. There’s nothing more joyful in my life than when I get a client that calls me up and says, “Hey, I just got my anniversary notice…”

Dick: And I got an increase.

Eric: “… and they’re sending me more money than they did last year. Is something wrong?” And I can say: “No, that’s how it was designed.”

Dick: Right, that’s what we talked about.

Eric: Those are the things that we truly enjoy and the things the client experiences that make this job really, truly part of what we enjoy doing on a daily basis.

Dick: Right, so we just wish you and your family a merry Christmas and don’t hesitate to call us, if we can help you with anything or just give you some advice, and obviously we’ll help you with a referral, if you want to meet with somebody face to face in your area, so you have a Merry Christmas. Eric, you want to add to that?

Eric: Nope. Just happy holidays and hopefully we’ll see you next year.

Dick: Thank you.

 

What Percentage of Your Portfolio Allocation Should Be Annuities?

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

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

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

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**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.

GAO Report Tells Americans: Buy More Annuities!

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

  • Delaying the age when you elect to start receiving Social Security payments; and
  • Converting your cash-balance defined benefit pension into a lifetime income annuity rather than take a lump-sum payment upon retirement.
Social Security is Not Enough for Retirement

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

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

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

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

by Jim Fink on April 19, 2012 at Investing Daily

 

Annuity Guys® Video Transcript:

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

Dick: Exactly 50%.

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

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

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

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

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

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

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

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

Dick: Cost of living adjustments.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dick: Thank you.