Current events, commentary, and links to other resources on retirement income and annuities in the news.

Don’t Make Decisions after One Bad Day in the Market

It all started Tuesday.  During lunch I watched the market report and things were relatively calm but by the end of the day the Dow had lost roughly 800 points.  I was speaking to a prospective client at the time and he’s the one who told me about the drop.

During our call he had received an email with a bold headline saying, “Avoid the Next Market Crash!”  The email came from another advisor who does a lot of online marketing so I thought it was interesting to get a peek at the competition’s tactics.

It amounts to fear-based selling at its finest.  And I think it’s ridiculous.  How in the world can you make substantive financial decisions based on a single day of market performance?  I suppose a day trader or hedge fund manager would disagree but those opinions are irrelevant to your concerns.

The carnage continued throughout the week and it’s anyone’s guess where it goes from here.  Trade talks, Fed decisions, corporate corruption or any of the myriad reasons why the market might hiccup will always affect outlook in the short run.  A look at the bigger picture shows that the S&P 500 has now gone negative for the year, for the second time.  It happened in October, the market bounced back and now it has dropped again.

Basically that means the S&P 500 has gone nowhere this year and that’s a far cry from the type of correction that will affect portfolio values in the long run.  For those of you heavily invested in the market it indicates that you are about in the same position as you were a year ago.  In my opinion, drastic moves based on short-term volatility are reckless and ill-conceived.

I’ve spent a lot of time on this newsletter in order to give you fundamental reasons for making major financial decisions.  From one day to the next solid advice doesn’t change.  Over the past several months I’ve given you plenty of documentation that will help you make decisions based on your needs and not exterior forces you can’t control.

One of the first newsletters I sent gave some information about how interest rates affect decisions.  More important than the stock market, the US Treasury Yield curve has gone inverted between two and ten years.  In the interest rate newsletter I referenced an article that explains what has always followed an inverted yield curve.  I’ve been watching it and talking about it for the past year and a half.  I thought it was so important that I sent it to everyone on the list three months ago.  You should read it right now.  Find it here…

Most people think about interest rates in terms of yield on safe assets.  That’s fine for analyzing options but there’s a deeper explanation as it relates to indicators that can help you make good decisions.  Interest rates have a broad and far-reaching effect on business and global economic activity.  It’s an indicator that lies beneath what you see on the surface in terms of stock prices.  It’s an indicator you can use to determine timing and market participation based on your time frame and individual needs.

I’m writing this on Thursday, Dec. 6th.  This morning the Dow was down more than 700 points and it has climbed back to being down about 500 right now.  I thought to myself that I might have to update this on Friday just in case there’s a bump that changes numbers.  But I don’t care because that wouldn’t change a thing.  One day in the market doesn’t matter.

Making decisions based on a single day of performance is nothing more than an emotional reaction.  Many of you can look back and remember emotional reactions that were not beneficial to your long-term growth and accumulation, kind of like when some people bailed in 2008 only to miss out on several years of recovery.  I don’t want you to do that so settle down and consider the big picture before making any major financial moves.

 

Best of Luck!

Bryan

Make an Appointment Now…

Don’t Put All Your Money in an Annuity

It happens more often than you’d realize and I saw it again last week.  I was meeting with Joe, who liked the idea of protecting some assets but had one major hesitation.  The only person Joe had spoken with was recommending he put all his investment assets in a fixed index annuity from Nationwide.

This is something I have seen several times before but it still surprises me to see a salesman stick his neck out so far with a wild recommendation.  After the meeting I went back through some notes and found five other people from the last month who dealt with a similar situation.  Another salesman had told each of these people to put all of their assets in an annuity.

I’ve spent some time in the past couple months talking about bad product recommendations but I think a bigger problem is what I would call bad allocation recommendations.

You should almost never put all your money into an annuity.  It’s only appropriate in a worst-case scenario, when retirement savings are just enough to meet income needs.

Let me tell you a little more about Joe.  He owns a successful business and has more than adequate savings in addition to some real estate investments.  Joe is not quite 60 years old and doesn’t have a planned retirement date.  He plans to work another six or seven years and has a local advisor that manages his portfolio.  The local advisor is friend who has done a really nice job choosing investments and performance figures indicate Joe has done well.

Joe is like almost everyone else.  Even if returns have been good he doesn’t want as much risk with his assets going forward.  The recommended annuity would eliminate risk but it made him nervous to put all of his assets into one product that would lock up his money for 12 years.  He had a good relationship with the local advisor and I think a lot of his hesitation came from the fact that Joe didn’t want to turn his back on a guy who had served him well for several years.  I don’t blame him.

I told Joe what I tell everyone.  Annuities are meant as an alternative to safe assets.  Approaching retirement, close to half a portfolio should be allocated to safe assets.  That cuts volatility and risk in half but also limits yield.  Traditionally bonds have been used for the safe side of a portfolio but with recent rate increases bonds have taken a hit as well.

Annuities give you greater safety free from interest rate risk.  Risk in a portfolio can also be cut in half but with the greater earning potential of the annuity there are less limitations on upside growth.

I am certainly not suggesting that half of your assets should go into an annuity.  It works for some but not others.  My recommendations are unique for each person and depend entirely on individual parameters.  Plenty of people will never believe an annuity can improve their situation and nothing I say will get them to see things differently.

Annuities are sold, never bought.  It’s an old saying that kind of makes sense to me.  With so many salespeople proposing an all-or-nothing approach to using annuities I can see why the sentiment toward annuities is often negative.  The bad actors in any profession get all the news.  Just don’t use that as a reason to not explore an annuity strategy.  You may learn something you didn’t know before and find a reason to buy an annuity that makes sense.  You wouldn’t be the first.

If you have any questions or would like me to review a proposal that seems too aggressive please don’t hesitate to give me a call.

All my best,

Bryan

Make an appointment now…

The Debate Over Annuities in a Retirement Portfolio

Marketwatch recently published an article on annuities that is worth reading for one simple reason.  It will highlight the reasons why it’s so hard to make retirement decisions when annuities are involved.  This article has received a lot of attention and Marketwatch has been running it for a few weeks now so it seems as though people like it.  I’ll explain the important points of this article and give you a link to it at the bottom.

The premise of the article centers on the long standing question of whether to annuitize in retirement, which means exchanging a portion of your assets for guaranteed lifetime income.

It’s important clear up some confusion from the beginning.  The article uses the term “annuities” and refers only to single premium immediate annuities which is a specific type of contract.  “Annuities” is a general term that can include immediate, deferred, fixed, variable or indexed.  Some are for income and others are for growth.  When referring to information in the article I will change the term to “income annuities” in order to be as specific as possible.

While the article does not draw any specific conclusions, it contains useful information because it does point out a couple considerations that need to be used in retirement planning.  When making allocation decisions it’s important to have a basis of comparison so you can recognize the best deal when you see it.  This is a stumbling point for a lot of people that see one or two options and don’t know if there is something better available.

Starting with a good academic debate should help put some building blocks in place.  If a consensus on using annuities does not exist then it is up to you to determine how and why to use them.

The article lists two particular issues with using income annuities in retirement.  You may notice I have dedicated newsletters to each of these topics recently so I’ll paraphrase below.

Interest Rates

The article equates lifetime income annuities to long-term bonds.  Although the income insurance from an annuity is a distinct advantage, the two investments are similar from a wealth-building and allocation perspective. (Newsletter Aug. 8, 2018)

Inflation

What I took some time to illustrate two weeks ago is clearly stated in the article.  Income annuities do not offer true inflation protection.  (Newsletter Nov. 10, 2018)

Interest rates and inflation are what I consider to be fundamental variables.  Both are present in any planning situation and should be accounted for but cannot be controlled.

I spend time in print and on video talking about the five keys to retirement planning, which are Income, Market Volatility, Inflation Protection, Control of Assets and Legacy.  The fundamental variables working for and against you allow you to test the viability of a plan based on how it will help meet goals.

Guaranteed income annuities eliminate market volatility on assets and provide income payments for life.  But they expose you to inflation, take assets out of your control and leave nothing for the next generation.  Each of the five keys has a different level of importance for every individual.  That’s why there’s no consensus on any financial product.  Some people love the assurance of steady income while others want as much growth as possible and don’t mind some volatility.

The academic debate over this subject has been going for decades and I’m going to tell you why no one agrees on the right answer.  Too much time has been spent on arguing over whether to annuitize and if so, how much of one’s assets should be used.  Annuities are not only used for income so adding an additional list of options for asset protection would certainly increase the likelihood of finding a solution.

A contributor to the article states, “It is easy to criticize annuities if you are not required to provide an alternative approach that guarantees one will have sufficient income in the event one lives to 100.”

I don’t mean to criticize income annuities and happen to know of several instances where the product fits well in a plan.  But you should know by now that this entire website is dedicated to an alternative approach. When your plan calls for creativity you will have an option.

The debate will continue and there’s no doubt most of you have seen something other than a single premium immediate annuity and want to know how it compares.  I will continue trying to put the pieces together but solutions are all individual so you’ll have to be patient with me.  If you need to know the answer for your situation then you need to send me some of the details.  Perhaps it will become the topic of an upcoming newsletter.

Read the MarketWatch article here.

Enjoy the rest of your holiday weekend!

 

Bryan

800.438.5121

Make an appointment now…

Some People Don’t Need Annuities

As much as I say that every situation is unique, the truth is most people fit in one of several categories of retirement preparedness.  If you’ve ever spoken with me than you might remember me telling you a story of someone in a very similar situation.  It is helpful to see that others have been in your position and have retired with a strategy that works.

Categories are general and specific.  How and why to use annuities are specific categories that separate the majority of people into unique situations.  Everyone also fits into a more general category that indicates whether they need an annuity or not.

Because most people are nervous around salesman I feel the need to make sure everyone understands that my goal is not always to sell annuities.  My goal is to help you find answers, regardless of what that means for me.

So I’d like to explain the factors that surround the people who don’t need annuities.  It may help you decide whether you need to be searching at all.

Last week I had the pleasure of speaking with a man named John, who had done well preparing for retirement.  When I say he has a bunch of money it’s not so much that he is wealthy but it speaks more to the fact that his spending needs were but a small fraction of his total assets.  That’s a far better measure of wealth than just adding another zero to the portfolio value.

John found my website because a local broker had pitched him an income annuity as a no-lose, obvious choice for a portion of his assets.  He asked me to weigh-in on the matter and what I discovered is not much different than what I see with many proposals.

Annuities are meant to solve problems and John was pitched an annuity that would solve a problem he didn’t have.  Therefore, I determined the recommendation to be irrelevant.

John is well-positioned and has his objectives clearly defined in relation to strategy.  He made a calculated decision to exit the market and maintain a majority cash position until an excellent investment opportunity presents itself.

If he were to use an annuity it would be for reasons unrelated to the standard industry approach, which is guaranteed income to reduce market exposure.  Instead you should consider a simpler approach.  Safety and yield can provide enhancement or diversification for a conservative plan but there needs to be a deeper justification for buying an annuity.

Most of my clients are not too dissimilar from John.  Many of them don’t need annuities either but using them is a strategic choice to add stability without sacrificing yield or flexibility.

Portfolio growth is more stable and sustainable when market-based investments are balanced with an annuity in place of other safe asset options.  Income needs can be met in all market scenarios so fluctuations in the stock market don’t negatively affect lifestyle or endanger longevity.

I get the feeling that some people think an annuity is going to stick to them if they call to ask questions.  I don’t like the average sales pitch either but in many cases an annuity is the preferred approach.  Within all the proposals and available options you might see there is a right way to approach allocation in retirement.  If an annuity is not the tool for the job then I’ll be the first to tell you so.

Talk to you next week…

 

Bryan

800.438.5121

Make an appointment now…

Annuities and Inflation

Inflation is one of the biggest concerns retirees face.  The possibility that your retirement income won’t buy as much as the years pass can be frustrating and scary.  It’s actually more of a reality than a possibility so rather than just worrying about it, you need a plan that accounts for it

Financial institutions know this so there are plenty of products and opinions that will claim to help you beat inflation.  But most of the traditional advice you might receive actually works against you and does nothing to solve the problem of declining purchasing power.

I’m going to give you an example of an annuity that is designed to keep pace with inflation and explain why it doesn’t do the job.  There are a couple inherent flaws with all inflation-adjusted annuity contracts and it’s a difficult concept for many to grasp.  Understanding this limitation is the first step to finding a real solution for inflation risk.

The first of the flaws shows that you don’t actually get more money out of a contract with planned increases, at least not for a long time.  Let’s look at a standard example of the same annuity, with and without an inflation adjustment to see how they compare for cash flow.

This illustration comes from a leading carrier with very competitive payments, although it may not be the highest available payment it is very close.

Single Life Age 65

Straight Life Payment is $548 per month for life

Adding 3% annual inflation adjustment drops the initial payment to $405 monthly

The inflation adjusted payment doesn’t exceed $548 monthly for 11 years at which point aggregate cash flow from the straight life payment stream would have put an extra $10,000 in your pocket.  So by age 76 you would have had more money going with the level payment.  Aggregate cash flow from each payment stream is not equal until year 20 so you receive no real benefit from the adjusted stream until after age 85.

This is just a matter of simple math.  Evaluating two options of any kind require you to run a break-even analysis to see which the better deal is.  Do you want a lot more money for the first 20 years of retirement or a little more for the last few years?

The other flaw of inflation adjusted contracts is not quite as easy to pinpoint but it’s important to understand.  Any fixed payment stream, whether increasing or not will decline in value because of inflation.

In the example above, the inflation adjusted payment stream is scheduled to be $710 monthly in 20 years.  What if interest rates increase substantially because of massive inflation?  The payment will still be $710 regardless of what happens with interest rates.  Sure it will buy more than you could get with $548 but it cost you plenty in lost payments to get to that point.

So what’s the answer?  Well you need growth that exceeds the rate of inflation and locking into a low rate makes it impossible.  Continued participation in the stock market is a really good way to offset inflation but the risk of volatility can hurt you even more.

And that’s the purpose for using annuities, to provide income free from market risk.  But using an annuity the right way is the key to beating inflation.  It doesn’t involve locking into low rates for a lifetime payment no matter how it’s structured.

Balancing a portfolio to reduce risk and keeping all investments flexible and short-term in nature will enable you to continually re-balance and put money to work in a rising rate environment.  Flexibility with assets is the only way to beat inflation.  If done right you’ll have the safety you need, growth you want and the ability to take advantage of higher rates in the future.

If you have any questions about how to make it work then feel free to call or make an appointment.

Have a great weekend!

 

Bryan Anderson

800.438.5121

Make an appointment now…

Why People Don’t Buy Annuities

Well it may surprise some of you to know that I don’t sell an annuity to everyone who calls. Rational or not, plenty of people choose to not use annuities in a retirement plan or they just delay the decision because big commitments are hard to make. I spend a lot of time reviewing notes from my meetings. It helps me identify trends, improve communication and enhance strategies based on changes in market conditions.

Over the years I have met with hundreds of people who have been doing exactly what you’re doing, trying to make sense of the options and find a plan that works. So I put together a list of the main reasons why people don’t buy annuities. Some choose to avoid annuities altogether and others decide to do business elsewhere.
Whatever the reason I figured it might help for you to realize that lots of other people have dealt with the same dilemmas. If you can identify with any of the situations below then I’ve offered a little reasoning that will hopefully help you move forward when the time is right.

1.)Market volatility:

Lots of people have a specific portfolio value goal and until the benchmark is met, no changes will be made. This is especially true these days since October 2018 was the worst month for the S&P 500 in seven years! It’s hard to look at a decreased portfolio and sell securities when down in value. Don’t forget that the stock market is still at a very high level and the last two years have produced excellent returns. A slight draw-down after such aggressive growth is quite normal so recent turmoil shouldn’t cause any great concern. The question is always where will it go from here? The market may resume its climb in the next couple months or it may drop even further. By all means chase the growth you want but don’t take on unnecessary risk that may negatively affect your retirement.

2.)Waiting for interest rates to rise

I’ve been hearing this since I started my career 16 years ago. But rates steadily fell and only recently rose slightly. The truth behind rate movements is that it takes a long time to see a substantial increase. Delaying retirement decisions based on interest rates is not rational. Rather, interest rates should help you decide what kind of strategy is more appropriate. In today’s market the value is found in short-term products and this means that traditional products and advice are fundamentally flawed. Most of the arguments I receive come from other advisors and it shows that most don’t do anything but regurgitate an institutional sales pitch. Stick with advice relevant to current conditions that give you the opportunity to make changes over time.

3.)Information overload:

Everyone experiences this when shopping for annuities. Opinions are diverse and most advisors try to justify their own biases. Misrepresentations and lack of experience is the source of much of the information you will receive. The science of asset distribution is very new so new products don’t always fit with the old way of thinking. The numbers never lie and sound strategies are backed by fundamentals. This is a hard barrier for many to cross so don’t worry if you need a little extra time to sort things out.

4.)Life is hectic:

Pre-retirement can be a busy time. Moving to a new location, kids in college or grandkids visiting are just a few of the things that make many feel as though there’s just too much going on to concentrate on finances. I meet a lot of people who go into retirement not knowing what they need from a portfolio. If so, the decision of whether to protect money or let it continue riding the market hasn’t been quantified. Protecting money and putting things in place for retirement doesn’t always mean buying an annuity. Interim steps can be taken so you don’t risk more than needed and allow you to save the big commitment until you have more time to focus.

5.)You don’t know what you don’t know:

All sales presentations are made to sound great. The majority of people start searching for answers after they see the first pitch. You don’t specialize in this area so it can be difficult to know if you are really making the best move. Asking for a comparison to all approaches is a good first step to solving this problem but that can also be hard when you don’t know what questions to ask. Take a step back and look at all safe money options, which are not as diverse as you think. Compare based on yield, time horizon and liquidity to find the one that offers the benefits and flexibility that you need.

6.)You want to work with someone local:

It takes a big leap of faith to make major financial changes in retirement no matter where the advisor is located. My goal is that you get the best plan for your needs and if you can get that locally then go for it. But it’s no reason to accept a less than ideal product or plan. Using technology to your advantage can open you up to more products, better strategies and a level of convenience that no conference room can provide. In the end it’s up to you but you need to understand that I’m still in business because I often beat the competition.

7.)You and your spouse can’t agree on a plan:

Communication is the key to success. You may like one advisor and plan but your spouse likes another. Different plans come with different benefits and if you can’t agree on which is better then you probably don’t have the best deal. This offers you an excellent opportunity to define every goal you have. In all likelihood you are both right, you just don’t have all the information and the best option in front of you yet.

8.)Alternative investments seem more exciting:

Earlier this year I had an interesting series of meetings. One particular gentleman came to me with a very specific goal of retirement income. He had seen one proposal and liked it but wanted to know if I had something better. I showed him a variation of the Flex Strategy that fit his situation and as usual my numbers were quite a bit better than what he had already seen. Thinking I had a new client, we spoke again just a few days later. He thanked me for my time and said he had decided that instead of buying an annuity he planned to invest the money in a family mining business in South America. Wow… talk about opposite ends of the spectrum! If protecting assets is not your primary reason to consider annuities then you should probably save the effort and spend your time analyzing different speculative investments.

9.) Trust

People run into this roadblock all the time and it relates to all of the above in some way.  It’s the same reason why it took my wife more than a year to decide what kind of new car she wanted.  Salesmen in every industry are skilled at convincing you his or her product is the best option, even though it may not be.  In the financial services industry there’s a difference in the type of advice you receive.  One is based on the suitability standard which means a recommendation needs to be reasonable for your situation.  The other is the fiduciary standard which says the recommendation has to be in your best interests.  That doesn’t make it any easier to decide who is telling the truth.  I see as much fault in many fiduciary plans as I see in plans based on the suitability standard.  The only answer to this is learning to trust yourself.  You need to analyze the options in front of you and choose the strategy that fits your best interests.  I’ll do my best to justify any recommendations and disclose all contingencies but in the end it is up to you to decide.

Most of the time I hear one of the objections above it’s the last time I talk to a person. I can only speculate as to the outcome but I assume that most don’t make any serious changes while some regrettably fall for the dinner seminar pitch. There are plenty of reasons why people don’t buy annuities or even just why they don’t buy annuities from me. If you fall into one of the above categories or have a different reason for not using annuities in retirement I’m fine with that. I just want to be sure you make decisions based on solid analysis.

Enjoy your weekend…

bryan
800.438.5121

Make an appointment now…

Allianz 222 Alternatives Comparison

After analyzing the most popular fixed index annuity last week the most common request I received was for a comparison to products I would recommend.  So rather than just asking you to take my word for it I’m going to show you why the Allianz 222 is not as good as it seems.  In comparison to a couple contracts without crazy restrictions it just doesn’t really yield all that well.

One of my new clients came to me after purchasing the Allianz 222 earlier this summer.  She is retired early at age 52 and happens to be appropriately suited for the contract’s purpose, as she can’t touch her qualified retirement funds until age 60 anyway.  Even still, projections for the contract are weak and the only strong point is the bonus.

She was gracious enough to show me her contract so I can see how the index options are allocated and will share that with you.  Since she bought it from a guy who claims to be Allianz’s top salesman then I’m assuming the allocations are standard recommendations.

I’m looking back five years to see how a contract with terms from today would have performed since 2013.  Yes, all contracts I will reference are longer in term than five years but the past five years had a lot of market activity that will test the validity of an index annuity.  You’ll see why by the screenshot below that show how the S&P 500 performed since this time in 2013.

This shows relatively moderate growth from 2013 thru 2016 with a pretty bumpy ride along the way and a steep rise up to 2018 with some volatility at the top that we all recognize from recent events.

For this post I’m going to explain the numbers that I calculated based on quotes from each insurance company.  The growth comparison is clear and supports my claims from last week.  First, let’s look at how each contract was allocated with the index options available.

The Allianz 222 was allocated as follows:

  • 25% S&P 500 Monthly Sum with 1.5% monthly cap
  • 25% Nasdaq 100 Annual Point to Point with 3.25% annual cap
  • 25%Bloomberg US Dynamic Balance Index II with 3.2% annual spread
  • 25% PIMCO Tactical Balance Index with 3.1% annual spread

Two Comparison Contracts

Great American Life Legend 7:

  • 25% S&P 500 Monthly Sum with 2.5% monthly cap
  • 25% S&P 500 Annual Point to Point with 6.4% annual cap
  • 25% S&P 500 Risk Control 10% with 70% participation rate
  • 25% S&P Retiree Spending with 75% participation rate

Midland National RetireVantage 10:

  • 20% S&P 500 Daily Average with 1% spread
  • 20% DJIA Daily Average with 1.55% spread
  • 20% S&P 500 Monthly Sum with 2.35% monthly cap
  • 20% S&P 500 Monthly Average with 80% participation rate
  • 20% DJIA Monthly Average with 75% participation rate

Okay, the numbers I am going to show you below come directly from each carrier.  These yields show the period from Jan. 1st, 2013 thru Dec. 31, 2017 because that is how the insurance companies present the numbers.  Different periods will produce different yields and each contract will change depending on what time period is being analyzed.  I took annual yields for each of the chosen indices and equally weighted them in the blended annual yield column.  Account value growth is in the far-right column and the ending account value is in bold on the last row.  This is how each contract would have performed over an identical five-year term.

 

Allianz 222

S&P 500 Monthly SumNasdaq 100 Monthly SumBloomberg with SpreadPIMCO with SpreadBlended YieldAccount Value
 $     250,000.00
20138.18%3.25%5.18%4.31%5.23% $     263,075.00
20142.08%3.25%2.97%0%2.08% $     268,533.81
20150.00%3.25%0%0%0.81% $     270,715.64
20160.00%3.25%1.15%2.16%1.64% $     275,155.38
201711.35%3.25%11.21%10.98%9.20% $ 300,462.80

Five year effective yield:  3.746%

 

Midland National RetireVantage

S&P 500 Daily AverageDJIA Daily AverageS&P 500 Monthly SumS&P 500 Monthly AverageDJIA Monthly AverageBlended YieldAccount Value
 $     250,000.00
201314.26%12.99%16.81%12.68%11.33%13.61% $     284,035.00
20143.49%0%7.66%4.16%1.29%3.32% $     293,464.96
20150%0%0%0%0%0.00% $     293,464.96
20161.51%1.37%3.09%2.42%2.59%2.20% $     299,909.45
20178.39%8.51%16.12%8.09%8.25%9.87% $ 329,516.51

Five year effective yield:  5.679%

 

Great American Legend 7

S&P 500 Monthly SumS&P 500 Annual PTPS&P 500 Risk ControlS&P Retiree SpendingBlended YieldAccount Value
 $     250,000.00
201316.20%6.40%15.34%8.48%11.61% $     279,012.50
20146.58%6.40%3.16%6.26%5.60% $     294,637.20
20150.00%0.00%0.00%0.00%0.00% $     294,637.20
20165.30%6.40%3.82%6.02%5.39% $     310,503.41
201715.41%6.40%13.58%5.91%10.33% $ 342,562.89

Five year effective yield:  6.503%

From an account value perspective the Midland and Great American contracts substantially outpace growth over a five year period.  For those of you who may get defensive and suggest that Allianz would do better with a different allocation I will say that each of the others could be allocated differently to produce more as well.  I didn’t cherry-pick data and could change any of the above to create better or worse returns.

So I’ll ask you, what is better?  $300K, $329K or $342K?  Over a five year period the differences are fairly dramatic.  After ten years it’s going to be an even bigger gap.  The Protected Income Value of the Allianz 222 would be higher but with the greater cash value of either of the alternatives you could buy more income than you’d get from the 222, and the important thing is you have the choice by going with an alternative.  I meet a lot of people that don’t necessarily need the income and even more still that might need it but not exactly in ten years.

Another frequent comment I received last week was in regards to the death benefit of the Allianz 222 which pays out the entire Protected Income Value out in five annual installments.  I did intentionally leave that out as it is irrelevant when you calculate the actual return.  Most agents are not inquisitive enough to look into it and just rely on the beneficiaries not knowing any better.  The death benefit is just window dressing and the 222 is not the only contract that pays the income value out as a death benefit over five years.

So, many of you asked for a recommendation and there it is.  I have to be competitive so I had to find contracts that would grow best and with growth you can beat any bonus or income guarantee available.  When you add an asset management strategy that shows you how to use it then it gets even better.

Many advisors will tell you otherwise but none can do the analysis to prove it.  If you have any questions or would like more detail on any of the above points please call or make an appointment and we can talk about it.

Have a great weekend!

bryan

800.438.5121

Make an appointment now…

 

How Personal Risk Tolerance Affects Retirement

Over the past couple weeks we have talked about the indicators that allow you to decide when to time your exit from market-based securities.

The idea is to give you some level of control so that you can decide when and how you retire rather than having market performance decide for you.

So we had three factors that will help determine when timing is right so that you can make decisions that are based on long-term goals instead of wild swings in the market.

First, we looked at how length of time until retirement gives you an idea of what level of risk is appropriate.  The closer you get, the less risk you need to take.  On average, it takes the stock market around three years to recover from a bear market.  You don’t want to tread water in the years before retirement so you need to shift assets to safety before you run the risk of declining portfolio value that will cause you to alter retirement plans.

Next, we talked about the main indicator that everyone needs to consider and that is income needs in relation to portfolio value.  The amount of income you need for necessary and discretionary spending in retirement gives you an objective benchmark.  Consider your income needs first and once you have reached the level of assets needed it is reasonable to protect enough assets so you can maintain expectations regardless of what happens in the market.

And finally, personal risk tolerance will cause you to adjust either of the first two.  There are those who don’t mind swings in the market, knowing that the market will always recover and continue to grow.  There is an equal number of people who don’t care for risk at all, don’t trust the market and would rather preserve assets and see continual, incremental growth over time.

If you prefer more risk in return for greater growth potential then you might be inclined to stay fully invested in the market all the way up to your retirement date or even beyond.  And if you have enough in your portfolio to sustain income withdrawals in retirement then too much risk might require a spending adjustment during volatile markets.

Those who don’t take the risk can use the same indicators and sacrifice growth for the peace of mind that comes with predictability.

But, it’s not my job to tell you how much risk to take.  Rather, I try to explain how protecting your portfolio the right way can result in continued growth and accumulation throughout your retirement years.  The proper strategy can give full protection and greater growth for those who are conservative as well as less volatility and more predictability for those who continue to chase growth at all costs.

Eliminating losses is an obvious way to enhance wealth accumulation because it allows you to maintain a higher starting point during times of recovery.  Appropriate asset allocation becomes more important as you approach retirement because systematic withdrawals enhance the effect of volatility on asset value.

Your personal risk tolerance will tell you whether to use the indicators mentioned over the last couple weeks.  Capping the three part series this week has been really good timing.  At the close of business Friday, broad US markets were down about 4% this week.  If you don’t mind risk then it won’t bother you to see a slight drop in asset value.  But if it changes the way you view retirement then you need to take a different approach.

As you get closer to retirement, a certain level of assets need to be protected so that you know income needs in retirement can be secured.  Personal risk tolerance will determine whether you want to push for more or play it safe.

When do you plan to retire?

Have you saved enough to make it work?

These are two of the most common questions I get from the thousands of people on this email list.  Only you can provide the answers and I’ll do what I can to help.

Talk to you next week…

Bryan

Make an appointment now

Timing the Market Part II: Income Needs in Relation to Portfolio Value

It’s the comment I hear most often.  “I’m trying to decide if I have enough to retire.”

Considering that for every time I get a question or comment there are several other people who are staying silent, I will assume that many of you need to answer this question.

It can be a hard decision to make.  Whether you have enough to retire is an objective calculation based on your needs and wants.  But it’s not always easy when you have a major emotional investment in the work you’ve put in to get here.

Last week we looked at how the length of time until retirement can give you an indication of to what extent you should be invested in the stock market.  Now I’m going to expand on the second of three factors that will help you determine the timing that is right for you.

Taking into account your income needs in relation to portfolio value is probably the most important consideration you should make.  Once you have enough and are within a few years of retirement then it’s time you need to protect some assets, regardless of what the market is doing.

It starts with basic math.  Find out how much you would like to spend on an annual basis and take that as a percentage of your total assets.

The higher percentage of income you need, the more assets need to be protected and the sooner you need to eliminate risk.  And the lower the percentage of income you need, the less assets need to be protected and the less you need to worry about making quick decisions.

Here’s a quick guideline for income percentages…

5% annual withdrawal– requires that you protect a substantial portion of your assets and maintaining too much risk in your portfolio may require you to delay retirement.

4% annual withdrawal– creates an optimal blend where you need a fair amount of protection but you still have enough flexibility to maintain a strategy for continued growth and accumulation.

3% annual withdrawal– you should have no problem meeting both necessary and discretionary income needs.  If income is secured optimally then a large portion of your portfolio will be available for whatever investment strategy you want to pursue.

The more you have the less you need to protect.  The relation between income needs and length of time until retirement will give you a clear indication of when you should exit the market and with what portion of your total assets.

Once you have figured out what percentage of assets you need to withdraw annually you’ll know when it no longer makes sense to take too much risk.  Remember, at five years you should start shifting assets toward safety, at three years you need to develop a strategy and within the last year you should implement that strategy.

In relation to the withdrawal rates above, protect yourself according to whichever category you are now in.  If you are still a ways out from retirement you’ll at least have a plan in place and can use the remaining work years to bump up to a more flexible position or even decide to retire early.

Everyone has different numbers, goals and expectations.  How you finally decide when to time full participation in the market will depend on your personal risk tolerance.  If you are an individual that doesn’t mind risk or market fluctuation then you’ll be more inclined to cut it close on both of the first two factors.  We’ll get into the details next week and that should tie it all together for you.

Enjoy the rest of your weekend…

Bryan

800.438.5121

Make an appointment now

Read Part I:  How Long Until You Retire?

Product Spotlight: Allianz 222

I come across this product more than any other and it’s no surprise.  The 222 is the highest selling annuity on the market.  It carries a serious bonus that has recently been as high as 30%.  In addition it gives you an extra 50% of any interest credited annually.  Sounds amazing, right?

Well, it is amazing if that’s all you’re told and that is about as much detail as most agents offer.  The problem is that bonuses always come with restrictions and that is rarely explained when this contract is presented.  Restrictions are fine in exchange for something of value but in this case those restrictions limit the suitability of the product for the majority of people.

I have talked to hundreds of people this year who have been pitched the 222.  Of those, one person was suited for its purpose.  That means it was inappropriate for everyone else, but it was still being pitched by “fiduciaries” and “CFPs”.

So, what restrictions come with the bonuses?

First of all, you need to understand the difference between the account value and the protected income value.

Account value– Equal to the premium you invest plus any interest earnings over the term of the contract.

Protected Income Value– Equal to the premium you invest plus the premium bonus, plus interest earnings on the contract that are increased by an additional 50% annually.  The resulting value is used to calculate the amount of guaranteed lifetime income you will receive.

Easy, right?  The account value is your money and the protected income value is nothing but a factor used to calculate retirement income.

Don’t take it from me.  Let’s look at how Allianz explains it on their website.

The premium bonus and interest bonus are credited only to the Protected Income Value. To receive the PIV, including the bonus, the contract must be held for at least 10 contract years, and then lifetime income withdrawals must be taken. You will not receive the bonuses if the contract is fully surrendered or if traditional annuitization payments are taken. If it is partially surrendered the PIV will be reduced proportionally, which could result in a partial loss of bonuses…

Allow me to summarize the key points that I would consider to be restrictive.

  • All bonuses only increase the potential income and do not affect your account value
  • You have to wait 10 years to receive the benefit of these bonuses
  • Lifetime income payments are required to benefit from the bonuses
  • Partial surrenders prior to 10 years will create a proportionate reduction in the protected income value (for example, 10% free withdrawal will cost you 10% of your future income)
  • If you take your money and do something else you will not receive any of the bonuses

It’s pretty clear to see that the bonuses are not just free money and unless you are buying this 10 years before retirement then it is not appropriate.  If you need to take RMDs or withdrawals of any kind before 10 years then it is not appropriate.

There is one little positive selling point I have left out so far.  The guaranteed income rider that comes with all the bonuses is free.  There are no fees on the contract.  So, some might say it’s worth doing because your money will still grow and you can walk away without a bonus in 10 years and at least it didn’t cost anything.

Yes, that is possible but let me explain why I think that’s a waste of time.  I cut the above quote from Allianz short and saved the last part for right here:

… Because this is a bonus annuity, it may include higher surrender charges, longer surrender charge periods, lower caps, higher spreads, or other restrictions that are not included in similar annuities that don’t offer a bonus feature.

I love that they use the word “restrictions”.  This is here to justify low caps and participation rates the contract offers and the result is minimal growth.  This is true with all bonus and income annuities.  If they give you more of one benefit then they will take it from somewhere else.

It wouldn’t take long to find several available products with no fees that have twice as much growth potential at the 222.

The underlying growth of the contract being low is what disqualifies this from being used for anything else but income after year ten.  The growth rates are low because Allianz adds 50% of the interest earnings to the protected income value.  This is a performance based guaranteed income contract

People have a hard time understanding this but there is one similarity that everyone can grasp.  Social security kind of works the same way.  The longer you wait, the more you get.  With the Allianz 222 you get more income if you wait ten years.

These critical points are almost never explained to the person buying.  It is not the fault of Allianz because we have seen they clearly explain the product right on their website.  It’s the fault of opportunistic agents and advisors who are not doing any research.

The Allianz 222 should not be the highest selling annuity in the market.  The ten year requirement disqualifies it for more than 90% of the people I meet.

Have you been pitched the Allianz 222?  Please reach out if you have received any conflicting information.

 

Bryan J. Anderson

800.438.5121

Click here to schedule a call

Part I: How Long Until You Retire?

To start this series let’s take a look at the first factor that will tell you how to appropriately time the market when planning for retirement.  Selling stocks at a high point sounds great but people tend to hang on a little longer than they should.  We are at a historic high right now but few people are selling and many who have been sitting on the sidelines are jumping in to the market.

If we add a few more variables to the decision process then you’ll see why it’s not just about getting the highest price, it’s also about making moves the fit well with your long-term goals.

The first thing to consider is the length of time you have until retirement.  There’s an easy rule I came up with that will help you keep things in line and on track.  You can call it the “5-3-1” rule if it needs a name or and I’ll explain it as we move along.

Specific portfolio moves should happen at five years, three years and one year prior to retirement.  This of course has a little wiggle room depending on the other two factors but we will put this building block in place first.  This is a general rule based on my experience dealing with these matters so please understand there is variability in each depending on your personal situation.

At Five Years:

You need to have 40-50% of your assets protected.  This will be different for everyone depending on factor #2 but for now it’s a good rule.  You’ve had a couple decades or more to chase growth and by now you should be able to tell if you have enough to retire.  Prudential calls the five year preceding along with the first five years of retirement the “retirement red zone.”  This is when you can least afford to weather corrections or bear markets.

You should be topping off savings, protecting your gains and preparing to turn on the income during this time period.  Big decisions like upsizing or downsizing a home, or even planning to move to a new place with lower taxes and nicer weather take lots of time.  If any of this is part of the plan then you need to stabilize your assets because it will give you more assurance that the market won’t take you off track.

At Three Years:

You should identify a strategy that will produce income, manage required distributions and sustain a long-term growth strategy that will help you meet inflation, discretionary spending and a legacy if you choose.

This is an important point in time because it’s when many people actually do the calculation to verify they have enough saved to retire.  Therein lies the reason to select products and identify strategies.  Different plans require different asset levels and you need to know your plan so you can confirm you have enough to make it work.

At One Year:

Your retirement strategy needs to be in place.  All the preparation done in the previous three years should be finished and all decisions made in regards to the right path.  Product selection and final asset allocation done a year in advance will give you plenty of time to consider all options and settle on what you feel is best.  In conjunction with this is the decision as to when it’s most beneficial to take social security.  Payouts will be close to set so you’ll have the clearest picture of what’s possible.  With a final strategy in place you will have more time to tie up loose ends at work and make a plan for how to spend your free time when you’re done working.

 

This is not something that I created out of thin air.  The guidelines for the timing of retirement are the product of conversations with hundreds of people just like you. But everyone is different and real timing of the market that allows you to keep long-term plans on track depends on personal factors.  Each of the above points in time may move forward or backward depending on who you are and what type of goals you have.

Some people buy annuities several years before retirement.  That works just fine since most people are shifting away from risk well before the final date.  Others wait and don’t do anything until the day of retirement and still others leave things hanging for several years.  This will be determined for you based on the other two factors.  Income needs and personal risk tolerance will help you narrow it down even more.

Next week I’ll expand on the second factor which is income needs in relation to portfolio value.  This plays directly into the above timeline.  When you have saved enough it’s time to start protecting assets, identifying options and finding the best strategy.

Focusing on this formula will help much more than watching a specific stock index and wondering whether it’s going to correct or keep climbing.  That’s a speculators game and you’re better off avoiding it altogether.

Talk to you next week…

Bryan

800.438.5121

Schedule an appointment now

When Is The Right Time To Buy An Annuity?

Managing retirement assets is stressful and it’s very difficult to not make emotional decisions.  Very few people are able to rely on objective analysis and it’s no surprise.  The old saying that fear and greed are the driver’s behind most decisions is absolutely true.  Given that all of you have seen some serious swings with investment accounts in the past 30 years I understand why it’s hard to time some of the biggest financial decisions you will ever make.

2018 has been something of a microcosm of the last 30 years.  It started with the stock market reaching a record high but before the end of January came a correction that skimmed more than 10% off the value of the Dow and the S&P 500.

Many were reminded of 2001 or 2008 and expected the route to continue, if not for fundamental reasons then definitely because it was about time for it to happen.  This extended recovery we’ve seen since the banking crisis of 2008 has had people jumping back into the market at every point along the way.

I’ve talked to people who stayed the course from the beginning and saw a nice rebound while others sold and sat on the sidelines, envious of the yields that could have been.  I always tell people, “in ten years we’ll know exactly what we should have done.”  It’s my variation of an old adage and I use it to remind everyone that all you can do is go with the best option today.

So this year has been interesting.  The market rose to new highs, corrected and scared everyone only to slowly recover and approach or exceed those record levels today.  Since we’ve seen it come all the way back I am reminded of some decisions people made early in 2018.

After creating an income plan for one gentleman, I asked him for any concerns about buying the annuity.  He replied that if the market rose another 15% he would regret not staying in the market with all his assets.

This person had a nice-sized portfolio and modest income needs so it wasn’t a critical move either way but I had to remind him that buying an annuity doesn’t mean you are taking all possibility of growth off the table.

Here are the details:

Portfolio value was just shy of $1M

Protecting enough to secure income would have cost $200,000

If he didn’t buy the annuity and the market rose 15% his portfolio would have been worth $1,150,000

With a 50% participation rate on the annuity and the same increase in the market he would get…

15% on $800,000 and 7.5% on $200,000

Total portfolio value of $1,135,000

So when the market gains 15% he gets 13.5%

Noticing he wouldn’t be giving up much yield he decided to protect what was needed for retirement income.

Fortunately, it was done in time to avoid the correction in late January so rather than limiting his gains, the annuity insulated the portfolio from greater loss.  What is needed for retirement income is protected and the rest of the portfolio can continue to grow forever.  Regardless of what happens in the stock market he will be able to pursue the kind of long-term growth that will build a serious amount of wealth through retirement.

When is the right time to buy an annuity?  When you’re ready to remove the stress of uncertainty.

 

Have a great weekend!

 

Bryan

800.438.5121

Make an appointment now…

The Case for Annuities in a Retirement Portfolio

If you are going to consider using annuities in a retirement plan it’s necessary to start by improving on traditional advice.  If an annuity isn’t the better option then there’s no reason to buy one.  The only reason I sell annuities for a living is because I know there are many instances where an annuity is the best choice.

For comparison purposes let’s start with a fairly standard portfolio example.  Generally speaking this is going to consist of a pre-chosen blend of equity stocks and bonds.  Traditionally people have been advised that a 4% withdrawal rate is sustainable so assuming no major volatility issues, a $1M portfolio should be able to produce $40,000 income annually with inflation adjustments.

Bonds provide steady income, stocks and mutual funds provide some dividends and the growth from the equity side is supposed to offset inflation.

We can use current interest and dividend rates to see how a mix of 40% bonds and 60% stocks will produce the income needed.

Five year bonds are paying 3.5% interest and the average dividend on stocks in the S&P 500 is around 2.5%.

40% of the portfolio in bonds will produce $14,000 interest annually.

60% of the portfolio in US-based equities will produce $15,000 in dividends annually.

This is a portfolio that is not particularly risk-averse and well positioned for growth on the equity side.  But the mix will leave someone $11,000 short of the initial income goal.  Making up the difference will require selling into principal and growth on the equity side will be needed to offset inflation and maintain a growing balance over time.

Selling into principal compounds risk and damages portfolio growth over time.

If you sell bonds, you have interest rate risk that could devalue the withdrawal, plus it will decrease future income payments with less principal.

Selling equities is fine except when the market is down in value.  Selling stocks when down in value only compounds losses and also decreases dividend yields with a lower balance.

“Interest rate risk and low rates on the bond side and market risk on the equity side make it complicated to manage income and achieve optimal growth.”

Over time the market will rise but if the timing is wrong on any withdrawals it will only be more difficult to keep pace with the income difference and any necessary inflation adjustments on spending.  This is the issue that causes long-term problems and has puzzled academics and industry analysts for years.

The insurance industry has an answer for providing the income needed but producing $40,000 income annually will cost $700K or more.  Income would be covered for a lifetime but only $300K of the portfolio would be left for inflation protection and discretionary spending.  For some, the peace of mind is worth it but I think that’s far too expensive and the kind of emotional leap that is hard for many to take.

I have always found that to be a hard way to sell annuities because I don’t especially like to prey on the various fears retirees have.  It takes a major shift in the portfolio to accomplish this as well.  The annuity expense is not the only problem.  You would also have to relinquish a significant portion of growth potential.

There happens to be a better way that addresses the issues with the standard stocks and bonds portfolio approach and also eliminates the substantial cost of the annuity.

Start by replacing bonds with an indexed annuity.  The first benefit is that you are not making a significant change to the overall portfolio.  Similar growth potential exists on the equity side and I’ll show you why the indexed annuity improves the safe allocation.

Rather than use the bonds in a portfolio to produce income, use the indexed annuity as a place to draw income when the market is down in value.  10% of the account can be drawn annually without penalty of interest rate risk.  And to beat a bond it only needs to grow at 3.5% or better, which is fairly easy to do.

If you consider the $15,000 available annually from the equity side of the portfolio that means a maximum withdrawal of $25,000 from the annuity.  Withdrawals can be increased on the annuity side so that dividends can be reinvested in good markets or bad in order to maximize growth or enhance recovery, depending on performance and personal goals.

Having developed a basic model to test the various options I can tell you with confidence that what I call the Flex Strategy produces substantially more growth on a portfolio than traditional management or the standard approach with a lifetime income annuity.

Targeting short-term indexed annuities without income riders will eliminate fees and enhance growth on the contract.  When the term is up the portfolio can be rebalanced to maintain the desired character for growth and income.

This is an excellent way to produce systematic or discretionary income but that’s not all.  When required distributions come at age 70 it is also the optimal way to manage a portfolio when you have to take withdrawals.

The details of this example are intentionally general in nature.  Average yields for both bonds and dividends can be increased by taking on more risk with lower rated bonds or by accepting less growth on higher dividend stocks.  The interest and dividend figures are also void of management fees so I call it a wash.

If you were able to manage it all yourself it takes a substantial amount of work and experience to accomplish total interest and dividend yields that exceed 4%.  If you are looking for a more care-free retirement then the annuity option would give you all the benefits needed.

Please feel free to comment or give me a call if you would like to see models using your numbers.

All my best,

Bryan

800.438.5121

Make an appointment now

More Advice From the Mainstream

Comments and questions from the blog posts give me valuable feedback so I can refine my recommendations and create new ideas for retirement planning strategies.  Some comments are thoughtful, inquisitive and insightful while others leave me scratching my head in confusion.

After last week’s newsletter we received a call from another advisor who accused me of only trying to sell 7-year annuity contracts so I could sell another contract in seven years.  Now I didn’t specifically mention that in last week’s post so he must have been reading some of the past stuff and decided to focus on a minute detail.

First of all, the main objective of this website is not to sell an annuity to everyone who signs up.  The goal is to provide information and useful retirement strategies that help people find value in the various products and financial vehicles available.

Second, when I do offer recommendations I put a fair bit of explanation behind it.  So focusing on the end result while ignoring the process of analysis that it took to get there is fairly short-sighted.  My fifth-grader has to do better on her homework than that.

I try to make things easy for you.  Over the past several weeks we’ve covered some simple topics that have technical implications.

We talked about how interest rates over different terms indicate different levels of economic certainty and dictate how you should approach the allocation of safe assets.  Short and long term rates are nearly identical right now so staying more liquid and flexible with a shorter commitment makes sense to me.

Then I gave you a retirement planning checklist that gives you a step-by-step list of considerations that need to be made when planning for retirement.  The point of that is to give you something useful no matter who you do business with.  It illustrates the fact that planning for retirement is a much more simple process than many advisors make it out to be.

And finally, last week we brought you a common question from a retiree and the standard type of advice you might receive from the average advisor.  Most of you are here because you’re in a typical situation and it helps to compare different plans and see what others are doing who have the same concerns.

None of this specifically states a belief that an annuity is the only way to get something accomplished.  Different people choose unique ways to solve problems.  I happen to believe that annuities have clear advantages over other assets and I clearly explain my point of view.  None of it means you have to agree with me and you are free to choose any strategy that you like best.

As for how I recommend annuities, 7-year contracts are the best value proposition in the market.  Terms for that time period are as good as or better than terms for longer periods.  I wrote an entire blog post explaining the fundamental analysis behind it.  Why go longer if it offers no additional benefit?

Shorter is always better and I actually use several contracts that are as short as five years in term.  I also like three to five year fixed annuities when appropriate for a given situation.

When I put these contracts into a plan I have proved over and over again that you can produce more income and accumulation in retirement with the proper strategy.  I keep the details close to the vest.  It’s my intellectual property and free information has its limits.  Without my help that means you have to connect the dots but I’m trying to make it as easy as possible.

The advisor who called was obviously not able to do that.  I’m concerned for his clients but that’s not my problem or yours.

Here’s the deal:  would you like to buy a 12-year contract with a bonus, income rider and annual fee that takes 20 or more years to break-even?

Or, would you rather buy a 5-7 year contract with no fees inside a strategy that protects assets and increases net worth in retirement?

What happens after seven years?  Well you can keep the contract, buy a different one, move the money somewhere else or buy a motorhome and come visit me in Montana.  It is going to depend on what the market looks like at that time and I have no way of knowing.  It will always be your money so you can do whatever you like.  But if I create a plan that works well, of course you’d be likely to continue doing business with me.

If not, you are fee to do whatever you want.  If you buy an annuity from me I want it to work so well that your retirement is as easy and care-free as possible.  The motivation goes no deeper than that.

As always you can call or email if you have any questions.  Just let me know how I can help.

 

All my best,

 

Bryan

800.438.5121

Make an appointment now

Retirement Planning Checklist

Below is a basic list of items to consider when working to formulate an income plan for retirement.  Much of what makes up this list requires a more detailed explanation as to why you might run into trouble when taking advice from someone else.

I’ve heard of some advisors telling some clients of mine that they don’t have enough money to retire when that’s not the case.  And more often than not I see a lot of advisors use funds from the wrong type of account to fund an annuity so special attention needs to be paid to allocation, not only with respect to your portfolio but also your blend of qualified and non-qualified assets.

Most plans that center around annuities require a far greater investment in that annuity than is appropriate.  This is one of major reasons for the negative press annuities receive.  The result is that many people avoid annuities when there is actually a strategy that can be used to strengthen a portfolio, adequately protect assets for income and increase wealth through retirement.  And yes, you can do that with annuities.

If you plan to do this on your own or with the help of a local advisor, you need to be able to verify that person knows what he/she is doing.  At the end I’ll tie it together with some final advice and hopefully this will offer some support to those of you planning to do business elsewhere.

Here is the list…

  • Total assets in relation to needs
    • Basic question that shows at a glance whether income goals are attainable
      • Annual income needs should be less than 5% of total liquid assets
    • More accurate if planned discretionary spending is included (new vehicle, daughter’s wedding, home repairs etc.)
  • Percentage of total qualified money
    • How much of your assets are in IRA/401(k)?
    • Calculate approximate required minimum distribution when you turn 70, even if you’re not yet 70
    • This can and often times does dictate an income plan and causes you to draw more than you want or need thus paying more in taxes
    • 80% of plans I see have come with strategies and products that have not adequately accounted for required minimum distributions
    • Keeping this in mind from an earlier age can help minimize tax liability or present an opportunity for a laddered Roth conversion
  • Current Account Allocation
    • Where are you in relation to the traditional mix of 60% equities and 40% bonds?
    • What percentage of assets would you like to protect?
      • No wrong answer – some want to protect it all and some don’t want to protect anything
    • How much you should protect depends on how much income you need.
    • In most cases it is advisable to have the same allocation percentage for both qualified and non-qualified funds
  • Safe Assets and Income
    • Safe allocation from above should provide majority of income
    • Some choose bonds – low cash flow and require performance and withdrawals from remainder portfolio so this carries a fair bit of risk
    • Many use annuities – guaranteed income but typically comes at a high cost
      • In most cases annuities require you to allocate a far greater percentage of your portfolio to safe assets
      • Locks up money and makes an inflexible plan
    • Other ways to use annuities – deferred fixed contracts using withdrawals for income
      • Saves on fees and makes asset more flexible
      • Creates opportunity to change and rework plan as time passes
  • Fixed vs. Fixed Indexed Annuities
    • Fixed annuities offer a guaranteed rate – Fixed indexed offers potential for more
    • Some would rather just take the guarantee and others like simple protection of principal with the opportunity to yield better than the guaranteed rate
    • In some cases your personal preference is the decision maker but there’s one advantage indexed annuities have over fixed annuities
    • Indexed annuities offer 10% free withdrawal and most fixed annuities only offer interest withdrawals, making them identical to bonds in regards to creating income
    • Using something similar to the flex strategy requires larger withdrawals in order to really get the most growth from the remainder of your portfolio

Ok, this is a general list and requires much more detail that I plan to build into this over the coming weeks.  When you create an income plan it takes a specific level of care and consideration.

First you need to have enough money to retire.  This mostly depends on how much income you need but additional expenses are important as well so you can get as close to the total as possible.  One person I recently met with had every planned car purchase and home improvement project planned for the next 20 years.  It doesn’t mean it will happen that way but it gave him the opportunity to text the viability of various income plans.

Next, you need to make sure that any qualified money in your IRA/401(k) is specifically considered as part of any income and allocation plan.  Lots of people have been sold annuities that cover income needs in their 60s that won’t work as well once RMDs are added to the equation at age 70.  And likewise, many advisors propose annuities that require deferral past age 70.  In either case RMDs were not considered and one person had a larger than expected tax burden while the other purchase an annuity that never created the intended benefit.

Next, consider your current portfolio allocation and how it relates to your optimal blend of assets.  If you have saved adequately and have reasonable income expectations then you can usually design an income plan without making any major changes to your portfolio.

And finally, learn to evaluate the different options you have for protecting assets and creating income.  Done correctly you can do both at the same time.  I am not partial to any one contract but I am being honest when I say that guaranteed income contracts in this market do not offer a way to maximize potential with assets.  While they may be safe you could be short-changing yourself.  I do believe deferred growth contracts are better for both protection and income and deciding what you use is a personal choice.

There are several ways to create a reasonable retirement plan.  There is a “best” way to do it and not everyone is going to do it that way.  With the financial services industry working the way it is you are likely to only see standard options so my objective is to first make sure you don’t make a mistake and second to give you ideas to improve your chances.

Best of luck to you all as you look to make the right moves for your future.  I am here to help and answer any questions you have.  Feel free to call or email any time.

 

All my best,

 

Bryan J. Anderson

Annuity Straight Talk

800.438.5121

Make an appointment now!

How Interest Rates Dictate Planning Decisions

As investors approaching or in retirement you all need to understand a few fundamentals that will help you make the best decisions in regards to asset allocation.  With respect to this I’d like to talk about interest rates as an indicator that give you some idea of how to plan and what to expect from market performance.

The first is to take a look at the US Treasury yield curve.  This shows the difference between short and long maturity treasury securities.  Obviously the shorter term treasuries will have lower yields and the longer term will have higher yields.  For investors with a short time horizon, the lower yields are acceptable because money is liquid at an earlier date.  Retirees with a long time horizon should look at the longer terms for stable planning over extended periods of time.

This explains what is considered to be a normal yield curve, with short term maturities paying low yields and the curve steadily rising and maturities increase.  This would happen when the long-term economic outlook is positive.  Short and long term investors get exactly what they need.  Retirees in this case would find that the products designed for guaranteed income are priced appropriately and offer a good deal.

Right now, the yield curve is basically flat and that is an indicator of economic uncertainty.  Take a look at the US Treasury yield chart using this link.  The 1-year is 2.42% but the 30-year is only 3.03%!

So if you loan the federal government your money you do almost as well with a one year commitment as you would by locking up your money for 30 years.  This directly correlates with the retirement products the majority of financial advisors are selling.  Long-term products are based on the long-term market yields and it doesn’t make sense for planning purposes to lock money up for extended periods of time unless you are paid a reasonable yield to do so.  That option doesn’t exist in the products available today.

The best deals are in the short-term opportunities.  You’ll earn nearly as much interest but have your funds liquid at an earlier date and available for re-positioning as markets change.

What about a third type of yield curve?  Let’s assume that short-term rates are higher than long-term rates.  This would be called an inverted yield curve and it signifies a poor extended outlook for the economy.

This doesn’t happen often but when it does it leads to serious market volatility that will wreck a portfolio.  Recovery could take several years and require a steel nerve that would make Josey Wales back down.

One of the more well-known indicators of this happening is seen in the difference between the two and ten year treasury.

As of the market close on August 10th, 2018 the 2-year is at 2.61% and the 10-year is at 2.87%.  Take a look at this article that explains what happens when those yields switch and the 10-year pays less than the 2-year.  In all points through history when the yield curve inverts over this time period it precedes a wicked market correction.  It’s reason to be cautious when making allocation decisions, and with equities markets recently approaching or reclaiming historic highs it’s not a bad time to protect some assets.

The above article about treasury spreads is from earlier this year and I have shared it with several of you.  The fundamentals and our current economic situation have not changed so I felt a little urgency to get this out to as many people as possible.  Several analysts are calling for an inverted yield curve within the next year.  I don’t like to make predictions but I do like to provide justification for the strategies I promote at AST.  Whether the yield curve inverts or not makes no difference to me.  I just want you to be ready if it does.

Keep your commitments short and flexible.  Set enough aside so you can weather a market downturn without sacrificing retirement lifestyle.  Be ready to make changes as time passes so you can increase wealth through retirement.

Planning is simple when you do it right.  If you have any questions feel free to call or email any time.

 

All my best,

 

Bryan J. Anderson

800.438.5121

Make an appointment now!

AST Newsletter for August 4th, 2018

We’re going to start this off by talking about two of the more pressing issues that relate to retirement planning:  interest rates and market volatility.

The Fed met this week and decided to delay a rate increase this quarter but confirmed plans for two more rate increases later this year.  I don’t mean to be patronizing but many people mistakenly assume that actions by the Fed are what lead to the increased consumer rates that we all care about.  You may or may not know that the Fed can only control the rate at which they lend to member banks.

The increase in rates on treasury securities, which fuel all rates that affect us, depend on several other factors with the most important being government spending.  To highlight this I have a link to a recent Bloomberg article that talks about recent debt issuance by the Trump administration.  This will bring US Debt sales to the highest level since 2010.  Many analysts believe this is unnecessary given the strong economy and the result is that we will continue see large federal deficits with no end in sight.  News of the issuance caused the 10 year treasury to spike over 3% for the first time in several years.  This will increase borrowing costs for consumers but may also increase rates on fixed investment vehicles so it’s not all bad for retirees who are looking for higher rates in order to plan for retirement.

You can read the article here…

Next week I will talk more about how interest rates affect the economy and stock market performance so we can tie it all together and look at how that might affect the way you should plan for income or asset management in retirement.

It holds true that investors should pare back on risk within five years of retirement.  But that’s hard to do when markets are recovering or on extended runs.  The S&P 500 is back in positive territory for the year but the Dow Jones still lags back and hasn’t recovered from the February correction.  These are things we all deal with but when retirement comes you certainly don’t want it to affect your lifestyle.

Many analysts are calling for another correction and a recent article on MarketWatch explains several fundamentals that may give credence to the thought of some volatility ahead.  With a strong economy and slightly higher rates, retirement planning is easier today than in the past several years and my gut tells me we should see some steady growth in the near future.  However, I am not a stock analyst and I make my living advising and selling conservative strategies and products.

Read more from MarketWatch here…

It’s always a good time to eliminate risk if you don’t have the time, patience or stomach for a recovery.  The key is timing and it’s different for everyone.  Keep the big things in mind and use discretion when chasing yield.  Fear and greed drive most financial decisions so do your best to remove emotion from all decisions.

If you’d like to chat about how any of this might affect your situation you can always call or email any time.  I’ll be out of service this weekend but can return emails if you’d like to respond.  Phone calls will have to wait until Monday but if you’d like to leave me a message I’ll call as soon as I can.

Have a great weekend!

Bryan

800.438.5121

 

War Stories:  The Allianz 222

I’m choosing a product topic for my first version of this section.  “War Stories” came about mostly because I feel a fair bit of hostility toward this product in particular.  The Allianz 222 is the highest selling product in the Indexed Annuity marketplace.

That’s curious to me since it’s a product with a very specific use.  The reason it’s so popular is because the 30% bonus makes it kind of easy to sell and for agents who have a loose relationship with the truth then it ends up being owned by far too many people who will get a not-so-nice surprise down the road.

Let me explain a little more since I’ll never ask you to take my word for it.

1.) You get a 30% Protected Income Value(PIV) bonus when you purchase.

2.) PIV is used to calculate guaranteed lifetime income.

3.) You also get a 50% bonus to annual index credits that is added to your PIV.

4.) In order to capitalize on the PIV you must wait 10 years and then convert that PIV into a lifetime income stream.

5.) The PIV is not your money – it is simply a factor used to calculate lifetime income.

6.) Underlying growth potential on the contract is very limited, in order for the company to limit exposure to the income payments via the PIV.

7.) Do you really think an insurance company is going to give you 30% free money without a catch?

If anyone tells you anything to the contrary it is a lie.  This is the most misrepresented contract I’ve ever seen.  Nothing in life is free once our parents kick us out of the house and the Allianz 222 is no exception.

Do you have any specific questions?  Respond to this email or give me a call.

All my best,

Bryan

800.438.5121

How an Annuity Can Increase Wealth in Retirement

I have made this claim during personal meetings with people and more recently updated a few places on the website to reflect the idea.  You can own an annuity that allows you to increase wealth through retirement.  It’s not the annuity that does this, it’s how you use the annuity that makes it work.

 

This is something you’ll have a hard time finding elsewhere.  It takes independence of thought and a confidence in understanding basic financial principles for a person to do it successfully.  The reason is because the insurance industry has a very specific way of promoting products that are meant to protect assets and produce income in retirement.  Agents and advisors for the most part are more than happy to stick with the status quo and simply sell the way everyone else sells.

 

But since I do business all over the country from my office in Montana, I need to have an advantage over other products and services.  Otherwise, why would you trust someone this far away?  I will show you why.

 

When you buy an annuity to produce retirement income you have to take it from an investment portfolio that has potential to grow.  So the annuity reduces your investment portfolio in exchange for a monthly paycheck.  It leaves less money available to invest for long-term growth, which is what you need to fight inflation and increase wealth.

 

If you model the effect on your portfolio you will see that while the annuity protects your income it essentially prevents you from maintaining the same level of wealth through retirement.  The reason the annuity costs so much is because it provides income for all years of retirement.  This doesn’t make sense to me.

 

Since the point of the annuity is to insulate your retirement income from market volatility wouldn’t it make more sense to have an annuity that covers income only during the time when you can’t take money out of the stock market?

 

On average it takes the stock market 3.3 years to recover from a bear market.  During the Great Depression it took around 7 years for the stock market to return to previous highs.  If that’s the case, then why not just have enough set aside to cover income when the value of the stock market is depressed?

 

This is the idea behind what I call the AST Flex Strategy.  Instead of using an income annuity, use a deferred annuity as a protected pool of cash that you can use to draw income when the market is down in value.  When the market is performing well you can sell stocks at high values and leave the safe money alone for the next time you need it.

 

This allows you to spend less on the annuity and leave more working in the stock market for long-term growth.  The result is all the protection needed, more long-term growth, lower fees and a substantial increase to your net worth in comparison to traditional income annuity plans.  That’s what everyone else sells so I’ve seen it a thousand times and nothing so far comes close to the output of the AST Flex Strategy.

 

Where the traditional income annuity decreases your net worth, the AST Flex Strategy allows you to increase your net worth.  In most cases the difference is several hundred thousand dollars or even much more, depending on your situation.

 

The details of exactly how it works is something I plan to keep to myself and share only with clients.  When you see how it’s done you won’t believe what a difference it makes.  It gives you more money, more control over your assets and more opportunity to adjust the plan as time goes by.

 

Go ahead and buy an income annuity or indexed annuity with an income rider, but if you do so without giving the Flex Strategy a look then you are just stubbornly refusing to put extra money in your pocket.  It’s ridiculous to thinking about approaching retirement any other way.

 

If you’d like to see how it works go ahead and sign up to get the Indexed Annuity Guide or just give me a call.

 

All my best,

 

Bryan J. Anderson

800.438.5121

Bonds vs. Indexed Annuities

 

Bonds: The Traditional ‘Safe Money’ Choice

Bonds are traditionally used as a safe, fixed rate asset in an investment portfolio.

As retirement approaches, conventional wisdom is to shift to a greater concentration of bonds to decrease risk.

Many people end up in bond funds that further diversify risk and return by actively trading multiple classes of bonds.

But do you fully understand the risk in a low-rate environment?

The truth is, if interest rates rise, bonds lose value.  The bond can perform perfectly well and you can still lose a bundle.

Now, it’s true that you can wait to term and get your yield, but a bond that is ‘underwater’ is completely illiquid because you WILL lose money if you sell and reposition your money.

And bond funds rarely hold individual bonds to maturity, so the risk of loss is even greater, because the fund manager might prune holdings and leave you with losses.

I don’t at all mean to be misleading.  Bonds and bond funds can be a very useful way to protect assets while receiving income in the form of interest or coupon payments.

But is it the safest place to be when we expect rates to rise?

There IS a solution

Yes, fixed index annuities provide conservative growth and asset protection to a greater degree than bonds in our current market.

I like to think of index annuities as bonds plus more…

….. Bonds plus more safety

….. Bonds plus more yield

….. Bonds plus more flexibility

Lets look at each of the ‘Pluses’ in more detail

 

 

Index annuities are bonds + safety

Insurance companies invest primarily in bonds, so the base asset behind the annuity contract is essentially the same as the bond you would buy….

…plus the reserves of the insurance company.

The insurance company itself issues you a guarantee and they bear the risk of bond devaluation based on changes in interest rates, which results in a guarantee of principal.

In sum, you get the Bond… Plus more safety, in a contract where you cannot lose money!

Therefore, Index Annuities Are Bonds Plus More Safety

Index annuities are bonds + yield

Insurance carriers that issue index annuities use your premium to buy bonds that yield interest income, and then use that interest income to buy options in a stock market index.

The market index options purchased by the insurance company are what drives the yield.  If the market does well, the contract owner captures a portion of that market rise.

Most caps and participation rates suggest that the potential gains far outpace yields on bonds of similar duration.   In recent years, renewals and actual contract statements bear this out (*Much depends on the crediting method selected, so your mileage may vary)

But in sum, you have more upside potential than by holding the bond itself…

Therefore, Index Annuities Are Bonds Plus More Yield

 

Index annuities are bonds + flexibility

Bonds are only a flexible investment if you can sell them.  But the price you’ll get could be higher or lower than what you paid depending on the rate environment at sale time.  This could be good or very bad, but you won’t know until it happens.

Now, if an unforeseen emergency forces you to sell, that crisis may come at a time when you’ll be forced to take a loss.  It’s not really the kind of flexibility most people want in retirement.

Index annuities come with a free withdrawal clause that allows 10% or more of the account value to be taken without penalty.  In addition, most contracts allow for full access to the funds in the case of major life emergencies including terminal illness, long-term care and death.

Unlike bonds, you have flexibility and no risk of loss whatsoever when a loss would hurt the most.

Therefore, Index Annuities are Bonds Plus More Flexibility

 

 

Summary- Bonds… Plus More

In summary, please let me repeat that I believe bonds to be a suitable retirement vehicle for many people.

The problem is that in today’s market environment bonds do not offer the overall benefits most retirees need for the safe side of a portfolio.

Index annuities are an option that provides more safety, higher yield potential, and the flexibility a person needs to make a retirement income strategy really work….

If you want more safety… more yield… more flexibility, then think Index Annuities instead of bonds.

 

Index Annuities Are Bonds…. Plus More!

 

All the best,

Bryan J Anderson

Annuity Straight Talk,   800 438 5121

Cons of Annuities

Most people approach the use of annuities in retirement planning with some sort of bias based on what they heard or read elsewhere.  There’s no shortage of negative opinions but you’ve got to consider where those opinions come from.  Typically you’re getting a perspective from someone who is in the business to sell you something else.

What do you think a Ford salesman is going to say when you mention the possibility of buying a Chevy?

It may come as a surprise to most people when they learn that I didn’t always like annuities either.  I didn’t like how annuities were sold so I learned to find the weak spots in a sales pitch and that would usually expose an under-performing product.  But I also found plenty of common features that looked very reasonable.

I have come to the conclusion that the cons of annuities are simply chosen add-ons that don’t have to come with a standard contract.  So avoiding the negative features comes down to how you use the annuity.

If a salesman doesn’t know how to use an annuity the right way then you will likely end up with an annuity that doesn’t work so well.  Let’s take a look at some of the cons of annuities so you know what to avoid.

The two biggest cons of annuities…

These are getting kind of tired but are still widely recognized as the biggest problems.

Fees:  You will be told that fees are too high and often undisclosed so they come as a surprise and work to        eliminate any possibility of yield.  Fees are directly related to options within a contract.  That means you choose whether you pay for an additional benefit.  An annuity without additional riders doesn’t have fees so it’s easy to eliminate the problem.  I don’t like fees and can show you how to use an annuity efficiently without paying extra for it.

Losing Control:  Most people are told that by using an annuity you are losing control of your money forever.  That is a general complaint about one specific kind of annuity.  And since lifetime income is not a very good deal then you have no need to lock money into a contract that pays for life.  If a plan is built properly you can get the same benefit without committing funds for life.  Less creative people have a hard time seeing the potential so you are likely going to continue to hear this.

Don’t ever forget this:  You only pay fees if you want to and there are plenty of ways to use an annuity and maintain control of your assets.

By debunking the two complaints above you can disregard 95% of the information you’ll hear about annuities that is negative.  There is more to it if you want to get technical but this really is about as simple as it needs to be.

Most people who don’t like annuities only say that because they are selling something else.  What you do with your retirement assets is your choice so you need to be able to logically compare the advice you get.

Annuities are just an option for protecting assets.  You have other options as well but the annuity will have some clear advantages, depending on what you are trying to do.  A good strategy is more important than anything and that’s the right place to start.

Go ahead and signup to receive the reports if you’d like to learn more or give me a call if you’d like to talk about how an annuity can improve your retirement plan.

 

Bryan J. Anderson

800.438.5121

Limited Time Rate Hike For Fixed Annuities

For a limited time, Fidelity & Guaranty Life’s FG Guarantee-Platinum® single premium fixed deferred annuity with a five-year guarantee period will increase to 3.10%* – initial guarantee period. This special will start on February 6, 2017.

Most market observers see rates on a rising trend, and these shorter term contracts like the F+G are a good way to go.  It’s a way to safely place money, earn a decent yield, and turn the money over in just a few years.

While this specific product might not be appropriate for you, this flexible and laddered approach frequently comes up during appointments with clients discussing The AST Flex Strategy.  Give us a call to find out more.