**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.

Highlights (or Low-lights) of the Fiscal Cliff

What is the “Fiscal Cliff”?

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

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

What is involved with the fiscal cliff?

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

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

2. The Bush tax cuts expiration includes:

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

3. Other tax changes include:

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

4. Miscellaneous changes include:

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

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

Annuity Guys® Video Transcript:

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

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

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

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

Dick: Right, under a rock.

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

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

Eric: It’s a political event.

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

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

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

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

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

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

Dick: That could be a problem.

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

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

Eric: It’s not like a fire sale?

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

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

Dick: Non-qualified dollars, right.

Eric: Qualified dollars don’t really count.

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

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

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

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

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

Eric: 2015, at the earliest.

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

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

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

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

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

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

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

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

Dick: Thank you.

The post Is the Fiscal Cliff a Threat or an Opportunity for Annuities? appeared first on Annuity Guys®.

**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.

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

Annuity Guys® Video Transcript:

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

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

Dick: Okay.

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

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

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

Dick: How do we fathom $1 trillion?

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

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

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

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

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

Dick: Maybe extra few years or something?

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

Dick: That’s huge.

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

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

Eric: Keep going.

Dick: 3,200 years?

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

Dick: That’s just 1 trillion.

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

Dick: We’re in debt how much?

Eric: Is it $3 trillion?

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

Eric: As you say, just one year.

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

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

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

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

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

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

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

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

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

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

Dick: There you go.

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

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

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

Dick: Correct.

Eric: You have multiple spots for your allocation.

Dick: A good portfolio is well-balanced.

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

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

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

Dick: A lot of volatility.

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

Dick: Typically annually, sometimes further out.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dick: Thank you.

Eric: Have a good day.

The post Are Annuities Best in a Difficult Economy? appeared first on Annuity Guys®.