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Top 5 Pros and Cons of Annuities

Top 5 Pros and Cons of Annuities

Pros and Cons of Annuities

As with any investment you consider, there are pros and cons of annuities too. When you purchase an annuity, you will want to time your purchase according to your needs, or how far away from retirement you are.

What follows is a discussion of the pros and cons of annuities in general.  This is a very basic starting point, but you can learn a whole lot more in the AST Flex Strategy videos.

Pros and Cons of Annuities – Pro Annuity Points:

The advantages of getting an annuity are absolutely easy to understand. Here are some brief introductions of each.

  • Liquidity: Your money is accessible. Most contracts have an annual withdrawal clause that will allow you to take 10-15% of the account value each year without incurring any penalty.
  • Tax Deferral: Like an IRA, annuity earnings are tax deferred. This makes them more appealing than CDs, money market funds, or other safe investments.
  • Safety of Capital: Your money is safe in annuities. Insurance companies are required to keep cash reserves to ensure this. Most states also have a guarantee fund up to $100,000 per annuity for additional security.
  • Rate of Return: Annuities offer higher rates of return than other safe investments. Currently, annuities are yielding an average of 4% tax deferred in comparison to only 2% taxable with CDs. As our economic markets stabilize, annuity yields should increase accordingly. Annuity rates of return offer more stability in fluctuating markets.
  • Income stream:  Annuities that provide an income stream has been found to be one of the best retirement income vehicles according to a study done by New York Life and the Wharton Business School. After the first annuity contract year, most annuities can provide monthly income payments for your lifetime. Likewise, immediate annuities provide monthly income payments for your lifetime, but they start immediately.

Pros and Cons of Annuities – Negative Points:

The wrong annuity product can have negative effects on your retirement. It is important to know these cons so you do not purchase the wrong product for you.

  • Surrender Schedule: Because annuity contracts have surrender charges for withdrawing money before the contract matures in lieu of up front sales charges, you will be obligated to the terms of the contract. Some surrender schedules can be as long as ten years.
  • Short Term Money: If there is a chance you need all of your money returned to you in the short-term, say one to two years, an annuity is not right for you. It is best to only invest funds you will not need for at least the next five years.
  • Sales Commissions: As with any purchase, the sales agent will earn a sales commission. An unethical sales agent may not have your best interests at heart and will not show you the right product for your needs.
  • Liquidity: You may be referring back to the pros section and find liquidity featured there as well. While liquidity can be a pro, it can also be a negative in so much as you realistically knowing how much money you may need to access and when you will need it. Without knowing these answers, liquidity can easily turn into a negative.

Annuities have pros and cons, and this brief summary should help you analyze your annuity needs. Use these guidelines to determine what factors are important to you and you will have an easier time selecting the right annuity for you.

800.438.5121

Annuities and Inflation- Like Oil And Water?

annuities and inflationMany of our readers are concerned about inflation, and rightly so.  Inflation is a creeping erosion of the purchasing power of the dollar and is like a shadow drag on consumers.  Many consider inflation to be a hidden tax too.

So how can an annuity protect you from inflation?  The truth is, no annuity will protect you per se.  There is really no asset that has guaranteed protection because the future rate of inflation is an unknown.  But used prudently, annuities form an important part of a smart inflation protection strategy for your overall portfolio.  Take a look here at what we wrote a few months ago about how annuities mitigate inflation risk.

But let’s talk about inflation for a moment.  Consider this:

As the cost of goods and services go up, income hopefully goes up too, yet purchasing power may remain flat or trend down.  Standards of living may not rise with income, yet tax receipts increase as incomes increase.   The dollars earned and the taxes paid go up, yet people do not feel any better off.  In this way, inflation is a shadow tax on quality of life.

Benefits of Inflation:

So who benefits from inflation? Inflation favors borrowers.  If you borrow a dollar today and use it for some constructive purpose or spend it, and inflation is 3%, it will only cost you $.97 in today’s terms to pay off that dollar one year from now.

Multiply this by trillions, and you can see that the government is the biggest beneficiary of inflation.  As they borrow and spend, the dollars used in the future to repay that debt will be easier to come by and worth less than they are today.  Of course, the government plays by its own rules and creates money out of thin air so can create new dollars when needed if they ever intend to repay the debt.

But for normal mortals, borrowing and buying assets that may appreciate with inflation is a smart move.  Take commercial real estate for example.  If you borrow $1 million and buy an asset that produces $50,000 a year net income, and your debt service cost you $40,000 a year, you have $10,000 to spend.  Hopefully you purchased a fixed rate mortgage…

But over time, that net income may rise to $100,000 per year, but your debt service remains constant at $40,000 per year.  Your spending income from the property increases, while you’re expenses stay relatively flat.

Of course, commercial real estate has different risks associated with it, and depreciation is a real erosion of the asset that requires maintenance dollars to keep up.  Tenant credit risk, maintenance, real estate taxes, utilities, interest rate exposure, and a host of other variables all contribute to make real estate a more risky play.

For average homeowners, long-term fixed rate mortgages today are such an incredible value in the 3.5% to 4.5% interest rate range that it is easy to see homes once again becoming a store of household wealth.

Annuities and Inflation:

Annuities will not protect you from inflation.  But inflation can be estimated and accounted for to the best of our abilities today.  Looking at historical tables available online here, you can see inflation over a very long data set since 1913.

Since 1913, inflation has averaged 3.3% per year.  Since 1990, and has averaged 2.7%.  Since 1970, which includes galloping inflationary years, the average is 4.4%.  And of course, this is based on the CPI –U index, which is a limited measure of consumer prices.  Not all things go up in price relative to purchasing power every year, some things go down, and others go through the roof like healthcare.

So how do you deal with inflation?  The most reasonable way to address it is to use a reasonable assumption like 3% and make sure your income in retirement increases by this amount to at least keep your purchasing power constant.  This will not be exact, but it is a prudent way to start.

Here is a quick table showing $60,000 per year income and what is required to maintain purchasing power with a 3% inflation out to year 100 starting from age 49.  The rows in green skip forward many years just to save space.

Inflation And Income

Income needed to maintain $60,000/ year purchasing power given 3% inflation over 52 Years

When using annuities, many of our clients use deferred longevity income annuities to produce lifetime income starting in the future.  For a 49-year-old in this example, an LIG contract that starts paying at age 85 should produce $173,000 of income per year to keep purchasing power constant.  Buying an LIG contract today that only pays $60,000 starting in 37 years will leave you way below your needs.

Another prudent way to use annuities to protect yourself from inflation is to pick the highest yield annuity you can find and put the least amount of money into it.  By giving you some degree of protection and guaranteed income, you then free your remaining assets to be used in more aggressive growth strategies and you remove pressure from your remaining assets to produce income.  We detailed this here:

Inflation and Annuity Summary:

Don’t let the fear of inflation freeze you in inactivity.  Annuities form an important floor of income and remove pressure from remaining assets, so in the annuity protected portfolio may very well be much safer and more resilient than a portfolio heavy on bonds that carry intense principal risk in a rising rate environment.

How Annuities Mitigate Inflation Risk

money-bill-inflationInflation is the gradual erosion of the purchasing power of your dollar.  Inflation has averaged about 3.3% per year from the start of the US Government data set in 1910 to today- this includes the galloping years in the 1970’s. Check out the Government’s own Inflation Calculator HERE:

Now, I’ll be clear, an annuity itself will not protect you from inflation.

What an annuity CAN do, however, is increase your overall safety AND simultaneously allow you to invest more aggressively.  Let me explain…

How A Flooring Strategy Helps:

One of the primary benefits of ‘flooring’ your income with a guaranteed annuity is that you can invest the rest of your assets for more growth.

It is growth, and exposure to assets that are resilient and increase in value with inflation, that will protect you in the long run.

So here’s the thing- how can you have exposure to ‘risky’ growth assets while safely protecting your nestegg? It’s actually quite simple….

By allocating a PORTION of you assets to be dedicated to guaranteed income in an annuity, you free up the REST of your assets to be safely invested for growth!

If you are protecting one pile of money, and simultaneously trying to make it grow AND be safe AND produce income, all at the same time (traditional asset management and systematic withdrawals), you are running a grave risk.

Because of the competing priorities, the performance of that one pile of money trying to perform well on each of these different fronts will be compromised.  Your money is divided, and you’ll be conquered

Instead, by allocating a portion for income in an annuity, and allocating a different portion to growth, the growth portion can simply grow…. without pressure to sell in a down market for income… and without pressure to be conservatively allocated for safety….

This gets to the heart of our approach, namely, to put yourself in a position of strength by building a floor level of guaranteed income to cover your essential expenses.  Then the rest of your assets can be more aggressively invested, yet your overall risk profile is quite safe.

It just makes sense.

Conventional “Wisdom”

Wall Street’s usual recommendation is to be increasingly weighted to bonds as you get older, for safety and income.

Following this poor advice, not only are your assets at grave risk of loss due to interest rate rises, but you are likely NOT invested in assets that can jump with inflation, such as equities, metals, or real estate.

You could be stuck nursing an overweighed conservative portfolio in an inflationary environment, losing purchasing power, yet not be able to allocate to growth for fears of volatility or loss.

Following the ‘Thundering Herd’ and conventional wisdom, you’ll get trampled to death.

Inflation Risk Summary

Inflation needs to be recognized, and many people shy away from annuities due to inflation fears.

However, a guaranteed income from an annuity actually frees your remainder assets to be invested for growth and inflation protection WITHOUT the pressures of safety and income on those remainder assets.

Therefore, guaranteed income from an annuity is actually a critical component of an optimal inflation protection strategy.

Top 5 Facts About Annuities And Taxes

There are often questions about annuities and taxes.  This brief guide will walk through a few of the top questions we receive.  Be sure to consult your own tax advisor for specific issues and clarifications.

Q: How Are Annuity Payments Taxed?

A: The basic rule for annuity taxation (i.e., “amounts received under an annuity”) is that the purchaser’s investment is returned in equal tax-free amounts over the payment period.  Tax is assessed on the earnings portion of each payment received. Each payment contains a portion that is return of principal and is nontaxable, and a portion of income, which is taxable income.

Q: How Is The Interest Income and Return Of Principal Portion Of A Payment Calculated?

A: For non-variable annuity contracts, this basic rule applies: Divide the purchase price by the total expected return.  This is called an “exclusion ratio”.  When you apply this exclusion ratio to each payment, you can determine the portion that is taxable, and the portion that is excluded from income.

For example, if you purchase a single lump sum future payment of $200,000, and pay $100,000 for it today,  exactly 50% of the future payment is taxable, and 50% is tax-free return of principal. The same calculation can be made for all period certain payments.

For  lifetime income payments, the IRS allows the use of your life expectancy age to determine the ‘end date’ of a payment stream for exclusion ratio purposes.

Q: If an annuitant dies before a deferred annuity matures or is annuitized into income, is the amount payable to heirs subject to income tax?

A: Yes. An annuity usually provides that the beneficiary will be paid the greater of the premium amount, or the accumulated value of the contract, as a death benefit in the event of the death of the primary annuitant. If there is gain, that gain is taxable as ordinary income to the beneficiary. Annuities are not like life insurance that qualify for tax free benefits to heirs.

That said, Secondary Market Annuities are absolute and certain payments, therefore in the event of the owners death, the payment stream will pass according to their will or estate plans.  The lump sum of un-returned principal will not be accelerated with Structured Settlement Annuities  and SMA’s.

Q: Are there penalties to “premature” distributions of  annuity contracts?

A: In order to discourage the use of annuities as short term tax sheltered investments, the IRS imposes a 10 percent tax on certain “premature” payments under annuity contracts.  This penalty applies to payments that are includable in income- see the exclusion ratio above. There are several exceptions however, the most common are:

(1) Payments made on or after the age of 59.5

(2) Payments made on or after the death of the annuity holder or annuitant,

(3) Payments accelerated to the annuitant if the annuitant has become disabled;

(4) Payments made in a lifetime, immediate annuity contract- there are certain IRS wrinkles here…

(5) There are other exceptions for certain annuities prior to 1982, other exceptions for dividends, and for a series of substantially equal periodic payments (SEPPs) made for the life of the taxpayer.

An important exception to note is that for qualified settlements and Structured Settlement Annuities such as our Secondary Market Annuities, there is NOT a penalty or extra tax assessed.  These are freely available to a buyer of any age.

Q: Are There Tax Implications For Partial Withdrawal and Lowered Annuitized Payments?

A: This may have a few answers depending on the annuitant.   But in general, a ‘free withdrawal’ from an annuity contract will be subject to the exclusion ratio, and once funds are withdrawn and the income payments are lower, the now-lowered remaining annuity payments will still be subject to the same exclusion ratio.

We hope this helps clarify a few questions about annuities and taxes,

Annuity Benefits

Annuity BenefitsWhen writing and speaking about annuities, I sometimes get caught up in products and contract specifics and need to zoom out to the big picture now and again.

Lets take a moment to look at the highest level view of annuities, where you really have just two types of benefits.  These are either Lifetime Income, or Fixed Term, solutions.

Fixed Term Options

Fixed term annuities, like Secondary Market Annuities,  Fixed Annuities, and Indexed Annuities, offer a known length of  term.  SMA’s and FA’s will also have a fixed appreciation rate.

Payouts from any of these products can either be lump sum, or income.  You can find fixed appreciation, fixed term lump sum payout annuities (SMA Lump Sums are highest yield), or you can find fixed appreciation, fixed term income streams that payout for a defined period of time.  These are SMA immediate and deferred income.

Fixed annuities and Indexed annuities also offer these defined lengths of time, and they offer additional benefits of some liquidity and surrender value, which SMA’s do not have.

With a fixed appreciation rate you have the ultimate in guarantees.  Put in X today, and you know your will get Y out in the future. Period.  This can be hugely rewarding and there are excellent yield opportunities in this avenue.

Lifetime Options:

Immediate Annuities simply trade assets for income- a one way ‘annuitization’ path.  This can be very lucrative, but is a hard mental leap to give up control of assets.

If you’re seeking to maintain some level of control over your assets, or want the potential to leave an inheritance, you will need to consider annuities that offer an investment account as well as a potential income account.

The best lifetime income with account value offering today is the Hybrid Annuity.  This is an index annuity with a lifetime income rider that can be turned on in the future.  This provides you with the potential for appreciation in the markets, no risk of loss or downside, and lifetime income protection, all in one product.

Give us a call today if any of these types of annuities and benefits suit your situation.  800-438-5121

Appreciation Rate:

In the fixed term section, you saw that many fixed term lump sum and fixed term income cases have a fixed appreciation rate. But what about the appreciation rate in other kinds of annuities?

If you are leaning towards lifetime income annuities that offer both the investment account and the income payout, the next big division to consider is the appreciation method that suits you.

Variable Annuities With Lifetime Income grow and decline with the markets.  These are NOT a great option for safety, and furthermore, many carriers have scaled back on variable annuity offerings in recent years.

By contrast, Fixed Index Annuities with Lifetime Income Riders grow based on a market index, such as the S+P 500, with no risk of loss.  These are sometimes known also as Hybrid Annuities.

It’s important to keep in mind here, however, that the primary benefit you are buying is the lifetime income.  The investment should have performance, but they are an added benefit above and beyond the primary benefit of the lifetime income insurance.

Summary:

It’s critical to know the benefits you seek when considering annuities.  It’s easy to move from seminar to free lunch to product marketing flyer and get quite confused by specific product terms and riders and conditions.

Save yourself the confusion by letting us help you focus on your goals first.  Once we identify the types of annuities that accomplish your goals, you can buy with confidence.  We can help- give us a call.

1-800-438-5121

Why Are Annuities Safe?

Its all about the money.  Annuities are safe because the insurance company issuing the annuity contract- obligating themselves to whatever specific guarantee you are buying- is in the business of making money and having money available at all times to pay claims.

Insurance companies offer a guaranteed benefit to you, be it life insurance, home insurance, or an annuity.  You chose to do business with them because of their strength and the guarantee they offer you backed by that strength.  They collect premiums from you, invest those premiums, and must have the strength to back those guarantees up.

It’s all about the money- yours to them, then their strength and their money coming back to you.

Their logos reflect this self image- “The Rock” for Prudential comes to mind right away.prudential

You want your insurance  company to be in the money- to always pay when you need them to pay.  You need a rock.

 

You may not know, but Warren Buffet’s fortune is founded on the insurance industry.  Premiums are a source of investment capital to him, and his adroit management of those premiums produced outsized returns for the insurance company (and stockholders) and rock solid guarantees to his insured customers thru Berkshire and GEICO and General RE and many other brands.

Those same insurance carriers that make boatloads of money for Berkshire Hathaway also can easily afford to pay out life insurance benefits to a young insured customer who dies in an accident just a few months after buying the policy…

That’s exactly why the young should own life insurance – to cover the what-if, worst case scenarios of life.  And insurance companies who know mortality tables know they will always come out OK, even when an unfortunate accident happens and millions of dollars in life insurance benefit is paid out on a new policy.

The have the money, they manage it conservatively and they pay when called upon.

And it’s exactly why you should consider annuities. 

People converting assets into income for retirement can and do benefit, every day, from the same mortality table calculations… from the same economics… from the same strong companies…. with annuities.

Annuities Allow For Higher Yields- Moshe Milevsky In The News Again

For once, the Wall Street journal has published an article that I agree with on the topic of annuities!

For years I’ve cringed as their “Buy and Hold Stocks and Bonds” tunnel vision routinely ignored or bashed annuities.

But today brings a good article that I agree with, advocating to create a guaranteed income floor  that will allow  you to take more risks elsewhere to chase higher yield (if you are so inclined).

It’s exactly the strategy I advocate with clients on this and our other websites.

Because it’s so unusual for the Journal, I’m going to quote it entirely below.  It appeared Here first.

Moshe Milevsky, one of our favorite writers on the guaranteed income landscape, features prominently as well.

For those concerned they might outlive their assets, annuities can provide a guaranteed income stream.

But for those who go this route, a big question remains: How should your annuities affect the rest of the portfolio?

 

In general, investing professionals say that putting part of one’s nest egg in annuities can open the door to taking on more stock-market risk, which in turn offers the possibility for more portfolio growth.

Matt Grove, a vice president at New York Life Insurance Co., who heads the company’s annuity business, says owning annuities can allow investors to increase their risk exposure in part because annuities are so different from conventional securities. For instance, there are types of annuities that provide a set monthly check for life and that are completely independent of the ups and downs of the stock market, he says. And mixing uncorrelated assets is a key strategy in managing portfolio risk, whether you are talking about annuities or simply diverse types of securities.

Brett Wollam, senior vice president at Fidelity Investments’ life-insurance unit, suggests retirees use income annuities along with Social Security and pensions to fund their essential expenses. When there are several sources of guaranteed income, retirees can invest more in products with growth potential than they might have otherwise, he says.

“Typically, investors are too conservatively invested” in retirement, Mr. Wollam says.

What’s Your Tolerance?
Fidelity Investments Life Insurance Co. sales manager Robert Cummings gives an example of a 60-year-old couple who changed a portfolio that was invested largely in cash to one with a 45% allocation to two annuities and a 28% allocation to equities. The couple weren’t knowledgeable about the stock market, but they knew longevity ran in their families and were concerned about inflation, says Mr. Cummings. “Both factors speak to the need for growth because of the time horizon they are planning for,” Mr. Cummings adds.

The couple’s annuities now include a $200,000 deferred-income annuity from New York Life with a $1,057 monthly payout starting in five years.

Of course, not all annuity purchasers should increase their exposure to stocks. To some degree, the decision depends on the investor’s risk tolerance and the types of annuities he or she owns. With variable annuities, the value of the contract can fluctuate with stock and bond prices. At the same time, fixed-payment annuities could involve risk if the issuer is on shaky ground, or if the annuity lacks automatic increases to protect against inflation.

In some cases, in fact, annuities may help an investor ratchet back too great a stock exposure.

Reduced Risk
At Steele Financial Solutions in Cherry Hill, N.J., Joel Steele recommended that a 61-year-old client with 100% of his portfolio in equities reduce his risk exposure and invest in deferred-income annuities. The client had booked some recent gains in stocks but was generally frustrated with the continuing ups and downs of the market, Mr. Steele says. Even with the recent gains, he adds, the client’s portfolio was only back where it had been 10 years earlier. The client also was anxious that his pension wouldn’t provide enough income for his wife in the event of his death.

At Mr. Steele’s recommendation, the client invested half of his assets in two deferred-income annuities with guaranteed monthly payouts starting in two and 15 years. Of the remainder, he has 17% in stocks and the rest in income-producing bond funds.

“He’s not completely out of the [stock] game, but he’s not going to be affected by any stock-market crash either,” Mr. Steele says. “We’re not talking about taking people out of the market,” he says of balancing deferred-income annuities and equities. “We’re just making sure they’re OK.”

Moshe Milevsky, an associate professor of finance in the Schulich School of Business at York University in Toronto, says that for income protection in later life, the best annuities are those that delay payments at least until the purchaser reaches his or her 80s. The payouts for these types of annuities tend to be bigger than for annuities whose payments start earlier, but many potential investors see the long wait as too much of a gamble.

Indeed, these products, generally referred to as advanced-life delayed annuities, or longevity insurance, have proved a hard sell for the insurance companies that offer them (see sidebar). But according to Mr. Milevsky, delayed payouts enable purchasers to allocate more of their portfolios to investments with higher growth potential, compared with purchasers of annuities that start their payouts within a few years.

Mr. Milevsky is also founder of QWeMA Group Inc., a developer of products for wealth management, investing and insurance, with a focus on retirement income planning. Based on algorithms that he has developed, the company, whose name is an acronym for Quantitative Wealth Management Analytics, recommends mixing longevity insurance and mutual funds as a strategy for protecting income in later life.

Why Annuities Are The Answer- And Are A Tough Sell

Time Magazine presents a poignant article today that gets to the heart of why so many people are in dire straits with their retirement. I can safely say that if you’re a regular reader or client of Annuity Straight Talk, you’re taking action to ensure this sad fate does not strike you- The article underscores why we feel so strongly that we are on the right track assisting people securing guaranteed income.

The article highlights results from a recent Blackrock study that surveyed the confidence levels of both retirees, and employees approaching retirement. See the article here.

The decline of traditional pensions and steady erosion of Social Security benefits has begun to leave most retirees without a source of guaranteed lifetime income. Plugging that hole is emerging as the most important retirement issue of our day.

How do we solve this retirement income puzzle? Annuities are the answer.  But this statistic is perhaps the most telling. 

Good luck figuring this one out. When it comes to the one sure-fire solution—immediate fixed annuities—retirees have a split personality. According to research out of Harvard, 77% of retirees wish they had locked in a guaranteed income stream when they retired and 86% say their employer should have helped them arrange one. Yet almost as many (69%) say they prefer to keep control of their retirement assets.

You can’t have it both ways. No company is going to guarantee income for life without taking control of the assets standing behind the guarantee. “We need a national conversation on this issue,” says David Laibson, a Harvard economics professor. “We need to learn more about what people want.” His comments came during a press conference for the latest BlackRock annual retirement survey, which found that retirees with a guaranteed income stream tend be most confident about their finances.

The article continues and gives some of the reasons why the logical answer is not utilized as often as it should be.

There are many reasons that retirees shun annuities. They can be confusing and some are laden with fees, and as noted people don’t like to give up control over their assets even if it means securing income for life. Another stumbling block is the low-interest rate environment, which makes annuities seem expensive. It takes $737,000 for a 70-year-old couple to buy joint lifetime monthly income of $4,000, according to immediateannuities.com.

Yes, immediate annuities where you give up control and access to your money do have drawbacks, but no other investment pays mortality credits and pays as high a guaranteed rate.

The bulk of the BlackRock study discussed the change in confidence levels and security among retirees as the workforce shifts  from a defined benefit or pension driven retirements, to defined contribution and 401K driven retirements.  

With defined benefits, longevity risk is on the plan sponsor- the employer.  But the responsibility and risk is shifted to individuals in a defined contribution world.

No matter how you solve it, securing guaranteed retirement income is an essential challenge.  The best way to solve the problem is by shifting the risk.  An annuity is a private pension, and with it, you shift longevity risk back onto the carrier.  It’s that simple.

Don’t be among that 77% who wish they’re locked in more guaranteed income.  Take action today for that guaranteed income stream that instills the most confidence in your future.

Consider Long-Term Care Insurance

Perhaps one of the best ways to protect and conserve wealth in retirement is to purchase a quality long-term care insurance policy. My intention here is not to spout a litany of statistics right now but suffice it to say that research has shown that a large percentage of retirees will need some form of care assistance in the future. And with costs already high, that will have a significant impact on your lifestyle if and when that day comes.

In this weekend article from the Wall Street Journal, you’ll see an overview of what’s available in the current long-term care market. Traditional LTC policies are the most common but now care features have been added to life insurance and annuity contracts as well. Although many insurance companies are exiting this unpredictable market the wide range of available options can make the search for a suitable solution fairly difficult.

Now at Annuity Straight Talk we don’t sell long-term care insurance but we do understand how best to choose what’s right for you. Given the fact that we have an intention to help people with all facets of personal finance in retirement, we have in place a network of fantastic advisors we’d be happy to refer you to. With this available you’ll get the same opportunity to search the entire market for long-term care that you get with us when trying to find the best retirement income options with annuities.

I highly suggest reading the article referenced above and then contact us if you’d like a little assistance without sales pressure. In time we’ll likely add some useful information on understanding and selecting a reasonable amount of long-term care coverage. Until that happens feel free to give us a call or send an email with specific questions or comments about your situation.

As with anything, we stand ready to assist so don’t pass up the opportunity for a little free education and advice.

Have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

New Index Annuity Calculator

Understanding  the benefits of an index annuity can be a daunting task for investors, but it’s totally worth the effort to become proficient and give these a serious look.

Index Annuities are very safe investments much like a fixed annuity, yet they have the possibility for gains linked to a market index.  And further, they can go up but not down due to the methods used to generate the market participation.

There are index annuities oriented towards appreciation, and there are index annuities geared towards the income rider.  Most people are familiar with index annuities in conjunction with income riders- these are often known as Hybrid Annuities.  But outside the guaranteed lifetime income rider component of Index Annuities lies the potential for a very safe appreciation vehicle.  

The nice calculator below is wonderful for illustrating the power of annual reset – this is an index annuity crediting method that builds account value annually (subject to participation and caps).  Use the start year to scroll through turbulent years and see how the annuity would perform.

Your comprehensive annuity investment guide: Annuities.

This calculator comes from another online resource so we can’t vouch for the complete accuracy of the historical data sets.  So please use this for a visual illustration and give us a call to select the best fixed index annuity with the highest crediting methods and most beneficial caps and participation.

How Safe is the Secondary Market for Annuities?

The question of safety of the Secondary Market is one  we receive frequently, especially after sending out a list of currently available offers that pique reader interest.

Quite simply, we like  structured settlement secondary annuities  because  they offer the highest yield and highest level of safety available to consumers for retirement income purposes.  They are not the simplest  transactions for buyer or agents to complete, and they are not appropriate for all situations.  For example, for older investors,  other types of annuities may have more benefits in flexibility or longevity protection.  However as planning tools with excellent  yield and safety, they simply can’t be beat.

Be sure to reference our post on the difference between Structured Settlement Annuities  and viatical (life insurance) transactions

 So now that you know why we like them in general, the question remains, is this market for real and how safe is it?

Secondary market annuities can more specifically be called structured settlements in technical terms. A structured settlement originates when an individual wins a settlement- this can be a car accident, medical malpractice, or any other sort of award.

The settlement essentially takes the same form as an annuity contract that is available to anyone who invests retirement assets with an insurance company- it’s a promise by a highly rated carrier to make a series of future payments to the individual.

In this case, rather than an individual buying those future promised with a premium (AKA an annuity), in a settlement, the losing party in the case settles their obligation by transferring a sum of money to satisfy those future payments. The sum is transferred to an insurance company who then shoulders the future market risk and court-ordered obligation to make specific payments. The winning party- usually an individual- enjoys this income stream tax-free per IRS regulations.

However, circumstances change for people, and sometimes they wish to sell their future payments for a lump sum. This is where our ”Secondary Market Annuities” originate.

Because of this slight difference in origination of funds in the settlement, there is one critical difference that separates primary market from secondary market annuities. In addition I’ll add two other reasons that will show clearly why the secondary market is a much SAFER investment.

Safety Factor #1

An insurance company becomes party to a structured settlement as part of a final court order in a lawsuit. In the unlikely event that this specific insurance company fails in the future, an existing court order compelling the company to make payments would place that liability among the company’s most senior debt obligations. And that means it gets paid out ahead of all other company liabilities. The insolvent insurance company would be held in contempt of court for failing to make payments according to the terms of a structure settlement. The stream of income provided to you via the secondary market annuity would not be affected nor have to wait for further bankruptcy or liquidation proceedings.

Safety Factor #2

And now for the somewhat less critical but also quite relevant…

Each state has an insurance guaranty fund that covers the guarantees of insurance policies and annuities for insolvent insurance companies who can’t make payments. Let’s assume your state guaranty fund covers $100,000 for annuities but you need to invest quite a bit more money to cover your retirement income needs. Within the primary market, no matter what you decide to invest, you may only be covered to the maximum limit of $100,000.

By using the secondary market, you are subject to the guaranty limits of the state where the contract was initially issued, not necessarily your state of residence. Structuring an income portfolio in the secondary market typically requires multiple deals to complete. It is quite probable that each contract will have originated in a different state, which affords you the total protection of all states involved rather than simply the limits offered in your current state of residency.

Safety Factor #3:

The risks in an SMA are generally transactional in nature- meaning, it has a risk of not closing due to the seller changing their mind or the court not approving the transfer. In both of these cases, there is no financial consequence to you if the case fails, and your deposit is fully refunded.  This happens in about 1 in 10 cases where generally a court disallows the seller from selling due to the seller’s personal situation.

Other risks in an improperly handled SMA transaction are that a payment stream could be already committed or not transferable. Our process eliminates that risk as our outside counsel reviews and will not release purchase funds until a thorough checklist is complete.

Thus the three key items that ensure legal safety are:

  1. Benefits letter from the issuer to the payee, which establishes that the Payee has the payments to sell,
  2. Court order changing the payee to you,
  3. Acknowledgement letter or stipulation agreement after the court hearing from the Issuer naming you as the new payee of the specific payment stream you purchased.

Not surprisingly, these three key pieces are what must be in place before your funds are released to a factoring company and seller, and are what constitute our closing book after a transaction is complete.

Safety Factor #4:

And finally we’re going to talk about a safeguard that is inherent to any sound retirement income plan. Any advisor worth their salt will advise you to spread your assets between several different insurance companies. While this is a great recommendation, it rarely happens because most salesmen are lazy and benefits can vary greatly between carriers to the point where it puts you at a financial disadvantage.

Because a typical case involves multiple Secondary Market Annuities, purchasing contracts in the secondary market virtually assures that you will place assets in several companies with no sacrifice to average yield or overall performance.

Summary:

A retirement income portfolio based on secondary market annuities thus offers unparalleled safety of 1) credit quality, 2) seniority status among the issuing company obligations, 3) rock solid legal review, and 4) diversity of carriers.

If you’d like to explore this profitable yet extremely safe opportunity for your retirement income plans, we’re ready for your call.

Annuity Straight Talk

1-800-438-5121

What Happens if Your Insurance Company Fails? CBS News

The economic climate of the past few years has caused consumers to question the certainty of nearly every type of investment product. Doubt is frequently cast toward insurance companies because of their position in the financial framework of our economy in addition to the number of spectacular failures in the banking industry, as mentioned in a recent article on CBSnews.com- read the article here.

This article basically talks about how to take protective measures that go beyond simply choosing to invest with a safe company. I expected to see a little more information regarding how annuities are treated when an insurance company fails but let’s first go over a brief summary of what the article does state.

First of all, a thorough discussion is offered as to how state guaranty associations protect annuity purchasers, much like the FDIC protects bank deposits. It is important to understand the coverage limitations that exist with your home state association. For annuities this will range from $100,000 to $500,000 depending on your state of residence.

Second, the author points out some critical information regarding the difference between failures at insurance companies vs banks. In the author’s words…

It’s hard to start a “run on an insurance company” like a “run on a bank.” While you can always withdraw the money from your bank accounts, you would have to die for life insurance benefits to be paid, and with immediate annuities, you’d have to wait each month to receive your check.

Also of note is the fact that banks are more highly leveraged, thus more susceptible to failure. Generally speaking, an insurance company’s liabilities are not much greater than its assets whereas a bank typically will have liabilities many times the amount of assets on hand. Which seems like more prudent financial management to you?

Lastly, the author offers some simple suggestions as to how you can protect yourself. Research your state guaranty association and keep individual purchases below the limit even if you have to use multiple companies to do it. And, only invest money with highly rated companies who have an excellent track record of conservative management. I know it sounds simple but you can’t even imagine how many people overlook these easy steps.

In this article we found a simple approach that shows why insurance companies are safe and what consumer protections exist. Now let’s also talk about what happens to your annuity if the company does fail.

Most importantly, annuities are backed by a conservative mix of corporate bonds and government treasury notes. Financial hardship is likely unrelated to the general company account that holds annuity assets. In the case of AIG, failure resulted from the company’s exposure to the sub-prime mortgage market. AIG’s fixed assets stayed in tact and annuity payments were made as promised. No consumer lost money from an annuity contract as a result of AIG’s reckless financial management. And that was a big one!

Had the company been allowed to fail without government assistance, the profitable portion of the company assets would have easily been sold to healthy institutions who would have carried the guarantees to term. You see, the problem was never the insurance business but the fact that executives used profits to further leverage the company with extremely risky assets.

When Conseco failed in the mid-90s, profitable lines of business like annuities were sold off to healthy insurers. Visitors to Annuity Straight Talk have showed me two original Conseco contracts issued before the failure that are now owned by separate insurance companies. Those contracts were not negatively affected by Conseco’s troubles and went to term and beyond with all contractual guarantees intact.

Nobody wants to see their insurance company fail but it certainly doesn’t indicate the end of the road. I know how it works. I’ve seen it in action. Annuities are extremely safe, and that’s all there is to it.

Have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

Low Rates Expected Until 2014

Arguably the most damaging effect of low interest rates is the impact it has on people approaching retirement and looking for more safety. Traditional safe havens such as CDs pay very little interest in relation to the time commitment required. And I’ll admit that selling annuities in this climate is challenging to say the least.

Several articles available have pointed to recent Federal Reserve meetings that indicate plans to keep interest rates near zero through 2014. That means we likely have nearly three years of the same issues to deal with.

The article linked here mentions all objectives behind keeping rates low for the foreseeable future, most notably an attempt to keep long-term rates low in order to spur economic investment and growth. While this may be a useful step toward reversing the economic lull of the past few years it sure doesn’t give the retirement investor a lot of options.

So, how does a person develop a reasonable game plan in this environment? For every individual there is a balance between different strategies and products available to accomplish each goal. Here are a couple of options:

Guaranteed Lifetime Income Products allow you to achieve a base level of guaranteed income in the future. By doing this with a portion of your assets your future income needs are met and additional assets can be used to pursue greater returns with less risk to your overall portfolio.

Short-Term Index Annuities allow you to keep assets safe for the time being with greater potential to outpace currently low interest rates. Short time periods are key so that you are able to reposition assets when the economic climate changes.

Secondary Market Annuities offer safe money yields that stand above historical average interest rate levels. This presents a unique opportunity to achieve substantial growth while maintaining high levels of safety.

These three options show just a few of the ways you can take positive action against the dismal conditions that exist. Just remember the idea is safety in combination with growth. The last thing you want to do is go backwards.

Feel free to call us for a straightforward talk about how you can improve the outlook for your retirement income plan.

Have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

Calculating Yields in the Secondary Market

Nearly every time we send out an email with new secondary market annuity offers, several inquiries come back with people asking how the return is calculated.

The first resource is one from the vault- a piece we wrote several years ago that is just as accurate today- Which 10% Do you Want?

For more, let’s see an example that everyone can relate to…

Assume a purchase price of $282,951 where monthly income payments of $1500 begin one month from today and continue for 360 months. The effective annual yield is 5% and aggregate cash flow comes to $540,000.

Everyone has seen this similar loan and repayment amortization schedule with a conventional mortgage. With a mortgage you would be the borrower but with a Secondary Market Annuity you are essentially the lender.

The payments outlined above can be a good example of a 30 year mortgage or it could be an excellent income stream from the secondary market. Either would be calculated exactly the same way.

With Secondary Market Annuities many people want to assume that the $282,951 is simply growing at 5% for 30 years, but this is not the case, just as it is not the case with the amortizing mortgage either. Why is this? When money is paid out, the compounding asset balance shrinks.

Every payment on an amortizing mortgage is part interest and part principal, and Secondary Market Annuities are no different- each payment includes an interest earned component, plus a return of principal component.  We won’t bore you with an extensive amortization table here outlining 360 payments- if you really want it, just ask and we’ll send it over!

Alternative  Way of Looking at Secondary Market Annuities Yields:

There is another simple way to look at it so let’s have another example. Assume you placed $282,951 in a savings account earning 5% effective annual interest (unlikely, I know). If you were to withdraw $1500 per month, after 360 months you would have collected $540,000 and the account would be empty. While you are in fact earning 5% interest, you are not earning interest once the money comes out of the account.

The calculations for these returns are slightly more complicated than a simple (money ‘times’ interest rate ‘times’ time) formula. If that were the case, $282,951 growing at 5% for 30 years would compound to $1,222,886 which isn’t the case here. Money at work in the account earns interest while money in your pocket does not.

Secondary Market Annuities Yield Summary

These examples indicate that not all income deals in the secondary market are appropriate unless the structure meets specific objectives for your retirement plan. Immediate income works for some people and deferred income or future lump sum payments work for others. Which one is best for you? You must answer that question.

There are several ways to capitalize on the secondary market. What we have are above average interest rates and extremely high levels of safety, and a variety of available cash flows. The rate and safety are a compelling proposition in any economy and especially true now. The only thing to determine is what you are seeking, and then match your goal with an available offer.

To maximize the strength of this market, use the right tool for the job- don’t buy an income stream if you have no need for the payments. Instead, let it defer and accrue a few years! Likewise, don’t buy a 10 year deferral annuity if you need money every month.

Please don’t hesitate to call us if there are any specific questions you have about how the secondary market for annuities works, and for assistance selecting the right offers for your specific situation.

You can always view our available Secondary Market Annuities here, or give us a call or make an appointment to help setting your goals and matching appropriate tools for the job-

Have a great week!

Bryan J. Anderson
800.438.5121
[email protected]

The $440 Billion Pension Gap

This distressing article highlights the issues pensions face meeting their promises to retirees.  According to the article, 14% of the nations workforce still participates in some sort of employer sponsored, defined benefit plan.  Yet, "The third quarter 2011 was the second worst in history for pension liabilities," due primarily to unrealistic assumptions and enduring low rates of return.

Is your pension in a similar state?  Or worse, are you hoping for year after year of 10% compounding gains to rely on to turn into income?  It might be time to rationalize expectations, and put true guaranteed income in place.

Judicious use of annuities can provide the floor of security and income for individuals.  It only makes sense to use your assets to lock in the security you need, and not rely on underfunded pension plans that can’t come to grips with economic reality.

Here's the article:

It’s been a tough year for corporate pension plans. Weak stock markets and falling interest rates have left a $440 billion hole in the nation’s 100 largest plans, with the shortfall more than doubling in the third quarter…. Read On.

Source: WSJ

Secondary Market Annuities Are Not Viaticals

At Annuity Straight Talk we encourage you to learn all you can about annuities so you can independently verify what we recommend, or what any advisor you chose to work with presents you for consideration. As many know, we often recommend Secondary Market Annuities as a very high credit quality alternative for investors seeking a yield above market for comparable safety.

Recently, a reader who inquired about Secondary Market Annuities did some research and wrote back,

Brian,

We just wanted to let you know that we are not interested at this time to purchase any SMA’s, after reading several articles about insurance company’s being able to opt out of these contracts in app. 35 states.

Thank you so much for your time.

As it’s easy to get turned around in the World Wide Web, we thought it would be beneficial for all to read our response:

The article referenced is here. It may require a registration to that site, but the registration is free.  If you don’t wish to register and want the article, Contact us and we’ll email you a copy.
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20100228/REG/302289992

Our response to the reader is as follows:

The article you referenced points to the proliferation of a ‘secondary market for annuities’ which is actually unrelated to the contracts I promote on my website. It is confusing, however, due to the similar name both transactions share.

In fact, the contracts I promote are more properly labeled ‘resale of structured settlements’ and come in the form of a payment stream (an annuity) from an insurance company.

We call them “Secondary Market Annuities” because they are annuity payment streams being bought on the secondary market. Unfortunately, regular annuities being re-sold would share the same title, and therein lies the confusion.

Secondary market annuities as mentioned in the article have to do with investors buying an annuity in the name of someone else. Why would someone do this? Because certain annuity contracts have death benefits attached to them.

Take for instance a variable annuity with a death benefit. If the owner dies when the market is depressed, a death benefit of the original investment amount plus interest will be paid to the beneficiaries.

Now, the problem with this sort of transaction is that groups of wealthy investors and attorneys got together and solicited terminally ill people. The investors purchased annuities with a death benefit while naming themselves beneficiary and a terminally ill individual the owner. It offered a risk-free way to invest in the market by leaving the insurance company on the hook for a death benefit.

The problem is that it went contrary to the spirit of offering protection for people saving for retirement while trying to protect family members. It falls in the same category of transaction as ‘stranger oriented life insurance’ and other viatical transactions.

Many regulators felt that investors were taking advantage of terminally ill people and the result was a series of laws that allowed insurance companies to cancel certain benefits if contracts were transferred. I personally believe that was the right thing to do. Contractual guarantees are put in place for very good reason and I feel any effort to exploit that should be stopped.

But comparing those “stranger originated transactions” to the structured settlements we promote at Annuity Straight Talk is like comparing apples to oranges, as they say.

The transfer of the Secondary Market Annuities we sell- more properly labeled ‘resale of structured settlements’- is regulated by an act of Congress in 2001 that produced HR 2884 and is found in Internal Revenue Code 5891. As of 2008, all but a small handful of states enacted laws governing transfers to mirror the federal statute.

In summary, the legislation and tax guidance cited states that a structured settlement may be resold and that if it follows a proscribed process involving the Court in the state where the original settlement originated, that the transfer of payments would retain its tax treatment and not be subject to a penalty taxation.

As a result, each of the transactions we promote has a Court date wherein the transaction needs to be reviewed and approved. Court orders must be in place and all documents reviewed and approved prior to funding.

The transfers we promote receive a substantial amount of due diligence from our legal counsel for your benefit and ours. As such they offer the highest levels of safety and retirement income efficiency. Each case is treated with exhaustive care and the result is the greatest amount of benefit for our clients, all firmly within the confines of state and federal laws.

It’s critical to perform due diligence and this article (cited above) is important if you are considering the purchase of a stranger-oriented life insurance policy or an annuity contract on the secondary market with a death benefit attached to another party’s life. But it’s equally important to understand the differences between that marketplace and the structured settlement market.

We hope this discussion and links are useful to our readers. We welcome any additional thoughts or questions- simply email us or leave a comment below.

** You may also wish to reference this post with more detailed information on the safety of Secondary Market Annuities.

The Best Annuities- Barrons Top 25 Picks

Asset Allocation on Wikibook
Asset Allocation Image via Wikipedia
Annuities are making news again and last week Barron’s decided to outline the reasoning consumers use to justify a purchase.  It’s all about safety for those who have experienced shocks in the market.  The related article also gives a list of the five best annuities in each of five categories.  In the end you’ll get a solid list of what Barron’s considers to be the best products on the market according to fees, past performance and company stability.  Read the article and see the list here– be sure to click the image of the list of quality annuities.
 
What is the primary characteristic of this list?   You’ll notice the first priority is the credit rating.  It’s imperative to understand that annuities are insurance, and are designed for the safe and low risk allocation of your portfolio.  The credit quality of the issuing company is of paramount importance then.  You will definitely find higher payouts and rates than on this list but as you dig in, you will nearly always find lower quality credits. 
 
Have you honestly analyzed your portfolio and your retirement income needs?  Most investors are accustomed to an asset allocation that is appropriate for accumulation.  But for investors approaching retirement, this often results in an inappropriately large allocation to stocks and even riskier classes of bonds.  Aligning your portfolio with your current and future needs is the first step in finding the right retirement income allocation- look for a future post on a useful exercise to help in this step.
 
Now, for the next comparison, please open this page– it's our secondary market annuity available inventory.  Notice the yields and the names of the insurers who make these payments.  These carriers have the same incredibly high credit ratings as Barron's top picks, but your yield is much better.  Why? Simply because the discounted purchase price available to you translates into a higher yield.  That's why we thump the table on Secondary Market Annuities- they are an incredible value, of high credit quality, and available most likely for only a limited time to individual investors. We'd be happy to help you do due diligence on the credit or specific contract terms of any specific secondary annuity you are interested in.  
 
With so many products on the market, there are likely many annuities that are comparable to the Barron's list.  As long as you understand how to compare different products you should have no problem finding one with the best mix of benefits for your situation.  Since most of you have read The Annuity Report, you know what it takes to do that kind of analysis and find an advisor that puts your needs first
 
We stand ready to assist and hope you will consider this opportunity in the secondary market annuity marketplace as well in your search for high yield safe investments.

Is the Secondary Market Too Good To Be True?

A fair number of people who have requested more information about the secondary annuity market have cast it aside as ‘to good to be true.’ Many other advisors might mention they have never heard of this market. I was personally in the same place six months ago. In order for me to become comfortable enough to recommend these products I had to go through the same process of discovery that you’ll want to go through before buying.
 
Every objection can be explained so I’d like to share the answers to the two most common skeptical questions in order to clear the air.
 
Why hasn’t my advisor heard of SMAs?
 
Secondary market annuities are better known as ‘factored structured settlements’ within institutional circles. You see, prior to 2009 these contracts were absorbed entirely by major corporations. After the credit crisis in 2008, many banks stopped buying these so the companies who sell them started actively searching for additional funding sources. Several partnerships were started with brokers who could offer them to individual investors as the yields offered exceptional value.
 
When financial institutions purchase these contracts, in many case they will be securitized and offered as a part of a bond or mutual fund, with a watered down yield of course. It’s not all too far-fetched to assume you may actually hold ownership in these as part of some of your other investments.
 
It’s important to understand the overall market is very small in relation to other financial products. The average annual market for these contracts is less than $800 Million. Of that, less than 20% is available to consumers. That may sound like a lot but it pales in comparison to the $200 Billion annual market for primary market annuities, including all fixed, variable, index and immediate annuities. If banks begin actively buying these contracts again it will no longer be available to you.
 
How do I know the insurance company will actually pay me?
 
I consider this a very reasonable concern since you need ultimate assurance when you part ways with a major chunk of savings. There are three key factors that offer certainty as to the outcome. 
 
First, we have attorneys that review each deal to make sure all issues that prevent the sale are remedied. These attorneys specialize in this type of transaction whether an individual or bank is the buyer. Since they are working on for your benefit they are willing to take time on the phone to explain their experience with this process. By the way, this legal consulting comes at no additional cost to you.
 
Second, all transfers are court approved and the issuing company is given a court order to redirect the payments to you. It’s easy to verify this through court filings and you are given a copy of this court order at closing of the sale to you.
 
Third, each issuing company will issue a form acknowledging the court ordered transfer. This document is issued from the home office of each company from a specific division that deals with structured settlements. This document is also including in your closing book and a representative within the company will confirm that your name is now listed as the person who will receive payments.
 
As I mentioned before, this is all due diligence I performed when deciding whether to offer these deals to my clients. When it’s all said and done, you’ll receive as much or more confirmation of the transaction than you’d get with any primary market annuity.
 
Since this market is only accessible to a very small number of advisors nationwide, it’s no surprise that few people know about it. Don’t let that stop you. Do your research and find the value. This could be a very limited opportunity so you don’t want to miss it because you didn’t take the time to investigate.
 
Please let me know how I can help.  You can click here to start learning about Secondary Market Annuities.
 
Bryan J. Anderson
800.438.5121

[email protected]

Annuities and the Puzzle of Income- New York Times

 

Here is still more information that documents the difference between a person with a pension and one without. This time, Richard H. Thaler from the University of Chicago writes of the difference in the New York Times this past weekend. In the article found here, Thaler considers two individuals, Dave and Ron, with identical ages and retirement portfolio balances to illustrate the point perfectly. Dave has a pension and Ron does not.
 
The lesson is clear; Dave has a substantial amount of guaranteed income for life whereas Ron has some difficult choices to make. Here it is straight from the article…
Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principal he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.
Which option would you choose? It seems taking the pension route carries several additional benefits, all of which we’ve covered recently. And while many people malign the fact that defined benefit pensions are going extinct, the same kind of secure benefits can be found with an annuity. While that may be true, this article considers that relatively few people choose to purchase an annuity to fill the pension void.
 
In the author’s words…
Although people like Dave who have them tend to love them, old-fashioned “defined benefit” pensions are a vanishing breed. On the other hand, people like Ron — with defined-contribution plans like 401(k)s — can transform their uncertainty into a guaranteed monthly income stream that mirrors the payouts of a traditional pension plan. They can do so by buying an annuity — but when offered the chance, nearly everyone declines.
As we know, there is no shortage of economic evidence to verify the superiority of pension income.
Economists call this the “annuity puzzle.” Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios…
If it’s this obvious, why don’t more people purchase annuities? Maybe you should tell me. I know first-hand that many consumers decline the annuity option, but rarely am I told exactly why. For starters, let’s take a look at the reasons mentioned in the article.
 
Stiffing Heirs– Many people feel that purchasing an annuity will decrease the likelihood of leaving a future inheritance. With the basic structure of most products, this is actually the case, although annuities can be designed to meet individual wishes.
 
Complicated Set of Choices– With the extreme amount of available annuities on the market, choosing one that fits perfectly is a daunting task. That’s exactly why this site was created. Here you can learn to grade specific contracts to find the most efficient way to produce long-term income without sacrificing other individual desires.
 
Payoff Is a Gamble– If profiting with an annuity contract requires that you live longer than average; many people would be justified to balk at the risk. The key to a suitable purchase is to not over-commit. By using an annuity to meet only your basic expenses you will keep additional assets available for the other financial goals you have.
 
If the economists are correct in saying that people with pensions and annuities are able to guarantee a higher level of cash expenditure over retirement, I think it’s worth raising all objections so you can give the option to purchase an annuity a chance. With a reasonable advisor, you should be able to take an academic approach to the question to verify a valid strategy.
 
I happen to think I’m a reasonable guy… and my clients would probably agree, it’s definitely worth closer inspection. What are your concerns with using an annuity for retirement income? An open discussion is the best way to answer every question. You’ll do yourself a disservice with any other approach.
 
I invite all your comments and look forward to helping you answer some very important questions.
 
Thanks for your time and have a great week!
 
Bryan J. Anderson
800.438.5121

Reasons to Buy an Annuity

A couple of weeks ago I referenced a study on reverse dollar cost averaging done by Henry “Bud” Hebeler that talked about the negative effects of market volatility while drawing retirement income from your portfolio. 
 
Well just last week Mr. Hebeler was mentioned in this WSJ article that covers some reasons to use annuities in retirement.  Find the article here.
 
Really it’s all about the benefits, right? I don’t mean to belabor the point but we’re talking about guaranteed lifetime income and all the ways it can enhance your portfolio.
 
Bud Hebeler is a retired Boeing executive who is in the middle of a new career as a retirement expert. This story shows that he puts his money where his mouth is. He personally uses laddered immediate annuities to cover income needs and mentions that the secure source of income allows him to invest remaining assets more aggressively.
 
And that’s the central point of retirement planning I have been and will continue to stress to members of this site. Securing a source of guaranteed lifetime income allows you to optimize your retirement portfolio. Everyone should be aware of all the challenges retirees will likely face in retirement so getting the most of your assets is essential to responsible planning.
 
When I am able to find quality articles that explain the subject well I like to keep this brief and to the point. The reasons to buy annuities are pretty cut and dry… asset preservation, conservative growth and guaranteed lifetime income. Honestly, who isn’t interested in that?
 
At Annuity Straight Talk, the focus is on finding solutions rather than pushing a favorite product. Call, email or make an appointment to talk about available options for optimizing your retirement portfolio.
 
Bryan J. Anderson

800.438.5121 [email protected]

Federally Issued Inflation Adjusted Annuity

indexMy mind was filled with negative images before I even got the details of the plan covered in this New York Times Op-ed. The article rightfully acknowledges the high risk many people face of outliving retirement assets but the solution causes all sorts of problems.

Yes, the authors do in fact believe that a federally issued inflation adjusted annuity is the answer to the challenge of longevity risk. In my opinion this is an extremely reckless proposal for several reasons.

Here are my thoughts based on what’s mentioned in the article.

First, it is stated that there is no single financial product capable of dealing with longevity risk. That’s news to me since insurance companies, as I understand, have been properly managing assets for retirement income for several centuries now. The authors do note that private annuities go part of the way to address the problem. If they don’t go all the way it’s a funding issue and no fault of the annuity product itself.

Next, and I quote, “By doing good for individuals, the federal government could actually do well for itself.” The problem here is that the government always does well for itself. Congresses past have helped themselves to the social security trust fund and that is a critical reason why that fund is costing taxpayers so much money and is projected to go insolvent in less than 30 years. The fox is already guarding the henhouse. Why would we put more chickens in there?

Also, the article mentions the risk of potential insolvency of insurance company and states that the fed is well-equipped to carry the liability instead. Again, I’ll quote.

“…how can someone — particularly a young person — know for sure which insurance companies will be solvent half a century from now?”

How indeed? Well, I don’t know, except for the fact that the federal government is already over budget and deeply in debt. Insurance companies, on the other hand, are solvent, profitable and suitably hedged for future obligations. If I were looking for a good steward for my money, I’d rather have a hole in my head than trust more of my financial well being to those spend-happy egotists in D.C.

Lastly, when you look at how the proposal would be structured it’s no different than current annuity contracts. It’s like these guys just realized what annuities are designed to do and figured that the government should get in the business. Sorry guys, your idea is a couple hundred years behind its time. Any notion to the thought that the federal government could achieve better results than insurance companies cannot be grounded in actuarial analysis. Do the American public a favor and run some numbers to assert these claims.

At a time when social security is projected to account for nearly 40% of retirement income for the average individual, the last thing that should happen is to ensure more private money to that public institution. Does anyone remember Enron? So many employees got hurt because they were banking on Enron pensions, planning on cashing out Enron stock options and had 401(k)s heavily invested in Enron stock. That’s a direct example of how the lack of diversification put millionaires on food stamps. How is this proposed strategy an less risky?

Annuities work as designed and no meddling from bureaucrats will improve the situation. The reason I’m citing this article is to illustrate the fact that you can’t count on anyone but yourself for long-term financial security.

If you feel so inspired, I would love to have some comments or questions on this post. Please… tell me what you think!

Bryan J. Anderson
800.438.5121 [email protected]

 

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