Nowadays, it seems nearly impossible to beat the bank — unless you are talking about their interest rates paid to a saver!

Retirees have been pummeled by an artificially depressed rate environment which filters down to interest offered by banks. Good thing, there are alternatives to traditional bank rates paying next to nothing. Insurance companies and the payments on annuities have also dropped off, although they still manage to consistently offer substantially better yields than their bank counterparts.

So, do fixed annuities beat bank interest rates? Simply compare and you will see that they do quite handily!

Is now a good time to place money into an annuity? Watch as the Annuity Guys® -Dick and Eric, discuss how the political and economic decisions of today impact annuities and retirees.

**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.

The Annuity Guys® believe a lot of the future economic impact will be based upon the decisions of Janet Yellen, read more about her in this Washington Post Ariticle.

Nine amazing facts about Janet Yellen, our next Fed chair

By Dylan Matthews

Janet Yellen will be appointed Fed chair tomorrow. Neil and Ylan already wrote the definitive profile of her, but here are the main things you ought to know going into her confirmation hearings.

1. She is perhaps the most qualified Fed chair in history.

Paul Volcker is the only Fed chair who even comes close to Janet Yellen’s level of experience.

Just look at the competition. When he was appointed chairman, Ben Bernanke’s only prior government service was three years on the Fed board and six months as chair of the Council of Economic Advisers (CEA). Alan Greenspan had three years as CEA chair.

Yellen, by contrast, has served for three years as vice chair, headed up the San Francisco Fed for six years, ran the CEA for two years, and before that did a three year stint on the Fed Board of Governors. She also did a stint as an economist at the board in the late 1970s, for good measure.

Only Paul Volcker — who had a multi-decade career at the New York Fed and the Treasury — even comes close to that, and he had nowhere near as much exposure to the highest echelons of the Fed system as Yellen has. If experience is your main criterion, Yellen is hard to beat.

2. She’s been a powerful voice for the unemployment hawks on the Fed.

In various speeches — perhaps most notably at the AFL-CIO — and in Fed deliberations, Yellen has been clear that she thinks subpar growth and too high unemployment are the biggest problems facing the Federal Reserve. “Maximum employment,” she has emphasized, is the main goal of the Fed at this point in time. In her words, “With employment so far from its maximum level and with inflation currently running, and expected to continue to run, at or below the [Federal Open Markets] Committee’s 2 percent longer-term objective, it is entirely appropriate for progress in attaining maximum employment to take center stage in determining the Committee’s policy stance.”

3. But she’s more than willing to crack down on inflation when the situation requires it.

As Evan Soltas and Matt O’Brien have noted, Yellen is plenty hawkish when the situation requires it. In the mid-1990s, when she served on the Fed Board of Governors, she made it clear that she thought unemployment was dangerously low, low enough that employers have to hike wages, which in turn leads to higher prices, i.e. inflation. “We have an economy operating at a level where we need to be nervous about rising inflation,” she said at one meeting. “We can’t dismiss the possibility that compensation growth will drift upward, raising core inflation and in turn inflationary expectations. This is a major risk. Obviously, we need to be vigilant in scrutinizing the data for signs of rising wages and salaries.”

So inflation hawks, take heart — if and when it’s actually worth worrying about inflation, Yellen will be ready to handle it.

4. She’s pretty darn good at predicting where the economy’s headed.

Yellen’s predictive record is the envy of the Fed. As Ezra noted, she was one of the few voices at the Fed in December 2007 warning that recession could be around the corner. At a time when most thought the worst of the subprime crisis was over, she was skeptical. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned.

It was far from the only time she got it right when her colleagues didn’t. Indeed, an analysis by the Wall Street Journal revealed that Yellen had the best predictions of any Fed policymaker in recent years. [… Read More at the Washington Post]

Transcription:

Eric: Hi, I’m Eric.

Dick: And I’m Dick. We’re the annuity guys.

Eric: And we’re going to examine today whether or not fixed annuity rates, will they’ve really beat bank interest rates?

Dick: You know Eric, to set the stage for that a little bit, we’ve got a nomination coming up here of Janet Yellen…

Eric: Ohh, so Uncle Ben, we’re throwing out Uncle Ben way and bringing her in?

Dick: New Federal Reserve Chairman and I think that we have to talk about where interest rates have been and where I think that they’re going to go, and then answer that question.

Eric: My general belief and I’ll start with – typically you see annuities are paying a higher return than banks are.

Dick: Well, historically.

Eric: Historically. So you’re fees are here and traditionally annuities are going to pay somewhat higher

Dick: But right now; the savers, the retirees, the folks that have been diligent in putting their money away – preparing for this time in their life…

Eric: welcome to the penalty mess… you no longer being treated like royalty.

Dick: So, we got this upside down world now where you’ve done everything right and now you get penalized with very, very low interest rates; and it would appear appearances that we’re building a nice bubble up into the stock market and just a very securities where that money is flowing instead of into savings nationally. Who would want to put money in a bank account that’s getting…

Eric: That’s getting zero…

Dick: Half of percent, a percent…

Eric: And people don’t really think about these terms but when put money into a CD or a money market account, you’re actually losing money because the effect of inflation is actually eroding what’s there. Your spending power is decreasing every year.

Dick: And folks who would maybe otherwise not put money in the market? They have no place to put their money that can earn anything. So, they’ll maybe take more chances and go a securities route. And that’s where we do find a lot of folks will turn to annuities and again looking for “hey, what’s got at least some comparison in terms of safety but gets a better interest rate?”

Eric: There’s a misnomer a little bit about fixed annuity rates because a lot of times; it’s going back to the term fixed; they tend to think the annuity rate is the same every year when they start out. It’s not necessarily always that case. Your first year rate is fixed and then the insurance company goes back to the next year with another year fixed-rate. Now, those rates can change already at all-time lows, would not be advantageous to say select an annuity where the rates could actually…

Dick: where you get a good initial rate. We call it a teaser rate or introduction rate. But they ask the idea that your rates could increase that does have an attraction to some; and then to others, they want that concrete, that absolute **guarantee that if I put my money in here I’m going to at least get XYZ. And, it would be the CD style or the multi-year **guaranteed annuity.

Eric: The nice thing is annuities have that flexibility in saying “hey, if you want that same rate **guarantee over a period of time, that’s an option.” If you think that interest rates are going to come up and you just don’t have another place to go, well, here’s a place where you can park money and get a market return each year based on what the companies willing to offer based on the market condition.

Dick: Yes. So, it can go up, but conversely, it can also go down. Well and back to that we’ve started with originally discussing where rates are going; with Janet Yellen, being the nominee for the Federal Reserve Chairman to replace Ben Bernanke; the concern is that she has a lot of the same strategies and thoughts, she’s going to follow that same line to pumping a lot of money into the economy, artificially holding rates down trying to pump up employment; and this is the biggest experiment we’ve ever done with monetary policy on this level that could really backfire on us in a big way. It does appear it’s going to hold rates down for a long time.

Eric: Well and I think the statement that’s been made by the Fed that says “until we get to an unemployment level of 6.5, below that level we’re going to keep rates where they’re at.

Dick: That could be a long, long time.

Eric: And we’ve talked to people consistently. They’re on the sideline; they’re park in cash, they’re park in zero percent basically returns because they expect rates to go up. They just can’t foresee this poor rate environment lasting but we’ve got people that are basically in charge of all rates telling us they’re going to keep them here until we get to this.

Dick: And Eric, this is why it does make sense, I believe, just financially – just doing this simple math; that if you keep money parked at a half of a percent and you got the opportunity to earn 3 percent or three and a half percent or something of that nature; by putting it in a shorter term type of an annuity and you made all those gains for the next year or two to three years before that rates tend to go back up; so, now if they do go up a little bit higher than your three, three and a half percent; at least you didn’t lose anything during those years. You had your money working and there’s just that nice offset to getting your money working today and then knowing that you can still do something later.

Eric: Well and I’m a big fan of laddering. I talked about laddering. In fact, I talk about laddering MYGA’S in the terms multi-year **guarantee annuities. We’ve got decent rates at five, six, seven percent. Well, five, six, seven years…

Dick: I was waiting where you’re going on that one.

Eric: But looking at those, by staggering those terms, you have money becoming available. It may take some shorter terms now but always having kind of that circular nature. Rates when they change are not just like flipping a switch and all of a sudden it’s going to be 5 percent tomorrow…

Dick: Right.

Eric: You’re going to see gradual changes. It’s best to get money in a place right now where you’re getting at least a competitive return to combat inflation and having that ability to kind of just keep recycling those ladders as they come available.

Dick: I agree and a lot of folks who have done that for many years have CDs and other types of banking instruments; and so, using them with annuities should not be anything unusual. And right now, it is a fact that annuities are considerably higher than bank rates, and there are some shorter-term annuities that give you a little more flexibility in the event that the rates do eventually take off.

Eric: I look at the average 5-year CD before we started. We are at one point three is the average.

Dick: And we’ve seen recently three, three and a half percent from five year annuity.

Eric: MYGA style. So, there are better options available…

Dick: Than the banks.

Eric: In my opinion.

Dick: Thank you.

The post Do Fixed Annuities Beat Bank Interest Rates? appeared first on Annuity Guys®.

Never to fear, we have a cost of living adjustment (COLA) in Social Security to help save us — maybe not the more generous COLA that we have come to expect if the President and Congress decide they should balance a portion of the budget by restructuring the consumer price index (CPI) formula used to calculate increases in social security income.

Can annuities be used to hedge against depleted spending power in retirement? Certainly! Today’s hybrid annuities are bringing forth solutions for just that concern. Annuities developed by multiple insurance companies are now offering options to tie annuity income to inflation tracking indexes such as the CPI-U. This creates an additional option to other strategies used by advisors in the past such as laddering annuities.

Watch as Dick and Eric discuss the potential change in the CPI and what annuity strategies you might consider if inflation is a concern for you in retirement.

**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.

Check out this article from Walter Hickey on what the change in the CPI  might mean for Social Security.

How Obama’s Plan For Chained CPI Is Both A Stealth Tax On The Middle Class And A Cut In Benefits For Grandma

Last week it was revealed that the President’s budget proposal will include a revision to the way the government calculates the impact of the rate of inflation as a concession to House Republicans.

Still, a switch to chained CPI from the current rate demonstrably cuts benefits to seniors and could be a stealth tax on primarily the middle class.

The Consumer Price Index (CPI) is used as a proxy for the annual cost of living adjustment used to keep federal benefits in line with inflation.

There are several different ways that economists calculate the Consumer Price Index, according to the AARP Public Policy Institute.

• CPI-W is the current cost of living adjustment index for Social Security. It reflects the spending habits of households where the income comes from a wage earner.
• CPI-U expands CPI-W to reflect the spending habits of the retired, professionals, the unemployed and self-employed as well as wage earners.
• A new, experimental CPI-E looks exclusively at how the elderly spend their money.

“Chained CPI” refers to another adjustment, particularly to CPI-U.

As an example, CPI-U and CPI-W already incorporate people switching from Starbucks coffee to homemade when prices increase.

Chained CPI-U takes that a step further — the idea that when coffee gets more expensive, people switch to orange juice. It incorporates more switching.

When it comes down to it, Chained CPI-U spits out a lower rate of inflation than regular CPI-U, which already spits out a lower rate of inflation than the current CPI-W. As a result, were the government to switch the way they index cost of living adjustments to chained CPI-U from CPI-W, payouts to seniors would increase at a much slower rate.

This means that over time, seniors receiving Social Security see their benefits cut. [Read More at BusinessInsider.com]

The post Hybrid Annuities as an Inflation Hedge appeared first on Annuity Guys®.

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

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

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

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

Should you get an inflation-adjusted annuity?

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

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

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

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

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

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

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

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

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

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

Annuity Guys® Video Transcript:

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

Eric: You don’t know Jack.

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

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

Dick: Or Germany.

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

Dick: Anarchy in the street.

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

Dick: Nothing’s going to save it.

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

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

Eric: Your interests.

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

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

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

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

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

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

Dick: Right. And immediates will . . .

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

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

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

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

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

Dick: Right.

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

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

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

Eric: I “annua” that.

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

Eric: Oh, yes.

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

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

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

The post Will a Collapsed Dollar Harm Annuities? appeared first on Annuity Guys®.