A new client of mine has been thinking about making this move for more than three years and has been waiting for just the right time to get things in order. Because he has been reading newsletters and watching my videos for a while, he knows well how I work but also did good due diligence by talking to several other advisors.
I am grateful for the opportunity to see the other plans he was presented and look forward to offering his family good service for years to come. He was thorough enough to ask a lot of good questions and the latest set came while he tried to decide which annuity to use. I thought it was a good list of frequently asked questions so I typed my response and turned on the camera to record a podcast.
See below for his questions and my answers in bold below each. The podcast goes into a bit more detail and commentary so click the page link above if you’d like to relax and just listen to it.
1. In reference to the plan that you sent me, on page 5 there are 4 allocation selections. I am assuming that the 4 comprise everything that the plan has invested? Correct?
The four allocations shown on page five represent the entire investment amount. The contract itself has another 12 options so this is not how it needs to be allocated from the beginning. Rather it represents a conservative allocation that produces reasonable results. There is much more potential in the contract and we will evaluate options on an annual basis to make sure we get the most out of it.
2. If so, does that mean that 2.9% would be the guaranteed interest earned on 25% of the portfolio or on the entire portfolio?
2.9% is the fixed rate and 25% of the entire investment amount is allocated to that. Yes, 25% of the investment will earn 2.9% for the first year. You can place as much or as little as you’d like in the fixed account and you have the opportunity to change that allocation once per year.
3. I don’t understand the S&P low Volatility Daily Risk Control? Could you please explain?
The S&P Low Volatility Daily Risk Control is an index that uses the S&P 500 but is managed for lower volatility than the pure index. When volatility is high in the stock market, this index moves funds to cash in order to limit losses. When volatility is low more money is moved into the S&P 500 to increase returns. This is similar to an actively managed portfolio when the goal is to reduce risk. The result is smaller losses when the market is down and smaller gains when the market is up. The objective is consistent, stable returns.
4. I also don’t understand the S&P Multi Asset Risk Control? Please explain?
This is similar to the above except that volatility is controlled by a daily adjusted blend of S&P 500, Gold and US Treasuries. Again, it’s kind of like an actively managed portfolio but with a different blend of assets.
5. The same with the Fidelity MFY 5%, 0.00% Annual Margin? Please explain?
This is similar as well but Fidelity instead uses six different global equity and commodity indexes on the investment side. It is also balanced with cash to reduce volatility and produce consistent returns.
6. On page 6, with no withdrawals and no growth, why does the Minimum guaranteed surrender value reduce by $45,000 on year one through year 10?
You are slightly mistaken on this. The $45,000 in year one represents the maximum surrender charges and market value adjustment, or the amount the surrender value is adjusted by changes in interest rates up to the date of surrender. This is a state-mandated part of the illustration and only applies to a full surrender of the contract. What you missed is the fact that this declines over time and by year ten the charge is 0$, guaranteed.
7. At our age, we would be required to take the RMD the first year. This would obviously reduce that value further. Correct?
The required minimum distribution would only decrease the account value but would not affect the guaranteed minimum surrender value. Just like taking money out of your bank account. If you take a withdrawal there will be less money in there.
8. With your charts showing (0) withdrawal, do you have something that you could run that would show the values yearly with the RMD’s being taken out?
We can illustrate any type of withdrawals you want to see, including custom amounts each year or simply set it to show the amount of RMD as the only withdrawal. I will send you another illustration for this.
9. With the RMD’s taken out yearly, I believe that you told me another 10% could be taken out yearly if needed without penalty? Correct?
Partially correct. You can take 10% total in free withdrawals each year. If your RMD is 4% then you can take an additional 6% without penalty. In the rare case when the RMD is greater than 10% of the account you are able to take the full RMD without penalty. That is not likely to happen and even if it did would not happen until you are in your 90s.
10. On page 2 under Annuity payout options am I correct that the monthly payment could be $3,404.80 with $380,000 still remaining at maturity?
These are two different things. The annuity payout is an option if you decide to commute the contract value for guaranteed lifetime income. If you take this option then there is no cash remainder, just guaranteed payments for life. This is only an option and not how I recommend using the contract.
11. It looks like this annuity could be in place until the age of 115? Is that correct? If so and if we lived that long, could we renew every 10 years until that age?
The maturity date is mostly irrelevant at this point. Maturity means that you must withdraw all the money or take guaranteed lifetime payments if you hold the contract to age 115. The ten years only refers to the surrender schedule and you don’t have to change anything or renew the contract every ten years. After the tenth year you simply have 100% liquidity and are not forced to do anything else with the contract.
12. Are you recommending that my wife sign up for the 10 year plan or do you think it would be better to look at ones offered from 3 to 5 year? Or to put some of it in a 10 year plan and the remainder in something shorter term? Of course we have mine to consider too either now or early next year.
I showed you the ten year contract because it holds the most potential and we were comparing it to other guaranteed lifetime income contracts. In that scenario I need to show the most growth but there certainly are other short-term options available with some being as short as three years.
13. After we talked the other day, I got a voice mail (never talked to the guy) that was offering an annuity for 5 years, the 1st year was either 4.5 or 4.8% and years 2-5 it reduced to 3.85% for an average of 4.05%? I don’t know if it was a great company or an A+ AM Best company.
What you are referencing is a fixed rate annuity. I don’t know the company off the top of my head but it is one of the additional options available over a shorter term if that’s the direction you want to go. One potential issue with short-term fixed rate annuities is that they don’t all have a 10% free withdrawal option. Some do and some don’t so you have to look at all the details.
14. With the RMD, are they withdrawn the first of the year or whenever we choose?
Required minimum distributions are required by April 1st in the year following your 72nd birthday and by December 31st every year after that. You get a little extra time your first year but then need to do it by year end after that. You can take the amount in systematic payments or in lump sum at any time before the deadline.
15. If we signed up, would the entire amount that we want to transfer to the insurance company
be done on forms that you offer or do we have to do it ourselves. You know that she has Fidelity and TDAmeritrade.
Transfer forms are part of the application process and part of the paperwork you sign. You don’t need to do anything extra on your own. The insurance company will communicate with Fidelity and/or TD Ameritrade and the two companies will handle it.