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. 6^th.  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…

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

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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

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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

Five year effective yield:  3.746%

Midland National RetireVantage

Five year effective yield:  5.679%

Great American Legend 7

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

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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

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Read 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

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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

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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!

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

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