Are Annuities Improving With The Economy?

January 11, 2013 By Annuity Guys®

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.

Hybrid Annuities have too many moving parts… Says Who?

October 26, 2012 By Annuity Guys®

What makes a Hybrid Annuity different from a Fixed Annuity? Answer: index strategies, an income rider, and the contractual **guarantees associated with the income rider.

What makes a Hybrid or Index Annuity better than a standard fixed annuity with an income rider? Answer: the opportunity to participate in the potential upside of index gains that can exceed the interest earned by a fixed interest only annuity.

The **guarantees may not be “sexy” but they form the foundation of why someone should consider a hybrid annuity. We all like the “potential” to do better — Dick and Eric tackle the moving parts of a Hybrid Annuity in this weeks second segment of this two-part series.

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Enjoy our short Fog Lifter video…

“The Power of Indexing and Contractual Income Guarantees”

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Are Hybrid Annuities too Complicated?

A common complaint leveled at hybrid annuities is that they are too complicated and have too many moving parts. The Annuity Guys®, Dick and Eric, discuss why many folks in the media and investment world like to hobby-horse this point while missing the real reasons why these financial products work so well as a foundational allocation in thousands of retirement portfolios. The secret is “the non-moving parts otherwise known as contractual **guarantees.”

Contractual Guarantees – absolute **guarantees, no-moving parts.

Hybrid/Fixed Index Annuities – allow for upside potential of specified moving parts in addition to absolute contractual **guarantees.

Income Rider – addendum to an annuity contract **guaranteeing a future lifetime income plus additional benefits in some income riders (this is a contractual **guarantee).

Features, Benefits, and Facts:

Annuity Owner Remains in majority control of the annuity’s cash account value during the surrender term and has 100% control after the surrender term.
Full account value of the cash account passes on to heirs with no surrender or penalty charge.
Guaranteed growth in deferral **guaranteeing a minimum future income. Example: Initial Premium $100,000 + 5% bonus **guaranteed growth of 7.2 percent deferred for ten years = $210,000 income account value producing a of $12,600 per year at age 70 with a single life payout.
Payout percentages from the income account are based on age and a single or joint income need. Example: age seventy single payout 6 percent or joint payout 5.5 percent
Fees for riders can be based on the cash or income account value and are charged to the cash account. Fees typically range from half of one percent (.5%) to one and a quarter percent (1.25%). This does not reduce the **guaranteed growth of the income account.
May have a death benefit allowing the income account if it is larger than the cash account to be distributed to heirs over a five-year period.
May have an increasing income as an inflation hedge.
May have a Long Term Care Benefit.

Index Strategy Moving Parts:

(Index examples: *S&P 500, *Dow Jones Industrial, *Trader Vic (Commodities), *Barclays Capital Aggregate US Bond, and literally any third-party index may be specified as a measure for crediting interest).

[Read More…]

Annuity Guys® Video Transcript:

Eric: Today, we’re going to talk about hybrid annuities. Do they have too many moving parts? Sounds like a flashback to maybe a previous episode.

Dick: Like one last week that we said ‘are they too complicated?’

Eric: This time, we talked about at the very end, all the moving parts. Now we’re going to get a little bit more detail as to, do they have too many moving parts?

Dick: That’s a good question, and I think that some folks would say, yes, it’s too complicated. There are too many moving parts. I think that you have to really weigh over who’s saying it and why they’re saying it; what their motive is.

Eric: Yeah. The first thing we should start out is where we started last week, in saying, why does somebody buy an annuity to begin with? It’s contractual to **guarantees.

Dick: Right. Exactly!

Eric: Safety, security, predictability. That’s why we like the hybrid annuities, is for those contractual **guarantees.

Dick: The moving parts, as we discussed last week folks, the moving parts are those things that are in addition to the contractual **guarantees; so those are the potential of the annuity. If you can be satisfied, and this is what we do with our clients, we help them to see where the contractual **guarantees actually do meet all of their concerns and their objections. Then if they can get some additional potential on top of that, then that’s a win-win.

Eric: Right. Let’s start with the base here. Typically, we’ve got this fixed indexed annuity as the base.

Dick: Right. That’s our chassis.

Eric: That’s our chassis. What then goes into making a fixed indexed annuity a hybrid annuity?

Dick: Typically, it will be an income **guarantee, and that income **guarantee will give a lot of different benefits, primarily knowing what your income is going to be at some point in the future that will help to offset inflation and know that you’ve got some type of increasing income at some point in time.

Eric: Right. We talk about that income rider quite a bit because of what it offers. It’s one of those things that’s attractive to people because they remain in majority control. We’ll go into detail in the article about what majority control means. It’s also a way of taking assets and being able to pass it on to a beneficiary or heirs.

Dick: Yes. It’s not like the immediate annuity where you give the lump sum away. There’s a count value.

Eric: Too often, people want the annuity, but they don’t want to give up that control.

Dick: Correct.

Eric: That’s what that hybrid aspect brings to this chassis.

Dick: It does.

Eric: Payout percentages, as good, better than . . .

Dick: Payout percentages, as compared to an immediate annuity, if you’re starting an immediate annuity today and you’re starting a hybrid annuity today, the payout percentage will typically be a little bit less. The beauty of it is, the immediate annuity pretty much has to be started within 12 months of the time that you’ve signed up or been approved for your immediate annuity. However, with a hybrid annuity, the idea of deferral says that it’s going to pay out a lot more at some point in time.

Eric: Right. If you’re just looking for the most money you can get right now and you don’t care about anything else, then look at an immediate annuity.

Eric: If you’re wanting flexibility plus those **guarantees, that’s where the hybrid comes in.

Dick: Not only that, but there situations where the immediate annuity isn’t that much more.

Dick: Folks are more interested in that account value, if they don’t use it all up, going on to the heirs.

Eric: Right. That’s been one of the biggest reasons people are drawn toward the hybrids. The income rider tends to be the first piece that we highlight. Is it a moving part?

Dick: No. That’s what’s good about the income rider, is that it is a contractual **guarantee. That is part of that chassis that is **guaranteed.

Eric: I would say, if you’re looking at a fixed indexed annuity, what makes it a hybrid is, again, is adding that income rider component, that **guarantee of income in deferral. Basically, you’re building that account base in deferral.

Dick: Another aspect that lends itself to the hybrid aspect of the annuity is the idea that you can get some upside potential without the downside risk. You’ve got a little bit of that variable annuity^# flair to it with that. That’s where the confusion tends to come in.

Eric: Yeah. We’ve talked about this before, too. People will call up and we’ll talk to them and say, “I’m interested in a variable annuity^#.” In the mindset of somebody, the variable aspect is because it has the potential of having varying rates of return.

Dick: Right, some increased potential.

Eric: Right. In this case, an indexed annuity has varying rates of potential, sometimes based off of, basically, those indexed components.

Dick: In the early days, Eric, of indexed annuities and what we now call hybrid annuities a lot, they were sold and people purchased them, or wanted them, based on these indexes that did have all of this fluctuation and movement in them. The reason for it was because it did protect the downside, it did give them upside, and the fact of the matter is, there have been many time periods when this type of an annuity has out-performed the stock market, but it was never intended to do that in the first place.

Eric: We’ll tell you right now, if your intent is to go out there and beat the market, don’t buy one.

Dick: Don’t buy one.

Eric: That’s not the purpose for a hybrid annuity.

Dick: It’s possible that you can do it.

Eric: Over a period of time.

Dick: But it’s not the reason. It’s not the purpose.

Eric: Right. Because what you’re trying to do with a hybrid is limit your downside.

Eric: You’re taking away that downside risk of being in the market because your principal is protected.

Dick: Exactly. Eric, we’re not doing a very good job of getting to our list here.

Eric: I was going to say, we’re going to get to the second point here very soon. It’s talking about some of the moving parts that are truly involved in the indexing components.

Eric: Dick’s done an excellent job of laying out an article here, so if you haven’t had enough time to watch us, you’ll see below, or in the links below.

Dick: Read it more in-depth.

Eric: We’ve got some additional details. Caps.

Dick: Caps, okay. My cap’s hanging right there. Let’s tie the caps into; first of all, what’s an index? Most of you folks understand that when we talk about an index, this could be any type of index. It could be an index . . . let’s use the popular ones.

Eric: S&P, NASDAQ.

Dick: Dow Jones, The Trader Vic’s. You could use a gold index. You could use a bond index; any degree of creativity.

Eric: Exactly. The index could be literally the temperature outside each day. It’s a benchmark on which you can measure something. The most popular ones are those that are tied to the stock market.

Dick: They do buy call options on these indexes, so that is the purpose, why we choose an index. When we look at the caps, folks, if the market goes up 10% in a given year, and your cap is 3% or 4%, which is about where caps are now. We have some exceptions, where caps are higher, but somewhere in that 3% to 4% range, market goes up 10%, how much are they going to get, Eric?

Eric: If the cap’s 3%, you’re going to get 3%. That’s the limiting factor. You have no downside risk. If the market’s down 10%; 0. You’ll hear a lot of people talk, “Zero is your hero,” because you don’t have that backslide in case you had multiple down years. You don’t have to worry about recovering from a backslide. The worst that’s going to happen is that you stay on a level plane.

Dick: Right. One of the things that we didn’t really touch on, which I will just drop back to for a second here and then move on, that is one the income rider. Typically, that will have somewhere in the neighborhood of maybe a 7% **guarantee; 6%, 7%, we’ve even seen 8% for some time periods, which was a **guarantee. Even though you might have a 3% cap on the indexing for your cash account, your index account could be significantly higher.

Eric: That’s why that income rider is so popular, because while it’s in deferral, you can get those **guaranteed growth periods.

Dick: Right. If we move into the spread?

Eric: Personally, I’m a big fan of the spread; and that’s not peanut butter and jelly, necessarily. I like spreads because with a standard fee, you have typically a percentage that’s pulled out every quarter, of your account, period after period. Let’s just use a round number.

Dick: You’re referring to the income rider.

Eric: Income rider fees.

Dick: Right. Okay.

Eric: You could have fees for other things, but the income rider fee, which is what makes a hybrid annuity really a hybrid, is having that income rider. There’s typically a fee associated. If that fee is ½%, that ½% is going to be pulled out on a regular interval, ir-regardless of whether or not you’re getting a gain.

Dick: Whether you had any interest earnings or not.

Eric: That’s correct. Spreads on the other hand, are typically higher than fees. A fee may be 50 basis points, ½%. You may see a spread of 1½% to 2%. The deal with the spread is the company only takes their portion if you have a gain. You’re giving up the first portion of any kind of gain that you could receive.

Dick: Right. Your account value cannot go backwards if you’re not earning with a spread.

Eric: That’s right. If you had 12 consecutive, or 10 consecutive, years of getting 0 return, whatever you put in principle-wise, would be **guaranteed to be that same level.

Dick: Right. I think that the spread has a definite place, and it should be considered in the overall picture. As we’ve experienced with certain annuities that don’t have a spread, their contractual **guarantees are so much higher for the income. Since that’s the client’s primary objective, then it makes sense to go with the fee over the spread, using that particular annuity. You have to weigh it against all those factors.

Eric: Exactly. Typically, you’ll see the spread number being higher. It’s just attractive when you’re looking at predictability, that you know that you’re not going to have any kind of negative impact just because you don’t have a return.

Dick: Another idea of using the spread is when the market has . . . when you’re using it in indexing, and maybe you’re doing an average of a year’s worth of indexing, and they will say, “If your average growth of the index for the year was 10%, you’re going to have a 3% spread.” That means that first 3% of that 10%, you don’t get. On the other hand, if that year there was a 5% negative growth, or 10% negative growth, then your 3% spread would not be applicable, because there’s no earnings, no growth there.

Eric: Right. Where we typically see the spreads are on something that have more upside potential a lot of the time.

Dick: Right. Did I actually do the math where I said, “If you’re up 10% and you have a 3% spread, you would have 7% gain”? Let’s move on and talk about participation.

Eric: That’s the easiest thing, in the sense of it’s taking a percentage of the growth and you get a participation percentage, typically. Back in the good old days, it might have been 50%. If the gain was 10% of the market, you would get ½.

Dick: I was always a fan of participation, but because of the financial crisis we’ve been through, the Great Recession, we’ve seen all that pare back to where participation rights are now down around 25%. The market goes up, let’s use that 10%, it’s easy to figure. If the market goes up 10% and I get 25%, what did I earn?

Eric: 2½.

Dick: 2 ½%, okay.

Eric: I got my calculator in my pocket.

Dick: You’re good, Eric. Okay. We already touched on the average a little bit, in using the spread, so maybe we’ll move on to the next one. This one’s very interesting. This one, I see messed with a little bit. When I say messed with, folks, I see you messed with a little bit, unfortunately, from advisors that overstate this particular strategy.

Eric: Are we talking about the monthly sum?

Dick: Monthly sum. The monthly average.

Eric: Look at the potential.

Dick: It does have good potential. It just doesn’t usually work out, Eric.

Eric: 2% a month. There’s 12 months in a year.

Dick: If I get 2% each month, and I add those together, that means I’ve got 24% potential. If the market goes up 24%, and it does at 2% a year, I get all 24%. Is that correct?

Eric: 2% a month.

Dick: A month, yeah, keep me straight.

Eric: For the whole year, I’ll get 24%. That’s my potential in a given year.

Dick: What’s the worst thing that can happen in that year? If you’re going up 2% every month, what’s the worst thing that could happen maybe in that 10th or 11th month?

Eric: That’s where the market loses 20% in one month.

Dick: That couldn’t wipe it all out, could it?

Eric: Yes, it can.

Dick: It can?

Eric: There’s no downside protection.

Dick: Folks, that’s the problem. The monthly sum and the monthly average has a cap on the upside, but it has no cap on the downside. The companies have figured out that, yes, there are some years where you really do capture and you get those big, big returns, and it feels good and it looks good. There are times to actually use this strategy.

Eric: Now is probably one of them, actually.

Dick: It very well could be.

Eric: I always call it the homerun versus the single. We talk about annual point being the single. You get lots of singles, but the monthly sum is truly going for the homerun. We have seen returns out there in the 14%, 15%, 18% range.

Dick: Right. More often than not, what do we see? A big 0. We may see a client go for 3, 4, or 6 years before seeing any interest crediting to their account, and that’s pretty tough for people. They’re not going backwards.

Eric: Right, and we should qualify that. While you’ve got not downside protection on the month within the index, that doesn’t apply to the account value. The account value, the worst it’s going to do, again, is 0. Even if your index finishes down on the year, what will be applied to your account is basically 0 gain.

Dick: Okay. Now we come to a very interesting one, Eric, called the blend.

Eric: The blend, the blender.

Dick: We put it in the blender. We’ll do one of these. Here we go. Let’s make this real simple. A blend is like a balanced portfolio: You put 50% in stocks and you put 50% in bonds. However in this case, what we’re doing is we’re putting 50% in some popular index. It’s not really going in the index, as we’ve discussed many times. It’s using it as a measure. We’re putting 50% in towards an index and we’re putting 50% into . . . I’m just using 50%, folks. It could be 30% or 40%, but it all equals 100%. 50% into a fixed rate of interest. We’re just saying ½ the account goes into fixed rate of interest, ½ the account goes into stocks.

Eric: Right. Then you dump them both in the blender.

Dick: Right. Exactly. There’s no cap on the 50% where the stocks are at.

Eric: Which is what makes it attractive to [inaudible: 16:08]. You’ve got unlimited upside potential on the blend side. They all have limiting factors.

Dick: It’s tricky.

Eric: What’s in that fixed rate bucket is typically, right now it’s at 1% or 2%. The best that 50% is going to do is 2%

Dick: Yeah, 2% or 1½%.

Eric: You can get 10% or 20% over here, but it has to be then blended with that fixed rate bucket.

Dick: Typically, you could take, in a year where you had the market up 10% and you had a 2% bucket and you had a 10% bucket, and they were both equal in this case. You put in the blender, you stirred it all up, what are you going to come out with?

Eric: 6%.

Dick: About 6%. Boy, you are good. Folks, we’ve done the math for you on these. When you’re on this website, we’ve got some formulas, and we broke it down in simple terms so that you can read it slowly and get a good understanding of what we’re talking about.

Eric: We try to give you at least a cursory idea of what to expect when you’re seeing some of these terms flown about.

Dick: We’ve probably . . . hopefully, we have not. Hopefully, we haven’t thoroughly confused you. What we really want you to take away from this is that these are the moving parts that give you greater potential. These are not the specific reasons, for most of you, why you would actually buy or choose to allocate to a hybrid annuity.

Eric: If you’re buying for these bells and whistles, the fit’s probably not right. If you’re buying for the base chassis, and you can live with that **guarantee from the income rider and from the annuity aspect and the income side, or the estate planning side, whatever that need is, if this fits your need and you can just understand that there’s the potential for a little bit more extra.

Dick: This is where a good advisor comes in, because they can look at the potential, they can look at what’s going on in the economy in general. Folks, they can help you make a good decision on which way to go in this indexing. Even if the indexing really produced nothing and you had good contractual **guarantees, which is what you should have your sights set on, you’ll be satisfied.

Eric: Exactly. Buy for the basics, and be happy with the extras.

Dick: Right. Exactly.

Eric: Hope we’ve broken down and explained to you the ‘says who’ portion.

Dick: Yes, ‘says who’. Look behind the veil a little bit and see who’s telling you that they’re too complicated, because maybe from that person it is too complicated. For someone who understands a hybrid annuity and what it does for the client, it can be very effective as a good retirement financial tool.

Eric: Thanks for tuning us in today.

Dick: Thank you.

IRA / 401k to Annuity Rollover Concerns

September 21, 2012 By Annuity Guys®

Many of the concerns people have with moving an IRA or 401k into annuities revolve around misconceptions with how the IRS treats these transfers. As long as these transactions follow some basic rules there should be no additional taxable consequence or penalty.

Dick and Eric examine the IRA to annuity transfer process and discuss some of the challenges and misconceptions that they have encountered when speaking with clients.

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401K, 457 & 403B to IRA ANNUITY ROLLOVERS
RULES CHANGE for IN-SERVICE 401(k) ROLLOVERS
401k, 457 & 403B to Roth rollovers are now possible before age 59½.

A new possibility. Sometimes employees want to pull money out of a 401(k) before they retire. It isn’t always because of an emergency. Some workers want to make an in-service non-hardship withdrawal just to roll their 401(k) assets into an IRA. Why? They see lower account fees and greater investment choices ahead such as combining the safety and growth of a Fixed Annuity with the tax free benefits of the Roth IRA.
As a result of the Tax Increase Prevention Reconciliation Act (TIPRA), tax laws now permit in-service non-hardship withdrawals from 401(k), 403(b) and 457 plans to traditional IRAs and Roth IRAs before age 59½. Of course, the employee must be eligible to take a distribution from the plan, and the funds have to be eligible for a direct IRA rollover.

This option may be very interesting to highly compensated employees who want the tax benefits of a Roth IRA. The income limits that prevented them from having a Roth IRA have been repealed, and they may have sizable 401(k) account balances.

Does the plan allow the withdrawal? Good question. If a company’s 401(k) plan has been customized, it may allow an in-service withdrawal for an IRA rollover. If the plan is pretty boilerplate, it may not.

The five-year/two-year rule also has to be satisfied. IRS Revenue Ruling 68-24 says that for an in-service withdrawal from a qualified retirement plan to take place, an employee has to have been a plan participant for five years or the funds have to have been in the plan for two years.

401(k) plan administrators may need to amend their documents. Does the Summary Plan Description (SPD) on your company’s 401(k) plan allow non-hardship withdrawals? If it doesn’t, it may need to be customized to do so. This year, plan administrators nationwide are fielding employee questions about rollovers to Roth IRAs.

401(k) plan participants need to make sure the plan permits this. An employee should request a copy of the SPD. If you ask and no one seems to know where it is, then call the toll-free number on your monthly 401(k) statement and ask a live person if in-service, non-hardship withdrawal distributions are an option. In some 401(k)s, an in-service non-hardship withdrawal will prevent you from further participation; be sure to check on that.

If this is permissible and you want to make the move, you better make an IRA rollover with the assets withdrawn. If you don’t, that distribution out of your qualified retirement plan will be slapped with a 20% federal withholding tax and federal and state income taxes. Oh yes, you will also incur the 10% early withdrawal penalty if you are younger than age 59½. Additionally, if you have taken a loan from your 401(k), any in-service withdrawal might cause it to be characterized as a taxable distribution in the eyes of the IRS.

[Read the Full Article]

Annuity Guys® Video Transcript:

Dick: Eric, I say here we go again.

Eric: Sounds like a song title.

Dick: This is something that we continue to work with clients on, and that is the question of IRAs and just the concerns they have about moving an IRA into an annuity. There are a lot of practical things, whether or not it’s a 401k or an IRA that someone wants to go into an annuity. There’s a lot of questions that come up. One is, does it even make sense to move an IRA or a 401k into an annuity?

Eric: Right. Obviously, yes, because the annuity is designed for lifetime income, and that’s usually when people are saving from their 401K or IRA. The goal is to get money to retirement, and that’s what an annuity does. There are a lot of common misconceptions, I should say, with when those transfers happen when you’re moving from one qualified product, like and IRA or 401k, and moving that into an annuity.

Dick: Many times, folks, I’ve had different ones ask me, believing they were going to have to pay tax if they put their IRA or their 401k into an annuity.

Eric: The misconception is because they think they’re taking a withdrawal. This is where terminology gets so complicated with financial lingo. You’re withdrawing from your IRA or your 401K.

Dick: It’s actually like a lateral move.

Eric: Right, it’s like a transfer, is the more appropriate term, because you’re actually transferring from . . .

Dick: Moving it from custodian-to-custodian or rolling it over.

Eric: Which is not the guy at the gymnasium at the high school.

Dick: Or the janitor, or the 60-day rollover which is popular. You can do it either way and both ways have some advantages and disadvantages. Let’s talk about those, but first of all, let’s just touch on what is a custodian?

Eric: It’s the guy, or in this case the institution, who is charge of the paperwork. They’re in charge of making sure what gets filed with the IRS is appropriate. They’ve got your qualified dollars, and they’re reporting for you. They’re telling the IRS this is what you took out, [inaudible: 02:20].

Dick: They have accepted this responsibility that’s put on them by the Federal Government if they want to be a custodian.

Eric: Right. In order to manage qualified dollars, it has to be a custodian who’s in charge of the report.

Dick: The next thing that we probably want to talk about is a 60-day rollover versus a transfer.

Eric: A 60-day rollover is basically the timing. When you have one IRA, if you’ve made a distribution, you have 60 days, basically, to put it into another product, so it’s a timing aspect.

Dick: Right. The transfer; we’re talking about just going from one custodian to the other custodian. There’s some pluses and minuses to both of these, and let me try to be fair to both of these. You can fix me.

Eric: Each of us has a preference. My preference has always been the custodian-to-custodian transfer.

Dick: Right, and mine has been the 60-day rollover.

Eric: I like the custodian-to-custodian because the paperwork, basically, is handled by the custodian. Their job is to make sure all the numbers match up, so when they’re reporting from one custodian to the next, that gets taken care of.

Dick: Unfortunately . . .

Eric: They’re two big institutions; typically they’re big institutions. It typically takes longer, you have more people involved, so you have to have a good flow of communication to make sure there aren’t any glips, clips, or mistakes along the way. It’s worked well for me; I haven’t had a problem.

Dick: What I found, because I have done both and do both, is that with the transfer process, it does take quite a bit longer. Typically, I hate to say this, but you’ve got usually two clerks working from one company to the other. You got a lot of paperwork, and a lot of times, there are just different things that happen along the way that delay or postpone.

The 60-day rollover, if it’s applicable, it’s not always applicable to do this, but the nice thing about the 60-day rollover is that when the client calls the company where the money is at, has the check made out to their name. When I say ‘to their name’, to their client’s name, then the check will go directly when they receive it, usually sent some type of overnight delivery, so they’ve got a tracking number. Then that check will be sent directly to the company; pay to the order of the company. Typically, that process takes about a week, week and a half, and the client knows every step of the way where the money is, what’s going on, but there is a little additional reporting at the end of the year. You have to notify the IRS on your tax return that you did a rollover.

Eric: What has happened is you’ve technically made a withdrawal from Company 1, and then did the rollover process manually. You have to, or your accountant, needs to report on your tax return exactly that that process took place. Occasionally, the IRS will come knocking at your door if it wasn’t filled out properly. That’s one step that I . . .

Dick: You want to have some documentation. You want to have the date on the check, when you received the check, and you want to have the date on when the money arrived at the new custodian.

Eric: Both are basically ways that you can do it.

Dick: Sometimes, it just comes down to personal preference, and what the client is comfortable with. What are some other concerns that we run into quite a bit?

Eric: I shouldn’t say the concerns, but there’s how people are able to move dollars, and when they’re able to move dollars. A lot of times, people aren’t aware that, especially the new plans have the opportunity to do an in-service, distribution withdrawal. You have the opportunity to actually move money out of a 401k plan.

Dick: If you’re still working, yes.

Eric: What’s typically common for a lot of 401K plans, they don’t give you a whole lot of more conservative options.

Dick: Right. They don’t have that variety; they don’t have the pension-style income that the annuity provides.

Eric: Some people want that comfort level of being able to take a certain amount of dollars out, put them in a product that they know when they turn it on for retirement, it’s going to give them a number, and they’re more comfortable with that than having those dollars in the market area at risk. That’s one aspect, the in-service withdrawal.

Dick: Another thing that I would like to bring up about 401K, which is different than the IRA, when you call the custodian on the 401K, if you would like to do a rollover on that, you actually can do a rollover, but unfortunately, they want to withhold 20%. The IRS makes custodians withhold 20% of 401Ks. It really is better, I found, in all cases to do a transfer on a 401K, even if it does involve delays or takes longer.

Eric: What we’re seeing more and more commonly now is because people are changing jobs more frequently, when you’re leaving one company’s 401K, they usually don’t want you to park your dollars there, so they want you to move out because they’re paying the administrative fee.

A lot of times, you’ll see people moving from a 401K to a self-directed IRA. You’ll have those transfers going on and that is usually, in my experience, more easily done with a custodian-to-custodian transfer of paperwork. As you said, then you don’t have to worry about the withholding or any of those issues.

Dick: Exactly. Another thing that we run into is RMDs.

Eric: Yes. For those of you who do not know what RMDs are, it’s not some kind of weapon of mass destruction, it’s what it sounds like, but they’re required minimum distributions.

Dick: Withdrawals that are required at a certain age.

Eric: Yes. This is one of the things that . . . with 401Ks, you do have withdrawal requirements at age 70½, unless you’re still working or . . . and this is a new one for us we’ve been talking about, you’re over a 5% owner of the company. Then you still have to have that RMD. That’s the little tweak there.

Dick: Tricky little laws here. Folks, we’re not, Eric and I want to make it very clear, we’re not accountants.

Eric: No. We don’t play them on television, despite the size of the screen here.

Dick: We don’t give tax advice. What we’re giving here is a general overview and understanding of how annuities generally, conceptually function with IRAs and 401Ks.

Eric: Correct.

Dick: One think that I’ve run into, Eric, a couple things on RMDs I should say, is that if someone is at that age; they’re at 70½ or past that age, had their first birthday after 70½. If they haven’t had the RMD taken out at the present company, then they have to make that that money gets taken out of the IRA at the new company. They have to make a decision; does the company where it’s at presently take it out or does the money move over, and then come out at the new company? It’s fair to do it either way.

Eric: Right. It’s just a matter of reporting. Of course, with IRAs, you don’t have to . . . if you have multiple IRAs in different locations, you don’t have to take it out of each and every one. You can choose to take it out of just one location versus all the others.

Dick: You figure what’s owed in your RMD on each annuity or each IRA account, and then you can add it all up and take it all out of one account.

Eric: I think this is where people say, “How much am I going to owe?” We should say RMDs are calculated based off of the end-of-year of the prior year, and then it’s based off of your age and a percentage; the formula the IRS puts us out there.

Dick: It’s in Publication 590, the unified tax tables, and there’s 3 different tables, depending on the age of your spouse and that type of thing. One thing that I found, Eric, that a lot of times it’s a misconception on the RMDs, a lot folks believe that once they turn this magic age, about 71-years-old, that they have to take large amounts out of their IRA and pay the tax, or they have to take it all out, which is really a misconception that I wouldn’t think would be out there, but I hear it quite a bit. The fact of the matter is that your initial first RMD is about 3.65%. We always say 3.5%, but it actually is about 3.65%, when you figure it, and then it graduates up from there. I’ve always said, “If the IRS has a choice . . .” folks, what do you think they’re going to do? You think they’re going to make the formula very simple, like just tell you the percentage, or do you think they’re going to make it complicated and make you do math with a divisor? They give you a table, a divisor, and that withdrawal rate goes up with your age, so that each year you’re taking a little more out, a little more out. By time you’re up in your 90s you’re getting your IRA pretty well depleted.

Eric: This is where that custodian comes into play. When you’re working with a company that you have an IRA with, if you have questions about the amount you need to take out, contact the custodian because they’ll do the math for you, because they want to keep you in compliance, as well.

Dick: What I want to go back to, Eric, is does it really make sense to move your IRA into an annuity?

Eric: For me, I like the idea of taking IRAs and 401Ks that have basically . . . they’ve been saved for the purpose of retirement income.

Dick: In many situations they have.

Eric: That’s what I’m saying, if they’ve been saved, and that’s the intent for these dollars, what does annuity do? It gives you lifetime income for that portion of your money. Are we saying move all of your IRA dollars or all your 401K dollars into an annuity? No, not necessarily. It’s taking what you need for that foundational aspect.

Dick: That has to be determined.

Eric: Create your own personal pension. Everybody likes the idea of having **guaranteed life time income. I don’t think anybody’s ever said, “That sounds awful”.

Dick: Most people choose it when they have that option and they’re leaving employment.

Eric: I have a family of educators; they all fight for their pensions. They love their pensions. That’s one aspect that people miss now in this 401K world, they don’t have that pension. The responsibility’s on you. This is one way of taking some of that responsibility and making it shared by having insurance on your life; you’re **guaranteeing your income.

Dick: When someone chooses to put their IRA into an annuity, one thing that they should be aware of, and that is you’re not doing it because you’re looking for tax deferral. You already have tax deferral. You’re doing it for other reasons: You’re doing it because you want security; you want a , perhaps some type of a hedge against inflation. That’s the reasons why you would do it; the sound reasons why you would do it. I believe that the idea would be to put as little as possible into an annuity to create the foundational income that’s necessary. It’s good to be able to calculate that out, forecast your cash flow needs, and know that you’ve got this portion of this portfolio setup for your income.

Eric: Right, it’s covering that foundation so that you’re comfortable. You know you’ve got that covered. Sounds like an excellent choice.

Dick: I agree. Thanks for joining us, folks.

Eric: You have a wonderful day.

Why are Hybrid Annuities so Popular?

August 31, 2012 By Annuity Guys®

What made fixed index annuities and hybrid annuities the fastest growing annuity type on the market according to a LIMRA report? Why would you consider a hybrid annuity when planning your retirement? Dick and Eric look at hybrid annuities and what makes them so special.

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What are Hybrid Annuities?

Hybrid annuities, also referred to as hybrid income annuities, are essentially a type of insurance contract allowing the account owner to allocate his or her assets into a fixed annuity with a market benchmark component, having an income rider or riders that give substantial present or future **guarantees to secure a variety of retirement objectives.

These annuities refer to a combination of several unique aspects of various types of annuities that have been combined. Technically, a hybrid annuity is a fixed index annuity with an innovative new generation income rider attached to it.

Some hybrid annuities can help to resolve the concerns with regard to other needs in addition to asset growth and retirement income––such as long-term care funding or wealth transfer to heirs––while still providing one with a secure income. These annuities are considered by many to be the answer to satisfying a combination of retirement objectives combined into one solution, thus having the potential to solve several issues in retirement.

Obtaining a hybrid annuity essentially works the same way that you choose any annuity, in that making an allocation begins by choosing the hybrid annuity after comparing rates, features and ratings that meet key retirement objectives and then funding the hybrid annuity contract with a licensed agent as the final step.

With some hybrids, if funds are required for needs such as long-term care, with certain hybrid annuities, owners can have access to withdrawals for that purpose by way of an accelerated cash account payout or a **guaranteed increased income payout, in some cases for as long as it is needed. However, if they do not need the funds for that purpose, they will receive their lifetime **guaranteed retirement income just as it was structured or use the annuity for moderate growth as a secure asset foundation to balance their portfolio.

Annuity Guys® Video Transcript:

Dick: We’re going to talk about hybrid annuities today. We’ve have a lot of different subjects, and a lot of times, Eric, we touch on hybrid annuities. But let’s talk about why they’re so popular and maybe, before we actually get into that, let’s talk about what they are.

Eric: Oh sure. I was ready to talk about why they’re so popular. What is a hybrid annuity? People call up and say, “Well, I’ve been talking to this guy about a hybrid annuity.

Eric: Then the first thing I do is I say, “Stop,” because hybrid unfortunately has become a marketing term for a lot of individuals.

Dick: A hybrid annuity, to us, is the fixed index or fixed annuity, usually with an indexing component, and then it has a rider typically that **guarantees income for life. These are like the newer, more innovative income riders. I know you run into this. I run into it. Folks will start describing a variable annuity^# to me, and they’ll start saying it’s a hybrid. They may have just confused it with a hybrid, or they may have been told it’s a hybrid.

Eric: In all fairness to the variable annuity^#, it was really the first one to have those riders that would give income for life.

Dick: That’s true.

Eric: So if you think of just that rider being that contextual piece that makes it more of a hybrid. Well, in my mind those pieces were always part of the variable. They weren’t part of the fixed. So the fixed has kind of morphed its way, to use a different term I guess, into that variable.

Dick: How long has it been that fixed annuities? I’m going back I would say . . .

Eric: I’m much too young to know.

Dick: I would say that it was about somewhere seven years ago that the riders on the fixed annuities really started to pick up steam. And like you say, on the variable annuities^#, they’d already been kind of a mainstay for the variable annuities^#.

Eric: Right. I think what they saw was the variable annuity^# market had a lot of traction. People really appreciated for life without having to give up their assets.

Dick: Without annuitizing

Eric: Right, annuitizing. And that’s where we always talk about the immediate annuities, that’s the component they have. You can get income for life, but you have to give up your assets. So why people are attracted and what makes hybrid annuities so popular is that aspect of, basically, income for life **guarantees without having to give up your assets. You can still pass on money to heirs. You can still change your mind. You have majority access as we like to say.

Dick: Yes, or majority control.

Eric: Majority control. So the aspect of the hybrid annuity is actually very popular for those specific reasons right now. The other thing I see right now, especially in today’s economy, when you look at where rates are, as far as what’s being paid on the growth side, not extremely attractive.

Dick: It’s not very good. It kind of goes back to the bank CD rates, savings rates, and money markets are all effected typically by the ten year Treasury, and we have that same effect on the annuities. If we said they’re paying double what the banks pay, it’s still not very much.

Eric: No. Two times nothing is still nothing.

Dick: Exactly. So you might be looking at a 2% to 3% range maybe on a fixed annuity or even a fixed index annuity. And yet, on a recent report, Eric, that we were just talking about, the LIMRA Report, it showed that people purchasing annuities, those sales are down pretty dramatically, except for the fixed index, which is what we consider the hybrid.

Eric: Which is the base of the hybrid.

Dick: Exactly. And let’s just say that for the sake of conversation, folks, in today’s annuity world, the mainstream hybrid annuity is considered the fixed indexed annuity with one of the newer income riders on it. So just for the sake of clarification, when you’re speaking with people, you really have to clarify terms. Ninety percent of what’s talked about on the Internet and what’s talked about, advisor to client and advisor to advisor, is a hybrid annuity is a fixed annuity with a newer, innovative type income rider on it.

Eric: That’s right. And those are the pieces right now that are for the upcoming retirees, basically or near retirees, as I like to think of them. That’s what makes it really attractive, because those companies are still providing some of those **guarantees in deferral for the growth component on those hybrid annuities.

That’s the other aspect of that income rider usually. It’s I’m going to **guarantee a certain percentage of growth in deferral. Right now, we’ve got in the range of 4%, 5%, 6%, 7% still available in that deferred growth. So for somebody who’s thinking about retiring in the next five to seven years, if you’re uncomfortable with what you think is going to happen in the market necessarily and you want that **guarantee, it’s **guaranteed and predictable. Those are two aspects that give near retirees comfort.

Dick: Well, and this is where, when we go back and we compare it to the variable annuity^# and we say sales are down in variable annuities^#, and yet they’re up in indexed annuities, there’s not as much potential on an indexed annuity for growth. People aren’t interested today so much in potential and growth as they are in **guarantees.

Eric: Safety and **guarantees.

Dick: Safety and **guarantee of principal, and I also say there’s one more factor that makes these so popular and that is cash flow, because we spend our life, our careers building our money up and saving, and we look at growth. So we’re accumulating net money. But what are we accumulating it for?

Eric: To spend it.

Dick: We need to spend it, effectively and efficiently, and that’s what the hybrid annuity does, is it allows you to know what type of cash flow you’re going to have throughout your retirement, to ladder it, stage it, cover some inflation hedge aspects. I believe that’s what’s driving the popularity of this hybrid annuity.

Eric: Yes, I would agree. I would say 90% of the questions I get about annuities are about hybrid annuities. When I talk to people, I say the best thing about a hybrid you work backwards. Tell me what income you want and when you want it, and I can use a hybrid annuity . . .

Dick: And we’ll tell you the least amount of money to put in to get there.

Eric: To get there. People are like, “Yes, that’s what I want. I want that predictability, reliability, and **guarantees, those contractual **guarantees.”

Dick: So, folks, we hope that this has cleared up some of your concerns and potential misconceptions, or confirmed the things that you already know about a hybrid annuity. It’s very much a part of the financial planning community today and what’s being used and what’s effective. Anything that we can do to give you more clarity and maybe some direction on these hybrid annuities, we’ll be glad to do it.

Eric: And hopefully we explained why they’re so popular right now.

Dick: Yes.

Eric: Thanks for tuning us in.

Dick: Thank you.

The Love Hate Annuity Relationship

August 17, 2012 By Annuity Guys®

Every financial product has negatives and positives, how these products are presented or utilized by companies and advisors can lead to a vast array of emotions and opinions…. Hence, annuities are no stranger to this love/hate relationship.

Dick and Eric discuss some of the rumors that annuities face that often lead to the conflicting opinions among individuals considering an annuity in retirement.

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Below are some excepts of an article by “Coach Pete” D’Arruda president of Capital Financial Planning and host of Financial Safari Radio broadcast the stimulated the idea foe this weeks commentary. [Full Article]

Annuities Have a Negative Perception

Despite their benefits, annuities have received negative attention over the years for a number of reasons, including rival products seeking to discredit them, poorly constructed products in the space and inappropriate sales of the products. It is imperative potential annuity investors have all the right information on hand to make an informed decision.

While annuities are not for everyone, those who can benefit from them should not let common misconceptions dissuade them from using an annuity as part of a comprehensive financial plan.

The Top 5 Rumors About Annuities

Every issued annuity is a variable annuity^#.
The impact of inflation is too great for fixed annuities.
With penalties and surrender charges, annuities are just too expensive.
Never use your IRA money to invest in an annuity.
With a big name comes a better return.

Remember that securing **guaranteed retirement income in this volatile, low-rate environment is difficult – but not impossible. Do your research, tune out the conflicting opinions and don’t be afraid to ask the tough questions of your financial planner. It’s absolutely possible an annuity should be part of your financial plan. Get your hands on an Annuity Owner’s Manual before purchasing an annuity and learn the good, the bad, and the fine print before you ever invest your money. [Read the Full Article]

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about the love/hate relationship that people have with annuities.

Dick: Why does that happen? I mean what is this love/hate relationship? But it really is there.

Eric: It is. We were reflecting on an article by Coach Pete, who’s on radio in the financial safari down there in North Carolina.

Dick: His radio station is really picked up all across the nation too, so a lot of people hear him.

Eric: He gets questions occasionally. One of the questions was, “What’s the true story?” Talking about the negativity of some of the annuities. Really, it’s looking at why annuities are so negatively portrayed in the media and these attempts to discredit annuities sometimes by their rival products.

Dick: I think it’s also important to recognize that there are these positive articles about annuities. There’s a lot of emphasis, even from the federal government, now that annuities could make a big difference. But yet we get a lot of negative press.

Eric: Sure. If you think about it, annuities compete for the same slice of the pie as mutual fund^{^}s, stocks, bonds, and CDs. I mean all those pieces are options for people when they’re trying to determine where to put their retirement dollars.

Dick: Do you think that some people just might try to color it, I mean the wrong way, for personal gain?

Eric: I have never seen a mutual fund^{^} company advertise ever. Well, maybe . . . You have to realize there are competing opinions, and everybody wants to think that theirs is the best. Yes, insurance companies compete against investment companies and the such. So there are conflicting opinions and approaches. You see sometimes people tend to go negative. We’re in the political campaign era. We don’t see any negative campaigning going on. I think that’s part of or one of the reasons that some people have such a negative opinion about annuities. That creates that hate relationship.

Dick: From our own perspective, when we’re working with folks that are just kind of entering that realm of understanding annuities, many of their questions center around variable annuities^# because that’s all they’ve read about in the press. They don’t know the difference between the variable and the fixed and the immediate. They pick up this negative connotation that’s continually put out there by the press.

Eric: His first point was, yeah, every annuity is a variable annuity^#. Well, that’s not true, but a lot of people confuse especially the variable annuity^# and the fixed indexed annuity.

Dick: Correct. They have some similarities.

Eric: Exactly. If you use the S&P as a benchmark, well the S&P is an investment product, right? So they think that it’s invested in the S&P.

Dick: Yet a fixed annuity is just what it says. It’s fixed. It’s safe. Your principal is **guaranteed, which is the opposite of the VA.

Eric: Exactly. In a variable annuity^#, your principal can go up and down with the performance of the underlying sub-accounts or the investment accounts.

Dick: Where with a fixed indexed, you’re not really invested into that index. You’re just using it as a gauge of rising and falling.

Eric: Exactly. That’s where the confusion comes in. It’s not necessarily a fixed return that you’re going to get with an indexed annuity. But the safety aspect of every fixed annuity out there, the worst you’ll do is a zero on the return.

Dick: Your principal is always protected.

Eric: It’s protected.

Dick: The other thing, Eric, that we run into a lot with the VAs is the idea that, “Hey, aren’t these annuities all high fees?”

Eric: Right. With a fixed annuity, everything’s built in. It’s what you put in is what goes in. There’s no load fee. That confuses the mutual fund^{^} aspect. “Well, what’s the load I have to pay? What’s the upfront cost?”

Dick: Sure. Right.

Eric: With fixed annuities, it’s all factored into the performance of the product. What you put in actually goes into your annuity.

Dick: I do find that from folks that are just setting up an annuity that they are kind of amazed. “Okay, so I give you $100,000 or I give this company $100,000 and then they give me a bonus. I start off with $105,000 or $110,000 in this annuity. And I don’t owe you anything?”

Eric: Yeah. “How much do I have to pay for that?” The insurance company has already factored that into the program.

Dick: Right. Yet, it is a little different with the variable annuity^#, or a lot different, we should say. I’m just saying in the sense of the fee structure. With the variable annuity^#, the fees are going to be right there on your statement. For the most part, you’re going to somewhere from 3% to 5% maybe, depending on the riders.

Eric: Depending on the riders. I mean you could get one of the barebones ones that have very low fees. But most of them, if you’re really looking at the income **guarantees or the death benefit **guarantees, you’re going to have significantly higher fees.

Dick: Yes.

Eric: All right. Rather than just focusing on the variables, we can talk about some of the other misconceptions. What about inflation? Can a fixed annuity combat inflation?

Dick: I think the answer to that is obviously yes.

Eric: Why is that obviously yes?

Dick: Well, there are different ways that you can either defer a fixed annuity with a very high rollup rate, high growth rate for future income. You know that when you turn that income on, that’s going to be an offset against inflation. Yet, there are also ways to actually have cost-of-living adjustments.

Eric: The other aspect that combats inflation is if you’re looking at something that’s going to be in the equities market, you have risk involved with the volatility of the market. That’s one of the things. You don’t have to worry about inflation on the side of you haven’t worried about taking a loss.

Dick: Yes. A lot of times there’s just this automatic assumption that if your money is in the stock market, it’s going up 8% a year. If we look at the last 10 or 12 years, you’ve made virtually nothing. There’s also the possibility that your money goes negative. Now how well does that keep up with inflation?

Eric: Oops.

Dick: Not good.

Eric: No, not good at all.

Dick: It’s not good for sleeping at night.

Eric: We’ve talked about, in previous videos, strategies for addressing inflation with annuities, whether it be through laddering. There are tools out there that can help you combat inflation with annuities.

Dick: Right, and I would, folks, recommend that you go back and look at some of the other videos that we’ve done on laddering annuities and various aspects of inflation.

Eric: Sure. All right. The third point he makes is with penalties and surrender charges, annuities are just too expensive. He points out that this is partially true. There are surrenders. There are penalties. Depending on the annuity you select, I mean it can have surrenders. I can think of one off the top of my head that has a 16 year surrender. So they are out there. There are surrenders.

We’ve talked about this also in previous interviews. Why are there surrenders built into it? It’s because these are not short-term products. If you’re buying it for the wrong reason . . .

Dick: Well, these companies have to secure the clients’ money. The money goes into long-term bonds, very high-quality investment vehicles, and US Treasuries. The idea is, to protect everyone, these surrender charges have to be there.

The key to setting up an annuity properly is making sure that it does meet the objective, that it meets the long-term objective. Then you’re not going to be in a situation where you’re going to suffer a penalty or a surrender if it’s done properly.

Eric: Exactly. I think that’s the key. If you look at something that has a ten-year surrender, it’s typically a long-term product. It’s been designed. Annuities are designed for lifetime income. They are safe, secure vehicles that have longevity, basically, as part of the quotient of what they’re built on.

Dick: I think the idea of the 10 years or 12 years or 8 years, whatever the surrender aspect of the annuity is, gives the client a sense of, “Well, if things change or I would change my mind, I have this escape.” But most folks that set up an annuity really look at the benefits way beyond 8 years, way beyond 10 years or 12 years. They want this to carry them through their entire retirement. It truly is a long-term solution to a long-term problem.

Eric: Exactly. That is really the solution it should be solving. It’s not a vehicle where you are going to trade in and out of different annuities each and every other year. If that’s your intent, you’re looking in the wrong spot.

Dick: Right. Go ahead. I was going to say let’s talk about what makes people love their annuities.

Eric: Well, they take out volatility of the market performance. If you’re concerned about volatility, people typically do that. The income aspect, you have for life. There’s a novel idea. Those are the two big ones that jump into my mind right off the bat. So **guarantees . . .

Dick: Safety. I can say this, Eric, from experience with clients, many times going into it the thought of, “Should I do an annuity, shouldn’t I do an annuity,” there’s hesitation. There’s this love/hate because of all of the negative press and propaganda from all directions.

Eric: What’s coming in. Yeah.

Dick: Correct. Yet, what I find is that those folks that actually have an annuity, that have had it for several years, especially those that have come through the financial crisis, that they’re very satisfied. There is an appreciation and a love for that decision that they’ve made. Very seldom is anyone not satisfied.

Eric: I would agree. If you buy it for the right purpose, if it fits like a glove because it satisfies what your need was, then you’ll be happy. That truly is where people who have purchased it and got what they wanted and are happy. If they educate themselves going in and understand what it’s going to accomplish for them, then they will be pleased with an annuity. Most often, you’ll love the fact that you’ve made that decision because, in some ways, it’s sleep medicine.

Dick: Yeah, it is. It’s sleep assurance. It’s sleep insurance in many ways. I know that we could end it right here, but let’s hit it on the other side of it. Let’s talk about the hate. Why would you hate an annuity?

Eric: You bought for the wrong reason. You thought you were going to buy it now thinking the rates were awful, and all of a sudden rates go up higher. “Oh, if I would’ve waited, I could’ve gotten a better rate.”

Dick: Or you like maybe living on the edge a little bit, you know?

Eric: You like volatility.

Dick: You like the up and down of the market, taking that calculated risk, hoping for the best.

Or you’ve got this discretionary money that you could put into the market. It wouldn’t hurt anything. You stuck it in an annuity, and now that annuity isn’t performing at the high level of the market.

Eric: Right, you have an annuity. You have the safety **guarantees. You’ve eliminated the risk. All of a sudden, everybody else is talking about how the market is doing . . .

Dick: They’re making all this money.

Eric: Oh, I’m making so much. You missed out. Timing is everything. But, you know what, the timing of an annuity is you’ve taken that **guarantee, and you shouldn’t have to worry about it.

I guess I’m not being negative enough.

Dick: Well, thanks folks for tuning in today. We hope this helps you in your overall decision to kind of balance all of this information out there, both positive and negative.

Eric: Well, we hope you don’t hate us, but I don’t know if you’ll love is either. Thanks for coming in.

Dick: Bye-bye.

Annuity Timing – Jump in or Wait?

June 1, 2012 By Annuity Guys®

Annuity Guys®, Dick and Eric examine the question on the mind of many people when comes to selecting an annuity in today’s depressed rate environment – should I jump in now or should I wait?

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Read the article that stimulated this weeks topic…

Why Indexed Annuities Keep Charging Ahead

In the first quarter, indexed annuities topped the charts in sales growth among all annuity lines as compared to first quarter 2011.

The sales volume still did not surpass that of more traditional annuity products, such as variable annuities^# and fixed deferred annuities, but in terms of sales growth, the products were definitely the leader of the pack, and by a substantial margin.

What’s behind it? The answer is in the sales results themselves.

The sales results

First quarter indexed annuity sales reached $8.1 billion — up 14 percent compared to first quarter 2011, according to estimates from LIMRA. AnnuitySpecs.com is reporting similar results — first quarter sales of $8 billion in 2012, up by more than 13 percent from first quarter last year.

The differences in results reported by the two firms are not significant, given that the firms have slightly different lists of participating companies as well as different research parameters and definitions.

But the double-digit growth that both firms identified is significant, especially when viewed against the performance of other annuity product lines. For example, total variable annuity^# sales fell by 7 percent in first quarter 2012 compared to first quarter last year, according to LIMRA. That was on first quarter 2012 sales of $36.8 billion.

In addition, total fixed annuity sales fell by 10 percent on first quarter sales of $18 billion, LIMRA says. That was despite the two-digit jump in sales of indexed annuities, which are included in the fixed total.

The total fixed annuity plunge was a result of sales declines in most fixed annuity categories that LIMRA tracks other than indexed annuities. These other categories include fixed rate deferred annuities (down 28 percent on sales of $7.1 billion compared to first quarter last year), book value annuities (down 32 percent on sales of $5.8 billion), and fixed deferred annuities (down 11 percent on sales of $15.2 billion). Fixed immediate annuities were the only products to flatline, coming in at 0 percent gain on sales of $1.8 billion.

AnnuitySpecs points out that first quarter indexed annuity sales did lag the previous quarter by 3 percent. But Sheryl J. Moore sees the product’s 13 percent increase over first quarter sales last year as the more compelling figure. Moore is president and CEO of Moore Market Intelligence, which owns AnnuitySpecs.com.

“No other lifetime income product is as strategically positioned to thrive in this low-interest rate environment. In fact, the indexed annuity is well-suited for any market environment,” Moore said in releasing her firm’s first quarter numbers.

LIMRA portrays indexed annuity sales as “the driving force in the fixed market” for the first quarter, and points out that for the third consecutive quarter, the products “outperformed traditional fixed annuities, capturing 45 percent of the fixed annuity market.” [Read More…]

Annuity Guys® Video Transcript:

Eric: We’re going to talk about annuity timing. Should you jump in or wait?

Dick: Well, that’s the big question. Do we jump in or do we wait and that’s a question we hear all the time.

Eric: We’re hearing it a lot.

Dick: Recently.

Eric: Especially even with people we’re working with in the last couple weeks, because things are changing. The market is changing, but why is the market changing?

Dick: Well, I think it has something to do with the government forcing these interest rates down.

Eric: Uncle Ben, are you doing it to us again?

Dick: These treasuries are setting new records on the downside, literally daily. So this is really making a difference and putting a lot of pressure on the annuity companies, and obviously banking instruments too, to lower rates dramatically.

Eric: Right. I mean we look at what has happened and I’m going to blame Europe, because they’re not here in the room with us, but the pressures of what’s happening with Greece and Spain and the euro and the flight to safety has been the flight to the United States. Bring us all your dollars, your euros, your yen. We’ll take them all and it’s pushing down the fed, the 10-year treasury is down 25%, from the beginning, just a couple of months ago.

Dick: So the big question gets down to do we jump in and do an annuity now for timing issues or do we wait for the rates to increase? Just recently, Bernanke has indicated that we’re likely to see this low rate environment, for three to five years. It wasn’t very long ago he was talking about the next year or two.

Eric: Yeah, it started it was going to be—when they started making these announcements telling us, giving us the information on how long they’re going to… it was 2013, then it became 2014, and then his latest statement is 2015. So now we’re in a—I don’t want to say **guaranteed low rate environment.

Dick: Yes, so how long do we wait for retirement? How long do we wait for these rates to change? Retirement isn’t always, say a choice. I mean there are a lot of reasons why we retire, and sometimes we just need to make that decision, because we need the income or we need the safety of the money. There are many reasons that we would move some money into an annuity.

Eric: Right and I think that’s the key. Why are you putting money into the annuity? If you need income and you don’t want to have to have that worry about outliving your money that’s where the strength of the annuity still lies. Now are we starting to see annuity companies start to pull benefits off the table?

Dick: Last week we had what three or four of them? Major companies start to pull back and just yesterday maybe, we were notified again?

Eric: I’ve seen two today of companies that have made announcements that within the next week to two weeks they are reducing their benefits.

Dick: And how many people have we met with over the past year or two that said that they were going to wait for things to go up?

Eric: Yes. I can remember two years ago when, oh my, gosh it was at 4.50% in the caps and they were like, “You know it’s going to go up to 5.0%. I’m going to wait till it’s a 5.0%.” Right now people would kill for 4.50%. So it’s trying to predict the market on that side, you just can’t do it, if you’ve got a crystal ball… What we’ve got though is we’ve got **guarantees of the fed. That’s probably not a **guarantee.

Dick: I was going to roll with you on the **guarantees. I was going a different way.

Eric: Prediction by the fed that basically, “Hey, we’re going to keep rates at a low level.” So timing-wise, do we wait? Well, if it’s income…

Dick: Then we should not wait, because the **guarantees that are offered right now on annuities for this income account, for the rollup to create a larger income in deferral is still excellent, and it’s about to take another step back.

Eric: It’s still better than what you’ll get in other areas sometimes, but the annuities excel right now with income. Guaranteeing a rollup and deferral, those are the pieces that really are superior. The lifetime income benefits versus some of the other pieces.

Dick: And if you need immediate income there is the possibility of using a hybrid, as some type of an inflation hedge or using an immediate annuity that has a **guaranteed cost of living adjustment. So there’s no reason not to consider going forward, if it’s that time to retire with immediate income or putting money aside for deferred income, because this is where the annuities really do shine.

Eric: Exactly. All right now so if I wanted to buy an annuity for growth, I’m trying to get the most bang for my buck in the sense of return, should I still buy an annuity now or should I consider other alternatives?

Dick: Yeah, we have a bridge to nowhere and we have an annuity in a package deal, right now. No, Eric. I say if you want growth we really have to think outside of the box. I think that we can still utilize safe money vehicles and use insurance companies for this, but I think that we need to be looking at more the secondary annuities, these would be like, pre-owned or pre-issued annuities, and you can find yields all over the internet.

Eric: Pre-owned, is that like buying a pre-owned car, a pre-owned annuity?

Dick: It’s certified. Actually, it is certified by the court. They’re court ordered. So they’re very, very safe. It’s backed by the insurance company, or the annuity company, the same as a standard annuity. Someone actually bought an annuity. Decided for whatever reason they did not need this annuity and they sold it on the secondary market.

And so by doing that, it can create a much higher yield. So we’ve been able to help different ones with yields in the neighborhood of between 5.0-6.0%. However right now, you see on the internet, you see advertised a lot, if you know where to look, somewhere in that 4.0-5.0% range. It just depends on the source that you have for these annuities. Another one would be that you could get growth. What would be another area?

Eric: Well, as you say, sticking with similar life insurance, in the sense of you’ve got life settlements, now. Life settlements are a little bit more unique in the sense of you’re buying life insurance that somebody decided that they didn’t need. Usually, it’s that someone purchased it and it was for a spouse and the spouse predeceased them. So they have a life policy they no longer need, so there’s more benefit to them by actually selling it on the secondary market, than cashing it out sometimes.

Dick: Right. So you know you’re going to get paid out on that and you know it’s **guaranteed by the insurance company that’s behind it, so it’s relatively safe, very safe actually.

Eric: You’re basically buying—you and usually a group of people are buying the premium. You’re paying the premium, in exchange for the death benefit, so you don’t necessarily always know when…

Dick: You never know when somebody is going to pass.

Eric: The people that underwrite these basically go in and they calculate, look at the life expectancy.

Dick: Of their life expectancy.

Eric: Usually they try to time it to 3-4-5 years, so you could expect it to happen, but you can’t **guarantee it. You’re putting this down, knowing you’re going to get this. You just don’t know how long it’s going to take.

Dick: So you always know that you’re going to have an increase in the money. You just don’t know what the percentage of the yield will be, based on the timing.

Eric: Right. You know you’re going to get the death benefit. You just don’t know when it is coming. You’ve also gotten another life insurance product. You’ve got your indexed life insurance. Now your caps there have not been impacted nearly to the extent that the annuities have. You’re still looking at caps that 12-14%.

Dick: Yes, and they’ve held up all through the whole financial crisis, so that’s again not for everyone, but it is an area where if you’ve got the right scenario, the right situation you get a pretty darn good growth on that. You do have to pass a medical audit.

Eric: Yeah, you have to be insurable or know somebody that’s insurable.

Dick: Know somebody who is insurable, right. So that’s thinking outside of the box.

Eric: There are alternatives out there, safe money alternatives.

Dick: If you want to earn somewhere in that 5.0% to maybe 7.0% range, and even in some cases it can go into the double digits, but we’re trying to be a little bit more conservative.

Eric: We’re by nature conservative.

Dick: Under, what do we call that, under promise?

Eric: Understate.

Dick: Over deliver.

Eric: That’s right.

Dick: Back to, did you have a point that you wanted to hit there, on something?

Eric: No. I was looking at the article that kind of stimulated the topic for today and talking about the changes, and what’s going on in the annuity market.

Dick: The annuity world out there.

Eric: You’re seeing a lot more of the purchases on the indexed annuity side, and I didn’t know if we were ready for the summary statement in this sense, but it’s basically looking at the changes and there are a lot more people purchasing indexed annuities.

Dick: Right, which are considered the hybrid annuity, so the fixed index annuity.

Eric: We like to personally think we’re responsible for the increases in the annuity market, but in all likelihood, probably not.

Dick: We’re rising a tide, across the nation with them.

Eric: And it’s because of one, the income riders. The ability for in retirement, and then you also have a safety of principal and a hope for gain.

Dick: Right. So you put all those factors together and compare the hybrid annuity or the indexed annuity to just a standard fixed annuity or the variable annuity^#. What we’ve seen is a great increase in the overall rate of sale, of the indexed annuity and the hybrid annuity and a decrease in the fixed annuity, which is paying very low rates right now, and also in the variable annuity^# which introduces the market risk factor.

Eric: People are agreeing with us more and more that they see the benefits of safety of principal and **guarantees, either whether it be, through just the **guarantee of not losing principal or increases in income.

Dick: Right. Well, I think we need to sum it up with—is this a good time to jump in?

Eric: Yes, and no.

Dick: He sounds like me, now.

Eric: If your timing is that you need income, if you want growth, there are vehicles out there that we would encourage you to look at.

Dick: If you want income it’s a definite, that a portion of your portfolio can go towards an annuity and the timing is probably better to move than to wait.

Eric: If you’re retiring now?

Dick: Or in the near future.

Eric: Yeah, as you say, you probably don’t have time to wait.

Dick: So that’s it for today, folks. Thank you for spending time with us.

Fixed Index Annuity Returns Reviewed

February 29, 2012 By Annuity Guys®

Dick and Eric take a look at the Wharton study and what it means for anyone considering a fixed index annuity as the chassis for the hybrid annuity.

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In 2010 the Wharton Financial Institutions Center updated their published study on the empirical performance of fixed index annuities based upon the products offered and the actual interest credited. What Jack Marrion, Geoffrey VanderPal and David Babbel found was ground breaking and eye opening for many in the financial world.

Their findings dismissed most of the previous studies concerning fixed index annuities due to erroneous findings based upon hypothetical data and non-valid assumptions. What the Wharton Study found was that during specific time periods fixed index annuities actually performed competitively with alternative portfolios of stocks and bonds.

Index annuities were originally introduced in the United States approximately twenty years ago as an alternative to mutual fund^{^}s. These annuities allow their holders to participate in growth from stock market indexes, yet prevent the risk of loss to the annuity owner’s principal in years when these popular indices produce a loss. This type of annuity has produced much higher annuity rates or interest crediting than traditional fixed annuities.

Due to this feature, money flowed very quickly into these types of annuities during the Great Recession of 2008-2009. In fact, according to LIMRA over 30 billion dollars flowed into fixed index annuities during both 2010 & 2011 and now represent 41 percent of fixed annuities sold annually (LIMRA, 2-16-12).

Why would money flow into financial instruments in such a volatile environment? Fixed index annuities during their history have actually performed competitively and even outperformed popular market indexes during period of high volatility.

To quote the Wharton study, “How will index annuities perform in the future? We do not know but the concept has proven to work in the past and any articles should reflect this. FIAs were not designed to be direct competitors of index investing nor have FIAs been promoted to provide returns to compete with equity mutual fund^{^}s or ETFs. The FIA is designed for safety of principal with returns linked to upside market performance.”

Annuity Guys® Video Transcript:

DICK: You know we’re here today to talk about the Wharton Study and Eric, before we get into the Wharton Study here and I know this kind of ties into it, but let’s just talk about fixed index annuities, which is what the Wharton Study is about. Let’s talk about the popularity of fixed index annuities in recent years.

ERIC: Well, it comes into why did we decide on this topic today? Just recently LIMRA came out and gave us some of the tallies from 2011 about what the most popular annuities and the flavors of annuities that were out there, were and of the fixed annuity chassis, so to speak, of that flavor indexed annuities amounted for 44% of the sales in the fixed annuity chassis world, which was over $30 billion, about $32 billion in sales of fixed index annuities.

DICK: And that’s been going on for the last couple of years.

ERIC: Yes, they’ve been increasing popular ever since they kind of came into existence in 1995. They’ve kind of gradually built, built, built and now they’re pretty consistent at being over $30 million in sales.

DICK: Yep, which is very good, and one thing I’d like to do is maybe tie that back into the Wharton Study, which we were talking about. We’ve got up on the board and he’s sitting in front of us. The Wharton Study folks, if you haven’t read it yet, it’s available in our annuity reviews blog, so you can get the link there.

But you might find it to be good reading, because it actually takes what was just assumptions that were maybe based on erroneous types of assumptions and actually brings it down to real data, so that we can actually look at fixed annuities and compare it even to the popular indexes like the S&P 500, and just see how it really performed.

ERIC: Well, and I like some of the fascinating statistics they toss in there. They look at indexed annuities being part of an index and one of the things they analyze and they break down is the Russell 3000, and I just find that index comparison fascinating, because they say the Russell 3000 takes into account 98% of the stocks that are out there. They said that when they looked at their analysis between 1983 and 2006, that has 98%t of the stocks, publicly held in that index.

DICK: Yes.

ERIC: Of that and this is the fascinating statistics for me, 40% of those stocks had a negative return during that time period, 20% lost all their value, while about 10% gained over about 500%. So and what their determination was, when they said you’re better off picking the index because you’re going to cover all those bases. You’re either going to get those big returns, and if you’re picking individual stocks…

DICK: Well, you could be on either side. And the chances are much more likely to be on the downside.

ERIC: You can hit the home run or you can hit the strikeout, and you’re back on the bench.

DICK: Right, let’s talk about the last decade or so, 10-12 years. What we call the lost decade, and how did fixed indexed annuities; I’m asking a rhetorical question here; but how did fixed indexed annuities compare to let’s say, the S&P 500 during that let’s say the first decade of the 21st century?

ERIC: If you take the decade as a whole, you know, everyone kind of looks at the 2000 to 2010, you know the S&P was basically flat.

DICK: Right, we call it the lost decade.

ERIC: There was nothing there, but if you were in the indexed world you got good returns.

DICK: And when we’re saying the indexed world, we’re talking about fixed indexed annuity world.

ERIC: Right, in this case we’re talking about it from an indexing standpoint, because of how indexing works, you get the gains and then you lock them in. Get the gains. Lock them in. Now when the losses come, you’re locked in so you don’t take that that bad.

That’s what we call zero is your hero. We’ve kind of talked about that a couple times and that’s where this comes in and it points out, the Wharton Study points out that, because you’re not having those big drops, you’re returns over a period of time, were actually pretty good. Are we predicting future performance with this kind of study?

DICK: It’s going to outperform the market in a good market? I would say no. But on the other hand, I’ve had a lot of folks that have actually sat down and we’ve talked about that difficult time like with the S&P and the major indexes. When we look at the fixed indexed annuity and we look at several of the different annuities that have performed during that time and it’s more now in the Wharton Study, is that they also outperformed those indexes.

The reason they could do it is, just what you were explaining and that is because when the index drops dramatically with a fixed indexed annuity that actually locks in all the gains that it’s had. It might just have a zero; no increase in that particular year, but now it’s locked in at a new low. So what happens the next year? The market goes up. Maybe the market doesn’t go up enough to make up all that it lost, but any gain that it has a portion of that goes to the fixed indexed annuity.

ERIC: Right, so you’re interest in crediting, coming off of a bad year is a good thing.

DICK: Is a good thing, right. So that in essence that allows it in extreme volatility or flat or down to actually produce a real return, where the market can’t produce a return, but the fixed indexed annuity can. Let’s talk a little bit about the way that a fixed indexed annuity actually is able to accomplish this. I mean a little bit of the inner workings, the mechanics of it.

ERIC: I’m not a brain surgeon, but I can tell you that they utilize options, put options, and call options.

DICK: Well, call options is what they’re using.

ERIC: Primarily, to basically buy pennies on the dollar. You’re buying the indexed, the strategies of the indexing, so you’re buying pennies on the dollar and if you get the gains, you get big returns and if you get losses, they expire or basically become worthless.

DICK: Right, exactly. They allow the options to expire for pennies on the dollar and these large companies are in a position to have the type of financial management, to continue to manage money in this way. And let me also take this in the other sense of the safety of the annuity.

The actual premium that’s put into the annuity is fully **guaranteed, in the sense that it’s invested in treasuries, investment grade bonds, very high-quality investment instruments, so that it can **guarantee that the principal will be safe, and that there’ll be a minimum return. It’s **guaranteed by fixed indexed annuity company, even if the market doesn’t perform or the call options don’t perform.

ERIC: They’re using the power of leverage. I mean it really is that way, that’s how they’re making those dollars and bringing those returns, those interest crediting back to you.

DICK: And now we do know that the fixed indexed annuity performed very well during what we call the lost decade, and actually outperformed many of the indexes that it was being used to measure against. I can see why that drove a lot of business into the fixed indexed annuity market. Now as of late, of the last couple of years what we’ve experienced has been lower caps, and yet fixed indexed annuities have continued to sell like crazy. People have continued to pour money into these, to the tune of $30 billion, last year $32 billion.

ERIC: And I will tell you it’s just another safe money alternative, when you compare it to money market accounts, CD account, but your opportunity for growth, we never thought 3.0% sounded like a slam dunk, but 3.0% is a great return, when your CDs are paying a .50%, your money markets are paying a .75%. Three percent, all you need is one good year to get you a 3.0% return, and it kicks the butt of anything that you had from the bank.

DICK: Well, and then we come into this whole hybrid annuity concept, where it uses the fixed indexed annuity chassis and then it has this innovative income rider on it that **guarantees 8.0% compounding. Because what we find, Eric in our practice, is that many of our clients actually need income.

ERIC: Right. We should say that the 8.0% is not on every annuity rider.

DICK: Yeah, well, 7.0-8.0%, some of them the lowest are 6.0% on some of them.

ERIC: The riders out there in deferral are what you can use to **guarantee income and that is a huge predictability for retirement income, and so when people are looking at a fixed indexed annuity and then taking in that additional rider option, it becomes a very powerful thing and even compounds what they found in the Wharton Study.

DICK: Right, right and I do believe from everything that I read and see and hear that, as we have more and more baby boomers they’re coming into retirement and they have to have answers for secure income. What we would call a pension style foundation to the portfolio that annuities are going to continue to be a viable answer in that area.

ERIC: We’re seeing more and more endorsements. We’re seeing them endorsed by the government, endorsed by people like ourselves, who are retirement planners, and basically becoming a large portion of what you should utilize, perhaps as part of your retirement.

DICK: As a portion of your portfolio. Well, I think that we’ve covered the Wharton Study in the sense of the general idea of what it’s about and really want to encourage you to check it out.

ERIC: Check it out. Yeah, check it out online. We’re more than happy to put a link out there on our site, so take a look.

DICK: Thank you.

Annuity Fees – The Nasty Truth

February 27, 2012 By Annuity Guys®

The conventional press has maligned annuities for years due to high fees and surrender charges, as well they should… when they exist. Confused yet? You should be. We have all heard the saying about throwing out the baby with the bath water and the same can be said about annuities. If we group all annuities into the “high fee” category we will be throwing out the baby.

Before we continue our thoughts we must express what we feel is obvious. All financial products have a cost of doing business whether it is a reduction of dividends returned, a fee or a charge. Financial professionals, investment and insurance companies are all compensated for their efforts in assisting you. So as we proceed we are not seeking to find the “free lunch” financial product – we are trying to make sure that you understand what you are paying so that you can make the determination as an informed consumer.

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Dick and Eric discuss annuity fees and some of the hazards and misconceptions of with differing types of annuities.

Annuities come in many “Flavors”

A trip to your local financial professional to select an annuity can seem a lot like a visit to Baskin Robbins… you may end up wishing there were only 31 flavors.

Let start on the most basic level (the chocolate, vanilla & strawberry if you will), here we have variable, immediate and fixed annuities. Variable annuities have fees… lots of them typically. Fixed and immediate annuities typically do not have any fees or charges.

Variable Annuities

Variable annuities all have at the very least mortality and/or expense charges (M&E). This fee pays for the insurance **guarantee, commissions, selling, and administrative expenses of the contract.

Variable Annuity Fee Guide
Annual fee (as % of account value) for:	Number	Typical
The insurance (M&E)	_____%	1.35%
The investments within the annuity	_____%	0.95%
Riders and options	_____%	0.65%
Total annual fee:	_____%	2.95%

What you pay to get out
Surrender charge (as % of withdrawal)	_____%	7%
Years before surrender charge expires	_____	8

Your next questions should be, “What do I get for paying this fee?” You usually get an added death benefit that basically **guarantees that your account will hold a certain value if you die before the annuity payments begin. This typically means that your beneficiary will at least receive the total amount invested even if the account has lost money.

The other expenses in the M&E are just truly that – expenses.

In addition to M&E expenses variable annuities^# (VA) also have management fees on subaccounts. The subaccounts are the mutual fund^{^} choices available within a VA. The management fees are the same as an investment manager’s fees within a mutual fund^{^}. These fees will vary depending on the subaccount options within the annuity. Typically, they will be less than those charged by a managed mutual fund^{^} within the same investment category — though not always.

The fees associated with a VA’s riders and options can increase the cost of the VA significantly, but these are optional. However, I would hazard to say that most of today’s variable annuities^# are sold because of the riders and **guarantees associated with them.

Why would anyone consider a VA with the amount of fees attached, two primary reasons; tax deferral and unlimited market upside potential.

Immediate and Fixed Annuities– the NO Fee Option

For the purpose of our fee discussion when we look at these annuities in their basics forms there are no fees are charges associated with these products. How do the agents and insurance company make money then you ask… similarly to the same way banks make money when you obtain a certificate of deposit. The expenses and cost are figured into the price of doing business by limiting or “managing” what they will return to you in the form of interest or dividends.

What about Equity Index or Fixed Index Annuities

Let me state this emphatically. A fixed index annuity is still a fixed annuity! So there are still no fees. All the index does is offer a choice to tie interest crediting to a gain in an index rather than a fixed number stated by the annuity provider.

Ready for the Chocolate Sprinkles – of Fixed Annuities

Due to the popularity of the income riders on variable annuities^#, fixed annuities have begun to add their own riders – typically for a fee. Some of these annuities are referred to as “Hybrid Annuities” because the riders let you construct an annuity that can combine pieces from the fixed, immediate and variable worlds.

The Ever Popular Hybrid Annuity – Fees can be Tricky

Hybrid annuities typically charge fees for income riders. The income riders typically have fees of less than one percent. However, you need to be sure you know which account the fee is based from. Hybrids with income riders have an account or ledger that tracks the value of the income rider account growth – this account typically grows at a higher percentage than the cash accumulation account.

A key for understanding hybrid account fees is to determine which accumulation total the fee is based upon. Some companies use the number to determine the amount of fee, even though you cannot use this account for a lump sum withdrawal. Other companies use the actual cash accumulation amount to determine the fee. However, the fee is always deducted from the case accumulation account and never from the account.

Why would you pay a hybrid rider fee? Much like the variable income rider, the hybrid rider fee allow for predictability of accumulation for an account geared toward retirement income. The main difference is that the insurance company is assuming the investment risk with a hybrid annuity.

Conclusion

The fees and expenses imposed by some annuities can be costly to own. You have to understand what you are getting for those dollars you are giving up. Annuities of all varieties are basically tools to give you insurance on you income. They are vehicles that are designed to provide a . When utilized correctly they can provide a level of comfort and security for anyone wanting a **guaranteed lifetime income.

Annuities are multifaceted devices that can be key pieces of a savings or retirement plan. Do not let the popular media discourage you from choosing the best decision for your future! Understanding what each annuity fee does empowers you to the best decision for you.

Annuity Guys® Video Transcript:

Dick: We want to clear up some misconceptions maybe about annuities and fees, because you see that in the press a lot don’t you, Eric?

Eric: Oh, the conventional wisdom, everything you read, headlines, “Oh, annuities fees, don’t use them. They’re so bad, nasty, nasty, nasty.”

Dick: Now there is some truth to high fees in annuities. We don’t want to say that there isn’t any aspect of that that needs to be brought out.

Eric: Well, the analogy is throwing the baby out with the bathwater.

Dick: Yeah, we don’t want to do that.

Eric: If you’re going to cast all annuities as being bad, then you’re going to lose some good opportunities, because not all annuities if your fee driven, are bad.

Dick: Well, even the annuities that have the higher fees, in the right situation, if they’re presented properly, they may fit certain situations.

Eric: Exactly, usually you’re exchanging a fee for some kind of service or some kind of piece that you’re given.

Dick: Right, so you’re either going to pay a higher fee or perhaps you may earn a little less.

Eric: Let’s deal with the first flavor of what the highest, the typical highest fee annuity, which is the one that is most castigated about and written about, which is the variable annuity^#. Variable annuities typically have higher fees.

Dick: Much higher fees.

Eric: And the reason is…

Dick: They have more upside potential. That’s one aspect of a variable annuity^#, yet the fee structure has to do with mortality, because they have a death benefit.

Eric: A lot of them have a death benefit. Then they also have mutual fund^{^} options, their investment options. So what you’re doing is taking out an annuity wrapper, so to speak and wrapping it around a mutual fund^{^} option.

Dick: And typically Eric, when we have a mutual fund^{^} just an average fee structure for a mutual fund^{^}, is approximately what?

Eric: Oh, you’re getting at least a.50%.

Dick: A half is minimal, pretty much.

Eric: Now I’m not talking about the load expense that you’re going to pay up front, your ongoing expenses could be .50% and usually 1.50%, so those fees exist in either world.

Dick: And I believe according to some data on Morning Star that they kind of look at the average and the average mutual fund^{^}, is somewhere around 1.15% now. It used to be 1.5% not very long ago, but it is right around 1.15%. So you take 1.15% and say on a variable annuity^# your mortality expense, your mortality and your expense ratio, M&E charges, you’re looking at an average of somewhere around maybe 1.50% or so. You put that with 1.15%, now you’re pushing you’re pushing 3.0%.

Eric: And then you start adding on the riders and that’s where the variable annuities^# get really expensive, but that’s the…

Dick: That’s the **guarantee part of a variable annuity^#.

Eric: Exactly, those are usually what most people are sold on, when they buy a variable annuity^#. You want that insurance on your investment.

Dick: Right. So if the investments are not performing very well, obviously those fees are going to eat in pretty quick to the principal. In addition if you’re taking money out, so the principal may be at a little more risk, but the income is not or the potential for your heirs with a death benefit, because of the rider on the variable annuity^#.

Eric: Right, but that’s typically the one thing we see out there when people are looking at fees, they’re looking at that variable annuity^# and so you can have variable annuities^# as low as .25% and as high as over 5.0%, if you start adding on all those riders.

Dick: It really adds up fast.

Eric: So there’s your high fee option. If you’re fee adverse knowing that your principal’s at risk and some other things with the variable knowing how they work, you have to make the educated choice.

Dick: Right, right and then a lot of times all annuities as we started out saying, in the press you tend to see annuity, high fee, but there are a lot of annuities that have no fees.

Eric: Exactly and when you look at fixed annuities and immediate annuities there are no fees.

Dick: There is no fee. It’s kind of known that you’re not, maybe going to earn as much—when I say you’re not going to earn as much; you’re don’t have as much earning potential, as you would have maybe in a variable annuity^#, where it can earn as high as the market goes. You may have a declared interest rate in a fixed annuity or you may have an index option, which indexes to a popular S&P or Dow Jones or something of that nature.

Eric: And those are your low fee/no fee options. People say, “How do you get paid? How do those places make money if there are no fees?” Well, it’s the same way a CD at a bank. The bank doesn’t say, “Oh, I’m going to charge you a fee. I have to pay the salary of the guy that sold it to you.” It’s all factored in as a part of the price of doing business. It’s all built-in to that expense. So what you’re earning on that annuity is truly all, basically earnings. There are no fees that are taken out of those products.

Dick: So I think that’s one thing that we just want to clarify, is that when you are buying an annuity that there are some annuities that really virtually have no fees. They protect your principal. They maybe don’t have as much upside potential. They’re purchased for other reasons than just the potential of a high return. They are purchased for safety, for a more secure retirement vehicle, and those are the ones that do not have fees.

Eric: Now when we talk about fixed annuities and we say there are no fees there is of course the mystical hybrid annuity, which is built off of a fixed annuity chassis, in the sense of your principal is not at risk. However, there are fees associated typically through the riders.

Dick: Yes, there are.

Eric: That is one of the things, when you look at a fixed annuity you can’t just throw the blanket over the fixed annuity and say none of them have fees.

Dick: There are some fees.

Eric: Because if you’re going for that hybrid option, which has basically, an income rider or a long-term care rider, if you’re adding a rider on, that’s where you are going to potentially see fees.

Dick: Right. I do think that we have to add the caveat that the fees typically are very low on the indexed annuity, under 1.0% as a rule, and sometimes some of those riders come with no fee involved. We do want to make that clear.

Eric: Exactly, so it’s understanding, if the rider that you’re buying gets you further to what you’re trying to accomplish with either your savings plan or your retirement cash flow plan, those are the times you’re willing to give up some of that upside or you’re willing to pay for that **guarantee. It’s insurance on your money. It’s insurance on your retirement plan.

Dick: Well, you know that you can potentially by buying a rider, by paying a fee, say it’s a .50% or .75% something of that nature, you know that you can **guarantee that your income potential could double in 10-years of what you would have today, just by buying that rider. That could be money very well spent.

Eric: Well, you’re putting a **guarantee of your future income in the bank. You’re banking on that retirement dollar being there, you’re buying an income stream. That’s what those riders are designed for. They’re designed for income, not for accumulation. If you’re designing them for accumulation, you’re being sold a bag goods, because that’s not what they’re for. They’re income riders, for your future income.

Dick: Exactly. Well Eric, I don’t know that if we’ve cleared up everything on fees, today.

Eric: Well, not necessarily everything. I guess the one thing we should in closing with the hybrid annuity. There is one caveat that you always have to be careful, when you’re working with your adviser you want to ask, “Is the fee based off of the cash account or the accumulation account?” Now we’re not going to explain that in this video, because it would take us another 30 minutes.

Dick: But there’s another part of that I want to give a little clarity to and that is that the fee never comes out of the income account, so even though we haven’t gotten into the detail of the income account and the cash accumulation account, we’ve done that in some other videos. That the fee always comes out of the cash account, so it reduces your cash value, but the income account has whatever the compounding amount is in there, say if it’s 8.0%, it’s not deducted. There is nothing deducted. So now we’ve really confused you.

Eric: I was going to say, “Now we’ve confused you.”

Dick: You have to watch our next video.

Eric: Perfect time to call your financial adviser or to give us a call.

Dick: Or give us a call.

Eric: Thanks very much for watching.

Dick: Thank you.