Last week I wrote about the wild year we are having in terms of not only what we see on the news but also how that has been affecting retirement portfolios.  The title if you recall is “A Wild 2019 and How Annuities Fit.”  More than one person commented that I failed to tell everyone how annuities fit but there’s a reason I did that.

It’s mostly because how annuities fit is up to you.  Most of you don’t really need me to spell it out every single time but here it is once more.  Index annuities lock in gains once a year and never lose money when the market is down.  In times of low interest rates you also have the potential for yields you can’t get anywhere else and enough liquidity to draw income as needed or ladder out to other investments if you find a better opportunity.

I can tell you all about the key benefits of index annuities but I’ve done that before and I think most of you know that.  Everyone seems to want to limit market volatility and portfolio losses.  Whether you realize it or not, interest rate risk can be just as big a threat to your assets.  The answer is sitting right here in front of you and for one reason or another many people can’t put the pieces together.

The problem comes from polarizing opinions.  Frequently I hear people say, “this is certainly a unique approach.”  Yes, my recommendations are different and nothing like the mainstream.  In a meeting this week one gentleman said to me, “I had no idea annuities could be this flexible.”  That’s someone who gets it.

Why are index annuities relevant today?  It’s because they are the most flexible safe asset.  Protection, growth and opportunity.  Aside from traditional advice on annuities I’ve explained several alternate uses and proved how those strategies can be more profitable.  The point of it all is to show you reasons why you may want to use an annuity, not why you have to use an annuity.

This isn’t a fear-based approach.  I’m not going to scare you into thinking that you might run out of money or talk about the likelihood and cost of needing long-term care.  While those are viable concerns they come from a defensive mindset.  I want you to play offense and learn ways to grow your money safely so that those concerns are an afterthought.

More than one client has recently told me that they are not even watching the stock market.  Why worry about something that has no effect on you?  That’s in stark contrast to many I know that worry about it every day or those who want to make just a little more from a market that has been frothy at the top for two years.  It’s not as if you don’t make money with an annuity and I have several indices that prove you can grow even in times when the broader market is having trouble.

Index annuities are relevant today because they provide a solution to the uncertainty in the economy.  Low interest rates and market volatility are the two major factors that affect retirement investing.  There’s one solution that will give you more certainty in both areas.  If you’re afraid to give it a shot then you just don’t have all the information yet.  Send me a note or comment below and I’ll send you some info that gets you started on the right path.

All my best,

Bryan

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At times it seems as though everyone talks about yield as if they are able to get the highest possible growth from every asset they own.  I’ll admit that may just be my perspective because it often comes in the context of my recommendation to use an annuity to reduce risk without sacrificing growth potential.  It’s in situations like these where people tend to over analyze the growth prospects of the annuity and think the opportunity may be too good to be true; or that it’s not quite good enough.

The past year perfectly illustrates the value of index annuities, especially in terms of retirees who don’t want or can’t afford to lose money.  There are two reasons; first, interest rates went up and came back down and second, the S&P 500 dumped last fall and climbed back to reach a record high as of Friday, July 12.

I’ll get back to why these two points are critical for retirees but first I want to talk about how two contracts performed over the past year.  Each of these contracts reset and locked gains in the past week.  It is fresh in my mind after talking to both clients about allocating index options for the next year so I will focus on these two alone.

As of this writing, the S&P 500 is up about 6.2% which is a nice result from the year if you consider what the annual chart looks like.  Neither contract beat the market but considering how the S&P 500 got here, the ride to the end result was much less stressful and more beneficial in terms of most retirement applications.  I’ll explain each very generally since a detailed report for either would be extremely long.  It’s the overall idea that’s important anyway.

The first contract from Midland National was split evenly between four indices.  The DJIA, S&P 500, Euro Stoxx 50 and the Hang Seng all returned positive growth for the year but the US-based indices did much better in the rebound than did the European or Chinese markets.  The equal blend of the four was meant to offer some sort of global diversification in yield potential.  While the international exchanges muted the returns a bit, the long-term potential of such a strategy suggests the type of balance that is appropriate for consistent returns for the year.  All in all, the 4.1% blended yield across the entire contract is what I would consider to be quite reasonable given all the political and economic turmoil and uncertainty.

The second contract from Great American Life did a fair bit better being divided among three different indices.  Half of the funds were allocated to the S&P 500 while the remaining half was split between the S&P US Real Estate and SPDR Gold Shares indices.  Real estate across the US stayed strong and the rally in Gold over the past six months brought the total contract yield to nearly 5.2% for the year.  I recall that a year ago there was plenty of market uncertainty so initially we allocated to a couple indices that could move in a positive direction regardless of the stock market.  Several different economic indicators are needed to explain why either gold or real estate can move inversely to the stock market but that’s worthy of a white paper all its own.  Suffice it to say, yield on the contract is very acceptable and creates optimism for this annuity to work out as illustrated from the beginning.

As I said before, yield is only a small part of the equation.  Growth is nice but far from the only reason to use an index annuity in retirement planning.  I mentioned in the second paragraph I would dive into the two most valuable features of index annuities and how that was illustrated by the events of the past year. 

Rates rose meaningfully for the first time in several years.  This caused a decrease in bond values that was erased over the past few months as treasury rates fell back to some of the lowest levels since 2015.  It represents the type of short-term risk to portfolio values that many don’t consider.  Aside from this, rates in general have stayed low, regardless of 2018 increases and it is still hard to identify opportunities with an acceptable combination of safety and yield.

Although US stock markets rebounded to finish the past year solidly positive, you can’t discount the affect that October and December 2018 had on the psyche of the average individual with assets exposed to daily fluctuations.  Just because it is back up does not mean it’s going to stay up.  Each of the annuities I mentioned locked in the gains made last year and will never lose value.  If the market corrects all funds are protected but if it keeps going both will continue to grow.

Both interest rate and market risk are compounded during retirement because consistent withdrawals are needed to fund a stable lifestyle.  Interest and dividends are not enough to cover the income gap for most people with the typical stocks and bonds portfolio.  If consistent withdrawals are taken when rates are rising and markets are falling you will be liquidating assets below top value which, over time, will have an exponentially negative effect on total portfolio value.  These two events happened in conjunction last fall when rates spiked to a five-year high in December on the heels of a 15% decline in the S&P 500.

To have an asset with enough liquidity free of interest rate risk is the solution to maintaining maximum growth potential while using a portfolio for income in retirement.  The numbers prove it and the long-term effect is dramatically more positive than any other strategy.

As a disclaimer, I need to remind anyone who has an objection that I could write an entire paper on any of the paragraphs above.  There are far too many contingencies to explain them all without making this post 20 pages.  I don’t have the time to do that every week so if you’d like an explanation of the details I’ll reserve that for individual meetings so I can show you exactly how it can benefit your situation.

All my best,

Bryan

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The thought of not having access to retirement assets is one of the biggest issues people have with annuities.  I think it’s funny when investment advisors, who have no intention of every giving up management of a person’s assets, claim that if you buy an annuity you will lose control of your money forever.  As much as annuity salespeople can be misleading, other professionals in the industry who want to sell you something else can be every bit as misguided in their claims.

The truth is that annuities have more liquidity than any other safe investment, except for cash in the bank. And it’s the ability to access money that gives the right annuity a strategic advantage when managing a retirement portfolio.

When mentioning the 10% free withdrawal people often mention they may need more and don’t want to give up control.  Many of these people having been saving and investing for 30 years or more and have never touched their money so 10% is more than they’ve ever pulled before.  That’s not always accurate considering some people kick-off retirement with a major purchase and need full liquidity.  But for anyone talking about general retirement planning, if you need more than 10% of your portfolio consistently then you haven’t saved enough.

So taking up to 10% annually from your safe assets should be more than adequate if a portfolio is structured correctly.  Almost everyone underestimates the value and flexibility that can add to a retirement strategy.  In addition to access providing the opportunity to draw income for anyone who doesn’t opt for the lifetime income stream, free withdrawals can be used to rebalance a portfolio or ladder funds out to other investments as opportunities arise.

Protecting enough to sustain consistent retirement spending is important.  Continued growth of assets is also important to protect against inflation and provide for unexpected emergencies in the coming years.  Low interest rates and uncertain financial markets make it difficult to find the right balance between safety and growth.

That’s the exact justification for the strategies I propose.  Several years ago I started comparing income producing annuities.  Most were paying between 4% and 6% of premium as income.  Since that is well under the free withdrawal amount in most annuities I started looking at short-term deferred contracts that offer the same level of safety only without the lifetime income guarantee.  I realized that you can always take the deferred product and use the funds to buy an income product later.  Why not take the short-term deal now and wait for a longer commitment when rates are higher in the future?

This is a simple explanation of how you can use the free withdrawal to your advantage.  The idea is to keep your powder dry, so to speak.  In the absence of the absolute best option, take the best option available but be able to make changes as conditions improve to give you more advantage.  Using this as the basis for my annuity recommendations has led to the discovery of more sophisticated strategies that make the traditional approach obsolete.

I’m not here to tell you what to do with your money, rather to share ideas so you can make confident decisions for yourself.  Don’t underestimate the advantage provided by a 10% free withdrawal.  Most contracts I recommend span from five to eight years in total term.  By maximizing free withdrawals you can get a substantial portion of your money into other investments before that point in time when you can move it all.  As I say all the time, if the annuity is the worst thing in your portfolio  then your other investments are in great shape and you can move your annuity money in that direction with the available withdrawal.  But if the markets hit the crapper you’ll be darn glad to have an asset that doesn’t lose value.  Maybe then you can even use the withdrawal to buy into the market when there’s good value.  Ooh… there’s a new idea!

Regardless of what you do, don’t let ignorant comments limit your scope of understanding.  It may lead you to make decisions you regret.  I’ve seen it go both ways.  There are not only people that spend far too much on the wrong annuity but also people who have far too much risk to survive volatile times.

An annuity would never work for a professional gambler or someone who flips houses.  But for solving general concerns related to retirement planning, the right annuity inside your portfolio really is one of the best options available.  If liquidity was a concern before this will hopefully convince you that it’s all relative and if you have saved enough for retirement, the 10% annual withdrawal is well more than you need. 

If you end up using an annuity in retirement, I want to make sure you do it the right way.

Bryan

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It’s a great question that I got a few weeks ago during a meeting and it stumped me for just a second.  Dianne and Fred have saved more than enough for retirement and their income needs are modest in comparison to the total portfolio value.  They are also young, both under the age of 60, so traditional products don’t have the same value as they would for a couple age 65 or older.

I took the common approach and first showed them what a traditional income product would cost and the benefit of doing it that way.  Some people like the idea of consistency and guaranteed income annuities are convenient and worry-free.  But the cost is prohibitively expensive in many cases so alternative strategies need to be explored as well.

For Dianne and Fred, retirement spending needs amount to roughly 3% of their total portfolio value.  At that level a traditional income annuity would be affordable but given their young age I don’t feel it’s the best option for them.  So I took them through several other strategies for producing retirement income that included use of bonds, growth and dividend stocks.  Each has benefits and disadvantages so we spent a lot of time talking about the potential for every scenario.

One option I showed had them staying 100% invested in the stock market.  For anyone with higher spending needs this will show potential disaster in times with serious market volatility.  But Dianne and Fred saw that their portfolio would have survived some of the most volatile periods in past market cycles.  This is when Fred asked if there was ever a time when someone has too much money to use an annuity.

My answer is simple.  Yes, there are plenty of times when a traditional income annuity is not necessary.  But there are always other reasons to use annuities.  In situations like this when someone has more than enough for a comfortable retirement it’s more about risk tolerance than anything else.  Lots of people have enough assets to weather any market downturn but seeing a portfolio cut in half might not be all too settling, even if a long-term simulation shows portfolio recovery.

Dianne and Fred are investigating the use of annuities in retirement because they want to reduce volatility.  That’s exactly what a deferred annuity can do.  Bonds are the traditional choice for people that don’t buy annuities but an annuity has a decided advantage when consistent withdrawals are part of a retirement plan. 

Annuities are meant for reducing risk in retirement.  Insulating a portfolio from market losses allows you to maintain more of your principal balance and increases long-term growth potential.  When the market drops it takes less time to recover if your whole portfolio didn’t take a hit.  That means you get to move forward and start growing sooner.

Lots of people who have more than enough money and still use annuities.  I would honestly say that many of my clients don’t even need annuities but choose to use them for one strategic advantage or another.  Guaranteed income products are fine but there is usually a better way.  If you have saved enough for retirement and don’t like the idea of a lifetime commitment or fees that erode your investments then you may want to look at an alternative use for annuities no matter how much money you have.

If asset protection, liquidity and growth are of concern to you then a simple alternative may provide what you want. Feel free to call, email or get on my calendar below.

Bryan

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During Preparation for a meeting this week I was running numbers and comparing options for a couple in California.  They had recently been to a dinner seminar to get some answers to retirement questions.  Of course the follow-up meeting included an annuity pitch so they decided to do some research online to verify whether they were getting the best deal.

Sound familiar?  It should since most of you have done the same thing so I’m writing this to remind everyone of the basic premise behind how I work.

Jack and Beth are both 67 years old, plan to work for three more years and retire at 70 when social security can be maximized.  With substantial growth in their portfolio over the past few years they decided now might be a good time to reduce risk and set an income plan in place.

Currently Jack and Beth have roughly $1M in savings.  With projected social security payments in three years they need to produce an additional $20K to $30K annually to meet desired spending levels.  So the advisor pitched them a product from National Life Group that looks like this:

                $500,000 initial premium deferred for three years

                14% premium bonus to income account and 7% annual increase

                0.9% annual fee for the lifetime income rider

                Joint life payments of $32,800 annually starting in year four

During the first meeting Jack mentioned the deal seemed fine to him but he liked the idea of having more control over his assets.  So I promised to first verify whether that contract is the best deal available and also run some numbers to see if an alternate strategy would give him more of the benefits he wants.

I took the information from the proposed contract and spent some time looking through the database to find other competitive contracts for that age and deferral period.  The National Life contract is at the top end, with a couple options paying a little more and a couple paying a little less.  All in all the proposal is right in line with the better options in the market.  But would a different strategy improve the results?

You first need to understand the potential downside of using the guaranteed income contract.  I’ve talked about it a lot but never given specific numbers until now.  Most importantly, with the above contract the break-even point for Jack and Beth is just past the age of 85.  That’s the point where aggregate payments equal the initial investment.  It takes until that point in time to realize any profit from the contract.  Now that deal would be great for Emma Morano (I had to look up the oldest living person), but the average person is not going to live to the age of 117 and collect payments for more than 47 years.

It’s also important to remember that contracts with bonuses and guaranteed income riders are built with lower growth potential.  So in order to start a comparison I first identified a few contracts with more than twice the growth potential of the National Life annuity.  By eliminating the income rider it would translate to more than $5000 per year in recaptured costs.  The combination of those two enhancements results in performance that offsets withdrawals so Jack and Beth have control over their assets and discretion as to how they are used.

I ran three separate illustrations with contracts built for growth in order to demonstrate that it’s more about how you use the annuity rather than the annuity itself.  Each was shown being deferred for three years and then annual withdrawals of $32,800 were shown to match those of the guaranteed income contract.  All produced favorable results and I’m going to show you the lowest performing contract below.  I do that so no one accuses me of relying only on an overly-optimistic illustration.

As you can see, at the break-even age of 85 there is just over $400,000 remaining in the account.  The income contract offered a 14% bonus on the front end but my way gives you an 80% bonus on the back end.  The two other contracts projected an account value that was much higher than the initial investment.  Because any of them would work I would recommend dividing the purchase between two contracts to spread risk and diversify growth opportunity.

The benefits of doing it this way are explained below in case you guys want a reminder of the advantages of the AST Flex Strategy.  If you maximize growth on safe assets you can always take the income you need.  Eliminating fees allows you to preserve more capital.  A shorter time commitment with more money gives you much more flexibility and opportunity to make changes as the market dictates.  The combination of the three puts you squarely in control of your assets through retirement.

Some may say they don’t want to rely on performance of an annuity to produce income.  That’s why I added a twist to it that gives this strategy a fundamental advantage over guaranteed income annuities.  Traditional use of income annuities separates those assets from your total portfolio.  One side is used for income and the other used for growth.  The two sides work independently and that gives you less control and decreases total performance.

The biggest disadvantage of using a guaranteed income contract is that the premium is separated from your total portfolio to produce income.  But when safe assets offset the risk of market-based assets, income can be drawn from either side depending on market conditions.  It produces a coordinating effect for both assets that provides substantially more growth over time.  If the growth contract is that much better than the income contract on its own then imagine how much better it can be when used in conjunction with your other assets.

The justification for using an annuity is a different argument altogether and I believe that has been thoroughly covered in previous posts.  This happens to illustrate the best way to use an annuity right now.  It’s different than what I recommended several years ago but options change over time so I know there will be better opportunities in the future.  That’s why I only recommend plans that can change so you can take advantage of my next great idea.

Take the best deal available today but keep your options open so you can pivot if and when a better opportunity arises.

Bryan

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Regardless of your expectations when you first hit the website, you should know by now that I try to get everyone to think about annuities differently.  Most of you come here with a general interest in annuities, trying to find a solution to a specific problem.  If I join the chorus and just stick with saying things you already know then you wouldn’t have an opposing viewpoint with which to judge a potential option.

Most people don’t believe that I started this website because I didn’t like annuities.  Agents get pitched products too and my initial reaction was to question the motivation of anyone who said I should sell one thing or another.

I realized that many retirement concerns can be solved using basic contracts stripped of all the options that make for good commercials and ad copy.  No matter why you’re here I know you didn’t come in expecting to see the AST Flex Strategy, much less know what it means and why it’s a really good strategy.

I want to give you a quick summary of the AST Flex Strategy.  This will outline all the benefits of approaching retirement this way so you can see it all in one place.  I gave it this name because I promote flexibility with retirement assets and this strategy provides it.  There are six major benefit categories and each individual puts more importance on some over others.  The result is more effective income production and increased wealth accumulation in retirement.

• No Fees

Cost is only an issue in the absence of value.  I’ve run the numbers and most annuity fees will not give you anything that you can’t already do for yourself.  Fees erode the growth potential of your assets.  So much so that this point deserves its own newsletter.  Eliminate fees and keep as much of your money as possible in your own pocket.

• Short-Term Uncertainty

The market is top-heavy and interest rates are low.  It’s a bad time to be over-committed to risky assets and if interest rates rise you don’t want to be locked to a contract paying lower rates.  I’m not predicting a market correction or sharp increase in the inflation rate but I do recommend that you keep your options open so your assets can be rebalanced if rates rise or an excellent opportunity arises for buying securities at lower values.

• Pick Your Start Date

Lots of people don’t make a move because they don’t have a planned retirement date.  And a few years ago I read a statistic that said the average person who buys an annuity with a deferred income rider takes income several years before they had initially planned.  That means they end up changing plans and settling for less income because the contract had fewer years to increase.  A better approach is to implement a plan that can be activated at any time without negative effects.   

• Changing Income Needs

I spend more money in the summer than I do in the winter.  Some years I spend far less than I did the year before.  I don’t expect retirement to be any different.  I want a plan that is flexible enough to choose the amount I want to spend each year.  Some people retire before they collect social security or are eligible for Medicare, meaning expenses in the first few years of retirement are higher than expenses that are offset by additional income or reduction of insurance premiums.  There are lots of reasons why you will spend more or less than planned at certain times.  It makes sense to have a plan that makes it possible.

• Lower Cost

In the marketplace today, guaranteed income products are expensive to the point that lots of people shy away and are afraid to make a lifetime commitment.  I don’t blame anyone who is hesitant for that reason.  Because the Flex Strategy produces more I often see a 25% or greater reduction in the amount of annuity required to make the plan work.

• Greater Wealth Accumulation

If you spend less on an annuity and don’t have any fees then it stands to reason you have more money available for long-term growth.  And if you’re not locked in for life you will have the opportunity to rebalance assets toward more growth or preservation.  After people see what the Flex Strategy can do the most common response is something like, “well I’m not greedy and I don’t need all that money.”  Well I’m a competitive person and I like to win.  I want my clients to win so I won’t apologize for showing someone a strategy that gives them a substantial wealth increase in retirement.  Besides that, there are plenty of unexpected things that can happen in retirement like inflation, long-term care and legacy wishes that might be easier to deal with if you can continue to grow your assets.

All of the above benefits individually give you more control over your assets and more potential income and growth over time.  If some part of it isn’t working you can change it.  That’s not possible with a standard approach.

I am reminded of a simulation I did with Bill last year.  We had talked several times and run a bunch of scenarios.  He liked the Flex Strategy and decided he wanted me to run the presentation by his CPA before he bought any annuities. 

The CPA’s first request:  Explain to me your reasoning for this recommendation. 

I said, “Interest rates are low and that has made guaranteed income products expensive and also suggests that making long-term commitments to fixed products is not advisable.  Since Bill would need to spend 2/3 of his assets to secure guaranteed income for life, my solution cuts that to less than half his assets.  He can use the annuity to draw income when his market assets are down in value and take gains off the market when it’s up in value.  The result is more money working for long-term growth and enough in the annuity to survive the worst market periods in history.  Bill is planning on splitting the funds between a five and seven year contract so if and when rates increase he’ll be able to shift to a better opportunity in the future, and at laddered intervals.  Since Bill has half his money in bonds right now anyway this doesn’t at all change his current asset mix except to give him more flexibility.”

I have a nice little spreadsheet that allows me to illustrate this over various historic market scenarios.  After seeing it the CPA replied that it was the most creative use of an annuity he had ever seen.  Like me, he also didn’t like annuities but realized there is value in the basics.  The CPA blessed the sale and Bill put it in place.  After one year the annuities had modest increases and his securities were all over the place but flat.  He’ll start taking income next year so we haven’t made a decision yet where it will come from but it’s only going to take us about two minutes to figure it out.  He has no reason to worry since half his money is safe and there’s enough in annuities to weather any storm in the market.

It’s simple, easy and effective.  Take out all the things you don’t like about annuities and use them for what works.  If you haven’t seen it already then you need to give it some thought.  If you’d like to see it give me a call.

Bryan

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For the past year or so the Federal Reserve has been steadily increasing rates at every meeting.  Response from consumer product rates was similar as we saw modest rate increases in all types of financial vehicles.  Mortgages may be a touch more expensive but options for conservative savings gave people better opportunities for safe income and growth in retirement plans.

Increasing rates gave people higher payouts on income-producing products and more growth for conservative investors who simply want to protect assets.

With widespread predictions of a recession coming in the next year, the Fed has paused rate increases and is now suggesting rates may be cut to keep the economy moving forward.  If that happens a market correction could be in the works and options for safe money are going back to the point where it will be hard to find something appealing.

My career has spanned more than 16 years and rates have been decreasing during most of that time period.  In fact rates have been on the decline since the peak of the late 80s and have only risen in a meaningful way over the last 18 months or so.

As long as I’ve been watching, all interest-based assets paid lower and lower rates giving retirees fewer and fewer options.  Over the past year when rates started to rise a bit that all changed.  All assets improved in yield and everything including cash accounts, CDs, bonds and even annuities seemed to offer improving potential.

Those who acted at the right time were able to lock into opportunity that hasn’t been available for six or seven years.  It may be nothing like things were 15-20 years ago but even a few years can be a long time to wait if you’re not earning much.

Over the years, low rates have caused lots of people to delay commitments on long-term plans.  I’ve heard it more times than I can count.  “Inflation is going to go crazy so I’m waiting for higher rates.”  Since higher rates have been here many people have continued to wait thinking more is coming.  It would be nice to have a crystal ball but then I wouldn’t spend my time writing this newsletter.

So what happens if rates do in fact drop?  Well, rates didn’t come up a whole lot so there isn’t as much room for decline as there has been in past recessions but the higher benefits we’ve seen recently will go away.  Income payouts will be decreased as well as growth potential on all safe assets.

In approximate numbers, the S&P 500 is up 15% or more since its low point back in December.  That’s back when I wrote the article titled “Don’t Make Decisions after One Bad Day in the Market.”  While most salesman were using the market turmoil to urge people to buy annuities I tried to remind everyone that short-term events should not dictate long-term planning.

Economic indicators that should help with long-term planning decisions reveal themselves over periods of time.  So I’m writing this to remind everyone that things aren’t so bad right now.  Yields have been good for market investors and current rates offer reasonable opportunity for anyone who is nearing or in retirement.  It’s a much better scenario than waiting until the market corrects and rates drop.

Annuities still offer potential and guarantees that are better than anything we’ve seen for several years.  It doesn’t mean you have to jump on a major commitment but it’s a good time to think about your goals and explore options to achieve them.

I listen to a lot of market commentary and right now my instincts side with those who say the bull market still has legs, although it may not be long before that changes.  I’m more concerned with the interest rate side of things and this time the two may go hand in hand.  High market values and reasonable options for safety are a good thing.  It’s much better than the alternative so now is as good a time as ever.

Call, email or make an appointment below if you’d like to revisit any of the ideas I’ve shared.

All my best,

Bryan

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It’s the foundation of many retirement plans.  You all paid into it so everyone is entitled to receive something in return after years of contributions.  As part of planning for retirement you need to get an estimate of benefits and compare different strategies for getting the most from the system.  It makes retirement easier by lifting the funding burden from your investment portfolio.

In addition to information available from the SSA there are various forms of planning software and articles that offer general tips for maximizing payments.  I recently purchased an advisor subscription to www.maximizemysocialsecurity.com since social security planning has always been a part of what I do.  Now I can get the options as technically accurate as possible.

I’m going to show you why going for the highest payment will not necessarily get you the most money.  In addition to any projection you need to also run a break-even analysis to see when the cumulative payments actually add up to more money in your pocket.  Articles on the subject typically recommend delaying as long as possible and standard advice follows a similar line of thinking.

That’s general advice and doesn’t reflect the personal variables that are different for every individual.  There are plenty of situations where delaying social security payments goes against your best interests.  If you happen to still be working after you are able to claim then it makes sense to delay as you don’t really need the money and the additional income may have adverse tax consequences.

But if you are actually retired and choose to delay payments there’s a cost for doing so since you then need to fund retirement for the interim out of another pocket.  To illustrate this issue I’m going to refer to the table below.  These are the numbers for Debbie, who I met with recently to answer some questions about her retirement options.

Before Debbie makes any other decisions she needs to firmly commit to a plan for collecting social security payments.  She has plenty of other assets so she can afford to pick any option but wants to make sure she does what’s best.  As is common, everyone so far has told her to delay taking social security as long as possible to get the highest payment.

As is common, I disagree with anyone who says that and I’ll show you why.  Debbie just retired and will turn 64 in a few months so that’s where I started the numbers.  Her monthly income needs in retirement are $2200 which is coincidentally the benefit available to her if she claims this year.  In the table I show monthly benefits available if she claims on her 64^th, 67^th or 70^th birthday.  Monthly income is shown beneath each age and the income column for each uses annual income totals.  Take a look and I’ll explain below.

Annual income for each year is listed in the first column and the second column shows aggregate payments for each strategy.  This is how you need to look at it…

If she waits until age 66 to claim it will cost $52,800 in lost payments in order to receive an additional $4512 per year.

If she waits until age 70 to claim it will cost $158,400 in lost payments to receive an additional $13,200 per year.

If she waited to collect until age 66 she would not actually receive more income until age 77 and beyond.  Note the bold box at age 77.

If she waited until 70 she would not actually receive more income in comparison to collecting at age 66 until age 84.  Note the bold box at age 84.

Cumulative income numbers to age 85 show a minor cumulative advantage to the delayed collection strategies.  If you factor in the out-of-pocket cost for delaying payments she is well ahead by taking the money at age 64.

So, when do you want the money and how much will it cost to wait?  For most people it makes sense to take social security payments as soon as it’s available.  My cynical viewpoint is that the SSA knows they pay out less money for the average individual if they can convince everyone to wait.  That most advisors suggest a similar strategy reveals a lack of creativity and critical thinking on the subject.

The remaining life expectancy for the average 64 year old is about 18 years for men and 21 years for women.  Half of all people won’t even make it to the point where delaying social security payments becomes worth it.  Again, after factoring in the cost of lost payments the comparison is not even close.

Since asset allocation in retirement is dramatically affected by additional income sources I feel that it’s critically important to get this right.  Creating a plan based on half information will never be as effective as one that truly consider all angles.  Lots of annuity proposals are based on an income gap for someone who is waiting to collect social security.  Without waiting the same need doesn’t exist so that type of recommendation is worthless.

If you are waiting then I suggest you reconsider.  If someone else advises you otherwise then you need to think hard about his/her motivations for doing so.  Feel free to reach out if you’d like to talk about your numbers.  Go ahead and call, email or make an appointment below if you’d like some help.

Bryan

800.438.5121

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Lots of people tend to overthink big financial decisions.  It happens all the time with annuities.  When you’ve heard constantly from other sources that annuities are complicated then your search is started with a negative opinion, grounded in nothing but someone else’s opinion.  You’ve probably owned mutual funds before but I doubt that many of you have read the entire prospectus.  Talk about boring and complicated!

In reality an index annuity is not that hard to understand.  It may seem so because too many agents speak only in sales pitches.  That leaves you wondering how all those wonderful promises are possible and many of you decide it’s just too good to be true.

Well that’s not the case.  You just need someone to simplify the product so you understand first and foremost how it works.  For years I’ve been talking about how the important components of a contract can be listed on one page.  After a recent meeting with a man who was overthinking the issue I decided it might be helpful if I wrote it all down on one page so he didn’t spend too much time thinking about irrelevant technicalities.

So here it is:  Index annuities explained on one page.  Start with the basics so you have workable knowledge that can be used for more important issues like creating a retirement income plan.

Start with Fixed Annuity:

• Insurance company invests premium in bonds
  • Receives +/- 4.5% and takes a spread or portion of the yield to cover expenses and produce profits
  • Roughly 3% remaining is credited to annuity as guaranteed yield

**estimate only and actual rates depend on bond maturity and length of annuity surrender schedule

Fixed Index Annuity is Slightly Different:

• Contract can be credited with 3% fixed rate, or…
• The fixed interest will be used to buy an option in an external market index
  • If index is positive, earnings from the option are credited to annuity as earnings
  • If index is negative, interest earnings are lost
  • Principal is never at risk so the contract will not lose money

Index Options and Crediting:

• Each contract has several options for external indices and money can be divided among all available options at buyer’s discretion
• Interest is credited once annually at which point you can change how the money is allocated to the available market indices, the fixed rate account or any desired combination
• Any earnings are locked in as principal and will never be subject to loss going forward

Limited Earnings:

• Fixed interest earnings do not buy 100% of the market option so cap, participation and spread rates determine how much of the market index yield is credited to the contract
• Limitations aside there is excellent growth potential available with yields into double digits likely, although 5% is a reasonable expectation for long-term yield

Free Withdrawals:

• Standard 10% of account value available for withdrawal annually without penalty
• Sometimes lower free withdrawal can be exchanged for higher growth potential

Fees:

• Fees only apply for benefits additional to the above, such as…
  • Enhanced earnings potential with higher cap, participation or spread rates
  • Guaranteed lifetime income, long-term care or enhanced death benefits

It does not need to get any more complicated than this.  Obviously certain components above can use more detail but you need the basics first.  Start here and build upon that as you investigate ways to use the contract in your portfolio.  Certain sales strategies might cause you to lose focus of what’s important.  It’s kind of like buying a car based on the color alone.

If someone is trying to sell you a contract and you can’t figure out how the promise relates to the basic structure then you are not getting the service you deserve.  I’m here to help so feel free to call, email or make an appointment.

Thanks!

Bryan

800.438.5121

Make an appointment now…

Last week a loyal reader of the weekly newsletters responded to me and asked if I’d give some advice specific to his situation.  He correctly assumed that others were in a similar position and it would help himself and other people who are trying to decide when and how to retire.  So I’m going to talk about the when and how of Bill’s situation so everyone can see how to objectively approach these decisions.

Bill lives on the other side of the country.  I’m in the mountains and he’s in the city.  We are both benefitting from the enhanced communication that is provided by technology.  For me I can share my message with more people and any of you, like Bill, have more information at your fingertips than ever before but need some help sorting out all the options and opinions.

Last fall Bill scheduled an appointment and made me part of his search for a financial advisor that can help with retirement.  He is now a 58 year old federal employee and wants to see if his expectations are realistic.  His pension would be available at age 60 but he plans to work until age 62 so early social security will set a nice baseline for retirement income.

So his first question:  Do I have enough to retire as planned?

I use the below assets to do a basic calculation:

$525,000 in a Thrift Savings Plan

Continued maximum TSP contributions until retirement

$175,000 in a Roth IRA

Continued maximum Roth contributions until retirement

He wants $5K per month in retirement and social security will pay $1600 and his pension is $2000

That leaves a $1400 monthly income gap to cover

Yes he can retire as planned with plenty of funding and will have his choice of options for asset allocation.  His annual income gap amounts to 2.4% of his current assets.  With continued growth and savings the gap will be a much smaller percentage of assets.  That means Bill can either retire earlier than expected or plan to spend more when he gets there.

Traditional planning gave us the 4% withdrawal rule and you are in really good shape if annual needs are less but 5% of assets as income is very possible for those of you who aren’t.  Bill at 2.4% of assets is in an extremely strong position.

The second question:  What do I do with my assets until then?

Like many people, Bill has been saving and investing during some excellent market periods.  While the market is still very high he is concerned that any volatility could put the planned date in jeopardy.  In a lot of situations there is an easy answer.  Once you have enough there is no reason to take unnecessary risk.  A few years away from retirement is the perfect time to add an annuity to the plan so risk is decreased and volatility won’t change your retirement date.

But like a lot of people with qualified retirement accounts Bill can’t move money from his TSP until age 59 ½.  Fortunately with the TSP there is a G-fund option so he can get the 10 year US Treasury rate and keep his assets protected.  It’s a floating rate that is paying about 2.7% now but was over 3% at the end of 2018.  The best feature is that the money is totally liquid so he can continue contributions and get a safe yield.  A whole new set of options will be available to him in a year and a half when he can move funds and that’s when I’ll recommend allocating assets to a more definitive retirement plan.

If you don’t have a TSP and G-fund then your options are going to depend on what’s available in your employer-sponsored plan.  In many cases nothing more than a money market fund is an option for protecting assets when they can’t be accessed.  Bond funds are a common option with liquidity but those are a bad idea when interest rates continually fluctuate.

No matter what your situation, a few years before retirement is when you need to start protecting assets, especially if you’ve saved enough already.  If low yields are holding you back just remember that often times not losing money is better than taking risk because you want a better return.  It’s up to each individual to decide for him/herself how much risk to take before and during retirement.  When it’s possible to yield well and protect money I don’t see why so many people continue to take risk but it’s not always up to me.

Bill is in a great position and there’s no reason to take risk.  About two years from now he’ll have access to funds and then can compare income strategies and products.  His income gap is small so there will be plenty of options and like always I’ll show him how to get the most from his safe assets.

As for the how, there are several ways he can do it.  If he chooses a guaranteed lifetime income product it could cost as much as $300K to lock in the steady cash flow required to fill his income gap.  Since that is less than half of his current assets it is a reasonable option if he doesn’t mind locking the money away for life.  But since he has plenty of assets, running out of money in retirement won’t be a problem.  The Flex Strategy would provide more growth and spending potential with the same level of safety and assurance, just without the lifetime commitment.

The Roth IRA is the perfect qualification for assets that can be managed for long-term growth, discretionary spending and tax-free income later in life.  Bill doesn’t need it for income so he can invest it for growth and will likely see substantial accumulation toward the later years of retirement.  Like I said, he is in a great position so has plenty of options.

Everyone should hope to retire at the top of the market and then take chips off the table in order to protect what they have.  Bill has done that a bit early but he still got out on top and will enjoy a profitable retirement because of it.  His when is whenever he wants and his how will happen when he can move his assets from the TSP.

If any of you would like a mathematical and objective answer to these questions then give me a call or schedule an appointment below.

All my best,

Bryan

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