The point of this whole operation is not just to sell as many annuities as possible.   A lot of time and effort goes into making sure people don’t make mistakes and that results in me not selling annuities most of the time.  Some people get it and some people don’t.  Annuities work for some but not others.  Some sales are easy and some take a lot of time and effort.

Last week I thought I had a really easy sale coming my way.  My dad needed help setting up a living trust so he could organize his assets.  I have five siblings and this will make things a lot easier than just hoping we all agree on something.  Many of you have had good or bad experiences with the issue so it’s something I recommend to all clients.

Part of what he needed was an investment idea for a fair bit of cash he has set aside over the years.  He has little experience with the stock market and is one of those people who really doesn’t spend any time thinking about how much money he can make.  Simple and conservative is his wheelhouse and there aren’t a whole lot of options.

Kim Anderson spent a 42 year career as a school administrator in Montana and Wyoming.  Two modest pensions and social security allow him to easily cover expenses with plenty of extra cash each month for discretionary spending.  He also has supplementary health and long-term care insurance so is well prepared for the big emergencies in retirement.

With plenty of savings and positive cash flow he is in a perfect spot to do about anything he wants.  He should invest some money and get more growth, right?  Yes he should and based on his limited experience a simple fixed contract would be a good way to increase yield.  Dad knows I’m in this business of course so he directly asked me to find a place where he could put a couple hundred thousand dollars.

Well he’s my dad and I really like the guy and would never steer him wrong.  I know this market and how to find a nice easy deal that yields well with no complication.  But I’d never take him for granted and just assume he’ll cut a check and send it wherever I tell him.  So I made him go through the same process as anyone else to find the need or justification for giving him a retirement product.  That’s how we settled on creating the trust before anything else happened.

During our conversation we talked about how he is planning to spend his time in retirement.  Currently he is getting ready to move back to our small family farm in the Bitterroot Valley so he can raise a few cattle and plant a big garden.  My grandmother and his mom is alive and well at age 89.  She lives alone of the property and needs some help.  Since my dad built the house back in the 70s there is a family connection he wants to keep in place.

Grandma needs help to keep the place in good order and it will provide him the opportunity to putter around on a little farm and do what he loves most.  But Kim has siblings too and they have an equal right to the property where Grandma lives, and she won’t be around forever.  Kim’s plan is to buy his siblings’ share of the property but won’t do anything until Grandma is gone.  Otherwise she’ll think they are trying to push her out.

So with a big need for cash coming at an undetermined time in the future he needs to be fully liquid.  He can’t risk losing anything in the market for the time being and no safe asset will give him the flexibility to make the purchase when it happens.  Real estate considerations play a big part in many retirement plans.  Some people upgrade or add a second home and some people downsize to cut cost and free up extra cash.

My advice is the same for everyone.  Money needed for major purchases within a few years should be kept safe.  There’s not enough time for real growth no matter what yield you get so it doesn’t make sense to risk not having fund available exactly when you need it.

For now, Kim needs to focus on his tasks around the farm.  When the snow melts he’ll go to the stock sale, buy some steers to finish and plant some raspberry bushes.  He will continue saving money and eventually buy the old house.  When that happens he will then be in a place where he can look at investing some assets for long-term growth.

Part of him thought that I didn’t want to deal with him because he doesn’t have that much money but that’s a long ways from the truth.  He understands it differently now that I explained why liquidity is the biggest issue for him.  I also told him that I spend my time solving problems that he doesn’t have.

He has adequate savings and monthly income plus insurance to cover contingencies.  He is simple and would rather trust me than spend a lot of time researching products and financial strategies.  For that reason I chose not to sell him an annuity.  He wanted me to make the decision so I considered all factors and determined it’s not what’s best for him right now.

I only sell annuities that solve problems and improve financial security and opportunity.  Whether it’s my dad or anyone else, I won’t recommend any strategy unless it’s the right thing to do.

Enjoy your weekend…

Bryan

800.438.5121

Make an appointment now…

Long considered to be the benchmark for ethical behavior in the financial services industry, the Certified Financial Planner (CFP) designation is thought by many to be a necessary qualification for anyone who gives financial advice.

The CFP designation does not, however, exempt anyone from criticism who implements a retirement plan that is poorly conceived and woefully inadequate.  CFPs after all are human and no more capable of competence than anyone else just because they spent a little money and took a test so they can have some initials on a business card.

Before I go any further please let me state that I know hundreds of professionals in this business with all sorts of specialties.  The person behind the credentials is what’s most important.  Whether it be CFP or any other standard, there are those who know what they are doing and those who don’t.

And now for the plan…

I met Roger last week.  He had signed up earlier this year and read some information that has him questioning the plan he put in place two years ago.  He is retiring this year and in addition to social security would like annual income of $60,000 with an additional 1%-2% yearly increase for inflation.  His total assets were roughly $1M in 2017 when a CFP assured him of a conservative plan that would take care of it all.

1/3 of Roger’s money would be put in a commercial cash account paying 3% and 2/3 of his money would be split between three deferred annuities.  One annuity would be used for conservative growth and the other two deferred for ten years to provide lifetime income.  After hearing the general details I was immediately scratching my head.

Allow me to break it down into more detail but remember this is a close approximation and not perfect to the penny.

Cash Account:  $340,000

This is meant to provide income from 2019 thru 2025.  If the yield is 3%, principal and interest payments over six years would come to roughly $5100 monthly.  So that part meets the income goal but in the first six years of retirement, 1/3 of assets would be gone.

Annuities:  $660,000 split three ways

• Midland National Endeavor 8 – $220,000
  1. Safe growth until the end of the surrender term in 2025
  2. Reasonable projection is growth to $300,000 in eight years
  3. Plan calls for taking proceeds and buying dividend paying stocks
• Midland National IncomeVantage – $220,000
  1. Guaranteed lifetime income starting in 2027
  2. Projection shows income of $21,000 annually after ten years
• Allianz 222 – $220,000
  1. Guaranteed lifetime income starting in 2027
  2. Projection shows income of $20,000 annually after ten years of deferral
  3. The CFP actually quoted higher income figures but I consider those to be ridiculously overstated so I am giving this the benefit of the doubt and projecting income numbers that are very high relative to all the 222 illustrations I have reviewed

Below are the issues I have with this plan.

• 1/3 of assets are spent after only six years with likely 20 years of retirement left
• The first annuity becoming surrender free in 2025 cannot all be spent on dividend paying stocks. For two years until 2027 there is an income gap and over $100K of the proceeds need to be spent to bridge the gap if I offset the $60K annual goal with the average stock dividend of 3%.
• In 2027 there would be $200K in stocks paying $6000 annual dividends and a combined income from both annuities of $41,000 for a total income of $47,000 annually
• In the best scenario this leaves Roger $13,000 short of the annual income goal with no plan or prospect for inflation adjusted income. Assuming a 2% inflation adjustment, by 2027 his income goal would be over $70,000 annually so that results in an even bigger gap.
• After 20 years of payments, Roger will be 81 years old and the above would provide him with a total cash flow of roughly $850K. There would likely be a remainder of some dividend stocks and two annuities would continue paying $41K per year but from a yield perspective he does not really start making money until he is over 80 years old.

To me, the first 1/3 of the assets was wasted in order to sell a couple of deferred income annuities.  Future success is going to depend on performance of the growth annuity that matures in 2025 and the Allianz 222 needs to wildly exceed expectations.

The major fault of the above plan is not with any specific element but rather the entire plan as a whole.  Roger’s withdrawal rate amounts to 6% of his total assets which is quite high so he needs real growth and no element of the plan allows for that.  On the flip side, with a high withdrawal need you can’t afford much risk either.  There is no answer that is guaranteed to be right.  But it is without a doubt wrong to risk it all or lock it all away in safe assets.  It can’t be all or nothing one way or the other.

There’s no doubt many of you would like to know what I would have recommended.  Well like I said above he needs to have a growth element in the plan.  Two years ago I was saying the same thing I’m saying now so there’s no doubt this is what I would have recommended.  He should have put half his money in a couple annuities meant for security and conservative growth and the other half in low-cost index funds tracking the broad stock market.

Everyone knows I like to run two different scenarios, one based on the worst 20 year market period and one based on the last 20 years in the market.  The worst case scenario is something of a stress test that indicates a maximum amount of protection that is required for success.  The last 20 years simulates roughly average market growth but with a few periods of volatility that justify protecting assets, especially during the withdrawal years of retirement.

If I match the income distributions from the CFP’s plan, the worst case scenario is managed with a remainder portfolio value of around $700K at age 81.  The last 20 year scenario obviously performs better and shows a remainder value of over $1.5M which would give him room to increase his income to the desired level and even provide for the inflation adjustments he wanted.

One obviously can’t bank on the second scenario that shows substantial portfolio growth.  It needs to be approached conservatively and changes for the better can be made after performance is proven.  Split the difference between the two remainders and you’ll get $1.1M.  So I’ll use that and say the income goal of $60K annually is possible and inflation adjustments can be made on a discretionary basis depending on performance.

So what should Roger do?  That’s a hard questions to answer and I’m working on it.  His worst-case scenario is $47K per year but there’s really no upside.  He may be able to improve his position by annuitizing the deferred annuity that matures is 2025.  That would get him close to $60K after 2027 when the others start paying but will leave him with a larger income gap for those two years that he may or may not be able to absorb.  Without real growth in the plan there aren’t a lot of options.

It’s likely going to come down to adjusting spending levels in the early years in order to preserve some of the cash that was tagged for early withdrawal.  There is also the chance that he can use the annuities he already has but with a strategy that is similar to what I promote.  There are two problems with that.  Income annuities do not accumulate as well as growth-oriented annuities.  And there’s no real growth element for maximum accumulation so this may not work.  He would need both to make this successful.

Roger called because he has doubts and may consider surrendering his annuities.  I don’t feel this would be the best option since taking a loss is almost never in someone’s best interests.  Most likely he should deal with the plan he has but continually monitor it to see if growth in the contracts and changes in market conditions present a better opportunity.

When I heard he had a plan designed by a CFP I expected to see a mix of bonds, dividend stocks and long-term growth funds.  That’s a standard asset management recommendation for someone with a high income goal.  I did not expect to see a mix of no-growth cash and deferred annuities that were shoe-horned into his situation.

My advice to you is set reasonable goals and settle for nothing less than a plan that gives you the optimal level of protection and growth while preserving your options for re-balancing and making changes for future planning needs.  The optimal annuity plan that covers all contingencies is simple and effective.  If you’d like to see how it works in your situation or how it compares to plans you’ve seen then please reach out.  You can call, email or make an appointment below.

Talk to you soon…

Bryan

800.438.5121

Make an appointment now…

During meetings people frequently comment that they know I don’t like guaranteed lifetime income.  I guess I do understand why people say that since most of my writing and advice centers around finding the best deal and guaranteed lifetime is only the best deal in a very specific situation.

So it surprises me to know many people get the message that I don’t like it because that’s not the type of message I’m trying to spread at all.  The insurance industry survives on long-standing principles of security and consistency.  The push to sell guaranteed income to baby boomers is an attempt to capitalize on a person’s fear of running out of money in retirement.

Running out of money in retirement is a real concern and my aversion to using guaranteed income products in most scenarios doesn’t mean I don’t think it’s important.  It’s more a matter of adjusting to current market conditions.  Today’s market conditions show that income products are not the best deal.  Again, it depends on an individual situation because it can still be the right choice but everyone needs to explore all options for making that big a commitment.

The truth of the matter is that I love guaranteed lifetime income.  That’s why I’ve worked so hard to make it even better than the industry says it can be.  Below I’m going to give you all the reasons why you should consider an alternative to the standard approach of producing income in retirement.

Age:

Most of the people I work with have an average age somewhere in their mid-60s.  Payouts for lifetime income are best when the buyer is in his/her mid-70s.  This puts most people in the market to buy when it’s not the best time to buy.  If this is you then you need to explore a short-term strategy that protects assets but gives you the option to change the plan when better opportunities come available.

Interest Rates:

I’ve said this hundreds of times and I’m not quite sure it sinks in.  When rates are low you want to be a borrower, not a lender.  When you buy lifetime income you are essentially loaning money to the insurance company in exchange for payments.  Your money is stuck at today’s interest rates for up to 30 years in many cases.  The realistic choice is to hold off on long-term commitments so if rates rise you can wait to lock in when it’s a much better deal.

Cost:

Because most people are shopping too early and interest rates are low, the cost of buying guaranteed lifetime income is prohibitively expensive.  Look at it this way, the average income contract takes a minimum of 18 years until the buyer breaks even.  So for a buyer at age 65 it will take until age 83 before you get back in payments every penny you put toward premium.  This means the average person needs to beat life expectancy by a significant margin in order to make the income annuity a good investment.

Flexibility:

Since the cost is high it takes a larger portion of the average portfolio to purchase the guaranteed income a person needs.  The cost of this comes when you have less to invest elsewhere for future planning.  Many guaranteed income plans leave you without options for optimal growth, inflation planning, discretionary spending or a legacy.  This is so much more important than most people realize and that’s why my solution to this problem is called the AST Flex Strategy.

Contrary Advice:

There are a lot of opinions out there and if I may be completely honest, there are lots of people with opinions who have no idea what they are talking about.  During one meeting last week a lady said another advisor told her that most people don’t sell immediate annuities because they don’t pay enough commission.  That’s about as ridiculous as Ken Fisher saying he doesn’t make as much money as an insurance salesman but he’s willing to pay surrender fees if clients will cancel annuities and put those funds under his management.  I don’t know how the actual numbers look but Fisher did not become a billionaire by losing money and he doesn’t run a charity.  Choose your strategy on facts and analysis, not a random opinion.

So at the right age, when interest rates give you a good deal you’ll be able to use an income annuity without using the majority of your assets to do it.  Until then use a short-term strategy that allows you to keep control of your assets.  It won’t matter what anyone else says because you’ll have fundamental analysis that proves you’re doing the right thing.

I like guaranteed lifetime income but I don’t agree with the standard message from the insurance industry and I find fault with most of the plans put forth by other advisors.  Guaranteed income products have their place but I see the appropriate situation only about five times per year.  As time goes by and markets change my recommendation may change as well.  But for now I’m more interested in making sure people get the best deal and I’m going to put in a little extra work before I recommend a major financial commitment to anyone.

Talk to you next week!

Bryan

800.438.5121

Make an appointment now…

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…

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…

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…

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

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

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…

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