Every night, it seems that the media cannot wait to tell us how bad it will be when it happens – and whose fault it will be. One talking head tells us the sky is falling followed by a response from another talking head telling us that it is not likely that we will let the sky fall all the way – because no one in their right mind really wants to see that happen.

So, rather than spread the doom and gloom, the Annuity Guys® look to answer the questions that really matter to people who are getting ready to retire and those considering annuities for a portion of their retirement.

Watch as Dick and Eric discuss:

• What is going to happen to your retirement if the political wrangling in Washington continues?
• How would a federal government default affect bonds and annuities?

**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.

Obama Says Real Boss in Default Showdown Means Bonds Call Shots

By David J. Lynch and Cordell Eddings | Bloomberg

President Barack Obama knows who is the boss: the bond market.

“Ultimately, what matters is: What do the people who are buying Treasury bills think?” the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation’s debt.

Even with the U.S. budget deficit down by more than half since 2009 as a percentage of the economy, the Congressional Budget Office says the government this fiscal year will need to borrow an average of almost $11 billion each week. That’s why Obama is so sensitive to what investors will tolerate.

“The market is the final arbiter of any policy, the ultimate barometer and enforcement mechanism,” says Russ Certo, a managing director at Brean Capital LLC in New York. “The market holds risk-takers and policy makers accountable.”

After weeks of confidently expecting a resolution of the standoff in Washington over the government shutdown and the debt ceiling, bond investors this week began to betray nervousness in their approach to short-term government borrowing.

The yield they demanded at the Oct. 8 auction of four-week Treasury securities almost tripled from a week earlier, Treasury Secretary Jack Lew highlighted in testimony before the Senate Finance Committee yesterday. The government was forced to pay 0.35 percent for four-week borrowings, up from 0.12 percent.

Endorsing Deal

The White House yesterday endorsed a short debt-limit increase with no policy conditions attached, signaling potential support for a Republican plan that would push off the lapse in U.S. borrowing authority through Nov. 22 rather than Oct. 17. Rates for all Treasury bills maturing through Nov. 14 fell in response, while those with due dates between then and Jan. 2rose. At a meeting with Republican leaders later in the day, Obama neither accepted nor rejected the party’s plan. The two sides will continue discussions.

Obama’s deference to bond investors is reminiscent of the last Democratic president, Bill Clinton, whose economic agenda in 1993 was eclipsed by demands for deficit reduction. The belt-tightening was followed by four straight budget surpluses later in the decade, prompting Alan Greenspan, the then-Federal Reserve Board chairman, to predict the end of the Treasury market. Bond buyers’ clout ebbed.

More than a decade later, surpluses are a fading memory and the bond market has regained its swagger. Yet unlike in the Clinton era when the danger of rising yields kept government spending in check, the market now is exercising discipline only after several years of record federal outlays and borrowing.

‘2008 Event’

“The one market that is behaving more as if a 2008 event is around the corner is the T-bill market — one must wonder if this is the proverbial canary in the coal mine,” David Rosenberg, chief economist at Gluskin Sheff in Toronto, wrote to clients this week.

Investors’ sudden awareness of the danger in Washington also can be seen in the difference between what banks pay to borrow from each other and the yield on one-month U.S.government debt. This so-called TED spread turned negative this week for the first time since Bloomberg began collecting such data in 2001, meaning investors regard banks as a better credit risk than the U.S. government.

Jack McIntyre, who oversees $44.5 billion at Brandywine Global Investment Management LLC in Philadelphia, said slow economic growth, low inflation, and accommodating central banks explain why 10-year Treasury yields are little changed from Obama’s first month in office, even as federal borrowing has soared. […Read More at Bloomberg]

Transcription:

Eric: Hi, I’m Eric.

Dick: And I’m Dick. We’re the annuity guys. And Eric, big government shutdown.

Eric: Government shutdown. We’re talking about right now obviously the United States is kind of imperil I guess where the people is like threat… the looming…

Dick: We’re on the threshold… we’re on the brink of disaster…

Eric: That’s right. Here comes the default, we’re all going to the heck of a hand basket. You know, we’ve already seen what happened in Greece and all of Europe over the last couple of years…

Dick: Which is very real and stronger markets into total mess and we’re feeling a little of it.

Eric: Yes. So, the threat of default a lot of times we go through this political pressure in the economic market and what we see is how they react and they keep on trying to anticipate what they think the government is going to do…. and I think we finally saw the first the market is kind of blink just here recently and it’s like they said “I don’t know if I want to own your death?

Dick: And political will tends to waiver very quickly and we were reading an article on that this morning; but political will is very quickly dictated to by the markets and politicians think that somehow they’re going to dictate a policy just based in a vacuum of what they want and they realize real quickly that they can’t do that.

Eric: Well, and I guess we should get a little bit history when we start talking about annuities and how annuities are impacted by bonds, it’s kind of a mixed bag really because you would toy to think when bond rates go up so do the rates on annuities which is generally because you have insurance companies are buying bonds to basically pay off their annuity holder.

Dick: Yes.

Eric: but when you have annuities that are ricocheting up and down and you have instability in the market, that’s really what makes a lot of people nervous.

Dick: Right. Well and the annuities, generally speaking Eric, what they do so well is they insulate against the volatility of the market and the risk in that is in most portfolios, and as you well know when you go back to the just the standard portfolios that we’ve all been recommended is generally everywhere all over the internet… you need a mix of bonds, you need a mix some stock, and just talked about it regularly.

Eric: Yes, just a rule of thumb – it’s all based of your age, you take your age and subtract if from a hundred and there’s your mix of bonds and equities. I’ll be honest. I’ve been having conversations with people telling them that they may want to consider eliminating some of their bond possessions – maybe all of them – and replacing them with annuities for the very reasons you’re just mentioning. That when you look at you know, you can eliminate the market declines in this kind of pingpong effect… you don’t have to worry about default risk because you own the annuity, you’re not worried about the bond defaulting or the federal government not paying its debt… and they got couple bonuses like for life…

Dick: Oh yes, that will be nice, why not?

Eric: And how about not having initially pay a management fee to somebody that’s managing a bond portfolio.

Dick: Well case in point Eric, go back to when the market took the big nose dive or 2008 the Great Recession, well, what do we think? We thought that based on conventional wisdom if we have at this stock bond mix, then sure the stocks are going down but the bonds are going hold us up!

Eric: Right.

Dick: What happen? It all went down. So now, here we are in probably the most vulnerable position potentially in all of history but at least in recent years – the last century, where the bond markets are facing this inverse relationship to interest rates were interest rates have nowhere to go… but straight up and what’s going to happen to the bottom market, to the yield?

Eric: Who wants to own a one percent bond when all of the sudden they’re going start to pay two percent or 3 percent? Nobody’s going to be able to get rid of those bonds!

Dick: Yes, it’s a hot potato. And why not let, you brought it up… why not let the annuity companies manage that risk because that’s what insurance companies do best. They manage risk and they basically hire the cadre de army of managers that’s needed to manage bond risk.

Eric: Right. They’ve done this for hundreds of years.

Dick: And they do it long-term, they’re not in it for the short-term treasury.

Eric: It’s just not for your lifetime which sounds a little funny but they have managed it for multiple lifetime. So, they look much bigger much larger…

Dick: Some of these companies, one in particular I’m thinking of, survived over the last three hundred years and it’s a rated A company today…

Eric: Couple World War and…

Dick: France take over… Napoleon Bonaparte… and the list just go on and on… So, the truth of the matter is that government shutdowns; rather they’re perceived, they’re real; the austerity measures we’ve seen in Europe, they have a dramatic effect on interest rates and interest rates have a dramatic effect on annuities; and interest rates have a dramatic effect on volatility in the market.

Eric: So, let’s put this in summary, I guess. Is it a good thing to hold an annuity or being an owner of annuity when there’s a government shutdown?

Dick: I think that that would be where I would want my portfolio to be; a portion of it anyway in annuities – a foundational portion – so that when these kind of things happen, which they’re going to or something new that we’re always blind sided with something new…

Eric: That’s something that’s never happened before…

Dick: We think we’ve got it all figured out, we’ve got all the stress tests then low and behold the next crisis comes along that blind side us… that’s why it make sense to have a portion of the annuity – a foundational portion, so that when these things happen you can weather the storms without stress… sleep well at night…

Eric: Some safety, some security, some annuities.

Dick: Agree.

The post Government Shutdowns Affect Annuities appeared first on Annuity Guys®.

Don’t let the sizzle fool you. You can get a fixed index annuity without an income rider. Why would you do that? Why pay a fee for a service you will never use?

Typically, you shouldn’t upgrade your annuity to a hybrid style unless you know you want the lifetime income **guarantee while still maintaining majority control.

A base FIA (fixed index annuity) offers the ability to grow based upon the performance of an index while not going backwards. Your principal is never at risk and to clear up a popular misconception – your money is never actually invested in the index itself. With a fixed index annuity, the insurance company assumes all investment risk and while you may be able to participate in the gains generated by an equities or commodities index your dollars were never invested in any of those securities.
Watch as the Annuity Guys® – Dick and Eric, report on the fixed index annuity to help you evaluate if this type of annuity would be a good fit for your portfolio.

**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.

There are pros and cons to any financial product and fixed index annuities have their detraction’s, such as cap rate, participation rate, and surrender terms. But if you are looking for an option that allows for better than average safer interest growth with no investment risk, check out a fixed index annuity.

Worried about interest rates impacting your bond portfolio? Check out this article.

Fixed-index annuities as bonds alternative?

By Robert Klein at MarketWatch.com

If you haven’t noticed, bond interest rates have been inching up over the past year. The U.S. Treasury 10-year index hit a 52-week high of 2.83% on Friday, up 1.29%, or 84%, from the 52-week low of 1.54% on Aug. 31, 2012.

Given the fact that market prices of bonds move inversely with interest rate changes, increasing interest rates generally translates to decreasing bond prices. An example of this is the Barclays U.S. Aggregate Bond Trust, which, after increasing 7.84% in 2011 and 4.21% in 2012, is down 3.27% year-to-date as of Friday.

Recent bond interest rate increases, combined with the prospect for continued interest rate hikes, have gotten the attention of investors, resulting in reduced bondholdings in many cases. Replacement investments have included dividend stocks. While this has provided an alternative source of income, i.e., dividends, it has also resulted in increased equity risk exposure, which may prove to be more problematic than simply remaining in bonds.

Many investors in the past few years have discovered a different strategy for a portion of their bond portfolio that retains the fixed income nature of bonds while offering protection from bond and equity market declines. It’s called fixed-index annuities, or “FIAs.”

 What is a fixed-index annuity?

A fixed-index annuity is a fixed annuity that offers a minimum **guaranteed interest rate and potential for higher earnings than traditional fixed annuities based on the performance of one or more stock market indexes. When purchased with non-retirement plan funds, unlike bonds, earnings grow tax-deferred. If a minimum **guaranteed withdrawal benefit (“MGWB”) isn’t built into the contract, a FIA can be paired with an income rider to give the annuitant(s) the ability to activate a lifetime income stream.

There are two types of FIA’s — single premium and flexible premium. A single-premium FIA is a one-time investment whereas a flexible-premium FIA allows for subsequent investments after your initial investment. With both types, you need to allocate your premium, or investment, between a fixed account and one or more indexing strategies. The fixed account pays a fixed rate of return for one or more years that’s generally higher than a similar-duration CD.

Indexing strategies provide the opportunity to earn interest based on the performance of a defined stock market index each contract year, with the Standard & Poor’s 500 Index being the most prevalent offering. Unlike a direct investment in an index where you participate in gains as well as losses, there are two basic differences when you allocate funds to an indexing strategy within an FIA:

1. If the index’s return is negative, no loss is posted to your account.

2. If the index’s return is positive, interest is credited to your account subject to a cap.

In other words, unlike bond and equity investments, you won’t participate in losses, however, you also won’t fully participate in gains to the extent that the performance of a particular indexing strategy exceeds that of a defined cap.

When do fixed-index annuities make sense as a bondholding alternative?

FIA’s offer several distinct advantages over bonds, including protection from market declines, elimination of bond default risk, participation in positive performance of stock market indexes, tax deferral in non-retirement accounts, sustainable lifetime income with a MGWB or income rider, investment management simplification, and elimination of investment management fees on the portion of a managed portfolio that’s invested in FIA’s.

They aren’t without their disadvantages, however. [Read more from MarketWatch]

Transcription:

Dick: Hi I’m Dick.

Eric: And I’m Eric and we’re the annuity guys; and today we’re choosing a fixed indexed annuity.

Dick: Yes, and Eric that’s referred to all over the internet as a hybrid annuity.

Eric: No, no…

Dick: Nowadays, nowadays it is.

Eric: Fixed indexed annuity without an income rider is the purest sense. Now, to get a hybrid style you got to have the income rider.

Dick: Well, that’s where we tend to talk in terms of hybrid combining a whole bunch of things into one annuity and mostly its marketing hype… mostly it’s just a sizzle to sell the annuity talking about hybrid; but it is in all fairness, hybrid does mean the combination of several elements into one thing. So, I would say that it is a hybrid in that sense but let’s get into the specifics of the fixed indexed annuity and what’s good about it?

Eric: Yes and I think usually the first thing I start with when someone asked me… its breaking down what’s an index? You know, really when you talk about indexing for an annuity, the most common one out there is typically are the S&P 500.

Dick: Dow Jones…

Eric: Now most people say “I’m invested in the market right?”

Dick: No…

Eric: What do you mean? It’s like an indexed mutual fund^{^} or…

Dick: And that’s the thing, it’s challenging to explain the folks is that you really are never invested in the market. You’re using that index just as an indicator.

Eric: It’s a benchmark…

Dick: A benchmark to know how much interest will be credited to your account. So, this is a completely safe, investment free product..

Eric: All risk-free.

Dick: Yes, yes it is.

Eric: And I always laugh because what I try to do is explain that you know; we can use the weather as that same index and say we start with the this time at eight o’clock today and at eight o’clock tomorrow we’re going to look at the same time… and if we’re up to two degrees, we’re going to credit you two percent. You can just use any kind a benchmark. In fact, there are indexes out there that use interest rates…

Dick: Commodities.

Eric: Commodities, gold.

Dick: Right. So, if somebody comes to you with an annuity, with this amazing new index; don’t get too excited because first of all even if that particular index could soar, you’re going to be limited on the upside up of it. That’s how these indexed fixed indexed annuities work is they give you the upside but they give you no downside. So you don’t get all of the upside.

Eric: And really, if you kind of peel back the layers of how an indexed annuity really works; the insurance company has something usually that it can purchase options on. They’re looking at options contracts something they can buy for pennies on the dollar;

Dick: If it doesn’t hit, it expires and throw it away; and when it hits…

Eric: It’s very good for everybody.

Dick: It brings some money in.

Eric: And they are willing to share some of those benefits.

Dick: Right.

Eric: So, like you were describing, what’s the negatives here? You don’t get the full upside typically that you’re going to get from a market participation; if you were just truly invested in one of those yourself but then also the inverse of that is you don’t go back…

Dick: Completely safe, completely secure. And when we say risk free, we have to qualify that a little bit. What we’re really saying is, it is a market risk free; and you know, there’s risk in anything we do. If it’s a US Treasury, there’s risk in it. So, in terms of measuring risk, it’s one of the least risky things you can do with your money.

Eric: Right. In explaining some other things that limits some of the upside; this is part of the conversation that if you ever look at an indexed style annuity, that there boards caps typically associated which is usually…

Dick: Limits your upside.

Eric: You may say you got the S&P 500 index with a cap of 5 percent. Well, that typically means the most you’re going to make in a year is

5 percent – so that’s your cap. The market may make up to twenty percent while you’re only going to get up to your cap.

Dick: Yes

Eric: And, there’s the participation rate which is how much of that index…

Dick: So, that if the market goes up 20 percent and I have a 10 percent participation rate, I’m at ten-percent of what the market went up or spread which in that case you agree that the first portion of what’s earned; it could be one percent or 5 percent, goes to the insurance company or is not paid to you. Let’s put it that way. And so consequently, you get anything above that. If you had a 10 percent spread, the market did 20 percent; you get 10 percent.

Eric: And those are really kind of need aspects to say… I can still participate in the upside I know I’m not going to go backwards. And as long as there’s no fee associated with the contract, you’ll never go… you never will back up and that’s what’s very attractive. And who would be interested in these types of annuities? It’s usually somebody who wants some growth but they’re just not willing to go backwards. If we look at the charts over the last ten years; and this is where indexed annuity companies are really putting those charts out, because if you remember back in 2008 when that market went boom…

Dick: Or 2009.

Eric: Well guess what your indexed annuities do?

Dick: No loss.

Eric: We did not go back thirty-eight percent…

Dick: A nice place to start from when the market started coming back up… stair steps up.

Eric: And that’s what’s nice. It locks in typically it resets if it’s an annual reset. Every year you started that new benchmark and all you do is…

Dick: Now Eric, one of the things; I am going to switch our subject here on this a little bit – and that is; that we see all the time and it kind of gets our higher up a little bit, 8 percent returns you know on indexed annuities; and pretty misleading is it?

Eric: Well, and that’s when people are typically selling the rider; they’re selling the piece that you’re going to pay a fee for usually, but it’s that sizzle portion that people want because they want that market-style return. So, eight percent **guaranteed… for future income

Dick: Or income account – it’s a kind of a virtual type account, does what it’s supposed to do – an excellent feature, excellent benefit, but consumers are generally confused and misled many times by that statement of getting an eight percent return on their money; safe, secure, **guaranteed; when that’s just factually not true or at least not the whole picture.

Eric: In effect, most people – and this is the conversation you have to have – that if you’re not looking at FIA or fixed indexed annuity for income you can buy it without the income rider. You don’t need that income rider…

Dick: No fees.

Eric: No fees, no charges. Now you’re not going to get that **guaranteed roll up for future income but you still have the option of receiving lifetime income from these annuities because you can annuitize.

Dick: Annuitize, right. So, when we start looking at the fixed indexed annuity and the benefits that that annuity will give as compared to other annuities – variable annuities^#, immediate annuities. We start to look at we’ve got the upside; we’ve got safety and **guarantees. So the upside would be kind of similar to the variable annuity^# that you’ve got some upside here. You don’t have the unlimited upside of the variable but you do have upside for a little better than normal growth should be; and then you’ve got the safety and security of the fixed annuity because there really is no investment for a fixed index annuity. Income – you’ve got the potential of what the immediate annuity has in two ways – you can annuitize or you can use the rider for lifetime income; and the beauty of using the rider for the lifetime income is back to what we call majority control of your money where you can actually not get your lump sum away like the immediate annuity, keep control of that money either to go on to the heirs or for a future use if there was an emergency.

Eric: So, I think we’ve broken down the fixed indexed annuity giving you some tidbits as to how the hybrid might be a part or add on to that that base chassis. I think we’ve got it covered all.

Dick: We’ve done it. Thank you.

The post Choosing a Fixed Index Annuity appeared first on Annuity Guys®.