Tons of people ask this question and those who don’t are probably thinking about it.  Annuities are supposed to be safe so what happens if a company fails?  Most people understand that every state has a guaranty fund for insurance contracts but there’s a lot that needs to happen before that even comes into play.  Aside from any insurance that may be available in your state there are several layers of protection that annuities provide.

Insurance companies operate quite differently than banks in that they have a 1:1 asset to liability ratio.  Banks are much more highly leveraged with the victims of the 2008 financial crisis being so thinly capitalized that some were in the neighborhood of 1:36.  That means if a mere 3% of their liabilities were in default it would wipe out all of their assets.  Foreclosures began to happen and it didn’t take long for the water to recede and several banks to be figuratively seen as swimming with no trunks.

On top of a very conservative leverage ratio, insurance companies are required to hold a certain amount of cash in reserves to prevent short-term funding issues related with the normal business cycle.  Banks need the FDIC and I wouldn’t put any money in there if they didn’t have it.  An insurance company’s first line of defense is that they insure themselves.

A little fun fact:  New York Life has more in company reserves than does the FDIC.  That’s right!  One single mutual insurance company has more liquid cash available than the corporation built to protect the entire banking industry.

An insurance company has a general account and a separate account.  When you buy an annuity, your money is used to purchase a block of conservative assets held in the general account.  The separate account holds riskier investments.  If the company fails it’s typically not because of problems with the general account.  Most often it’s because of failed investment in the separate account.

When AIG ran into trouble with collateralized debt obligations (CDOs) in 2008, many aggressive agents urged annuity holders to surrender their contracts and go with a more stable insurer.  That turned out to be a phony pitch.  The company itself and state regulators sent letters to contract owners warning them of the scam and stating officially that annuities were not in danger.  The general account had not been compromised but some separate investments had.  AIG annuities were never affected.

Also, I think there’s some misunderstanding about what it takes for a company to actually fail.  First, the company is put under state receivership if cash outflows exceed cash inflows or if the operating surplus turns negative.  It doesn’t mean the company failed it just means that its financial strength has been compromised.  In the same sense, you’re not bankrupt just because you only make the minimum payment on a credit card.

The insurance commissioner in the company’s state of domicile will take over control of a company when certain conditions of financial distress have been met.  The first step would be for the state to sell off underperforming assets.  Any losses incurred would be subsidized by company reserves.  Stable parts of the business will remain on the books if the company is to be rehabilitated or sold to another company for profit that would further help to recoup losses from the bad investments. It’s a long process that obviously requires more detail but through it all, annuity payments and insurance claims are all paid.

When people ask what would happen if a company goes bankrupt my quick response is that they are likely to see another insurance company buy the block of business.  Their annuity would then be backed by another carrier because annuity pools are usually a profitable part of the business.  This happened in the mid-90s when Conseco was put in receivership.  Don’t quote me but I think it was Metlife who purchased the annuity business so everyone with a Conseco annuity got a new cover page and correspondence sent from a different company.

The worst case I recall of insurance company failure was Executive Life of New York (ELNY) in 1990.  The process of rehabilitation and liquidation took state regulators 23 years to complete.  It wasn’t until 2013 that a final settlement was reached.  Throughout that time, annuity payments were made, contracts were cashed out and claims were paid as the regulators managed investments, sold pieces of the business and slowly worked through company reserves.  It might have been a pain in the butt for some but everyone got their money.

In 2013, regulators took all remaining reserves, funds from all the state guaranty associations and several large contributions from the insurance industry and formed the Guaranteed Annuity Benefits Association (GABC).  GABC is a non-profit company that holds a series of zero-coupon treasuries for the purpose of making good on all remaining lifetime payments and liabilities for the former ELNY.

That’s a rare example but through it all you’ll be hard-pressed to find someone who has lost money in an annuity, unless you’re talking about a variable annuity.  Those are risk-based funds held in the company’s separate account, but that’s beside the point.

To sum it all up, there are four components to the safety of an annuity.  First, insurance companies back every liability, dollar for dollar, with an income producing asset.  Second, additional reserves insulate the company from the ups and downs of the regular business cycle.  Third, profitable asset classes, like annuities, can be sold to other carriers in times of financial distress.  And finally, if all else fails and once everything has been liquidated the guaranty associations from several states steps in to soak up remaining liabilities.

It’s the kind of thing that happens so infrequently that I’m telling you about the one great example from nearly 30 years ago.  How many banks have gone down since then?  How many billions of dollars have been lost in mutual funds, real estate and bonds since then?  And if you take my advice to go short-term with a solid company then you’ll never even get close enough to sniff this kind of trouble.  It takes years to unwind an insurance company and an annuity gives you more collateral than you can get with any other asset.

I have no problem with anyone who wants to limit their investment to the maximum coverage offered by a state guaranty fund.  But proper due diligence will show that annuities provide far more protection than even a money market fund.  Have you ever read the fine print in that contract?  You’d be surprised to learn just how much risk you’re taking by sitting in other assets that seem to hold value.

If you rely entirely on a state guaranty fund for safety then you haven’t done your homework.  It’s fine for a backstop but there are plenty of lines of defense before it gets to that point.

There are several points in this paper where greater detail can be provided.  My intention is to make it readable, provoke thought and provide a base of knowledge for understanding why annuities are truly the safest asset you can own.

Call me next week or comment below if you have an issue with my assessment. Or, you can Make an appointment…

Thanks!

Bryan

800.438.5121

Much of the work I do and the strategies I have created are based on debunking popular myths about annuities.  Not all contracts do what Ken Fisher warns against and most people trashing the products are only trying to sell magazines or another financial product.  Everything has a negative side so you have to keep an open mind and consider the motivations behind any source.

Several weeks ago I wrote about liquidity being one of the biggest myths about annuities.  Sure, some of them have restrictions and I’ve consistently advised you to avoid lofty promises and focus on fundamentals.  Doing so will uncover the contracts that give you no more than the benefits you need and a simple plan free of complexity.

There’s more to the liquidity issue, so much more in fact that looking at it from a different angle might reveal a conservative strategy with excellent long-term growth potential.  In case you didn’t know, I like to tinker with numbers.  Playing with ideas and testing scenarios for me is just like a kid who is addicted to video games.  But I like to think that the results are much more productive.

The idea behind this comes from several sources.  I learn something from everyone I meet and each experience gives me the opportunity to serve the next person.  People who have worked with me for years get the added payback in the form of improved ideas and strategies.  Staying on the cutting edge and being able to pivot and change over time is probably the most important aspect to consider when planning for retirement.

The biggest inspiration for all of my ideas comes from the people who call to say they bought an annuity that isn’t working out.  Either the performance isn’t that great or in the worst case the contract has components with a purpose that was not properly disclosed to the purchaser.  Situations like these give rise to the sentiment that someone feels “stuck with an annuity.”

Unless you buy something completely dysfunctional, no one should ever feel stuck with an annuity.  The 10% free withdrawal gives you more than enough to draw spending money or to even ladder your investment out to other opportunities.  It may not seem like a lot but have you sat down with the numbers to see what it actually looks like?  I have, and you may be surprised at the results.

For years I have been dealing with people who expect rates to rise.  Never mind the economics required for an inflationary environment, rates are low, have been higher in the past so it stands to reason they are going higher again, right?  Maybe, but that’s no reason to be sitting around earning nothing.  If you accept a long-term rate lower than what you’d like, you can take the free withdrawal and ladder into the rising rates.  The result is a higher long-term average than what you’d get by waiting for a mythical interest rate.  And in the past, many have found out that the low starting rate was better than anything in the later years because rates kept dropping.

That idea is nothing new.  Other people have been talking about that for a while but like everything else I took it a step further.  Several months ago I realized that most retirees are taking on more risk than they’ve ever had.  It has nothing to do with asset allocation but it has everything to do with retiring right now with more assets than you’ve ever had and a stock market that is at its highest point ever.  The implications of having more assets exposed is also greater because you are also thinking about not just growing but living off of those assets.  The game has changed completely and the stakes never higher.

So, everybody wants a better yield but nobody wants to take risk.  Here’s an idea: instead of laddering into higher rates, protect some money with an annuity and use the free withdrawal to ladder incrementally back into the market.  It takes a substantial amount of risk away from a portfolio now but also proves that dollar-cost-averaging back into the market creates some excellent returns.  What’s interesting is that I’ve run the free withdrawal reinvestment scenario across several time periods and results are similarly impressive in all examples. 

In good market periods you would have done better by leaving it all at risk and in bad market periods you would have consistently purchased at depressed values, which would enhance your yield.  In either case you will see yields that far exceed what any annuity can do alone and it’s exactly the kind of performance that everyone has been saying they want.

All annuities offer protection, even the ones I don’t recommend buying.  If you feel stuck with a contract, don’t just sit there and do nothing about it.  Of course if you use an annuity that performs well then the whole idea could be a good way to move forward into retirement while protecting all you’ve earned without sacrificing future potential.

I definitely have numbers to support this theory.  It’s something I’ve kicked around for about six months now and it’s been tested in hundreds of different scenarios.  But I can’t give away all my work for free so if you’d like to see what it can do then drop me a line and we can run it with your parameters.

Enjoy your weekend!

Bryan

800.438.5121

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Three or four unfinished drafts are sitting in the newsletter folder and most of the time I can’t decide what I plan to send out for the week.  Recent stories and misguided objections gave birth to this weekly exercise just about a year ago.  Since then hundreds regularly read this email and many of those have identified with a problem others are having.  Some are prospecting for ideas well ahead of retirement and others are clients who have worked with me for years.

Over the next few weeks I’ve got a steady string of clients who have finally taken me up on an offer to come visit Montana.  I say the same thing to a lot of people.  When you have the free time and extra money, why not come see Glacier Park for a nice summer trip.  The offer is on the table and Carl from Florida is the first to arrive.  Last night we grilled elk burgers and he told me he really likes reading the weekly updates.

Without a solid plan for this week I came up with an idea on the spot to do something that has been in the works for a long time.  Because dozens of new people come in every week I’ve wanted to somehow recap everything to get all people on the same page.  If this is the first newsletter you’ve read you may not have the context of all the others.  So below is a link to each of the best weekly posts I’ve sent, judged by total views and viewer comments, either on the site or by email response.

This will more or less outline my whole philosophy in regards to using annuities in retirement.  It works for some but not others and some people like it while others don’t.  The entire point of what I’m doing is to first make sure you don’t make any mistakes.  Annuities only have a bad name because people often use them the wrong way.

Check out the ones you like and skip the ones you don’t.  I’m going to start with the simple stuff and build up to some of the more complex ideas I’ve shared.  Here we go…

Index Annuities Explained on One Page

Most people are made aware if index annuities from a sales pitch of a popular and perhaps complicated contract.  To build a house you can’t start with the shingles.  You need a solid foundation first and this one helped a lot of people clear the air and come back to basics.

How Commissions Affect Annuity Sales

Why do so many agents sell the same contract?  There’s a reason you see more products than others.  This one partially lifts the veil on the sales side of this business so you can understand exactly the most popular contracts are sold so frequently, and in my opinion sold in error all too often.  You need to know who has a stake in your deal so you know for sure whether they have your best interests in mind.

When and How to Retire

Earlier this year I got a requests from one reader who asked if I’d write something that addressed his situation.  Like many of you, he wanted to make plans early but because of TSP transfer rules he is too young to move his assets.  So he has to work a few more years and wait to put retirement plans in place.  It’s not too uncommon for people to be barred from moving money when under 59 ½ so this one gives a little advice on what to do in addition to just being patient.

I Didn’t Sell My Dad an Annuity

Earlier this year I went to visit my Dad for about a week.  Sports has always been a big part of my life and we spent a lot of time watching my nephews play basketball.  It was some good father/son time and brought back a lot of memories of how my parents supported me when I was playing.  One of the reasons for the visit is that he needed some retirement advice.  Here is where I explained to you all that my goal is not to sell every single person an annuity.

How to Really Maximize Social Security

A cornerstone of most retirement plans, advice on how to maximize what you get from the system is one way many advisors attract clients.  But there’s no real secret, it just takes some number crunching to figure it out.  As with most things I disagree with the establishment on this one and I’m right.  Here’s a look at how to really settle the question once and for all.

The Reality of Roth Conversions

Tax-free income is a dream for just about anyone.  But if your goal is maybe to pay the least amount of taxes over time then a Roth conversion may not be the answer for you.  In this one I offer some explanation as to why this strategy only works in some very specific situations.

How to Beat a Guaranteed Income Contract

Most advisors are pitching guaranteed lifetime income because that’s what the industry wants us all to sell.  But in reality that approach is not appropriate for most people.  In certain situations a guaranteed income contract works the best but for most people the flexible approach offers more benefit.  It’s not something you see at the standard dinner seminar and started right here at AST.

Why People Don’t Buy Annuities

There are a lot of reasons why people fail to act on a good plan that meets all their objectives.  You may identify with one or more of the reasons on this list.  Is it information overload or disagreement with a spouse?  This one lists all the reasons why some people have a hard time making the leap.

The Case for Annuities in a Retirement Portfolio

Here is where I explain exactly why index annuities give you a substantial advantage over all other safe assets available.  Bonds, CDs and other cash instruments don’t give you the full benefit needed if market volatility is a concern in retirement.  If you want to know exactly how to protect assets, produce income and increase wealth in retirement then this is essential reading.

And Finally…

Why I Call it the Flex Strategy

This was my big idea several years ago.  The evolution of this strategy shows exactly how to get the most out of an annuity and even your total portfolio as a result.  There are several benefits that prove exactly why this is the most efficient approach to managing assets in retirement.

After about a year this has become a great way to communicate with all of those who have signed up on this website.  Feedback has been great and it surely helps to have current information rather than stock, standard retirement advice.  Things change and it takes new ideas to keep you in front and in position to make the most out of your retirement plans.

As always if you have any specific requests or ideas for one of the next newsletter just send me an email or comment below.

Have a great weekend…

Bryan

800.438.5121

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This year so far has certainly had its share of ups and downs.  In some ways it could be viewed as a microcosm of the issues one might face throughout all the years of retirement.  It’s summer time and I stepped away from writing for a few weeks because I figured no one would notice.  The weather has been nice and most Friday afternoons I decided to get out of town and refresh myself.  The bug to get back to writing hit me and it made sense to do something of a recap of the year. 

And what a year it has been.  Political and economic uncertainty have been prevalent.  The stock market has been up and down with almost no consensus as to whether the bull market will continue or if we should expect a serious correction.  Interest rates that started to rise last year settled back down to some of the lowest levels ever while the Fed is trying to prematurely prevent a recession.

At the beginning of this year lots of people were hurting, or at least very concerned.  The market was down sharply to end 2018 and the damage to portfolios had everyone frozen.  No one likes to move money after a big loss, preferring instead to sell only for top dollar.  Whether that actually happens is a different matter altogether.  But the market came back… and then dropped again but came back, and then this week happened.

Through it all I have become more confident in the recommendations I make.  That’s because fundamentals always hold true and if you plan based on those you’ll be just fine.  Throughout this year I know people who have lost money and people who haven’t, those who worry and those who don’t.  I’ve created new strategies that enhance the potential of a protected portfolio and through it all discovered even more benefits for using annuities in retirement.

People say all the time that my approach is much different than anything else they’ve seen.  Of course it is.  How can you expect to do better if your strategy is not different?  I’d pick a different line of work if I had to be as boring as everyone else. If I didn’t have a solid rebuttal to the asset management proponents then I’d throw in the towel.  But here I am trying to convince people to see things through a different lens.

Aside from the market being all over the place, this year has seen some whacky interest rate moves.  For years all the armchair economists have been telling me that rates are going to go sky high.  That started to happen a bit last year but very few took advantage.  A few months back I hinted that rates might drop.  Not many people read that newsletter because I guess it wasn’t interesting enough.  Can anyone tell me where treasury yields are compared to earlier this year?

I watch Bloomberg for my financial news.  It’s not very political and offers a diverse, global perspective that gives me an idea of what concerns institutional investors have.  If the big boys and girls are worried about something than maybe you should be too.  Of all the research and reading I do, information specific to annuities takes about 10% of my time.  The other 90% of my time is spent understanding the broader world of financial markets and economies.  Last weekend I took the family on a camping trip in Canada.  I spent five minutes fueling up my truck and an hour looking over maps to be sure I could make the most of our time.

Strategies are more important than products.  It’s better to be flexible than stagnant.  Things have been up and down this year but everyone is alright for the time being.  Through it all I’ve been saying the same thing over and over again.  Some listen and others don’t.  If things change I’ll pivot on my recommendations and those who work with me will be able to do the same.  For those people we set things up right and there will be no issue with altering a plan because we built every single one to do it.

The old saying still holds true.  Fear and greed drive most financial decisions.  It’s contrary to the rational thought and objective analysis it takes to make solid plans.  I’m not a psychologist and don’t know how to pull people away from emotional tendencies so the best thing I can offer is consistency.  Take the best deal you have today but reserve the option to make changes over time.

If you’re up for a rational conversation then leave a comment below or give me a call. And if you’d like to know specifically how annuities fit, please follow the link to my second post on this subject titled “The Relevance of Index Annuities Today.”

Have a nice weekend!

Bryan

800.438.5121  

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In some ways I consider it a waste of time but it happens often enough that I’ve realized it validates the information I provide.  This website and all the newsletters are meant to help consumers but there are plenty of advisors as well who are looking for answers to the same questions.  And it makes sense because this site was created more than ten years ago mostly because the science of asset distribution in retirement was and still is unresolved.

Academics study the problem.  Insurance and asset management companies create new products and funds as a solution and most advisors just sell the products.  Target date funds, dividend stocks, bonds, annuities and various strategies that mix all of the above into a mess of options and ideas.  If you think it’s hard to figure out then imagine what it might be like for an advisor who is responsible for making the recommendation.

I only bring this up because about one third of my advertising budget is spent on other advisors who sign up to read my reports.  It’s important to understand because some of the people giving advice are just as lost as you might be.  Many great things are learned from seeing what’s hiding in plain sight.  This has been happening for years and I only just realized it.  Advisors ask me for advice because many of them need answers to the same questions as you.

I don’t mind helping out anyone who asks.  About a month ago an advisor who reads this letter asked if I’d help him find one of the annuities that I talk about.  He was retiring and had just sold his business to a younger guy so was creating his own plan.  He had been following this site for a few years and decided this approach is best.  He didn’t need me to sell him one, preferring to keep the commission for himself, I assume.  That’s fine with me so I took it as a compliment and put him in touch with a couple of companies and told him which products I typically recommend.

A more egregious example from a few years ago came from an advisor who posed as a customer.  We went through several meetings and got to the point where he was ready to put my plan into action.  He took the questionnaires and promised to return them with all the info so I could complete the applications.  To make a long story short, after not hearing from him I eventually was able to contact him.  He admitted being new to retirement planning and just wanted me to help with a case he couldn’t figure out.

In addition to this example are three different cases where I was able to determine that someone else had taken one of my reports, personalized the cover and passed themselves off as representatives of my company.  I don’t have representatives and I don’t share names from my list because I refuse to put my name on someone else’s recommendation.

Not all examples of advisors using this information are negative and I don’t mind lifting up another professional in the industry with a new idea every now and then.  Most who call only want to know if I’ll give them free leads and some want to know if I want a regional partner.  Once in a while a nasty comment comes in from some advisor I offended by unintentionally poking holes in his approach.  As much as it may seem like there’s too much information there is actually a lack of creativity that produces new ideas and strategies.

A couple of past newsletters partially illustrate the source of the problem.  One has to do with there being more salesmen than advisors and the other has to do with how commissions affect annuity sales.  You can read either or both by clicking below.

The Difference between Sales and Advice

How Commissions Affect Annuity Sales

Most information you find will give you a dictionary-like definition or represent nothing more than someone’s opinion.  It all relates to pushing available products and collecting assets.  But there is a better approach available and just as many advisors are trying to find it as you.  As always I am here to help anyone who asks and if you really like the guy you’re working with then send him my way and I’ll teach him a thing or two.

Enjoy your weekend…

Bryan

800.438.5121

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It’s never more evident than when you talk to kids growing up today.  Younger generations take for granted easy access to information that can still seem like magic for anyone who remembers a rotary telephone.  I appreciate the convenience it adds to my life while trying to make sure it doesn’t run my life.

Technology is a blessing and a curse at the same time.  While almost everything we need is instantly accessible it also means we are always connected and rarely have full privacy unless we just walk away from it.  Most of us are not likely to adopt the use of technology like current teenagers have but we are all using it to enhance life and broaden our scope of understanding on certain subjects.

I started in this business at the very beginning of the evolution.  Digital processing eliminated stacks of paper and file cabinets.  Everything got smaller and faster, resulting in cost reductions and simpler transactions.  I’ve seen both sides of it and have to say that the new way of doing business is not only more convenient but also much more effective.

In my opinion, the two greatest benefits of this new age of communication are information and time.  An answer to any question you have is immediately available and takes much less effort to find what you need.  What before required you to have full trust in an individual is possible now if you trust yourself to make decisions and sort through all that’s available.

I started this website because I had questions about some products a wholesaler wanted me to sell.  I did some research and crunched some numbers to figure out which parts were worthwhile and which were not.  I came to some interesting conclusions and decided to catalog the results and information.  It turned into a website with the primary purpose of documenting the research I was doing.  I put an 800 number on it and was actually surprised when someone called with questions.

That’s not at all why I initially did it but over time it has turned into my primary business because a lot of people want a second opinion.  And that’s where the information age lends a serious benefit to you.  The right answer for you is out there and you can find it from the comfort of your favorite chair with a cup of coffee in hand.  You don’t have to believe anyone in a strip mall office.  You can do it all yourself without leaving home.

My mentors in this business are a successful group of guys in Missoula, MT who started decades before I did.  They know the old way of doing business in the days where information and communication was limited.  Automated changes were not embraced but accepted mostly out of necessity.  I get it, a required 300 word legal disclaimer at the bottom of every email is somewhat overbearing and a little less personal than a hand-written note on office stationary.

If you walk into the conference room at their office and start asking questions about retirement planning the options they have are somewhat limited.  They have a variable annuity from Guardian Life, a couple fixed annuities from Jackson National and from what I’ve recently heard they are now pushing some new structured annuities from Brighthouse (Met Life).

The limited options speak to another problem I have with the industry that relates to captive sales agreements and it’s a separate issue I’ll acknowledge but set aside.   But they are not unlike most other professionals you are likely to meet who claim to have the best options and ideas when in reality what they have is limited to what a broker/dealer or marketing organization tells them to sell.  The science of asset distribution is still very new and many agents are recommending what’s easy rather than stepping out of a comfort zone to see if more is possible.  Technology has allowed me to take ideas from an insurance company board room and apply new strategies to the products based on traditional fundamentals.

It’s understandable that my age comes up a lot in meetings.  I’m younger than all of you so it’s common for someone to question my experience.  My typical response is to remind anyone who asks that the 60 year old agent wants to retire as well and won’t be around when you really need him.  Aside from that I reminded someone this week that in terms of the information age I’m really old because I’ve been on the edge of it since the beginning.  My learning curve was steeper because more information came available every day.  I consumed it and continue to do so. 

Pressure to compete against other agents and proposals, along with access to a significant amount of information has allowed me to not only find best products but also the new strategies and ideas that work.  I urge you to not take that for granted and suggest you leverage my experience for your benefit.

Anyone who talked to me this week knows that I stumbled upon a really good idea.   After doing some simulations to validate the strategy I shared it with a few people who I thought could benefit specifically.  It’s a rough idea that hasn’t been polished into actual advice yet but I was able to share it right away with people all over the country.  It’s one more step in the evolution of retirement science and when the next one comes I’ll be ready.

Stay flexible so you can take advantage of that as well… have a great weekend!

Bryan

800.438.5121

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One benefits of picking my brain that many people don’t realize has nothing to do with asset management or annuity shopping.  I’ve talked to hundreds of people just like you.  I hear stories of both failure and success or good choices and bad.  My recommendations are not only based on what I know about retirement products but also on other people’s experiences.

So when I give advice it is quite likely the result of me having seen someone in an identical situation who has done it right and another who has not.  This weekly post was started with the idea of sharing those stories so you can find similarities that will help sort through the mess of options and ideas.

Regardless of what you decide to do with your money in retirement, isn’t it also important to have a plan for what to do with yourself and all that extra time?  Some pursue retirement as an opportunity to finally experience all those things sacrificed for family and career while others keep working because they don’t know anything else.

I only bring this up because it’s a natural part of most conversations I have and what I’ve recently realized is that most people don’t have it completely figured out.  So I consider it to be a nice diversion from the potentially complicated matter of portfolio allocation.  Why not take a break and map out a plan for all the time you have as well?

Most people who retire early plan to travel a lot.  High pressure careers and a substantial savings rate don’t allow for free time or frivolous spending.  It makes sense that anyone with that kind of discipline would like to open things up and enjoy life a little more.  But there are some who were able to travel plenty even if it meant a later retirement and now travel is not so much of a priority anymore.

That’s an important consideration simply because no matter what your plans are, I’ll bet they change somewhere along the way.  Time with grandkids is another great reason to want more freedom but when they grow up and start families of their own regular visits are going to take more effort.  The things I enjoy today take a fair amount of physical fitness that I won’t likely have when I’m in my 60s.  I’ll enjoy taking pack strings into the mountains as long as I can but in retirement I may have to trade the horse trailer for a camper trailer.  That means less time chasing elk and more time around the campfire.

I happen to know lots and lots of people who are happily retired.  Eliminating the stress of a career is the biggest motivation and it also happens to be a healthy choice too.  But after that, what’s your plan?  Living in the tropics, giving time and money to charity, improving your handicap or catching every last fish in the ocean are but a small sample of the ideas I’ve heard. 

I spent last week at something of a college reunion and it made me think a lot about life from the age of 20 to 40.  Looking back at the last 20 years of my life made me think about how my clients are planning for the next 20 years of theirs.  What I realized is that it’s much easier to dream when you’re young but as time passes the stress of life disconnects you from those ideas and retirement is your chance to reconnect.  It’s reasonable to spend as much or more time doing that instead of worrying about the financial side.

I had a conversation this week with a lady who is having a hard time making financial decisions.  Three people, me included, are all telling her different things and she can’t decide which idea is best.  So I decided to be the first to tell her that it’s ok if she doesn’t do anything.  She doesn’t owe anything to anyone and there’s no reason why she can’t put financial matters on the shelf for a bit.

After speaking with her I decided to put “Life Insurance and Long-Term Care” (yawn) on hold for a week or two.  Sometimes the best ideas come to us when we are focused on something else.  Give yourself a break and spend some time thinking about something a little more fun than numbers.  It may just make that part a little easier when you get around to it.

All my best,

Bryan

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Timing is a deciding factor for a lot of people.  Interest rates and stock market performance keep people locked in to current holdings and nervous about making changes.  If rates were higher many would find it easier to shift toward protecting assets.  Instead there are those who hang on to old habits and currently have more risk than they should.

As often as I hear from someone who is waiting for rates to rise I also hear people say they are waiting for the market to correct before buying an annuity.  I get it.  Why buy a contract with growth potential tied to the stock market when the market is at an all-time high?  Asset protection is one thing but everyone seems to be focused on yield.

From a mechanics perspective there is one feature of index annuities that mitigates the risk of no earnings when the market is down.  If the market drops you don’t lose money and the next year you get to start the crediting period from the new low point, giving you the opportunity for enhanced yields after being protected from loss.  After all, the point of a good investment is to have a nice average, not just one year when you do really well.

But that’s not enough for some people so I thought it would be a good time to point out a few ways an index annuity will grow no matter what happens with the stock market.  One way is available with all contracts and the others are only available in select contracts.  The best options have a little of all three so there is always opportunity for growth, regardless of market conditions.

First is the fixed rate option that all contracts have.  One of the allocation options you have is to place funds into an interest bearing account so if you think the market is overvalued you can get a guaranteed interest rate for one year.  You make money no matter what happens in the market and at contract anniversary you can change the allocation to chase growth with market options if you are optimistic and want more potential.

It’s a good option for treading water, giving you a reasonable yield for one year.  Currently fixed rates are close to 3% so it meets or exceeds safe yields on CDs and money market funds.  Sure the contract requires a longer commitment but after you bank the interest it’s your choice whether to take guaranteed interest for a second year or chase more yield in one of the market-based index options.  Every year you get to choose.

Second, alternative indices are available in some contracts that allow for growth not tied to the market. Two of the more common options I use are real estate and gold bullion indices that provide positive movement that can either precede or follow market growth or decline.  As the market has been more volatile over the past couple years, U.S. real estate has continued a steady recovery  from a bottom more than ten years ago so annual yields have beaten the S&P 500 in several years since.  Gold has been mostly flat for the past few years but I expect it to provide a safe haven for investors if the economy falters and the stock market reacts negatively.

The final option is less common but not unknown.  It’s called an Inverse Performance Trigger option.  Essentially it gives you an interest credit if the chosen index stays flat or drops in value.  Just like you can make a bet on the market going up you can make a bet on it going down.  In one of the better contracts I frequently recommend, the insurance company will credit your account with 6.95% if the S&P 500 stays even or drops by any amount by the end of the contract year.  For anyone who insists the market is doomed in the near-term you have the chance at a decent payoff with no risk if you predict correctly.

More important than excessive growth potential is consistent performance with any contract.  I get tired of the new indices and outrageous participation rates that some agents suggest are built to create yields you can only dream about.  But I’ll tell you from experience that simple contracts with various index options and believable crediting terms will always win in the long run.  Consistency produces the best results.

Most explanations of index annuities use general examples and illustrations regularly use the S&P 500 to show performance potential.  It’s easy to do because the S&P 500 is widely understood and followed.  But that doesn’t mean it’s the only thing available or that tracking just that index will produce the best results.  Having hedges available that allow for growth during volatile market periods is one of the keys to finding the best contracts to use. A variety of indices gives you diversification of opportunity and long-term yields will be more favorable if you have more ways to earn interest.  If you blend the allocation so yield potential comes in every scenario you’ll find the kind of performance that makes the safe part of your portfolio work well throughout retirement.

Bryan

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Frankie and Linda are like family.  We met in 2011 when Frankie was doing what most of you are doing, trying to find the right way to distribute retirement assets.  They had made the rounds through several online salespeople and contacted me for an opinion on some of the offers they had seen.

I talk a lot about the risk spectrum.  On one end is money in the bank and on the other end is market investments that go up and down in value.  Most people fall somewhere in the middle, wanting to protect some assets but also hoping for long-term growth.  I’ve met people who go to either end of the spectrum with everything they have and it’s a matter of personal choice so that’s fine with me.

Frankie and Linda fall squarely on the conservative side of the spectrum and that’s why they were looking into using annuities in retirement.  After making the rounds and looking into several different options they honored me with the job of helping them put assets to work.

Well like everyone else I keep in regular contact with clients, some more than others just depending on personal needs.  Frankie and Linda have been actively reinvesting as certain allocations mature so their money has always been safe and always at work.  We speak a lot because they are very proactive about getting the most from their money and never taking risk.

We spoke this week because Linda has some funds maturing this summer and Frankie is looking for some ideas.  I looked into the accounts to see where it’s at and we were both pleased to see the value of current holdings.  In 2012 they were sitting with a combined $500,000 in 401(k)s and as of yesterday it’s all worth just over $763,000.  Over a period of seven years that amounts to more than 6% annualized return, all without risk of loss.

Back in 2012 the stock market had fully recovered from the losses in 2008.  Everyone was still nervous about the market dropping again and anyone at retirement age, like Frankie and Linda, were justified in protecting assets.  Sure the market has roughly doubled over that time period but it’s easy to pick winners in hindsight.  And there’s nothing wrong with a 6% yield with none of the ups and downs that were all part of the market getting to where it is now.

Everyone is going to want to know, what specifically did they do?

Well the full picture is complex because we’ve been working on it for more than seven years but I can give you a general idea.  The placement of their assets pretty much follows my evolution of recommendations as a result of a difficult interest rate market over time.  The most important point of their plan is not just the specific assets used but they flexibility they have had for reinvestment

Back in 2011 I sold a lot of structured settlements because of higher rates available on the secondary market.  Frankie and Linda needed an income stream so we were able to place several secondary annuities that would give them a discount on the initial purchase.  They did more with their money at the beginning but that’s not what made it work.

Frankie decided to go back to work for a while so he saved a little more money and didn’t officially retire until they started collecting social security.  Since they live within their means none of the income we put in place was needed so they continually reinvested in short-term deals to ladder investments and always have funds available if rates rise one day.  They used a series of fixed and indexed annuities with one maturing this year and another next year.  Plus the unused income stream provides steady available cash for reinvestment so flexibility in the future is optimal.

No one can predict the future and there’s one thing I say all the time that Frankie and Linda do better than anyone else.  Take the best deal available today but make sure you have the option and ability to make changes if better opportunities arise.  They have never been afraid of simply putting money to work in the best option available.  The result speaks for itself.  Not all of their assets have done better than 6%.  Some have returned higher and some lower but their diligence in identifying opportunities and acting on them is what produced the result.

Oh yeah, and there’s one more thing.  So many people question me about fees and feel like I’m holding back some hidden information.  Well Frankie and Linda do pay some modest fees.  They both have a self-directed IRA and the custodian charges $295 annually for each account.  So on $763K of assets they have combined fees of $590 per year.  No other fees of any kind apply whatsoever.  That’s less than 1/10 of 1% for anyone who wants to do the math.

Everyone knows I promote the Flex Strategy and I tell all who ask that it takes a different form for everyone who uses it.  There’s no single way to do it but the point is to maximize safe assets and maintain control of your money so you can take advantage of new opportunities when markets change.

Next week I’m going to share with you a complete overview of all the benefits of approaching retirement with the Flex Strategy.  Since I talked to Frankie yesterday I thought it would be a better idea to show you how it worked for some of my clients.

If you have any questions feel free to call, email or leave a comment below.

Thanks!

Bryan

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If your goal is to never pay taxes again then converting qualified assets to a Roth IRA is one way to do it.  But if you really just want to pay the least amount of taxes over time then it may be best to leave your assets right where they are and adopt a different strategy.  In reality there are only a few specific situations where a tax-free conversion works.  I’ll explain first why it doesn’t work for most people and then give you a couple examples when it can work well.

First a disclaimer:  This post is meant only to provoke general thought and conversation in regards to an oft-promoted retirement strategy and should in no way be construed as tax advice or a specific recommendation on any particular tax strategy.  You should consult a competent tax advisor in conjunction with any retirement plan that includes conversion of a Roth IRA.

When a conversion happens all the money coming from an IRA is counted as taxable income on top of any other income you receive.  With our progressive tax system, the more money you make the higher taxes you pay.  Converting large sums of money to a Roth puts you in a higher tax bracket which may have you paying more in taxes than if you withdrew smaller amounts over an extended period of time.

This was certainly the case with Mike, who I met with last year.  He had a few years until retirement and thought a conversion might put him in a favorable tax bracket.  His goal was to retire in a 15% tax bracket and he was planning to spend the last three years of employment to get half of his IRA converted to a Roth.  If so his retirement withdrawals would eventually be taxed at half the rate as otherwise.  The problem is that the last few years of retirement are his highest earning years so a six-figure conversion would have him paying taxes on those fund in one of the most aggressive tax brackets.  It amounts to paying a significant premium for a small benefit down the road.  Plus, given his assets and income goals I calculated him to be just under the 15% threshold without doing anything so a conversion would add unnecessary complication since his goal was already attainable.

A similar situation happened with Candace who retired at 63 and needed to supplement social security with $30,000 per year from her IRA.  She thought it might be a good idea to convert an additional $100,000 per year to a Roth so at age 70 there were no RMDs and income from that point would be completely tax free.  First of all, $30K per year as her only reportable income puts her in a very low tax bracket.  The additional $100K conversion annually would have her paying taxes in a much higher bracket on the whole thing than if she just left it alone.  Plus during the time period of the conversion her social security payments would also be taxed at the highest rate which brings the cost up a touch more.  If she simply leaves all assets in the traditional account she will be able to meet RMDs, remain in a low bracket and pay a very modest amount of taxes each year.

The above two scenarios in a general sense fit the objectives of most people I know.  There are situations where the conversion works but those are more specific and I’ll explain below.

Richard has a sizeable portfolio and a modest retirement expenses.  He has lived within his means which helped him save a substantial sum.  Social security covers all his needs and he doesn’t like to spend money, preferring to manage his assets and leave them to his kids.  In this situation Richard has no taxable income so he can convert a fair bit of assets annually while staying in one of the lower tax brackets.  A Roth is superior to a Traditional IRA for inheritance purposes so he made a strategic decision to convert gradually to maximize the benefits.  His prudence and discipline helped create a nice portfolio so I have no doubt he possesses the perseverance and aptitude to make it happen.

In another scenario when it works, Charles retired early with a disability at age 60.  He has a private disability policy that pays until he is 65 and that income is tax-free.  For the five years he is receiving tax-free income he can gradually convert to a Roth IRA without paying high taxes upfront.  A similar strategy can be used when non-qualified investment losses can be deducted to offset additional income.  In either case conversions can be done while staying in a relatively low tax bracket.

A few of my clients use a different approach and I recommend it as an option for anyone who likes the idea of having more assets in a Roth IRA.  The maximum contribution to a Roth for anyone over age 55 is $6500 in 2019, or $13,000 when each person of a couple does it.  I’m also fairly sure that rate will rise over time, allowing for even greater contributions in later years.

Pulling an additional $13,000 from a Traditional IRA every year will not substantially affect taxes and if consistent contributions to a Roth average even 4% yield then there would be nearly $400,000 in the account after 20 years.  It provides a nice base for inheritance or tax free withdrawals in the later years of retirement.

So I’ll ask the question again.  Do you want to never pay taxes again, or pay the least amount of taxes over time?  If you are looking for a strategic advantage there first needs to be an advantage.  In most cases a significant Roth conversion is not the most profitable strategy.

As with everything else it comes down to an individual decision and variables are different for everyone.  If you have questions about whether a Roth conversion is the right approach go ahead and call or click below to make an appointment.

All my best,

Bryan

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