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

Safe Investments

In today’s economy, you are probably wondering where you can find a high-yield investment that is also safe. Internet searches may not provide the answers you seek.

Your searches may have yielded results such as tax lien and real estate funds claiming to offer returns as high as 12%. If you delve into the details of these offerings, you will see the investors are carrying 100% of the risk. For absolute safe investments, you must turn to the tried and true, such as certificates of deposits and government bonds. However, absolute safety does not provide high yields.

Currently, CD yields are about 3% and Treasury bill five-year yields are lower than 2%. So, the question remains, where does one invest money that will offer security in this rocky economic climate but still provide good returns? In other words, where can you find a high-yield safe investment? A fixed annuity from a highly rated insurance company may be the answer to your dilemma.

An insurance company is very similar to a bank, except insurance companies get preferential corporate tax treatment. Since insurance companies have lower corporate taxes, their rate of returns will be higher than that of commercial banks. Insurance contracts can offer safety, while providing great rates of return and tax deferral. Fixed annuities are insurance contracts.

A highly rated insurance company will have a lower leverage ratio than a bank would. This means their default risk is also lower. Deposits into fixed annuities are also backed up to $100,000 in most states. These factors make fixed annuities a safe choice. The second half of the equation is high yields. Many annuity contracts offer rates of return at 5% or higher. These returns can be tax deferred, allowing you to compound the interest over time. The Annuity vs. CD article section will compare these two products in detail.

As with any government backed note, you will want to invest with a respectable and secure financial institution. Credit ratings are a great place to start your research. Also check press releases for past performance results, particularly 2008 results. Some insurance companies are better equipped to come out ahead in this economic climate. A little research before you invest will help keep you worry-free over the long term.
Annuities are not one-size fits all products.

You need to select the annuity that best matches your investment goals, and time your purchase accordingly. Annuity Straight Talk is a valuable resource to help you make these important investment decisions. Learn all the tools to select only the best companies in The Annuity Report.

Retirement Income

How are you planning for retirement income? What are some of the forces you are up against, and what do you need to be aware of for retirement income when making long term plans? Read more

Annuity Straight Talk, Your Annuity Advisor

Welcome to Annuity Straight Talk.  We understand Annuities and unfortunately, some are Good, some are Bad, and some are down right Ugly.  Here you will find advice and tools free of charge to make an informed decision, unbiased by any particular company or product.  You need these tools and techniques to pick the best annuity for your personal situation.  If you’re working with an advisor, Verify what they tell you with what you learn here.  If you like what you read and need help picking the best annuity, we are at your service .

We give you the knowledge to Verify what you hear about Annuities…

We give you the Straight Talk on Annuities…

An Annuity is nothing more than insurance for your money- a contract between you and a credit worthy insurance company, guaranteeing you a series of cash payments in exchange for premiums.

That’s the simple definition – but the actual contracts, riders, benefits clauses, and a host of other factors make buying an annuity complicated.

We cut through all the static and noise and get you the tools you need to make informed decisions about these high yield safe investments.

You’ll learn to sniff out when an agent is pushing something you don’t need.  You’ll learn how to read annuity contracts to be sure the insurance companies are not taking advantage of you.

Please read through the free resources on this site.  If you like our style, you’ll love the proprietary and straight shooting answers and tools found in ourAnnuity Report and the wide range of premium articles and tools available to you once you’re a Member of Annuity Straight Talk.

For investors considering annuities, our tools are essential reading to make informed decisions.  We live by Ronald Reagan’s memorable motto Trust, but Verify .”

We give you the tools and discernment to independently verify any annuity choice, so YOU pick only what’s best for YOU.

Trust, But Verify

When shopping annuity companies, we take a slightly different approach to Ronald Reagan’s motto.  We believe investors must be critical and learn how to Verify, before Trusting.

There are very few people you can trust with your retirement savings when considering annuities, and it only makes sense to learn a few things first.  Certainly, don’t trust annuity companies or annuity sales people.

Be critical of financial products, and learn to trust yourself. By educating yourself, you can make the best decisions for YOU- and you can learn how to screen all the other competing interests. Only then will you be a Smart Buyer and be ready to make an informed decision.

“Trust, but Verify” is great mantra for any confident person, and we give you the tools to Verify what you read and hear about Annuities.  Annuities, and the advisors who recommend them, must Verify against your knowledge and tools. Only then do these people and products earn your Trust.
Become a Smart Buyer- Empower yourself to Verify before you Trust.

So how do you do that?  It’s pretty easy.

Step #1 is to sign up for our Free Guaranteed Lifetime Withdrawal Benefit report. This free report is available to help you understand these popular products, and you may be surprised to learn some of their pitfalls. Simply fill in your name and email and we’ll send it to you right away.

Get Our Annuity Report Now!

Step #2 is to become a member of Annuity Straight Talk- membership is free and The Annuity Report is available to our members. This report outlines in detail the decision process and critical factors necessary in buying an Annuity.

Step #3 is a strategy session, available to our members. These simple questions help us see if an Annuity is right for you, and help us to design an Annuity solution for your needs.

When you have the tools to make an informed decision, allow us to recommend annuities that meet your specific needs. You will find our recommended products and companies come with the best combination of Safety, Flexibility, and Profitability for your situation.

Buying An Annuity: 5 Critical Decision Tools

Any investor buying annuities must contend with a barrage of sales pitches, glossy brochures of happy couples walking on beaches, fearful Wall Street Journal articles about Ponzi Schemes and defrauded investors, and worst of all, ill informed friends, neighbors, and other Schmexperts who offer unsolicited and generally uninformed advice when you least expect- or want it. But fundamentally, for investors seeking security, appreciation, guarantees, and simplicity, buying an Annuity can be like finding an island of calm in the storm. Here are the critical factors that you will need to understand to make an informed decision on an annuity.  If you understand your needs, and if the Suitability Quiz indicates that an annuity may be a good option for you, then screen products with the information outlined below, and detailed throughout The Annuity Report and this Website.

Surrender Schedules
Interest Rates
Guaranteed
Current Yield
Yield to Surrender
Renewal Rate History
Free Withdrawals
Bonus Rates
Issuing Company Credit Rating

These are the critical components that you must use to judge and throw out competing offerings.  There is a lot of garbage in the Annuity universe, so if, after all your research and learning, you’d like a to speak with an Annuity Expert, please Contact Us

Annuity Surrender Schedule

We think the Annuity Surrender Schedule is the single most important component of an Annuity, and want you to know why. Pay close attention.

The annuity surrender schedule tells you how much of your money you can have at any given time.  Why do we think this is important?

Companies that offer shorter surrender schedules indicate a respect for your capital. This fundamental integrity flows through to the myriad other contractual terms we look at, and indicate the overall quality of the people at the issuing company.

We like to work with good people and companies.  Companies that are up front and honest don’t try and lock up customers unnecessarily.  They don’t tempt agents to steer their clients into inappropriate products with high fees.  Many good terms and conditions stem from something as simple as a surrender schedule.

Why have surrender schedules at all?

Most annuities have no upfront fee to customers who purchase annuities.  But in selling an annuity contract, the insurance company incurs costs, so they attach a contingent deferred sales charge, or surrender charge, to make sure the company gets its money back in case the customer cancels the contract early.

The surrender charge is a direct indicator of the fees associated with placement (sale) of the annuity.  The major costs to the company are one-time bonus rates for the customer, and agent commissions.  Minor expenses include administrative costs linked to shuffling papers and managing money within the company.

You can’t get away from administrative expenses but you do need to be careful that you are not on the hook for a 15 years surrender schedule while the agent made off with a big payday.

As a corollary to this topic, there is another very important detail often left out.  We call this the “Negative Inheritance.”

In the unfortunate event you pass away during the period the surrender schedule of your annuity, your heirs may be liable for that surrender cost.  Many high quality annuity contracts will waive the surrender charge to your beneficiaries in this unfortunate event.

Of course, as you do your homework, you will find many companies that do NOT waive this surrender penalty upon your death, leaving your heirs with a large penalty and thus the Negative Inheritance.

It’s pretty obvious that you’ll want to work with only the best companies- like the surrender schedule, this waiver of surrender charge upon death is a key indicator of the integrity of the offering company, and adds an important item to the list of reasons why certain companies do and do not deserve your business.

Action Items:

Seek annuities with the lowest surrender charges and the shortest surrender schedule.  Seven years is a good ballpark.
These annuities will have the lowest agent commissions, so most likely your agent won’t tell you about these products.
Whenever possible, make sure the surrender charge is waived to your heirs.

Annuity Interest Rates

Want to know why we think the Annuity Interest Rate is the most important component of an Annuity, after the Surrender Schedule? There are many annuity rates in contracts.  As Annuity contracts are long term, you need to understand what each rate means, and how you can use the various rates published by an Insurance Company to make an informed Annuity decision. It can be confusing, even for professionals. The critical rates are:

Minimum guaranteed rate;

The lowest rate of return you could possibly earn.

Current rate;

The actual current rate of return for investments in the Insurance Company Portfolio .

Renewal rate history;

The actual rate of return over several prior years.

Yield to surrender;

The investment yield over the life of the product.

Remember the Ground Rules – Financial Institutions want your money as a tool to invest and make more money with, and they want to pay as little as possible for the privilege of controlling your money. Think of your annuity purchase premium as a loan to the insurance company- You want to be paid for your loan to the insurance company, don’t you? The various interest rates quoted in a contract tell you a lot about the company and how serious they are about earning your business and your trust.

The Smart Buyer understands the rates, and quizzes the agent or advisor.  You might be surprised at what they DON’T know!

Minimum Guaranteed Rate – Like it sounds, this is the minimum guaranteed rate a company will pay you per contract, regardless of the performance of the company’s investments.  This is their risk and minimum cost of capital.This is a good indicator of financial strength of the company and/or quality of the financial product. Don’t ever buy an annuity product, fixed or variable, with a guaranteed rate of less than 3%.  That will be about as high as the guarantee goes and there are plenty of very strong companies that will promise a minimum return of 3% so don’t bother with a company that pays less. For us, low guarantees represent a lack of confidence in long-range investment planning for the issuing company.  We also believe it is a sneaky way for some companies to recapture the expense of offering a big bonus rate or paying the agent a large commission.
Current Rate This is the current rate of return for the Company’s investments. These rates are an excellent indicator of the current strength and competitiveness of a company as well as a good basis to evaluate a company’s historical performance. The current rate can be easily compared to other annuity contracts.  Pick the best one.  Be critical of annuities that offer a locked rate for the first few years because they often reset to the lower base guarantee. Again, like the teaser bonus rate, do not be fooled by big payments up front when your real concern should be long-term performance.
Renewal Rate – Much more important than the current rate, a history of the company’s rates at renewal will tell you more about how the company in question treats their investors and about their profitability over a number of years. An excellent company will actually volunteer this information while some companies will have a hard time finding it.  Be wary.
Yield to Surrender This is your projected annualized return when the annuity contract expires.  When the surrender schedule has lapsed, how much money do you actually have?  This can also be expressed as an Internal Rate of Return.As you analyze all the interest rate components, this rate is where you should direct your attention.  Large upfront bonuses that give way to lower guaranteed rates, lower current, and lower renewal rates will most likely fall short when you compare the product’s yield to surrender.

Everyone remembers the story of the tortoise and the hare.  The hare jumps out to a quick lead but is surprised in the end by the perseverance of the tortoise. Annuities work along those same lines.  Teaser bonuses do not stack up against solid companies offering good current rates and a solid history of strong renewal rates.  This will give you the information you need to validate the feasibility of the yield to surrender.

Action Items:

Pick at least a 3% minimum Guaranteed Yield;
To Compare the same product among different companies, use Current Yield as your measuring stick;
Compare the past performance of companies with their Renewal Rate;
Most importantly, think like the Tortoise and focus on the Yield to Surrender- you’ll see that slow and steady wins the race!

Using Free Withdrawals In Annuity Contracts

The Free Withdrawal from your annuity is a critical element in your decision process, and any Annuity buyer must carefully consider how they would use free withdrawals, and when.

Every annuity contract contains a clause allowing the free withdrawal of a certain percentage of the initial premium each year without a surrender charge. Individual states have laws that dictate a minimum percentage.

Typically, the amount of free withdrawal is around 10% and some annuities allow for a 15% free withdrawal.  On the flip side, there are products that limit the withdrawal to 5%.

High Quality companies offer more than the state mandated minimum.  Like most of the factors we discuss, this fundamental integrity and respect for customers permeates their contracts and earns your trust and your business.

Conversely, many annuity agents and companies will use bonus rates and higher minimum guaranteed yields to entice you into lower minimum withdrawal allowances. Is this in YOUR best interest?

Remember the Ground Rules ! It should go without saying that the bigger free withdrawals are good for the customer and the smaller ones are good for the insurance company.  Which would you choose?

Action Items:

If liquidity and control of your capital is important, be sure that your free withdrawals are as large as possible
Quality companies are not afraid of you withdrawing your money, and consequently don’t sink to the lowest levels allowed by law for your withdrawal allowance.
Remember, it’s YOUR money.

Annuity Vs CD

Annuity Vs CD: Which is Best?

Annuity or CD? That answer depends entirely on what you have planned for the money.  There are advantages and disadvantages to both methods of saving.  And of course there are hybrid CD Type Annuities that offer Higher Yield’s than CD’s, with the tax deferred advantages of an Annuity. Read more

Bonus Rates

Want to know the ONLY time to consider a Bonus rate in an Annuity Decision? Many products include attractive bonus interest rates.  Some annuities offer bonuses as high as 10% or more just for signing up.

Companies lose money on this from the start!

To pay for this expensive form of marketing, the insurance company will need to guarantee they can hang on to your money for long enough to recoup the cost and turn a profit. If you buy such a product, you are married to a serious surrender schedule with substantial fees.  Say goodbye to your money for a long time. Bonus rates are just a form of flashy packaging for annuity products and should definitely be ignored nearly every time an annuity is evaluated. When they make sense: Once all other contract provisions are equal, a bonus rate can break a tie between two annuities.   Then, and only then, is a bonus a deciding factor.  Regrettably, we have yet to see an annuity where all the other factors are equal. Action Items:

Bonus rates are carrots that pander to the base human emotion of greed.
Set aside greed and examine your true motivations – if you really don’t need liquidity, or don’t mind a long surrender charge, a bonus rate might be worthwhile
In general, avoid bonus rates until the end of a decision making process, once YOU lay out EXACTLY what you want your annuity to do for your financial future.
  

 

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Annuity Companies: Corporate Credit

Analyzing the financial strength of a financial institution is the final critical component of your annuity investment process. The four major independent ratings agencies are:

  • A.M. Best
  • Standard & Poors
  • Moody’s
  • Fitch

All of these agencies are online and you can find the strength rating they have assigned to each insurance company.  It is recommended to look at information from all four agencies to make sure there is a consensus in relation to the company you are researching.  If there is not, you need to find out why! The credit rating of a financial institution is just like a credit score for an individual.  If you want a loan from a bank, they will assess your ability to repay that loan.  In regards to annuities, you are loaning your money to the company so you should assess their ability to meet the terms they agree to. The approach to insurance company analysis used by these agencies is similar but no two agencies are alike.  Therefore, finding ratings from multiple agencies and not simply taking the one supplied by the Insurance company itself is critical. Since this is not the most exciting section, let’s keep it simple and just focus on the ratings from Standard & Poors.  Before we continue I will stress one more time the importance of getting information from as many agencies as possible. S & P divides all classifications into two major categories. The highest tier of B rated companies and all A rated companies are considered ‘investment grade’.  The middle and lower tiers of B rated companies all the way down to D rated companies are considered to be ‘speculative grade’.  The entire list of S & P ratings is as follows:

AAA :Superior ability to meet obligations
AA :Very strong ability to meet obligations
A :Strong ability to meet obligations
BBB :Adequate ability to meet obligations
BBB -:Lowest rated investment grade companies
BB+ :Highest speculative grade companies
BB :Not vulnerable in the short-term but faces long-term challenges
B :More vulnerable to adverse business and economic conditions
CCC :Currently vulnerable and dependant on favorable business and economic conditions
CC :Highly vulnerable currently
C :Some form of bankruptcy action has been taken but current obligations have been met
D :Defaulted on payment of obligations

Investment grade companies are preferred since they will offer the highest levels of safety. Because of the quality of these companies, they expect to get a better deal when they borrow money. What’s that mean? You should expect lower investment returns from these companies in exchange for the higher levels of safety their superior credit offers. Now, that’s not all bad news from the perspective of yields.  The most stable companies do offer some of the lower interest rates on fixed annuities, but good research can still uncover your goal:

A Strong Company AND A Good Interest Rate.

As these rates and corporate credit ratings are always changing, be sure to Contact Us for an Annuity Expert to help you find the best of the best Speculative grade companies should be avoided during annuity consideration.  The chances are good that even speculative grade companies can meet their obligations, but they offer practically no benefits in terms of rate for the increased risk you assume Why gamble for a minimal increase with your nest egg? Consider your safety and cast these companies aside. 

If you wish to dig deeper into the analysis of credit ratings, you must look at any recent changes to the rating assigned to a company.  With the financial catastrophe that has hit the global credit markets over the past year, many companies have seen a change in the ratings assigned by the various agencies.  The ratings agencies will offer free information on whether a company has been upgraded, downgraded or left unchanged.

The ratings agency will also give their opinion on the future outlook of the company.  This is usually listed as positive, stable or negative.  Any information related to a negative outlook deserves closer scrutiny. Companies with significant exposure to real estate and sub-prime credit markets have been damaged.  These weak or non-performing assets have caused many companies to pledge cash reserves to back the bad assets or seek new loans that load the company with more debt.  Non-performing assets mean less profit to the company.  More debt brings on more obligations to the company.

Even with less profit and more debt, many battered companies may be safe in the long run.  Companies like AIG saw a great deal of stress on their portfolios of assets due to bad bets.  Many advisors churned clients out of AIG annuities and into new products.  This is rarely in the YOUR best interest, however. Even with our current financial crisis, however, there are plenty of good companies that have avoided the risk altogether and are sitting in a very stable position. Identify the stable companies and you find the ones most deserving of your business.

At Annuity Straight Talk, we can connect you with an Annuity Expert to help you select the best companies and products, and do the heavy lifting to research the best credit rating.  Please Contact Us .

Action Items:

Investigate the Credit Rating of the Insurance Company you are considering from Multiple agencies
Don’t blindly accept the rating supplied by the Company as ratings vary between rating agencies
Pick the highest possible rating you can find without compromising your interest rate or other critical factors

Case Study – Sales Tactics

How Bad Products are Sold to Good People: There is a clever way to spin information in an annuity contract to make it appear safer, more lucrative and less restrictive than it really is. We need to dive in to this subject so that you can see first- hand just how difficult it can be to deal with some of the people selling annuity products.

One online resource on annuities sends a free booklet when you enter your contact information. Because of their claim to be a trusted, reliable source for information on annuities, we took them at their word and sent away for the booklet. What arrived in the mail was something completely different. As we’re not looking for a libel suit, we won’t name the site here, but almost any Internet search on ‘annuity’ will return this site near the top. It is interesting to note that they claim to be a resource and offer the headline ‘Don’t get Scammed!” The information steered all discussion to a fixed indexed annuity, and then to a specific product.

The book gave just enough background information to appear as a resource, but spun important facts we outline in the Critical Decision Tools in a skewed direction. In fact, we got so riled up we posted a special report on the  “Pros and Cons Of Fixed Index Annuities ” with more detail on these popular products. Some of the Sales Spin we trudged thru in this ‘Trusted Resource Report’:

The booklet reveres fixed indexed annuities as a ‘no lose’ proposition without mention of other types of annuities on the market.
The booklet states that a long surrender schedule may give you “more contractual benefits.” Absolutely false!!!
The booklet refers to minimum fixed rates of 3% within fixed indexed annuities, yet the product promoted with the booklet, in fine print, offered a paltry 1% minimum. Can you say Bait and Switch???
A guaranteed minimum rate of 1% is laughable. What kind of assurance is that? Especially with a 14 year surrender penalty!

And now for the Straight Talk…

True, Fixed indexed annuities potentially offer returns that match the market while eliminating the potential for loss, but….
The fees on these contracts are substantial and there is no promise of solid returns,
Contractual caps on appreciation and dubious methods of calculating Index Averages further reduce your Yield,
You should expect only 60-70% of the actual market average to be credited to your account, BEFORE fees. With historical averages around 10%, this would leave you with a return of 6-7%. With market volatility, you may also loose or simply just meet the minimum.
Long surrender schedules NEVER provide you with additional contractual benefits!
 The product they promote has a 14 years surrender schedule!!!
 I guarantee you’ll find another use for your money before 14 years has passed.
 Long surrender schedule only benefit the insurance company directly and the agent indirectly.
Ground Rules: You are loaning the insurance company money and they are assessing serious penalties if you want your money back in a reasonable time frame.

These are a few of the concrete examples we found in this free booklet. The ambiguous language in this online booklet makes it hard to call this anything other than a sales pitch. Obviously, during the verification phase, you would find that these guys do not deserve your trust. On another important note, the sales commission paid to the agent is disturbing. If you purchased the annuity promoted in conjunction with this ‘Trusted Resource’ booklet, your ‘trusted agent’ earns an astounding 9% commission.

No wonder the product has such a miserable guarantee and a binding surrender schedule!

The lack of information in combination with the sales pitch tells us that these guys are either idiots or common criminals out to make a quick buck. Honestly, we think they are a little of both. This is specifically why I want each person who reads The Annuity Report to be able to objectively determine why sales tactics like this are dishonest, misleading or just plain ignorant.

No matter how you look at it, it is dangerous to do business with people like that. On a final note, the SEC agrees with our assessment of this kind of sales tactic in a July, 2008 speech on the matter Here: If you are sick of being Sold on junk and like our approach, please Contact Us. We can help you find an Annuity Expert who shares our values and that meets our Criteria.

Case Study – Annuity A Vs Annuity B

Now that we have established the Ground Rules and discussed the Decision Tools for Annuity Analysis, let’s put those tools to good use and examine two annuity products that are popular in today’s market. 

 

We’ll simply call these Annuity A and Annuity B. I assure you, these are actual products that are being sold by the thousands. To re-cap, the critical provisions to make an annuity decision are:

Surrender Schedule,

Free withdrawals,

Interest Rates, including

 
Guaranteed minimum rates,
 
Current Rate
 
Renewal Rate
 
Yield to Surrender

Premium Bonus Rates.

Corporate Credit

There is a lot of contrast on these issues in the annuities I have chosen for this example. Tale of the Tape:

 

Annuity A

Annuity B

Bonus

10%

0%

Current Rate

3.75%

5.60%

Minimum Guarantee

1.50%

6.25%

Surrender Period

10 years

7 Years

Principal Amount

100,000

100,000

Agent Commission

9%

3%

Free Withdrawal

5%

10%

The differences between these annuities jump out when laid side by side. We’ll discuss each one…

Annuity A The premium bonus for Annuity A is quite attractive and is most likely it’s big selling point. The obvious downside is that you must wait an extra three years for the surrender schedule to expire. You also contend with limited liquidity thru a smaller free withdrawal. Take a look too at Annuity A’s cost of placement- this is the total cost to the insurance company to sell this annuity. Between the premium bonus and the agent commission, the company is down 19% before it even gets started!!! What’s the conclusion?? The company will make up for those costs by holding on to your money for ten years, offering you very little liquidity and guaranteeing a pretty low minimum rate. It may be one of the only annuity choices your agent shows you, however, because the commission is juicy.

Annuity B- Annuity B on the other hand, has only 3% lost to placement costs. Because of the lower expenses, you get a more solid guaranteed rate, shorter surrender schedule and more liquidity via free withdrawals. Conclusion? Annuity B gets no love because of its low commission, but its high guaranteed rate indicates that management is confident in their long-term ability to deliver on their promises. So what annuity is best for you? To determine that, let’s put Annuity A and Annuity B in a spreadsheet to see how the long-term performance looks for each product. These Spreadsheets are available on our Downloads Page

Below, you will see each annuity’s yield to surrender based on both current and guaranteed rates, the surrender value in each year and the ending account value. Just so you know, Annuity B’s surrender schedule will expire in year seven but I went ahead and illustrated the returns over ten years in order to keep things as even as possible.

 Annuity A5% annual free withdrawal

End Of

Current Rate

Guaranteed Rate

Surrender Charge

Surrender Value

Year 1

$113,750

$113,750

10%

$102,375.0

Year 2

$118,016

$115,456

9%

$107,394.22

Year 3

$122,441

$117,188

9%

$111,421.50

Year 4

$127,033

$118,946

8%

$116,870.14

Year 5

$131,796

$120,730

7%

$122,570.73

Year 6

$136,739

$122,541

6%

$128,534.52

Year 7

$141,867

$124,379

5%

$134,773.23

Year 8

$147,187

$126,245

4%

$141,299.09

Year 9

$152,706

$128,139

3%

$148,124.87

Year 10

$158,433

$130,061

2%

$155,263.88

Yield to Surrender

4.71%

2.66%

  

A Link to the Excel Spreadsheet that calculates this table is available on our Downloads Page

 

Annuity B

10% annual free withdrawal

End Of

Current

Guarantee

Surrender Charge

Surrender Value

Year 1

$105,600

$105,600

7%

$98,208

Year 2

$111,514

$112,200

6%

$104,823

Year 3

$117,758

$119,213

5%

$111,870

Year 4

$124,353

$126,663

4%

$119,379

Year 5

$131,317

$134,580

3%

$127,377

Year 6

$138,670

$142,991

2%

$135,897

Year 7

$146,436

$151,928

1%

$144,971

Year 8

$154,636

$161,423

 

$154,636

Year 9

$163,296

$171,512

 

$163,296

Year 10

$172,440

$182,232

 

$172,440

Yield to Surrender

5.60%

6.18%

  

Okay, what differences do you notice?

The end result? Annuity B looks boring and pays a lower commission, but offers a higher yield to surrender and higher account value than Annuity A.
The premium bonus that entices annuity buyers is often offered in conjunction with high commission. Premium bonuses should not be a deciding factor in an annuity buying decision unless to break a tie between two equal offerings. But it’s important to see how they are used.
In deciding, you must consider only your best interests. The high commission, high bonus, but shortsighted approach used to sell Annuity A costs you freedom, liquidity and profitability. Your money is locked up with a smaller free withdrawal and bound by a high surrender charge. You can’t get your money back, and your appreciation rate on it is pretty small. Even still, the agent made a hefty commission.
  

Action Items:

The end result? Annuity B looks boring and pays a lower commission, but offers a higher yield to surrender and higher account value than Annuity A.
The premium bonus that entices annuity buyers is often offered in conjunction with high commission. Premium bonuses should not be a deciding factor in an annuity buying decision unless to break a tie between two equal offerings. But it’s important to see how they are used.
In deciding, you must consider only your best interests. The high commission, high bonus, but shortsighted approach used to sell Annuity A costs you freedom, liquidity and profitability. Your money is locked up with a smaller free withdrawal and bound by a high surrender charge. You can’t get your money back, and your appreciation rate on it is pretty small. Even still, the agent made a hefty commission.
  

That’s not the kind of analysis most advisors will give you.

Annuity Vs CD| Are You Losing Money, Safely?

Certificates of Deposit or CDs are a great place to put money, right?  Well, the answer depends on if you are the bank or the customer.

As a customer you give the bank your money and agree to leave it there, at the risk of a penalty, for a certain period of time, usually anywhere from three months to five years.  In return, you are paid an interest rate that is better than a savings account or money market rate.

The bank takes your money and loans it out to other people at an even higher interest rate and makes a profit on the difference.  The bank makes more money but they also deserve to profit.  They guarantee your money and take the risk that a potential borrower doesn’t pay it back.  The bank’s reward is justified for the risk they take and the guarantee they offer depositors.

So far, it looks like a fair deal.  In simple form, each party should be happy with the terms.

But look beyond that relationship for a moment to see what else is going on outside that relationship.  Your money is safe, no doubt, but are you really getting ahead?…..

Most people don’t realize that money is susceptible to many eroding factors.  Among these, taxes and inflation are two of those factors I would like to focus on.  As we have explored in other areas of this site, taxes can seriously affect investment returns.  In just the same fashion, inflation can be every bit as damaging.

Let’s look at this by way of an example.   We’ll buy a CD, hold it for a year and adjust the earnings for taxes and inflation and see how much we have left.  Let’s start with $100,000.

Assumptions:

4% CD interest rate

3% inflation

40% tax bracket

Initial Investment4% InterestLess 40% TaxPurchasing Power
$100,000$104,000$102,400$99,328

Wow!  That is not an optical illusion.  In this scenario, after one year in a CD where inflation is a realistic 3%, the power of your money has actually decreased.

Now, in other areas of the site, we talk about protecting your money from taxes.  The inescapable truth is that inflation can make any investment look a lot less desirable.  If you want safety, you must find a place for cash that moves ahead of the rate of inflation.  Taxes make that job even more difficult.

As popular and safe as bank CDs are, the Straight Talk is that you are doing nothing more than losing money safely .

Annuities: High Yield Safe Investments

So you’re looking for high yield safe investments for your retirement….  What are your options?

If you look hard enough at the best search engines on the web or in the classified pages of newspapers, you will find investment offerings like tax liens and private real estate investment note offerings yielding 8% to 12% or sometimes more.

Please, send away for a prospectus.  The reading is revealing and interesting- generally you will see that you, the investor, retain ALL risk associated with the offerings.  The companies, many with no credit rating and no track record, simply promise to pay… with no guarantee, personal recourse, history, or track record to back it up!

So much for safety!

Go to the opposite extreme for true safety, and you are stuck with government notes.  As of this writing, they yield less than 0% due to market turmoil.  But even when prices are normalized, T-Bills are in the 2-3% range.  Investors worldwide are therefore willing to lose money over the short term and give it to the US government to use, rather than invest in any other instrument.  Likewise, certificates of deposits are low yield, and after the bank failures, these hardly seem like low risk.

So much for Yield!

High-yields go out the window for safety, and safety is illusory!

So, what to do….

Investors in a cash position should congratulate themselves for being prudent and safe. But you know your need to step out into the market again soon.  Many need to place cash in a high yield safe investment that avoids the volatility of the current markets. Is this an oxymoron?

How about an investment with the safety of a CD, but the yield of a mutual fund… Would this work?   If you think this is too good to be true, read on…..

A great high yield safe investment comes in the form of a fixed annuity from a highly rated insurance company.  Insurance companies take in premiums and make investments, but you enjoy one major advantage in an annuity over a bank CD- …..  Tax deferred appreciation on your investment.

Insurance contracts, such as fixed annuities, offer competitive rates and tax deferred appreciation of investment gains, yet give up very little to a risk premium associated with most other investments.    The biggest tradeoff is usually liquidity- access to your funds.

Financially strong insurance companies have very small leverage ratios in comparison to banks, so in addition to stringent state regulation, these companies suffer much lower default risk than banks.  Also, state insurance guaranty funds back deposits up to $100,000 in most states.

Returns on fixed annuity contracts can exceed 5.5% in many cases with companies that have superior financial strength.  Plus, when you calculate that annuities enable investors to defer taxes and have the interest compound over time, you realize these are powerful tools.

For a complete primer on annuities, be sure to read  The Annuity Report and refer to the Annuity vs. CD comparison section for more information.

Also remember, to reach comparable safety with government backed notes of any kind, it is essential that you place your business with only the best financial institutions.  We give all the tools to select only the best companies in The Annuity Report .

Financial Ground Rules

Money is a tool that institutions and companies use to make more money. Obviously, the less your money costs a company, the more profits the company can make with your money.  Of course they have to pay for your money, and they are constantly balancing the cost of money and their return on the money. Here are the Ground Rules:

 

Financial Institutions seek to acquire as much low cost capital from you as they can get;
Financial Institutions want to hold on to your money as long as possible;
Financial Institutions want to pay as low a rate of interest for your money as possible;
Financial Institutions and the products they offer are geared to keep your money as long as possible;
Financial Institutions pay you just enough money for your deposit or investment to keep you from giving it to their competitor across the street.

Is this simplistic? Yes.  Is it often discussed?  Never!

It’s important to note, too, that none of the Ground Rules above are dishonest- it’s just the way things are.

Let’s look at this another way- from your perspective.  When you borrow money from a bank, you want the lowest interest rate, the longest repayment terms, and the most flexible loan covenants you can get.

Financial institutions are no different- they’re selling you financial products in exchange for your capital, and they give you a return on your dollars.  You’re loaning them money, and they want the best possible terms for that loan. We don’t fault them for this, but we do want to raise your awareness of the methods by which things are sold.

You must know enough about the products, the companies, and the business to ask effective questions and protect yourself from the selective use of information.

To use an analogy, when you buy a home, it is wise to bring a buyer’s agent to represent your interests in a purchase until you how to ask the right questions to get all the necessary information about the property.  But after you’ve bought and sold many homes and acquire more specialized knowledge in the field, you can feel confident dealing directly with the seller’s agent and representing your own interests.

Financial products likewise require specialized knowledge to understand the nuances and ask the right questions.  But even so, most people considering an Annuity deal directly with the seller by working with a company sponsored agent, and don’t educate themselves.  Commission motivated agents want a sale and can easily put a positive spin on their favorite products.

We at Annuity Straight Talk will give you the information you need to make an informed Annuity purchase decision.  Be your own informed agent and challenge your advisor, or anyone representing a product, to answer tough questions.  Be your own trusted advisor and expert, and learn to verify what others are selling.

Annuities make great sense for people at the right time of their financial life, but too often sales commissions and conflicting interests cloud an advisor’s fiduciary duty to the customer. Now, if what your advisor is telling you checks out against the tools and techniques we give you, stick with that person.  But if not, be wary.

If you like what you read from us and are considering an annuity, please Contact Us for specific products that fit YOUR criteria and your new-found informed approval. You better believe we’ll only recommend products that fit our criteria for integrity, quality, safety, and overall intelligence.

Annuity Returns: Which 10% Do You Want?

Does market volatility leave you confused when trying to calculate your annual investment returns?  Or, is a flashy piece of marketing making it hard to calculate the actual gain you can expect?  Investment products and marketing can confuse even the simplest concept, so read on…

By learning the difference between an Average Rate of Return and the Internal Rate of Return (Or Effective Rate), you will begin to understand how increased volatility can decrease your real investment return… no matter what the ads and past performance milestones tell you.

Which 10% do you want?

Seems like a silly question, right?  It’s not- what we’ll demonstrate below is critical to measuring different investments.

But it’s important you read this whole post- the key point comes near the end (spoiler alert!)

Often you’ll see a mutual fund or other investment advertising its 1, 5 and 10 year historical rates of return.  The first thing to be aware of is that taxes are almost never factored in here, so take this return number with a big dose of salt.

The next concern we have with this return representation is the method of calculation.  Too often, you’ll read in the disclaimer or disclosure statement that the manager uses an Average Rate of Return rather than an Internal Rate of Return.  This masks volatility and can be highly deceptive.

The answer to ‘Which 10% Do You Want?’ comes down to how well you know the difference between these two measures of investment performance.  Understanding this will shed light on what I consider to be misinformation and possibly deceptive marketing by many well-known money managers.

The Internal Rate of Return is truly a discount rate at which the present value of the investment plus all the future cash flows equals $0.  In other words, a true ‘discounted cash flow’ measure.

This is a longer term, true measure of return for a variety of cash flows  and is equivalent to the ‘Yield to Surrender’ in Annuity products.  It is also the “Effective Rate” that we use to measure performance in Secondary Market Annuities.

The Average Annual Rate of Return is simply an average of the year-end rates of return. So, adding the percentage returns from each individual year and dividing by the number of years will give you the arithmetic average.

Many investments, mutual funds, and indexes may be reported using this method. (In the fine print!)

When a constant yield is used to illustrate an investment return, the Average and the Internal Rates are identical.  But when returns differ from year to year (as they always do in real- life investments) the two ways of measuring can be very different, and the effect on your portfolio is also drastic.


The key lesson- Volatility can destroy an account value but investment managers can calculate their returns in a rosy way that is technically correct, but that leaves you with less money.

Let’s keep this exercise simple to illustrate the point.

So, consider an initial $100,000 investment and analyze the dollar value of that after a two-year period under several return scenarios that all yield a 10% average.

We’re going to assume you leave your money invested over the 2 years and look only at what you went in with and what you came out with.

Scenario 1 shows an even 10% annual return on your investment.

 Rate of ReturnAccount Value Cash Flow
Opening Balance  $                   100,000 $        (100,000)
Year 110%$                   110,000$                       –
Year 210%$                   121,000$           121,000
    
Average Annual  Return10.00%Internal Rate of Return10.00%
  Ending Account Value $           121,000

This is an Average return of 10% per year, and an Internal Rate of Return of 10% also.

After two years, your account would be valued at $121,000.  Not bad, right?  Sure would be nice if the world worked this way…..

Now, let’s input some volatility-

Scenario 2 shows a slightly uneven but still positive return.  We’ll input 5% and 15% returns for years one and two respectively.

 Rate of ReturnAccount Value Cash Flow
Start  $                   100,000 $        (100,000)
Year 15%$                   105,000$                       –
Year 215%$                   120,750$           120,750
    
Average Annual  Return10.00%Internal Rate of Return9.89%
  Ending Account Value $           120,750

Notice, the arithmetic average is still 10% but the IRR is 9.89%, and the account is only worth $120,750!  Same stated “Annual Rate of Return” of 10%, but you have less money!

Now let’s look again-

Scenario 3 shows a solid 20% gain in year one and a flat zero in year two.  Guess what happens…..

 Rate of ReturnAccount Value Cash Flow
Start  $                   100,000 $        (100,000)
Year 120%$                   120,000$                       –
Year 20%$                   120,000$           120,000
    
Average Annual  Return10.00%Internal Rate of Return9.54%
  Ending Account Value $           120,000

This is another 10% average annual, but the account value is lower still….  Are you seeing a trend here?

How about one more?

Scenario 4 shows us a great example of what actually happens in the securities world.  Let’s earn 30% in year one and lose 10% in year two.  The results are even more depressing.

 Rate of ReturnAccount Value Cash Flow
Start  $                   100,000 $        (100,000)
Year 130%$                   130,000$                       –
Year 2-10%$                   117,000$           117,000
    
Average Annual  Return10.00%Internal Rate of Return8.17%
  Ending Account Value $           117,000

There it is again, that same solid average but the account is worth even less.  Do you think I manipulated the numbers somehow?  Remember, trust but verify.  At this point, you should all grab a calculator and check my numbers.

OK- now for the final blow—

Scenario 5 illustrates a major blow to the account- Sounds like 2008, right?- followed by a giant rebound (We make NO promises of this!)

 Rate of ReturnAccount Value Cash Flow
Start  $                   100,000 $        (100,000)
Year 1-30%$                     70,000$                       –
Year 250%$                   105,000$           105,000
    
Average Annual Return10.00%Internal Rate of Return2.47%
  Ending Account Value $           105,000

In this scenario, even a rip-roaring rebound of 50% gain in year 2 barely gets you above your original basis when you lose 30% in year 1.

In calculating returns, the Average Rate or Return of 10% is still technically accurate, but it masks the reality that you have only made a 2.5% annual appreciation, and have barely more than your original principal in hand after a wild ride.

So what’s the point?

The examples above illustrate the effect of volatility on an investment.  Has the stock market ever returned exactly 10% two years in a row?  The answer is no.

Now, imagine how long the odds are that it will return exactly 10% for ten, 15 or even 20 years…..  Volatility is a fact of life in the securities world, especially in recent years.

In retirement planning, volatility is a demon to be avoided.  Products that advertise a good rate of return can do so using the Average Rate of Return and be technically correct, and also be wholly inappropriate for a retirement investor.

Don’t expose yourself to unnecessary risks or technicalities! Safety first!

Action Items:

Make sure you read how any investment is calculating its rate of return.  “Average Annual Return” is very different than an a true measure of value- this is more properly titled ‘Internal Rate of Return’,  ‘Yield to Maturity’, or ‘Effective Rate’.
Slow and steady guaranteed rates of return over the long term, especially in tax deferred appreciation vehicles, often outperform even aggressive equity portfolio allocations that swing down as much as they can go up.
It takes a very large rebound, which is historically unlikely, to make up for a large portfolio loss, which is all too common.  Unfortunately, catching the loss is a lot more likely than timing the gain…
Remember, it’s YOUR money, NOT TheIRS. 🙂

Test Your Annuity IQ

Annuity Quiz We put this quiz together from the California State insurance licensing test. These are the types of questions your annuity agent may or may not have been asked to qualify them to sell Annuities. This may be all they know about these complex products! The answers are at the bottom.

  • Most Americans use annuities to give them __________?
    • Stream of retirement income
    • Tax deduction
    • Emergency fund
    • Income in the event of disability
  • If the participation rate is 70% and the index-linked interest calculated in an Equity Indexed Annuity policy is 6%, how much will be credited to the policy?
    • 4.4%
    • 2.4%
    • 4.2%
    • 6%
  • Unlike other savings vehicles, the growth inside an annuity is __________?
    • Tax creditable
    • Tax deterred
    • Tax deductible
    • Tax deferred
  • The period of time during which there is a build-up in an annuity of interest is call the __________?
    • Gross up phase
    • Deferral phase
    • Accumulation phase
    • Interest phase
  • Periodic payments that begin within one year after purchase are characteristic of a(n) _______________ annuity?
    • Imediate
    • Deferred
    • Tax sheltered
    • Qualified
  • Deferred annuities provide a great deal of flexibility in the __________ and __________ of payout benefits?
    • Timing and type
    • Amount and type
    • Timing and amounts
    • Growth and determination
  • A variable annuity fluctuates in accordance with the __________ of its investments?
    • Origin
    • Performance
    • Diversification
    • Expense loads
  • All of the following are phases of an annuity EXCEPT?
    • Accumulation
    • Contribution
    • Distribution
    • Interpretation
  • Split annuity combines a _______________?
    • Fixed deferred and an immediate annuity
    • Variable and fixed annuity
    • Term life and fixed annuity
    • Endowment and immediate annuity
  • Premiums in fixed annuities are either__________ or __________?
    • High or low
    • Fixed or variable
    • Single or flexible
    • Taxable or deductible
  • IRS specifies age __________ as the maximum payout age for fixed annuities?
    • 59 ½
    • 70 ½
    • 100
    • no specific age
  • Generally, companies charge a __________ surrender fee?
    • Level
    • Increasing
    • Decreasing
    • Fluctuating
  • If an annuitant dies or becomes disable, most companies __________ the surrender charges?
    • Increase
    • Average
    • Freeze
    • Waive
  • A “1035 Exchange” involves the exchange of all the following EXCEPT?
    • Life insurance policy
    • Endowment
    • Disability policy
    • Annuity contract
  • IRS imposes a __________% penalty on withdrawals prior to age 59 ½?
    • 5
    • 10
    • 15
    • 20
  • Companies allow for an annuitant to “bail out” if their interest rate is __________ a pre-determined level?
    • More than
    • Less than
    • Unchanged from
    • One half of
  • An annuity that has all the guarantees of an annuity contract plus the potential for stock market returns is a(n) __________ annuity?
    • Interest sensitive
    • Bond index
    • Equity index
    • Market specific
  • Guaranteed __________ and guaranteed __________ options are characteristic of a fixed annuity?
    • Interest / income
    • Rates / options
    • Fees / income
    • Interest / investment
  • A fixed tax deferred annuity is safe due to __________?
    • Flexibility
    • Dollar cost averaging
    • Diversification
    • Reserves
  • Principal and interest can continue to grow until one becomes age __________?
    • 85
    • 90
    • 95
    • 100
  • One sum of $’s contributed to an annuity and left to accumulate is what type of annuity?
    • Single premium deferred
    • Single premium immediate
    • Single premium flexible
    • Single premium accumulator
  • Two types of single premium annuities are __________ and __________?
    • Deferred / indexed
    • Deferred / flexible
    • Immediate / indexed
    • Immediate / deferred
  • Payments stop at the annuitant’s death in a __________ settlement?
    • Joint and survivor
    • Period certain
    • Joint life
    • Life only
  • An interest rate that is higher in the first year and is guaranteed for one year is a(n) __________ rate?
    • Index
    • Bonus
    • Variable
    • Fixed
  • Almost all annuities allow for a withdrawal of __________ of their account value before a surrender charge is applied?
    • 5
    • 10
    • 15
    • 25

Here are the Answers to the Quiz

Annuity Benefits and Riders

Generally speaking, Fixed Annuities and Variable Annuities offer add-on Annuity Benefits and Options.  These can add significant cost to your annuity.  The following are the key riders to watch out for…

With added benefits come added expenses so be selective when you choose extra features and definitely do your homework so you know exactly what you are paying for.

We have put together a list of the most common riders available to consumers to give you an idea of what’s out there. You will likely come across other options and some that are specific to one contract.

We seek to teach you to be critical and objective so you can do a good job of evaluating your needs for any additional contract provisions that are being pitched. If you need some help with analysis, please Contact Us and we’ll be happy to walk through any rider or particular contract.

Here is a list of common riders you will encounter in your search for the proper annuity.

  • GMIB – Guaranteed minimum income benefits guarantee a base income upon annuitization for a specified period
  • GMDB – Guaranteed minimum death benefits are designed to protect the beneficiaries of the purchaser by paying a death benefit equal to the initial investment regardless of market conditions in the event of the purchasers death.
  • GLWB – Guaranteed lifetime withdrawal benefits give a minimum payment for the lifetime of the purchaser based on the value of the initial investment and a stated guaranteed minimum investment return.
  • GMAB – Guaranteed minimum accumulation benefits offer a minimum return of principal to the purchaser equal to the initial investment or the highest account value reached during accumulation depending on contract specifics.

These riders can be added to annuities for an additional cost, usually in the range of .5-.75% of the annual guaranteed yield. The costs vary from company to company.

This additional expense adds even more to the already higher than average cost of variable annuities so make sure you understand the product thoroughly before you invest.

Even after you learn the Decision Tools to make your own decisions, expert advice is essential.

Contact Us and we can help explain the benefits and disadvantages of each of these annuity benefits.