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Millions of Pensions Dumped – Can Annuities Fill the Gap?

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Every time you turn on the news it seems we are bombarded with information on pension reform or the scaling back of retirement benefits. In 2012 Ford and General Motors began offloading their pension liabilities and based upon a recent AON Hewitt survey many other business are considering following suit.

What will that mean for the retiree who counted on that lifetime income? What options will they face? Is it doom and gloom or perhaps a new opportunity to take better control of their own retirement?
Watch as Dick and Eric examine this changing trend in retirement funding, what opportunities it creates for individuals and how annuities may play a role in creating a pension styled lifetime income.

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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.

Over the last 12 months we have reviewed lump sum buyout opportunities with many individuals and discussed whether or not an annuity might work for their situation. When we ran the numbers – some individuals were better off with their company options when it came to **guaranteed levels of income… but until you run the numbers based on each individuals situation you can never be sure.
See the report from insurancenewnet.com that led to this weeks entry below.

Survey: More Employers To Offer Lump-Sum Payouts In 2013

LINCOLNSHIRE, Ill., Feb. 13, 2013 /PRNewswire/ –Last year marked a watershed moment in retirement benefits as numerous companies decreased their pension risk exposure by offering participants a one-time lump-sum pension payout. A new survey by Aon Hewitt, the global human resources solutions business of Aon plc (NYSE: AON), reveals more employers plan to follow suit in 2013.

Aon Hewitt surveyed 230 U.S. employers with defined benefit plans, representing nearly five million employees, to determine their current and future retirement benefits strategies. According to the findings, more than one-third (39 percent) of defined benefit (DB) plan sponsors are somewhat or very likely to offer terminated vested participants and/or retirees a lump-sum payout during a specified period, also known as a window approach, in 2013. By contrast, just 7 percent of DB plan sponsors added a lump-sum window for terminated vested participants and/or retirees in 2012.

“There is no question, employers are looking for new ways to aggressively manage their pension volatility,” explained Rob Austin, senior retirement consultant at Aon Hewitt. “In 2012, many DB plan sponsors were exploring options and planning their strategies—we think 2013 will be the year when many more actually implement large-scale actions such as offering lump-sum windows. Pension Benefit Guarantee Corporation (PBGC) premiums will begin to increase in 2013 and 2014, which will increase the carrying cost of pension liabilities and give plan sponsors an economic incentive to transfer those liabilities off their balance sheet.” [Read More…]

28 Risks Retirees Face – Part 2

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What are the risks everyone will face in retirement? We recently received a list of retirement risks prepared by the financial planning team at Global Financial Private Capital. This list comes as close to encompassing all the risks that retirees face as we have seen. Annuities do not answer or alleviate all of these risks, but they can control a significant number of the risks retirees have to consider.

This week Dick and Eric discuss the last 14 risks retirees face and how an annuity can be utilized to address some of these potential concerns.

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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.

  1. Tax Risk – Significant tax increases or elimination of tax benefits.
  2. Loss of Spouse Risk – Planning and financial hardships that arise upon the death of the first spouse.
  3. Unexpected Financial Responsibility Risk – When the client acquires additional unanticipated expenses during the course of retirement.
  4. Liquidity Risk – The inability to have assets available to financially support unanticipated cash flow needs.
  5. Legacy Risk – The inability to meet the philanthropic and/or bequest goals that the client has set.
  6. Financial Elder Abuse Risk – An advisor or family member preys on the frailty of the client, recommends unwise strategies or investments or embezzles assets from the client.
  7. Reemployment Risk – The inability to supplement retirement income with part-time employment due to tight job markets, poor health, and/or care giving responsibilities.
  8. Home Maintenance Risk – The inability or unwillingness of clients to continue household chores and activities that they once handled themselves, which may require financial resources to pay for these outsourced activities.
  9. Timing Risk, also known as Point-in-Time Risk – Considers the variations in sequences of actual events beginning with different time periods.
  10. High Debt Service Risk – Clients retiring with significant mortgage, student loan, and/or consumer debt that may erode the resources needed for retirement spending.
  11. Procrastination Risk – Clients started saving for retirement too late.
  12. Retirement Saving Opportunity Risk – Working for an employer that did not provide a retirement plan.
  13. Inadequate Resource Risk – Clients have not saved enough to provide adequate retirement income.
  14. Unrealistic Expectation Risk – Client makes poor choices because he/she was not properly educated, or remained unaware, about the consequences of insufficient retirement income planning.

Read the 28 Risks Retirees Face – Part 1, here.

Annuity Guys® Video Transcript:

Eric: Today we’re talking part two, of our 28 risks to retirees. We left off on number 14, so we’re going to tackle the second half here and start with number 15.

Dick: I’m ready for number 15.

Eric: All right, and its tax risk. It’s basically what happens if they eliminate certain tax benefits or if perhaps maybe, the tax brackets increase.

Dick: Let’s take an informal survey here, Eric. How many people think taxes are going to be going up in the future? How many people think taxes are going to be going down in the future?

Eric: So there is some tax risk out there especially when you’ve got things like IRA’s, which are not being taxed now, they’re going to be taxed when they come out on the other side.

Dick: Right. Well, we’ve got Roth’s, which offer a great tax benefit and there’s always the possibility that that could be taken away.

Eric: Right, that was with our public policy risk from last week, and if you don’t know what we’re talking about, I encourage you to check out last week’s video.

Dick: Life insurance. That’s another one. It has a lot of great tax advantages.

Eric: They’re tax-free, tax deferral, [unintelligible 00:01:14].

Dick: Annuities, so as we face all of these possibilities one thing we’ve told our clients, because they’ve asked us the same question, “Well, if I go ahead and go forward with this plan, what assurances do I have that the government won’t change the rules and disallow this for me?” Well, there are no assurances, but one thing that we have been able to say with some confidence, is that in the past, the government has grandfathered those that acted in good faith, and were using a viable strategy that was allowed by the IRS, but the new folks trying to get into that strategy…

Eric: Right, it goes away, usually. I guess what we’re saying on tax risks don’t wait for the rules to be changed, because then it is too late.

Dick: Exactly.

Eric: Interesting, the next one here we had a little too much fun probably with this; loss of spouse risk.

Dick: Yes. Well what can annuity do to replace your spouse, Eric?

Eric: Well, in this case replace the spouse…

Dick: I don’t think that’s what they’re talking about, do you?

Eric: It’s not go out and get yourself a new one, but it’s the financial. Each spouse brings a financial benefit hopefully to the arrangement, and what happens when one is gone?

Dick: It makes a big difference, and many times it’s not factored in properly, and usually there will be one spouse that will be in a better position, if they lost the other spouse financially, than the other spouse would be, because it would create a great hardship. So you’ve got to determine which one is, maybe at the greatest vulnerability in the plan.

Eric: And pension factors, social security impacts, what happens. And you hate to sit there and do the math on it, but you have to know what the impact is going to be if one spouse is gone, and how it’s going to impact, not just the financial aspect, but then there’s also replacing some of the service aspects and things that they do around the house. Little things go a long way, here.

Dick: Right, number 17?

Eric: Unexpected financial responsibility risk.

Dick: Where something blindsides you, and you’re caught unaware with a huge bill.

Eric: Yes, I always think of the kid that is going to move back home with me or the parent that’s going to move back in with you.

Dick: Or the child or grandchild that had an unexpected health need, that wasn’t going to be covered by insurance.

Eric: Right, what happens when the unexpected happens?

Dick: And you need to get your hands on that money when you need to spend some of it.

Eric: So it’s having that bundle, so to speak of dollars, available for that unanticipated need.

Dick: Right, right. And in some ways that isn’t a job for an annuity, so you really have to think in terms of an annuity, how can I position this money and leave it alone, so that I’ve got additional money for those unexpected things that may happen.

Eric: It’s having that resource though. Then we have liquidity risk, so by liquidity risk we mean having basically, cash on hand. It’s that ability to go get and take and walk away.

Dick: Which goes back to what we were saying, don’t put too much money in any one area without having some liquid money. Another good example of that area could be stock.

Eric: Right, stocks. It’s even annuities.

Dick: Sure.

Eric: If you over-obligate too many of your dollars into resources where, if you’re going to have to go get them out, and take a penalty for having to go get them.

Dick: What happens if the markets fall?

Eric: Well, you’re buying high and selling low, so you’ve just reduced your principle.

Dick: So you don’t have the liquidity, unless you want to shoot yourself in the foot.

Eric: And the same thing, if you’ve spent too much on a CD or an annuity, you’d have to go in and get it out early and there’s a surrender or a penalty. Those things can impact you negatively, as well. It is having the right amount in liquidity in place, and the flexibility in your plan to be able to go get those assets.

Dick: Another risk concern, it doesn’t really affect everyone but we do have clients that it is important to, and that is their legacy. They want to leave something behind.

Eric: Yes, charitable giving. I see hospital wings with people’s names on them.

Dick: A scholarship, some type of a benefit that they want in their memory.

Eric: That they want to leave money for this. Well what happens, if what you think you’re going to leave is depleted by either poor market returns, living too long, I mean sorts of legal things. So how is your legacy going to be impacted by [inaudible 00:06:32]?

Dick: And if it’s important to you, then you have to consider how you’re going to make that real.

Eric: Yes, so number 20 here is very interesting, financial elder abuse risk. Now we were talking a little bit about little known laws, that require children to provide for their parents.

Dick: Yes, yes. In many of the states; and I was just reading this recently and maybe we can do a little bit more of an expose on it in future videos; but that a lot of the states have laws on the books that actually require the children to take care of the financial responsibilities of the parents, if the parents cannot handle. So a few of the states have tested this a little bit, and some children have been called into play and even, may potentially face criminal activities, for not supporting their parents’ needs, when the parents thought that their poor planning or poor decisions would not affect the children.

Eric: Right, and then it goes back to more, I would say the more common aspect, where the children don’t make good decisions, or they have a financial adviser that takes advantage. Things that happen along the lines to basically deplete the resources, thus abusing the parent/child relationship, financially abusing it.

Dick: Number 21, in the time period that we’re in, with employment numbers the way they are, for retirees they do face the challenge if they would lose a job, a part-time job, a full-time job. Maybe it was supplementing their income. Will they be able to get reemployed?

Eric: Right, we joke somewhat and the Wal-Mart greeters are going to be…

Dick: Yeah, replaced by security cameras, and…

Eric: The jobs that you think you are qualified for as a retiree, sometimes you’re over-qualified, and it’s tougher to find those jobs. A lot of people didn’t really anticipate having to go back to work, and things have changed. So that reemployment risk or needing to be reemployed…

Dick: It can be serious, if you’re relying on it.

Eric: Number 22, is home maintenance risk, which if you’re a homeowner, you know what it takes to maintain it right now. Well, as your resources are depleting, all of a sudden you think your house is paid for and everybody talks about “my house will be paid for by then.” But will it need a new roof? Will it need a new furnace?

Dick: Right and another area of vulnerability on this Eric, that a lot of times folks don’t look at are reverse mortgages. A lot of folks say, “Well, I’ll get a reverse mortgage. It’ll take care of me. Give me that equity, out of my home.” But then you still have to maintain that home. If you cannot maintain that home, then you could be in default on the loan.

Eric: True, if it goes into a state of disrepair and the other aspect of even being elderly is being able to maintain, if you’re physically not able to do the chores. The lawn mowing, the upkeep, those things come into play, because you have to hire those things out, a lot of the time.

Dick: Right. Well, timing risk, that’s another thing in terms of what catastrophic things that might happen.

Eric: Yeah, I think it’s the actual events that impact all of us financially and some of them are unpredictable. A tsunami wipes out the entire town, an earthquake.

Dick: Tornadoes.

Eric: They can take away your business. They can take away your home.

Dick: Are you properly insured, this type of thing?

Eric: Exactly, and it’s that you can control and things that you can’t control. What’s going on in Europe right now is an actual event that’s happening that’s impacting our ability to earn and save, because of a financial crisis that wasn’t of our doing.

Dick: It all gets down to some point in time, that we have no control over, and so if timing is in our favor it goes very well, and if timing’s not, we can’t afford that in retirement.

Eric: Right, it’s just the times we live in, basically. You can’t change the time. All right, what about number 24 here, high-debt service risk.

Dick: Well, I think that most retirees want to say they’ve got their home paid off. They own their cars. They’ve got some money in the bank, and obviously we’re very fortunate ourselves but also a lot of the clients that we work with, that have gotten themselves in a very good position financially. But we do talk with some folks occasionally that will have some pretty sizable debt going into retirement. This can turn around and bite you, especially if you’ve got a variable rate mortgage or something of that nature.

Eric: Variable rate mortgages, buying that new house right before retirement sounds, “Oh, it’s beautiful. It’s what you always dreamed for,” but it comes with a new price tag. I always talk to a lot of clients especially in their 40’s, about spending money on college. Well, those college loans, they let you defer, defer, defer well all of a sudden, your son or daughter who’s the doctor now and 12 years of accumulated college loans that you’re on the hook for. You can pay them off over the next 20 years. Well, you’re in retirement now and you’re paying off your kid’s college loan still. How much of your retirement dollars, have you put into paying off those pieces?

Dick: Exactly, you’ve lost the time value of the money earning and growing. So I do think that when we look at the high debt situation, that we do have to also, recognize that there are way that you could have debt, and yet have the money set aside to service that debt. To pay that debt off in full and you could be earning some arbitrage, making some money on your money, and so there are ways to do that effectively. We don’t want to just say that everything has to be paid off. There are smart ways to be in debt.

Eric: Yeah, there’s strategies, if you don’t do number 25, which is procrastination risk.

Dick: There you go, I like that. Nice segue.

Eric: Yeah, we planned that very carefully. We hear this all the time, the rates are too low. The rates are going to improve. I’m going to wait til next year.

Dick: I can think of dozens of examples dating back to 2008-2009. “I’m just not going to do anything. I’m going to wait.” Well, how well has that worked for you?

Eric: What’s the impact on your retirement on waiting, starting too late? We always talk about, if you’re going to save for retirement if you put the same amount of money in between the ages of 20-28 and then stop; is the same as putting it in from the ages of 28 to almost age 60; so it’s just because of the compounding out there and my math’s probably off a little here, but it’s truly what you’re putting away. What it costs us to wait.

Dick: It’s what you can put away and how long you can let it grow and compound, so procrastination is probably the greatest enemy to achieving your objectives in retirement. Even though you might think, “Well, I’ve only got five years or ten years,” there are some wonderful things that can be done and annuities can accomplish a lot of these things with **guarantees, so that you know that you’re going to have, at least a certain reasonable income.

Eric: Right, right. All right 26, retirement savings opportunity risk. So in simple standard language it’s working for an employer that doesn’t have a retirement plan.

Dick: Or you just didn’t contribute much to it.

Eric: Well in this case, I think they’re blaming the retiree. It’s the employers fault, because if they were supposed to take care of me and provide for retirement.

Dick: Things have changed.

Eric: Yeah, if you don’t take the onus on yourself that really does impact.

Dick: Right, if you haven’t saved enough it doesn’t really matter if it’s the employer’s fault or your fault you haven’t saved enough.

Eric: And I think what we’re seeing is a generational change, from that defined benefit plan where you worked for an employer, and part of their obligation is they were going to give you a retirement that took care of you, for as long as you lived. That was going to be your benefit for working there for so long. Now we’ve got these 401k programs that are really more an individual’s responsibility.

Dick: Which really ties us into 27, which is the same thing, inadequate resource risk, you just don’t have enough.

Eric: And this is the speech we have with 401k participants, because their thoughts, “I’ll put in the minimum and the employer will put in this much, and I’ll be fine for retirement,” until they start running numbers.

Dick: Yeah, exactly. There’s no silver bullet. If you don’t have enough money set aside, you’re just limited in what you can produce for an income.

Eric: Well, you’re going to have to step down your living. Your standard of living is going to go down, because you haven’t put away enough resources, and it’s tougher to do later in life. That’s that procrastination thing.

Dick: Well and, this is a good place to wind things up. We’re on number 28 and that’s having unrealistic expectations of retirement, and what it’s going to produce. What the results of that retirement are going to be, based on what you’ve saved. The old saying, “We have champagne taste and beer pocketbooks.” That’s a job that an adviser has to help the client a lot times, understand.

Eric: It’s hopefully what we’re doing here with these videos. Talking about and making you aware. We’re trying to educate and present the scenarios here, but you have to take responsibility for going out there and answering some of these questions. You’re now aware. You’ve been educated. You’ve been asked, but you have to make the right decisions going forward. You may not have saved enough to maintain your lifestyle. You’re going to have to make changes.

Dick: Right, you’re going to have to cut back a little bit.

Eric: Your expectation was here, well reality is here, and you don’t have any time left to make it up.

Dick: Or maybe you saved a much larger amount of money than you really need, and you have discretionary income and you can have some in the market. If you lost it, it wouldn’t be the end of the world. On the other hand, you’re in a very good position financially, and you need someone to help you understand how to spend your money.

Eric: And if all of this is overwhelming to you, and you don’t know which way to go, that’s the time to sit down with an adviser. Get somebody that can ask you these questions, if you’re not sure how to answer them, to present you with these scenarios.

Dick: We’ve spent 30 minutes doing these two videos probably, and realistically this would comprise hours and hours and hours of planning with most clients.

Eric: Yes, so we encourage you to sit down, take the time, start working through these if you haven’t already done so. Hopefully you’re working with an adviser that is asking you these questions, and setting the scenarios for you so that you can be prepared. Our goal is for everybody to have a safe, secure comfortable retirement, so these are some of the risks that we hope that you can avoid, and basically have abilities to deal with.

Dick: Absolutely. Well, thank you so much for spending your time, looking at these different risks that retiree’s face. They’ll be on the website, so you can check them out, and read about them. Take them to your adviser and do some serious, good planning.

 

28 Risks Retirees Face – Part 1

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What are the risks everyone will face in retirement? We recently received a list of retirement risks prepared by the financial planning team at Global Financial Private Capital. This list comes as close to encompassing all the risks that retirees face as we have seen. Annuities do not answer or alleviate all of these risks, but they can control a significant number of the risks retirees have to consider.

This week Dick and Eric discuss the first 14 risks and how an annuity can be utilized to address some of these potential concerns.

[embedit snippet=”video-specialist-button”]

 

**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.

  1. Longevity Risk – Outliving retirement resources by living longer than planned.
  2. Excess Withdrawal Risk, also known as Portfolio Failure Risk – The depletion of retirement assets through poorly planned systematic withdrawals that lead to the premature exhaustion of retirement resources.
  3. Inflation Risk, also known as Purchasing Power Risk – When the price of goods and services increases in such a way as to impede the client’s ability to maintain his/her desired standard of living.
  4. Long-term Care Risk – When dementia and/or physical impediments restrict a person from performing the activities of daily living and may require him/her to outlay significant resources for custodial or medical care.
  5. Incapacity Risk – As a result of deteriorating mental or physical health, a retiree may not be able to execute sound judgment in managing his/her financial affairs and/or may become unable to conduct his/her financial affairs.
  6. Health Care Expense Risk – Not having adequate medical insurance.
  7. Investment Risk – Losing money in the financial markets.
  8. Asset Allocation Risk – Losing money in the financial markets due to inadequate diversification.
  9. Market Risk – Events cause all stock market prices to fall.
  10. Sequence of Returns Risk – Receiving low or negative returns in the early years of retirement which will lead to a long-term negative effect on the ability of the retirement portfolio to provide the needed income.
  11. Reinvestment Risk – As higher-yielding fixed income investments mature, the client may be forced to reinvest that principal in a lower-yield fixed income investment.
  12. Forced Retirement Risk – Work ends prematurely because of poor health, care giving responsibilities, dismissal by the employer, lack of job satisfaction, or other reasons.
  13. Business Continuity Risk – The employing business closes and the client is unable to amass the appropriate amount of retirement resources.
  14. Public Policy Change Risk – An unanticipated transition in government programs such as Medicare and/or Social Security that were embedded in the retirement planning process to the point where they will not provide sufficient protection during retirement.

Annuity Guys® Video Transcript:

Come back next week to see the next 14 risks people with face in retirement.

DICK: Eric, there’s so many risks that we face in retirement and I know that you’ve put this list together. You didn’t actually put it together.

ERIC: With the help of some certified financial planners.

DICK: Right, that’s right; and amazingly, and we’re not saying this is exhaustive but it would appear exhaustive; 28 reasons– 28 ways that retirees are at risk.

ERIC: Yeah.

DICK: And I don’t think that there’s any way we can actually get through this in one session, so let’s call this part one.

DICK: Hopefully, we’ll get it done in part two but these, folks these are important. We’ll go through these one at a time. Annuities do not answer or solve each one of these.

ERIC: Not all of them.

DICK: But there are several that an annuity can…

ERIC: Impact an end player. Yeah, there are at least 11 of them, by my count. Basically annuities have the ability to negate or assist with and there’s a few more that there are options that you can add to an annuity that would help take care of some of these things.

DICK: Right. Let’s start off with number one here, Eric, longevity risk.

ERIC: Okay, and longevity risk is the first and foremost one that annuities take care of, because when you purchase an annuity you’re looking for lifetime income, typically.

DICK: So when we talk about longevity risk we’re talking about living too long.

ERIC: Too long. Yeah, living longer than you planned. Oops, I’m still here, right?

DICK: You’d have had enough money if you would have just died on time.

ERIC: Right, yeah. So that number one risk that longevity risk is really the one that fits hand and glove with annuities, because you don’t have to worry about outliving your money.

DICK: Right, which can be accomplished through immediate annuities, hybrid annuities even a variable annuity# can be annuitized.

So really virtually any form of annuity can solve longevity risk, if you have enough money and you’ve positioned it in the right way.

ERIC: Sure.

DICK: And we would contend that this is like a pension plan.

ERIC: Exactly, you’re self-directed pension, basically. So, all right, should we move on to number two?

DICK: Let’s go.

ERIC: Okay, excessive withdrawal risk, also known as portfolio failure risk.

DICK: Can you say that again?

ERIC: No, I have to read that.

DICK: Portfolio?

ERIC: Portfolio risk.

DICK: Okay, so what we’re really talking about here is actually not having enough money, for the amount of money that you’re pulling out.

ERIC: It’s very similar to longevity risk in the sense of you think that you put yourself on the clock, you have five years-worth of income.

DICK: I’ve got a half a million dollars, Eric.

ERIC: I can spend, I can spend; I can spend. And you’re just basically outspending what you’ve saved. Right. Your expectations…

DICK: So you really don’t have a plan. You’re just spending, because you feel that you’ve got quite a bit of money. And so that’s—you know, there’s some other things we need to talk about on that, but we’ll be coming up to that in a little bit. Now we look at number three here, this is one that I think everyone is concerned about in general terms and that is inflation risk.

ERIC: Yeah.

DICK: Losing our purchasing power and let’s talk about that, and how annuities might make a difference.

ERIC: Well, obviously, there are ways to structure annuities to give yourself an increase in income. Some of them have a staged series, where you can take a 3.0% increasing income across your life.

DICK: Right.

ERIC: Others have options that tie to an index, and there are even options now to tie it to the CPI or a version of the CPI, consumer price index. So those are ways to help guard against inflation with an annuity.

DICK: Right. So let’s just say, maybe in a simplified way, when it comes to using annuities for inflation that there are probably a couple of variations. One is an immediate annuity that will give you– or annuitization of a deferred annuity that will allow you to have some kind of a **guaranteed increasing income or there is another way to offset inflation and that is, you don’t need the income now so you can defer it and you can get a very high rollup rate, maybe in the 7.0% range that will allow your money to grow for future income needs

ERIC: Yeah, we call it, laddering is basically laddering annuities, so that you’re saving some out there. You may hope you never have to turn them on, but they’re there, in case the cost of living grows so much that you’ve outlived your income, so you need more.

DICK: Right. Okay, long term care.

ERIC: Oh, it’s only number four. Yeah, so long term care risk. I mean and people I mean none of us want to think about losing, the kind of the physical…

DICK: Sure. Going into some institution…

ERIC: And we talk about the activities of daily living, you know?

DICK: Right.

ERIC: Being able to button your shirt, being able to do the small things. There are things that if you all of the sudden you can’t do all those things on your own, how do you adapt so that your ability, and bring those resources in to take care of that situation so you can still have a comfortable, you know.

DICK: Well, I’ve seen these situations with clients where—I mean the first thing that we think of is being institutionalized, nobody wants to be institutionalized. And yet, many times that’s not the even the bigger concern, sometimes it’s just home health care. How do we get someone to come into our home and be able to afford them? Because that can actually be, sometimes even be more cost prohibitive, because it’s 24/7 care in your home.

ERIC: Sometimes.

DICK: Sometimes or it could just be a supplement. You’re right.

ERIC: Right, but it’s paying for that resource. Did you anticipate having to take care of that need?

DICK: And long term care with annuities there are different ways that we can provide some long term care benefits, supplement or maybe even, a full long term care plan with an annuity.

ERIC: Right, so there are pieces, riders typically, that you can utilize in annuity to basically make those kinds of contingency plans if you need them, but that’s one of those risks that’s out there that really needs to be addressed quite often.

DICK: Right.

ERIC: The next one, incapacity risk, now that sounds really deadly when you, but it’s– I have a family with a history of Alzheimer’s so it’s the mental, losing that physical, the ability to make the decision. We don’t say that the annuity takes care of this but what happens, if you can’t make those financial decisions?

DICK: You have to have planned in advance, because if you can’t make the decision, a decision’s going to be made for you and it may not be the person you want making it or the decisions you want made, so a little advanced planning can make a big difference.

ERIC: Right, so the financial matters, it’s not having the physical mental capacity, to take care of your own financial matters.

DICK: Health care, number six, health care expense.

ERIC: I think this is becoming more and more of an issue that’s coming into the forefront, with everything that’s going on. It’s what medical insurance going to cost? How much are we going to have to expend out of our pockets, especially as an aging community?

DICK: And this is one of the things that I have frequently discussed with clients and that is that they will inevitably say, “You know, I’m going to need more money in the beginning, because I’m going to be traveling and I’m going to be doing this, that and the other thing. So as I age, I won’t need as much.” But what they’re not counting into it many times is the cost of health care, and that’s the wild card. There are more and more things that are becoming electives that you have to pay for out of your pocket, so if you want a high quality of life, you’re going to pay for some of these things yourself in the future.

ERIC: Yeah, you don’t think about—yeah, you may be on an 80/20 plan, which seems like a great thing well, all of the sudden your portion of that 20% is getting to be a lot more expensive as you age.

DICK: Right, so I think that health care expense is a big risk that retirees face.

ERIC: Yes. So our next one here is investment risk which is obviously, if you’ve got money in the markets, the risk there of losing money in the financial markets. So a lot of people will put a portion of their money out there, still leave it in the equities. Well and there’s a chance that the market’s going to go up and the market’s going to go down.

DICK: Well, in a very general sense, Eric, the way that we like to discuss this with our clients in general, is if you have discretionary income, money that you can afford to lose. Then you may want to have it in the market or some in the market. But when it comes to that portion of your money that you want it to be secure and safe, annuities can be very effective in this area.

ERIC: And we talked about foundational income, protecting, having your covering your basic needs and basic necessities, with the foundational level of income. You know stuff that’s in the market you don’t have the time, sometimes to recover. It’s a risk-reward aspect, you have to realize those are higher risk, higher reward settings. You may not have the ability to recover as a retiree.

DICK: Yeah, these next couple here, Eric. Number eight and number nine are somewhat tied into the same risk area. One is asset allocation risk, having inadequate diversification.

ERIC: Yeah, and when we talk about asset allocation usually most people in the equities think, small cap, large cap, bonds, exposure. There are really more safe money positions, in addition to that, but it’s allocating across multiple places and making sure that you’re not having all your eggs in one basket. It’s simple. Don’t use that silver bullet. It may work very effectively for a big growth, but then all of the sudden it comes crashing down.

DICK: Right. You know when we look at annuities, there’s a lot of talk about non-market correlated assets, and annuities are very much non-market correlated, and you’ve also got an additional level of security and protection because annuities are basically secured, many times with very high grade investments and bonds, even government treasuries. So you’ve got the claims paying ability of the insurance company, actually even **guaranteeing another level above those bonds, which you don’t have if you buy the bonds directly.

ERIC: And here we’re talking about fixed annuities.

DICK: Fixed annuities, right.

ERIC: We should always be, the caveat there, if you’re in a variable annuity#, you’re going to have…

DICK: You’re going to have the investment risk.

ERIC: Exactly, and then market risks, which is of course…

DICK: Stocks fall.

ERIC: Yeah, it’s events that we’re looking at things right now. You look at what’s going on in Europe. It’s causing our market to fluctuate both up and down.

DICK: A lot of things that are out of our control. In the sequence of returns risk, this kind of ties back into one of the early ones that we had talked about and that was excess withdrawal risk and that’s when you’re…

ERIC: But it is tied into the market, as well.

DICK: Yes it is.

ERIC: We talk about a dollar cost averaging. Well, this is the reverse of that. When you’re putting in you’re going to buy more at the low times than at the high. Well, the same happens when you’re pulling out, by odds you’re going to pull out more at the low times. Well, you’re reducing your principal more quickly then, and so it’s that sequence of returns.

If you actually get negative returns while you’re pulling money out, you don’t get the advantage of compounding. So it really does become a much bigger impact when you’re using equities, as that safe storage place for your retirement plan, and so you have to be careful about sequence of it, and you can’t control it.

DICK: You cannot control it and there’s unfortunately, long periods of time where the market does go in a negative or in a flat position and you can really get yourself in a bad situation, especially when you’re in or near retirement. When you’ve got a lot of time ahead of you, and you can wait things out, it’s completely different then when you’re in retirement, and you’re very vulnerable.

ERIC: The next one’s kind of an interesting aspect, and its reinvestment risk. And we’ve had a lot of it lately especially with the people we’re talking to, and it’s basically, when your investments mature.

DICK: Like CDs?

ERIC: Like CDs right now. I don’t know how many people I’ve talked to that said “Hey, my CD was at 5.0%, it’s coming up due, and they’re offering me 0.8% for five years.

DICK: They’re in shock.

ERIC: Yeah. So, you thought you were getting a good deal when you did it, and by today’s series you did, and then, all of the sudden, it’s at maturity. Well, if you were living off that interest, that 5.0%, you were just pulling that interest to live off. Now it’s matured, what do you do?

DICK: Well, and this is where an annuity properly positioned, the right strategy, could even be a pre-issued annuity with a high yield, so there’s a lot of things that annuities can solve in this area, especially really when there’s no yield to be found in the banking instruments.

ERIC: Yeah, you usually think of things—you always hope will be higher when you come out. In this case, what happens if they’re lower?

DICK: You know this number 12 here, forced retirement risk, now you run into this quite a bit where someone maybe is relying on a younger spouse that’s working or maybe the two of them are healthy, and they believe that they have this many more years to work and then they’re forced into retirement.

ERIC: Right. Well and it can be their own doing. It could be the business’s doing. Something happens to them, that they have poor health. One of them gets injured on the job, all of the sudden, having 15 more years of anticipated work, turns into 2 or zero and now you don’t have that income or that level of income, to basically continue planning or preparing for retirement.

DICK: Exactly

ERIC: It’s become a lot more prevalent with how companies are kind of moving and downsizing.

DICK: Well and this is where with the flexibility of a deferred annuity, you can actually have your money earning and preparing for that day, even though, you don’t know what day that’s going to be. There’s enough flexibility, if it’s set up right that you can turn that income on when it’s needed.

ERIC: The business continuity risk is really what I was kind of alluding to in that, what if the business closes? What if you work for a small business and it doesn’t have to be a small business. You can look at what just happened with GM, we were on the verge of hundreds of thousands of people being out of work.

DICK: And then there’s been, is it Ford or GM that’s just recently done the…?

ERIC: Well, they both did. The pension change…

DICK: The pension changes, right. They forced people into choosing new options and foregoing what they thought they had.

ERIC: Right, so you think you’ve got your retirement taken care of and in this case, it’s still stable but your options change. How they’re funded it changes. What you expect to happen from the business being able to fund your retirement.

DICK: Hey, Eric. We’re kind of about halfway through here. Maybe we’ll call this our part one, but let’s take on number 14. I think this is a big deal. I think we’re in a lot of flux right now and that’s public policy change risk.

ERIC: Yeah, what do you do if the government changes the rules on you or basically, it could be the insurance companies, I guess too, but in this case we’re usually talking about the government?

DICK: Or forcing insurance company rules, you know to change, so we’re got, right now we’ve got our health care.

ERIC: Health care. Social security is in flux.

DICK: Medicare. State Medicaid programs.

ERIC: That’s right.

DICK: And then just all of the tax, which I think we’re going to get to that in part two, but all of the public stands that are being taken in what’s going to be taxed, what isn’t going to be taxed. How investments are going to be handled, capital gains, how insurance will be treated.

ERIC: Exactly.

DICK: Roth’s everything’s on the line.

ERIC: I mean here in Illinois we’re having problems with public employees. Their pensions are basically going to go away.

DICK: Right.

ERIC: And that’s the threat anywhere, of what’s going on here.

DICK: Exactly, and throughout the United States to various degrees.

ERIC: Exactly, so what happens if a public institution changes the rules, on how things are going to have to happen?

DICK: So again, all we can work with is what we have in the present, and know that in many instances especially going back, those that have entered into something in good faith, such as certain life insurance policies, and that type of thing that had tax benefits, they typically were grandfathered in, and then those new ones trying to get in were disallowed.

ERIC: Right, you have to plan based off the rules for today and you hope that the game doesn’t change.

DICK: Folks, this has been more of a little bit serious time of reflecting, on the various risks that retirees face. These are very real risks and Eric and I, deal with these on a regular basis with our clients and so we really wanted to take this in, kind of a serious sense, and take our time on them to some degree. So these first 14, call it part one?

ERIC: I think that’s probably, this is probably a good stopping point, but we’ll continue to go through this list next week.

DICK: Yes, talk about them individually.

ERIC: Because these are things, I think as you’re planning your retirement, these are questions you have to ask, ask yourself. I mean hopefully, your financial adviser that you’re working with, is asking you these questions as well, but you have to have a plan, or at least the ability to say “What are we going to do if this happens?” And so it’s a good strategy for us to, kind of go through all these pieces, lay them out there for you and give you some options to prepare your own answers.

DICK: Right, very important exercise. So thank you for taking your time with us and look for us next week and we’ll go over some other details on risks to retirees.

ERIC: That’s right, 14 more coming next week.

 

Is Social Security an Annuity?

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It is important to understand the way that Social Security was designed to function. By commercial standards, this is the ultimate lifetime annuity. The definition of an annuity is basically exchanging one’s money with some entity in return for a reliable income stream over a period of time based on a predetermined agreement. The strength of the annuity in this case is the full backing of the US government which is considered to be the safest financial haven of the entire world. With this, Social Security’s ultimate annuity aspects are:

  • Full Backing of the US Government
  • Tax advantaged – 0 to 85 percent is taxed based on income
  • Inflation Protection – cost of living increases (COLAS)
  • Income for life – eliminating longevity risk
  • Spousal, Family and Survivor benefits
  • Priced less than commercially available annuities

 

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

What did retirees do before 1935 when Social Security was not available? What about those less fortunate who had no supplement for their retirement income to survive? There was more family and church involvement on behalf of the poor and more hardship for certain. Here are some recent statistics from www.SSA.gov that demonstrate why Social Security, like it or not, is likely to be continued to a large degree as part of what it means to be a Social Security entitled US citizen.

  • In 2011, nearly 55 million Americans will receive $727 billion in Social Security benefits.
  • Social Security is the major source of income for most of the elderly.
  • Nine out of ten individuals age 65 and older receive Social Security benefits.
  • Social Security benefits represent about 41% of the income of the elderly.
  • Among elderly Social Security beneficiaries, 54% of married couples and 73% of unmarried persons receive 50% or more of their income from Social Security.
  • Among elderly Social Security beneficiaries, 22% of married couples and about 43% of unmarried persons rely on Social Security for 90% or more of their income.
  • Social Security provides more than just retirement benefits.
  • Retired workers and their dependents account for 69% of total benefits paid.
  • Disabled workers and their dependents account for 19% of total benefits paid.
  • About 91 percent of workers age 21-64 in covered employment in 2010 and their families have protection in the event of a long-term disability.
  • Just over 1 in 4 of today’s 20 year olds will become disabled before reaching age 67.
  • 67% of the private sector workforce has no long-term disability insurance.
  • Survivors of deceased workers account for about 12% of total benefits paid.
  • About one in eight of today’s 20 year olds will die before reaching age 67.
  • About 97% of persons aged 20-49 who worked in covered employment in 2010 have survivors insurance protection for their young children and the surviving spouse caring for the children.
  • An estimated 158 million workers, 94% of all workers, are covered under Social Security.
  • 50% of the workforce has no private pension coverage.
  • 31% of the workforce has no savings set aside specifically for retirement.
  • In 1940, the life expectancy of a 65-year-old was almost 14 years; today it’s almost 20 years.
  • By 2036, there will be almost twice as many older Americans as today — from 41.9 million today to 78.1 million.
  • There are currently 2.9 workers for each Social Security beneficiary. By 2036, there will be 2.1 workers for each beneficiary.

Low Interest Rates Hurt Seniors

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The Federal Reserve Board has not formally relaxed its intention to keep interest rates low through the end of 2014. And there is little new to say about the way non-existent interest rates on savings accounts, certificates of deposit, and U.S. Treasury securities have hurt all savers, particularly risk-averse investors.

Retirees are, of course, the poster children for risk-adverse investments, and their nest eggs have been hammered by the Fed’s policy. The Fed has said that low rates help the economic recovery. So it argues, in effect, that investors should enjoy the solid stock market returns and that savers should display a stiff upper lip. [Read More at US News…]

**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.

4 Ways New Annuity Rules Will Help Retirees

The White House last week strongly endorsed annuities as a needed but missing piece of Americans’ retirement plans. Insurance companies and annuity trade groups had something nice to say about Washington regulators for a change. And the new rules just might set in motion some interesting retirement-plan changes.

Among financial products, annuities have long been a very hard sell. It’s easy to understand the appeal of buying Apple stock or getting in on the ground floor of Facebook’s IPO. Understanding annuities and their benefits, however, is not on the minds of many investors.

The premise of an annuity is easy to state: Give some money to an insurance company and it will make **guaranteed payments to you for the rest of your life. The money can be paid now or in the future. The payments can begin at any time the investor chooses. And the lifetime stream of income promised by an annuity can augment Social Security and help put to rest a person’s fear that he or she will run out of money before they die.

[Read More at US News…]

Annuity Guys® Video Transcript:

Dick: One thing that really gets our blood boiling, and I would have to say a lot of the folks that we speak with, is this low interest rate environment that is really being penalizing to retirees.

Eric: The unfortunate thing is you’ve got a government who is forcing low interest rates down our throat.

Dick: Why would that be to our government’s benefit, Eric?

Eric: Let’s see here. If I print cheap money, and if I don’t have to pay it back at high interest rates . . .

Dick: If I owe $16 trillion, and there’s a way I can actually manipulate and hold interest rates low, that might be a good thing for me?

Eric: Just borrowing free money. We’ve been propping up the banks and propping up and, supposedly, economy by keeping these rates low, but the return effect is we’ve taken our retirees and our savers, and we’ve thrown them under the bus.

Dick: We’ve penalized them in a major way. When you look at the financial institutions that these interest rates were put into effect, supposedly, to help and to shore-up, these financial institutions are all passing their stress tests.

Eric: They’re making money.

Dick: They’re making money; they’re coming back. There’s a few that are having a challenge, but overall, our financial system at least gives the appearance that it’s been restored to some degree.

Eric: What they did is they designed this to basically push money into the economy to make it better to borrow. Borrowing helps the economy; that’s what the theory is here.

Dick: Stimulating the economy.

Eric: If you want to borrow money right now, it’s a great time, but if you’re getting close to retirement and you’ve already saved up everything, you’re now earning next to nothing on most of your major options or your safe money options: Your CDs, your money markets, the FDIC-insured options. You’re being forced to look at other alternatives.

Dick: Our corporations are cash-rich. The banks have a lot of cash that they don’t know what to do with. The demand isn’t there to borrow the money, even though the rates are extremely low. What I believe that this is leading up to, and I think, Eric, we’ve discussed this, is that there is no short-term fix.

Eric: No. In fact, Uncle Ben Bernanke has promised us that we’re going to keep interest rates at this level at least until the beginning of 2015. We’re sitting here, years away now, and people are saying, “Are rates ever going to increase?” The crystal ball in front of us says no, because we’ve got a **guarantee, or a pledge, to keep rates at a hyper-low level.

Dick: Our government’s motivation isn’t there to stimulate and raise the rates for savings, which encourages savings and that type of thing. The more that consumers spend, the more that they borrow, the more that drives the economy, and it has that other side effect of holding the government’s borrowing costs down. When we look at Japan, we go back to 20 years of very, very low interest rate environment, and the savers over there have had . . . who knows if we’re really following that model or not, but there are some similarities there.

Eric: I’ll be honest, and Dick’s heard me say, I don’t care about Japan. I’m worried about what happens here at home.

Dick: What happens to our clients right here in Central Illinois, United States.

Eric: That’s right. We’ve got people that are constantly walking in the door. I’ve had umpteen people that are typical CD borrowers, who walk in with their hands in the air, and they go, “What can I do? What are the alternatives?”

Dick: We’ve been pretty fortunate. We’ve been able to establish at least the foundational portion of many of our clients’ portfolios in annuities, and we’ve been able to ladder those annuities and get 8% **guaranteed growth on the income base anyway. Maybe the cash accumulation isn’t growing at 8%, but their income base is growing, that they can draw their income off of. It will have a tendency to outpace or stay ahead of inflation.

Eric: Just real quickly, when we talk about laddering annuities, what we’re talking about is basically having different start-points for annuities. You may turn on Year-1 and you may wait 5 years before you turn on another, and another 10 years before you would turn on a third.

Dick: You’ve got this 8% or 7% compounding year-after-year. The longer you can stretch it out, the better. You may need some income immediately or income in 5 years, and then income in 10, in 15.

Eric: To turn those on after those have been in deferral so they have a greater compounding effect.

Dick: The other choice that we have if somebody needs income right away, is to setup some type of an immediate annuity or a hybrid annuity that will actually have some cost of living adjustment built into it.

Eric: The one thing with [inaudible: 05:11] the immediate annuities, if you start them with a cost of living adjustment, they usually start a little bit lower than those that just have a normal life expectancy.

Dick: Similarly on some of the hybrids, but there are some hybrids that will actually start about the same point and still have a cost of living adjustment built into them.

Eric: That’s what we always talk about with the client: What’s the longevity expectation? If you have a longer than normal life expectancy in your family, that’s especially the time to look at those things, because that’s [inaudible: 05:39].

Dick: You can really come out ahead. Our goal is never to do out and beat up on the insurance company, but when it comes down to . . . Eric says, “Yes we do.” When it comes down to the client or the insurance company, we’re for the client.

Eric: That’s exactly right. We want you to make the most money possible back.

Dick: If you can win against the insurance company, then obviously, longevity is one of those variables, those wildcards.

Eric: Our goal is for everybody to win. I say that facetiously. I don’t want to take the insurance company down, but that being said, I want all my clients to benefit.

Dick: To benefit in the best way possible. We really come down to, Eric, a low-rate interest environment. It’s affecting retirees all over the country, and their choices aren’t that many.

Eric: No, very limited. I don’t want to say ‘in closing,’ necessarily, but in summary . . .

Dick: It’s okay. We can close.

Eric: Look at your full range of options because of the interest rate environment. It’s not the time to be sitting on the fence, unfortunately. People keep on saying, “If I wait.’ I’ve had somebody out there waiting for 3 years now, waiting for rates to increase, and the opposite has happened.

Dick: It lost ground, and they don’t have the same options they had a few years ago.

Eric: How long can you sit in a 0.5% CD?

Dick: With 3% inflation.

Eric: Exactly. You’re losing money by putting yourself in a . . .

Dick: You’re going backwards at 2½% to 4% a year, probably.

Eric: In summary, yes. Low interest rates hurt retirees, they’re very painful, but it shouldn’t stop you from taking action and making a progressive retirement plan.

Dick: Yeah, making a good decision. Use a good financial advisor and just weigh all the options. Thank you.

Are You Too Young or Old to Purchase an Annuity?

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What is the best age to purchase an annuity?

There have been a plethora of articles and reports about unscrupulous agents who sell annuities to senior citizens who did not understand what they were buying or the contractual ramifications of their decision. Due to the publicity of many of these unfortunate events there has been a blanket statement made by many that annuities should not be purchased by any over 70….. Hogwash!

In the world of financial planning and investment advising there is a need to have safe money options regardless of age. The key relies on the fact that the financial product should provide a solution to a financial need.

[embedit snippet=”video-specialist-button”]

 

**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.

Annuities by their name are designed to be income producing financial instruments. Yet, they can also be used effectively as estate planning tools.  Unfortunately for senior adults insurance companies safeguard themselves from bureaucratic regulators by limiting annuity purchase ages – most companies would rather err on the side of not selling an annuity to someone approaching or exceeding eighty years old than to risk being accused of an unsuitable sale by a regulator even if the annuity would be a great benefit to the purchaser.

Why wouldn’t an eighty two year old on their own or with their families consent buy an annuity when they want safety of principal, a higher growth potential than the local bank, a 5 to 10% bonus and all of the account value to bypass probate and go directly to their heirs with no surrenders or penalties? The main reason is that senior citizens are discriminated against by overzealous regulators that in the name of protection have caused the door to be shut on this legitimate purpose for annuities in estate planning.

It should be noted that the age limiting also applies to younger individuals. We have seen insurance companies pull back on benefit eligibility for younger individuals which seem “to promise to much” based on today’s interest rate environment when these benefits are extrapolated out over a younger person’s lifetime.

So again, what is the best age…

The most common age tends to be between 45 and 65. However, it depends on the type of annuity and your planned retirement age. Our most common experience has been to start utilizing annuities in retirement planning 1-15 years prior to retirement. Annuities excel at keeping retirement dollars safe and secure while providing growth for retirement income. We often discuss with clients that they should consider annuities for their income foundation or “If they cannot afford to lose principal” or if they “do not have the time to recover from losses in riskier financial choices” — then annuities are always prudent alternative for consideration.

It seems that every month or so I see a newspaper and magazine financial writer that writes a column gets asked a question like, “I’m 70 years old and my advisor wants me to by a (fixed, variable, hybrid) annuity, should I do this?” I’m sorry, but no columnist can effectively answer that question in 300 words or less, unless his/her answer is “it depends.” It’s not uncommon for retirees to live into their 90’s – and a 70 year old with a family history of longevity may be a candidate for an annuity if they have a concern about outliving their money. It should be part of the discussion – if it fits the need.

 So if I’m in my 20-40’s then I should not consider an annuity… right?

For younger individuals two key elements need to be part of the consideration when discussing if an annuity is a valid option. First, what are they giving up and at what cost? Younger clients who are disciplined enough to make regular contributions into an investment can benefit from dollar cost averaging. Also, they have the advantage of time — the longer the time before the dollars are needed the more likely they are to benefit from the volatile upside of some of the riskier investments. Second, how do they handle the loss of principal? Can they continue to invest into a financial product that may not always consistently grow? If they cannot stomach a loss then other safe money options like annuities should be part of the discussion.

Get Good Advice

In closing, we encourage you to get good advice. Find a financial professional that will listen to your needs and then work with you to find proper solutions. Ultimately it will be you who makes the decision on what to do with your dollars. Do not make decisions based upon a newspaper article or what your neighbor just did that sounds so great. Work with someone who has your goals in mind and you have a much better chance of meeting your retirement target.

Eric: Today, we’re going to talk about what is the best age to purchase an annuity. Now Dick, I see it in the newspaper all the time, “Dear Abby,” well Dear Abby isn’t quite right, but a financial columnist gets the question, “Dear, Dick; I’m 70-years-old. My financial adviser wants me to buy an annuity. Is this a good recommendation?”

Annuity Guys® Video Transcript:

Dick: Absolutely, if you’re 70-years-old, you should never buy an annuity.

Eric: Now 70 and a day, you’re okay.

Dick: Or what about 69 and a half?

Eric: Okay, that’s fine.

Dick: You know really folks; this is the problem with columnists and 300 word articles or whatever. They don’t really take your individual situation into account and where one 70-year-old buying an annuity could be completely the wrong thing, you know Eric we’ve seen that, on the other hand there are other 70-year-olds that have a unique situation, where an annuity could be the exact perfect answer for them.

Eric: Age; we hate to say age doesn’t matter, because really it comes into play in a certain aspect, but it’s all about longevity, expectations, and partly being part of your financial plan.

Dick: Right. If you want to get money over to heirs, maybe your children, you want that money to be safe. You want it to have better earning potential maybe than what the banks could give you.

Eric: Right now, that doesn’t take a whole lot.

Dick: It doesn’t take much. So there could be many of those factors. You want to avoid probate; that could be a good reason to consider an annuity for that purpose.

Eric: Exactly. So the blanket statement to say, “I’m too old for an annuity,” is not the right way of saying it. Now there are certain considerations. I would say as far as liquidity as far as what’s a sound investment, you have to trust the decisions, and that the people you’re working with are giving you good advice. If you ever don’t feel comfortable with any financial advice, get a second opinion.

Dick: And this is where I’ve had taken issue anyway, with some of the compliance regulations and the regulators, which they try to make it one rule fits all, and they don’t really take the individual into account. And I very frequently find that an older person is truly discriminated against, because they cannot choose what is best for their situation. The insurance companies are afraid to sell them an annuity or to allow them to purchase an annuity, because it could be looked at as something incorrect, even though for that person, it would be the very best thing in their situation.

Eric: Yeah, I think part of what happened; this is the historical perhaps side of it. There was a time when annuities were sold and the reflection was that, basically agents were just selling them because of a higher commission level. They were just going to sell them, no matter if they were the right fit or not.

Dick: Yeah, unscrupulous. Not doing the right thing. Taking advantage of people, and yet in every investment that we’ve known out there in the world of investments, there’s been someone that will take advantage of another person. So we have to be somewhat careful, and we can’t change the way the whole world, the investment world is set up. But because of that, I do feel that the protection rules have come down so strongly that now the insurance companies are afraid to sell or allow an older person to purchase an annuity.

Eric: And we’re not suggesting that if you have dementia that you should purchase an annuity. Basically, what we’re saying is that, if you’re of sound mind, and you’re making sound decisions and you understand how it fits.

Dick: And maybe even bringing the family into the decision. But even in the environment that we have now, if the family wants to come into the decision and help their 80-year-old mother purchase an annuity that would be a great thing for the family and for the goals and objectives of the client, they can’t do it.

Eric: Some insurance companies basically tie agent’s hands, based off of age. It depends on the company and what the age cutoff is.

Dick: Right, it seems like, when we get up around in that area of 78-80, in that neighborhood, it becomes pretty minimal what’s available.

Eric: Then of course there are people, I’m going to say in my age group that…

Dick: The much younger…

Eric: They’re also the discriminated against group that some of the benefits, I call them the richer benefits that are available on some annuities, the income riders. We’re actually too young. The benefits are actually too great.

Dick: The companies feel and I think that this should be a cue to some folks that are maybe a little bit more in that sweet spot, which I’m approaching, somewhere in that 50-year- old up to 65-years-old, that some of the **guarantees and that the companies feel are just a little bit too strong to offer to a younger person that could take advantage of that. So we do find this sweet spot to be somewhere between the ages of near 50, up to maybe a little over 65 or pushing 70, where an annuity can be positioned, either to start income immediately or defer it for up to 10 or 15 years.

Eric: I really like that. For me in my practice, those 10 years before retirement, it should be part of the discussion. Even if the decision is no, it should be part of what’s looked at as part of this.

Dick: I can’t tell you how many times, I know you’ve heard it over and over too. That someone has said, “I wish I would have known this ten years ago, five years ago, because why was I wasting my time?” Their money many times, hasn’t done any of the things that it needed to do, to be ready for where they are today, and they could have positioned it with contractual **guarantees, which is what annuities offer and at least that foundational portion of their income or their assets would have produced the income that they needed by this stage.

Eric: Well, and it takes some of the guess work out. If you take a portion of your retirement savings and you position it in a place where you know that you’re this age, your goal is to retire here, isn’t it nice to have predictability of what that income level is going to be at that point, and that is where it becomes part of the discussion.

Dick: So I think that truthfully, getting back to what we were discussing initially and that was too old or too young? I think that we would have to say that it depends on your unique situation. You’re never too old or too young, if it fits what you need.

Eric: That’s right. It has to be a solution to a financial problem and it’s a piece of the puzzle. If it fits it should be part of the consideration. So talk to your financial adviser. Find somebody that you trust and that you feel comfortable with and have the discussion.

Dick: That’s right. Thank you.

Understanding Immediate Annuities

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Today, people are living longer than ever before. While the idea of living a longer (and hopefully healthier) life is appealing to most of us, the tradeoff for many people is the fear of outliving their retirement savings.

On top of that, the immense costs of healthcare today––along with constantly rising inflation––continue to compound an already stressful situation for many. However, there is an option available to retirees that can help ease the stress of outliving their savings while providing them with an income stream almost immediately upon funding it. That financial vehicle is an immediate annuity.

While many annuities are created to build up the account value for retirement, an immediate annuity is actually designed to provide income immediately to its holder.

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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.

Immediate annuities are insurance products that pay their owners a regular income––monthly, quarterly, or over another desired time frame––for as long as the annuity holder lives.

These products are essentially a contract between the annuity owner and an insurance company. They are typically purchased with a large cash lump sum by retirees in order to pay living expenses in a reliable pension style INCOME over a long period of time. In exchange for this lump sum deposit, the insurance company will provide them with a regular income for a specified time OR long as they live, regardless of how long that may be.

Plus, if it is a lifetime annuity, this benefit will continue for as long as the single or joint annuitant is living. Therefore, an immediate annuity actually pays for living a long life instead of the emphasis being on heirs receiving a large payout when the immediate annuity owner dies. It is possible for the immediate annuity owner’s heirs to receive some of the deceased owners intended income if he or she should die prematurely.

Immediate Annuity Features

Throughout the years, there have been some modifications to the original immediate annuity design. Many of these annuity features, which may or may not be available on all immediate annuities, or offered by all insurance companies, are discussed below:

Inflation protection: With this option, the immediate annuity income payments offer some form of a hedge against inflation. Here, the annuity owner may choose to have his or her income payments increase by a certain percentage each year, typically around 3 percent. Another choice may be to have the annuity income payments actually tied to an inflation rate by the use of a consumer price index. When this option is chosen the initial payout of the annuity starts lower.

Refund, liquidity, and withdrawal options: The traditional refund feature on immediate annuities has typically been either a cash refund or an installment refund that ensures after the annuity holder’s death that the beneficiary will receive an amount of money that represents the difference between the initial deposit amount and the amount of the income payments that the annuitant received during his or her life. This, however, reduces the amount of the systematic payout when comparing to life only with no beneficiary benefit.

There are several different ways to structure an immediate annuity with regard to the income payment options. These options include:

Life only: A life-only immediate annuity can also be referred to as a straight life annuity. This means that the annuitant will receive annuity income payments for the rest of his or her life, regardless of how long that duration may be. The payments will cease and all of the unused initial premium will be to the insurance company’s benefit or detriment based upon the annuitant’s actual death and life expectancy underwriting calculations.

Certain period: This structure is not considered to be a life annuity. Rather, the annuity payments will only go on for a fixed period of time, such as for ten years. Even if the annuitant is still living at the end of the stated time period, the annuity payments will cease at that time. However, should the annuitant pass away within that time period, the beneficiary will continue to receive the payments until the period of time has expired.

Life with period certain (or certain and life): This type of immediate annuity payment structure is a combination of both the life and the certain period structures, meaning the annuity will pay income benefits to the annuitant for as long as he or she lives. However, if the annuitant passes away during a specified period of time, say ten years, then the beneficiary will continue to receive income payments from the annuity until the end of that ten-year time period.

Life with cash refund: This can be considered a money-back **guarantee annuity. The income benefit payout is for life. However, if the annuitant passes away before the payments that total at least the amount of premium paid, then a lump sum payment is made to the annuitant’s beneficiary.

Life with installment refund: This, too, can be considered a money-back **guarantee annuity. This immediate annuity payout option is similar to the life with cash refund option, except the annuitant’s beneficiary will continue to receive the monthly annuity income instead of a lump sum until the full amount of the premium has been paid out.

Joint and survivor: This annuity income payout option will **guarantee that the income payments will continue for the lives of both annuitants. Along with this, period certain options can also be added. This particular payout option is typically used with married couples in order to provide income as long as either one of them is still alive. In some instances, the income benefit may drop when the first spouse passes away.

COLA SPIA: This annuity income payout structure has payments that increase or decrease by a floating percentage which fluctuates when tied to a consumer price index, each year. In this case, however, the initial income benefit will likely be lower than those that are non-COLA (cost of living adjustment) annuities.

Annuity Guys® Video Transcript:

Dick: Today, we want to talk about immediate annuities and do a little comparison with immediate annuities and why you might consider an immediate annuity.

Eric: One of the things we often hear, in today’s world, where you have this hybrid annuity, which gives you lifetime income as well as some other bonuses/extras, why would you ever want to actually look at using an immediate annuity, where you’re going to give up your assets?

Dick: Right. That is the difference, Eric. When we think about the hybrid annuity, it’s kind of your cake and eat it too annuity, where you can get your lifetime income, but you don’t have to give up your asset. Yet, there is a place for an immediate annuity.

In fact, let’s do a little history lesson. How about some trivia here? When we think about an immediate annuity, it literally goes back to the early Roman Empire. They called it the “annua,” and that’s where the word annuity comes from. So it is a very early form of an annuity, and it has really gone through the test of time, spanned the centuries.

Eric: So next time you have your toga on, you’ll know to get your annua language out. Exactly. It’s an old standard. It was the first kind of annuity out there, the standard lifetime annuity. You gave up a lump sum, and you got a lifetime income stream.

Dick: It is probably the truest pension-style income. In fact, immediate annuities, a lot of companies will offer a choice of a lump some or an immediate annuity.

Eric: I talked about immediate annuities with a lot of clients, when they were saying, “Hey, I’ve got a 401(k). I want a lifetime income. What can I do to get my own personal pension?” That’s kind of how we think of it. The thing is you’re usually giving up that 401(k) in exchange for that lifetime income stream. Now, the big thing here is you realize that none of those dollars are going on to heirs.

Dick: Yes. Well, in a true pension, there’s no money in a pension, as a rule. When you have a pension, when you pass, the money ends, or if you’ve chosen a survivorship option, you’ve probably taken a little bit lower payment on your pension, and then some of those payments will go on to perhaps a spouse.

Eric: Exactly. When I grew up, my parents were educators. So they had a traditional kind of benefit program, where they have a retirement that’s there as long as they live. The bad thing is, once they’re gone, nothing goes on to me. Being a little self-serving here now. The 401(k) plan . . .

Dick: Why didn’t they get a hybrid annuity?

Eric: Exactly. Why can’t they get a hybrid annuity? So when they’re looking at it, that’s the old style. The hybrid, on the other hand, allows you to pass some of those dollars on to heirs typically.

Dick: Right. So, really, where the immediate annuity fits, let’s just give some examples. Someone who really wants to start income right now.

Eric: With an traditional immediate annuity, typically you’re going to get a higher payout than you would with a hybrid. You’re going to start with a little bit higher. . .

Dick: Typically. But we have seen a few instances where . . . you’ve got to run some illustrations to know.

Eric: Exactly. So that’s one of the things that when people are going that direction, that’s usually the reason.

Dick: General assumption is you’re going to get more income.

Eric: A little bit more. A higher percentage to start with.

Dick: Right. Then the other key factor would be that, perhaps, if you’re going to use an immediate, you really aren’t as concerned about giving money over to heirs.

Eric: Right. Are there ways to get money on to either survivors or heirs? That’s one of the things we . . .

Dick: With an immediate?

Eric: An immediate annuity. You can structure it so that it’s a joint lifetime payout. So if you and a spouse purchase an immediate annuity, you can set it up so that it is the lifetime of both of you or either of you. Whoever lives the longest, those payments will continue. There are little tweaks that you can even do there, where you can set it up so that once one passes, it sometimes reduces by a percentage.

Dick: A percentage, so they only get three-quarters or one half of the annuity.

Eric: Right. The other way that you can somewhat pass on dollars to heirs is there are a couple of things. You can do a period certain, where it’s lifetime with a certain number of years **guaranteed. A lot of times you’ll see somebody do a lifetime annuity with 20 years **guaranteed. So that 20 years of payments is **guaranteed.

Dick: So if I pass in 5 years, somebody is going to get another 15 years of payments. But what does that do to my income?

Eric: It’s going to reduce your payments. You have to realize going in, if your goal is the highest payout possible, you don’t want to add any of these other pieces. But if you’re wanting to try to pass on money to somebody, that’s a way of **guaranteeing basically that some of that comes back. One of the things I always look at is either the installment refund or the cash refund, which says once you purchase the immediate annuity, if you haven’t gotten back at least what you paid in principal wise, that amount will be refunded either to your heirs or to your estate.

Dick: Well, isn’t that the installment refund?

Eric: The installment refund keeps the payments coming back to your return of principal.

Dick: Okay. So you’re talking about the full lump sum.

Eric: Yes, just a refund of whatever you’ve put in, so it’s either a lump sum or installment refund.

Dick: One of the biggest vulnerabilities that Eric and I look at with our clients, and what we think you should be concerned about, is inflation. That is probably one of the biggest vulnerabilities we face. We have had historic inflation the last 4 decades of over 4%. We believe that the stage is really set for some higher inflation over the next two or three decades, which is going to cover most retirees. So if we would happen to go through a stretch of 4% or 5% – I’m not talking about runaway hyper third world country inflation – but if we’re talking 4%, 4.5%, 5%, 6% inflation, that makes that immediate annuity, if you have no inflation cost of living adjustment, a COLA on it, it really puts you at a disadvantage.

Eric: Yes, especially if you’ve got longevity in what you’re looking at. You realize you’re taking a level payment and you’re stretching it over your lifetime. So your purchasing power is going to diminish with inflation.

Dick: Right. So one of the things that we do suggest, very strongly, is that whatever type of annuity, whether it’s an immediate annuity, a hybrid annuity, a deferred annuity where you’re deferring it for a long time, that you’re really taking inflation into account. There are different ways to structure for inflation, but if you’re not taking it into account, you’re really setting yourself up for a bad situation.

Eric: Right. That’s another aspect that you can add to an immediate annuity. Some of them you can add a cost of living adjustment. Others have a fixed percentage.

Dick: Tied to a consumer price index or a fixed percentage.

Eric: So those are things you can add, but you realize you’re going to start lower.

Dick: Your payments are going to start lower. Right.

Eric: So it’s all about the tradeoffs.

Dick: I love the idea of a real cost of living adjustment. So if things get carried away and we start seeing 5% or 6% inflation, we’ve covered a major vulnerability in a retirement plan.

Eric: Yes. That’s what we’re looking at here. When we’re looking at immediate annuities, we’re looking at you creating your own personal pension.

Dick: Yes, that’s right.

Eric: If you’re into this marketplace, where you’re going to create a personal pension, and you have that magic number you know that you need to hit and you can anticipate the growth, that’s where this product really comes in.

Dick: So if we’re to kind of wind up this discussion on immediate annuities, being a true pension-style income, where would we summarize that this is going to fit? What type of person should buy an immediate annuity, should really consider it for their retirement portfolio?

Eric: I always say it’s someone with no heirs, that doesn’t have to worry about passing on dollars to somebody in the future. They’re not worried about that. They want the highest payout now, and that’s really the person that I start with.

Dick: Right. I think that, in winding this up, we just want to say, do a fair comparison. You may be the ideal person for an immediate annuity, but get with a professional advisor, run some illustrations, compare it. We have actually seen situations where a hybrid annuity can right off the bat outperform an immediate annuity. It’s not often, but it does happen.

Eric: Yes. Very good.

Dick: Thank you.

How Much Income Can You Withdraw Safely in Retirement?

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A Reuter’s article hit our desk recently. It’s based on a “safe withdrawal rate” during retirement (safe being relative since we’re talking about the stock market) and how that percentage is trending down.

Here’s a direct quote from the article:

“Some financial firms have considered lowering their recommended withdrawal rate to 3 percent but have found it hard to gain traction. That’s a safer rate, concedes T Rowe Price spokeswoman Heather McDonold, but it may be difficult and unrealistic for some folks.”

We might even agree with T Rowe Price’s statement for those individuals who are fully invested in the market. However, some of the other statements have us really “steaming,” not because they are lies necessarily, but they could be disastrous advice for some retirees.

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The article quotes a “pioneer of the safe withdrawal methodology,” William Bengen who goes on to state that retirees can increase their withdrawal percentage to 4.5 percent if they include small stocks in their portfolio. He does not discuss volatility or the increased risk associated with this strategy. Failure to address risk or proper allocation could lead consumers and readers down an unrealistic and tumultuous path.

One of the biggest oversights of the article is the failure to mention the use of annuity allocations to **guarantee a larger withdrawal percentage than what can typically be done safely with a portfolio consisting of stocks and bonds.

Annuities typically offer withdrawal rates in the range of 4 to 8 percent depending on age; and the income from these products are the result of contractual **guarantees on lifetime income.

By utilizing annuities to secure the foundational income amount needed individuals and couples can then afford to take more risk with their discretionary dollars to capture higher potential returns. Retirement planning to accomplish goals and secure a safe secure income should be done with the assistance of a financial professional who can help you examine your assets and guide you in the process.

Failure to Plan is most likely a Plan to Fail!

Annuity Guys® Video Transcript:

Dick: Well, Eric, we’ve got a fun topic today.

Eric: Fun for some. If you’re that close to retirement and you’re starting to think about, “Gee, how much can I pull out?”

Dick: Right. Well and that’s really one of the jobs that we have as financial people to help our clients know what they can spend, and so that you don’t feel guilty about it and you know what you’re secure spending.

Eric: What’s the magic number? There are the old standards and when you start talking about withdrawal rates in retirement the old standard is 4.0%. I should say that’s been the standard since I’ve been in the business. At one point in time, I know it was 5.0%. Now it’s down to 4.0%

Dick: We’ve recently been backing it down to about 3.50%.

Eric: Now the chatter is, “Oh, maybe 3.50%.” There’s an interesting Reuters article that highlights it. In fact, they even mention here that there’s somebody that says maybe 1.50% in this low interest rate. How do you pick what’s that magic number, so that you can make sure you don’t outlive your income?

Dick: I think Eric, one of the things that we want to establish is that there are really two– there are probably more than two ways, but there are two, kind of obvious, different ways. Let’s call one the Wall Street way.

Eric: The “oops” method.

Dick: Yeah, “oops.”

Eric: And I kid, but there’s nothing better than your broker calling you up and saying, “Oops, we ran out of money.” I’m not saying that’s likely, but when you’re invested in it…

Dick: Or it’s dropped so much that you better back off on income for we don’t know how long.

Eric: The annuity method is more of a foundational plan. That is not to say that it’s the, be all and end all, but it’s a great way to protect the base line of what your income is.

Dick: So incorporating annuities, we look at in our planning, as more of a foundational part of the overall income plan, and yet when I read this Reuters article, I think we should spend a little more time on that and talk about it. I think, folks you want to look at that article and read it, because it does have some enlightening aspects to it. But they’re taking the Wall Street way and there is no mention at all of the possibility of using annuities for the foundational portion of your portfolio. It’s all in on securities and the right mix of securities and different strategies for pulling money out.

Eric: I find there are certain things in this article that I’ll be honest, actually frustrate me a little bit, because when it comes to, when people read something they tend to believe it, because it’s in print. There’s a guy here and I don’t know William Bengen, pioneer of safe withdrawal rate methodology. And one of the things he talks about is utilizing smaller stocks, small cap stocks to increase return, so that you can withdraw more of your money. Now my understanding of the market and small cap stocks, they tend to be a bit more volatile. There’s definitely the potential for that growth, but there’s also that potential for that drop.

Dick: Right. So you’ve got a corresponding risk and we would tend to think, when a client is in that type of an investment, that they’re taking on more risk. So when I look at, in all fairness what he’s suggesting in this article is that you pull back when your stocks are down and you increase what you take out when your stocks are up. But that doesn’t seem to work for our clients I mean as a whole. We might have a couple of clients that are in that discretionary where they could just be that flexible, but most people have a budget.

Eric: Yes. They have a minimum living standard, that they have that meet their basic necessities and if you can’t beat/meet those basic necessities, this doesn’t work. That choice doesn’t work. I think the best bet is truly a blending of the two methods, using a foundation building piece, whether it be an annuity or Social Security. Something that **guarantees that coverage across, and usually it’s a combination of multiple pieces that gets you there, and then you can use an equities based model, to increase and use that for a hedge for inflation, perhaps.

Dick: That would be your discretionary money. You know when I look at AARP, they put some information out on this but they also, in what I’ve read, they’re taking more of a Wall Street methodology in terms of without looking at annuities, saying take out a 4.0% rate of withdrawal. When you start looking at that, if you’re pulling that out at the wrong time, you’re going to have what’s called an unfavorable sequence of returns and you can really get into trouble.

Eric: We always talked about dollar cost averaging, when you’re buying in. You’re more likely to hit buying in at more low times over the course of a period of time, than you are high times. So it’s advantageous to keep doing it in regular intervals. Well, guess what? When you start making withdrawals, the same is true. You’re more likely to hit those consistent low periods, so you’re actually hurting yourself when you start pulling money out during those low periods.

Dick: Right. You have to be very, very careful. I know I’ve run some scenarios, and some modeling of you know, if you were pulling money out during certain years and sometimes just missing it by a couple of years. Like, if you started your withdrawals back in 1975, and you were pulling out a certain amount over a certain period of time, your portfolio would tend to look pretty good over an extended period of time. But if you just started in 1973, when there were a couple of bad years unexpectedly, you would have wiped your portfolio out in a much shorter time, 15-20 years.

Eric: Especially early on, when this unfavorable order of sequences or returns rather, is early on in your retirement those things can be devastating. I think what we’re looking at here as well we’re saying, guidance. Its take some of the guesswork out. Know that you’ve got a piece there that takes care of it. The standard bearers here for the market methodology, they’re giving you guidance, but you have to decide if you need to be more conservative or more aggressive or if you need a blend of the two to make yourself feel comfortable.

Dick: Eric, when we go into annuities it’s a completely different world, because we’re looking at contractual **guarantees. There’s no market fluctuation in the income side with contractual **guarantees. So we can help a client not only know what they’re going to have. But we can typically get a much higher withdrawal rate than what AARP and Reuters and certain financial advisers out there are recommending, and people are somewhat surprised by that. When we initially show them what they can pull out of their account, and pull out safely with contractual **guarantees.

Eric: That’s all about preserving your lifestyle, your standard of living. Knowing that you’re going to do it regardless of how long you live. I think those are the pieces that for me, I take solace when I’m working with somebody, knowing that we’ve protected a lifetime of foundation. I love working with people in the market, but we realized that they were going after potential gains, you know?

We’re not getting **guarantees, those are not contractual **guarantees. There are things that we’re doing, typically to combat inflation, get some of those consistent gains. We’re talking about asset allocation, not just being in the equities market, so obviously when we see somebody advocating for small cap stocks, it gets my blood a little boiling, because it can be a piece of it but you don’t…

Dick: It sounds good just to read it, but when you actually look at that and look at the possible negative side of that, it’s not very pretty. So again one of the things, I think that we want to stress Eric, and just for you folks to give a little better understanding of what’s possible with contractual **guarantees. Typically when you’re around 60-years-old, we can get out kind of on a minimal basis for joint income, for a husband and a wife, somewhere around 4.50%, if it’s a single person, maybe closer to 5.0%. Then add to that, there are some ways to structure annuities so that you can get an inflation hedge, and if that is done properly we’ve been able to show illustrations right from the company, where after 20 years they’d be pulling out what, Eric?

Eric: We’ve actually seen withdrawals as high as 9.0%.

Dick: Right, in that range.

Eric: Obviously caps have changed, and things are a little bit more– not quite as the participation rates and those things have pulled things back, so we don’t anticipate if things stay where they are today you would necessarily get that, but…

Dick: But it could still be up in the 7.0-7.50-8.0-8.50%. So again, what we’re talking about here is that you start off with, say half a million dollars, and you start off by pulling out, say $25,000 a year and within 20 years to maybe, within 30 years-time, you’re pulling out almost double that, so instead of $25,000, you’re pulling out nearly $50,000.

Eric: Each year.

Dick: Right and so you may have used all your money. You may have spent it.

Eric: It’s not a plan that is designed for giving money to the heirs.

Dick: Giving a lot of money back to the kids, unless it’s the early years. The early years you could die unexpectedly, the kids could get a lot of money.

Eric: Right, so it is that. But we like this a lot for hedging against inflation, and basically taking care of your standard of living, that gets those bumps each year.

Dick: Right and that protects other assets, if you’ve got that foundational income, so those assets can grow and go on to the kids. So yeah, there are a lot of things that you can do. You don’t have to look at the annuity way, as the only way. You don’t have to look at the Wall Street way, as the only way. The best is to blend those into a very balanced allocation strategy and balanced portfolio.

Eric: Yes, it’s all about planning. You know you have to plan to succeed. What’s the saying?

Dick: If you don’t, if you plan to, I can’t even say it now. Plan to fail or fail to plan.

Eric: If you fail to plan, you plan to fail and I guess that’s the summary statement for today.

Dick: Yeah.

Are Annuities a Good Choice in a Low Interest Rate Environment?

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One of the questions we have heard asked quite a bit lately, “Is it the right time to buy an annuity?”

A prolonged low interest rate environment does impact returns and interest crediting on annuities. Payouts, **guarantees and riders have all been impacted in the annuity marketplace during the last five years. In fact, one recent example showed that immediate annuity payouts were down about five percent from just eight months ago.

So, if you are considering an annuity — is this the right time or should you wait?

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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.

Firstly, proper financial planning would indicate that a balance of assets and asset classes should be utilized in constructing a quality retirement plan. Many financial planners now utilize annuities as part of the fixed income allocation adding additional layers of security by eliminating longevity and credit risk. When it comes to providing income, annuities offer unparalleled combinations of safety and security when navigating through 20 to 40 years of retirement.

Secondly, if you are trying to time the market you may just end up guessing wrong. How can we guess wrong when the Federal Reserve has indicated they plan to keep interest rates at near zero levels until 2014? Only hindsight will be certain, but what are the costs to your portfolio when you park money in an account earning zero or stuff it in your mattress. While you may not lose principle you most likely will lose buying power. Inflation, which has averaged somewhere around four percent for about the last 30 to 40 years is sure to erode your future spending power.

However, nothing could be worse than losing principal and depleting your retirement savings just because you choose to stay invested in riskier asset classes due to a perceived lack of choice.

What is the best plan for when I prepare for retirement – NOW?

  1. Protect the Basics – If you are in or near retirement protect your income by selecting safe money options that provide reliable and steady income. Consider CD’s or annuities for this portion. Annuities are superior for providing income, while CD’s are federally insured.
  2. Spread out your assets – Look at all assets classes, not just stocks and bonds to provide diversification. You can spread out your risk by choosing assets classes than are not as heavily correlated to each other. Consider MLPs, REITs, preferred stock, commodities, currencies, options, carry trades and annuities.
  3. Take reasonable risks – Once you have protected your foundational level of income you can be more comfortable in engaging traditional more aggressive asset classes that can provide additional returns to combat inflation.
  4. Get a second opinion – Ideas and philosophies about financial planning are plentiful. Seek out professional advice and don’t be afraid to get a second opinion. When it comes to retirement planning some advisor are definitely better than others.

Lastly remember you are in charge, too often we hear from clients who say “I did not want to do that but my advisor said I should”… if you don’t like their advice or service. Get a new advisor. It’s your money and more importantly it is your retirement.

Annuity Guys® Video Transcript:

Dick: Today we have with us the new and improved Eric. He’s done a little shaving and he’s got that youthful appearance. Hey, we’re going to talk about annuity timing today and what is the best time to buy an annuity?

Eric: Yeah, it’s really we’re looking at today’s low interest rate environment. One of the questions we constantly get asked is “Is it the right time, or am I better off waiting?”

Dick: That’s the big question and I think that is the good thing about an annuity is that they are structured for income, and they’re not really structured just for the aspect, of treating them like a CD. So they’re more of a potentially, foundational place in your portfolio that can get you the higher income that you’re desiring even in a low rate environment. So I think that that’s just part of structuring an overall portfolio. What would you say, Eric?

Eric: Yeah, it’s about asset allocation, so when it comes down to it, you start with a plan. You can’t hit a target, you can’t see. So what’s your retirement financial plan? And then you start building from that, all right? We always talk about the foundation, taking care of the foundation and if income is part of the foundation, that’s really where annuity makes sense.

Eric: An annuity makes sense for fitting that income foundation portion, securing it so you don’t have to worry about running out of money.

Eric: One of the biggest concerns a lot of people we talk to have is with the rates being as low, you know…

Dick: Yeah, right, when is the right timing? And we do know, Eric. I mean it is a fact, if we keep money in a low-rate environment and we do nothing, put it in our mattress or put it…

Eric: Put it in a savings account.

Dick: When you put it in the bank it’s about like putting it in the mattress. It’s going to earn about the same amount of money, so we know that we’re not going to keep up with inflation.

Eric: Right, we know that zero is what we’re getting…

Dick: We know that our spending power is dropping, dramatically.

Eric: So if inflation’s averaging 4.0%, over the last 30 to 40 years, what are you getting when you put it in a zero-earning environment? You’re losing money. You don’t like to think of it as losing money, but you are.

Dick: Well by contrast, let’s just talk about for a minute, because we hear a lot about it. The hybrid annuity and what makes the hybrid annuity unique in this low-rate environment when it comes to income?

Eric: Well, it’s the income riders. You’ve got that **guaranteed return, sometimes as high as 8.0%, 7.0-8.0%, that those dollars can be used to **guarantee income in the future and that’s a way of securing income.

Dick: Right, it’s another layer of security that we’re really asking the insurance company to take that risk, instead of us taking the risk by going into riskier investments, we’re saying, “Hey, if I can grow my income base in a similar way, if I just put it in the stock market and tried to earn 8.0%, I mean I realize it’s not going into my cash accumulation account.” But if I can draw income off of it on a similar level that I could, if my stock account grew then that’s a way of transferring some of that risk.

Eric: Right and it’s about putting the right pieces or filling the right buckets. You want to have that secure portion taken care of, so then you can add those other allocations that can help you combat inflation, help you earn a little bit higher, because you’re taking care of your foundation.

Eric: So it allows you to take more risk in other areas.

Dick: Exactly, folks. I think that you can kind of understand that. That if you’ve got your income foundation very secure, you feel a lot more comfortable taking risk, or being more aggressive with that portion of your assets that’s more discretionary.

Eric: That’s really what we’re going after, so if you have somebody that you’re working with and, you have to be comfortable with your advisor.

Dick: Yes, you do.

Eric: First of all, get professional advice. It never hurts to get a second opinion.

Dick: No, no.

Eric: No matter, if you’re at the first stage or you’ve been investing and are ready for retirement, for a long time, you’re getting to that stage, ask for a second opinion.

Dick: Well, one of our slogans that we use quite a bit is, “Your Retirement Deserves a Second Opinion,” and it’s true. It’s really true.

Eric: We work with a lot of folks who had a very good accumulation specialist to get them to retirement.

Dick: Good strategy. They’ve earned well.

Eric: But when you get to retirement, you need to work with a retirement planning specialist and that’s where we would encourage people, to get that comfort level with your retirement plan.

Dick: If you do not feel comfortable with what is being proposed or the plan just doesn’t seem to make sense, get that second opinion. Don’t just go along, because how many times have we heard someone come in to us new and say, “Well, my advisor told me to do this.” Well, this is a reciprocating two-way street when you work with an advisor. We want our clients to tell us…

Eric: There has to be a comfort. There’s a relationship that you have to have with your advisor. If you cannot tell your advisor no, you’re working with the wrong guy or gal. Don’t want to be gender specific. But it’s about that relationship and letting them know where you feel comfortable and how you’re going to work to achieve, they’re going to work to achieve your goals, and you have to feel comfortable with that client.

Dick: And yet, Eric, there is that balance that we do know things that, because of our training, because of the way that we forecast, project and look at the way that these things interrelate, that there has to be a mutual level of trust and comfort between us and the client. That’s why they have us. We’re the professional. We know what we’re doing. We have the expertise. But they should never feel forced. You should never feel in some way that you’re being coerced into something.

Eric: Right, and if you don’t agree with the advisor’s assessment get a second opinion. That’s what it’s about. It’s about your retirement.

Dick: Have we fairly answered the question of annuity timing? Is it a good time to buy an annuity?

Eric: Well, I would tell you that it’s always the right time, if it fits the situation. You don’t wait until it’s too late.

Dick: Right, I do agree. I could say a lot more, but why don’t we…?

Eric: That’s a great gag line. Don’t wait until it’s too late.

Dick: That’s right. That’s right. Thank you.

Annuity Fees – The Nasty Truth

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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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**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.

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:NumberTypical
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.