I’ve been hitting this from several different angles all year so I figured it’s time to look at some real contracts.  This is how I work with the numbers to determine unequivocally which is the best path for each individual who asks me for help.  Aside from safety, guaranteed income is the biggest reason people buy annuities so I’m going to start with a new contract that is very competitive and will no doubt be the top choice for many who want the simplicity of a guaranteed paycheck in retirement.

For years I have said that the best thing about Nationwide is the Peyton Manning commercials.  I’m a big fan of the quarterback but have not been impressed by the insurance company’s index annuity options.  Still it is a fine company with solid financial ratings and I’m not one to hold a grudge when a good product comes along.

The Nationwide Peak 10 has been around for the better part of a year so I’ve known about it for a while but it was only available through certain sales channels that I couldn’t get.  The first time I heard of it was earlier this year when a guy told me about the contract during an appointment.  He said it had a 10% bonus, immediate income and joint life payout at age 65.  You all don’t see this stuff as much as I do so may not recognize right away that it’s a pretty good deal in today’s market.

Based on our conversation I determined that the product was indeed the right option for this guy and I didn’t have anything better.  So, I told him to buy it from the advisor that showed it to him.  No one should be scared to make an appointment with me because I have plenty to offer to the right people but I know my strategy is not a fit for everyone.  I tried to get access to the contract, which was possible, but in its current form was not available in a few of the states where I do much of my business.

I put it on the shelf and told a few people about it when it was the right fit but I’m not into income riders, as many of you know.  Nationwide has now expanded the distribution and opened it up to a few more states so it’s going to hit home for more people.  I can sell it now but this is by no means a solicitation.  It’s nothing more than a basis for comparison and it’s pretty competitive so it offers a good test for my strategy.  We’ll start with that next week but for now let’s look at the details of this.

10% bonus to the income value

7% simple interest annual income increase for each year of deferral

Extremely generous payout rates for all ages (the grid is too detailed to mention because it’s different for everyone)

Immediate income option means this will offer higher income and more liquidity than a single premium immediate annuity

Yes there is a fee for the income rider but who cares if your goal is maximum income – this will likely deliver it

Ashok Ramji and I just recorded a podcast about this contract that will be edited and released next Thursday, July 29th, 2021.  Subscribe to the podcast here at Castos or here on my YouTube channel if you want to see the video with illustrations.  If you do either, you will be notified when it’s published.

What we talked about during the recording is that the 10% percent bonus increases the immediate income to the point where it clearly beats any other contract for immediate income.  This is not free money in your pocket, rather an enhancement to the guaranteed income payment.  What makes it more compelling is that the payout is only reduced by about a quarter percent for a joint life payment.  What does this mean?  Insurance companies pay more income for one person than two.  One of two people will always live longer than a single person so the company has to lower the payout to make sure it works.  Actuaries are never wrong.

In the example we ran during the podcast we showed a basic example of a 65 year old paying $100K for the contract.  Including bonus, a single 65 year old could receive more than $5600 per year for the rest of his or her life.  But a 65 year old couple would get just over $5400 as long as either person is alive.

This is incredible because most of the time you would see a substantial reduction for a joint life payment.  From what I understand the typical change in payout would take the joint life payment to around $4500 or so.  That’s an amount that would add up over time.

Again, I’m not saying that everyone should bombard my phone on Monday with purchase orders.  It’s more about this being a viable option for certain people who want a simple solution.  My instincts tell me it will be better for near-term income in the range of 1-5 years but longer term deferrals may show another product to offer more.  I can still beat it with another strategy but that can only be determined on a case-by-case basis.

The summer is hot and dry just about everywhere, including Montana.  But summer is fleeting so we all have to take advantage of the sunshine when we can.  I’ll probably hit the trails with the horse and mules at some point this weekend.  By Monday morning I will have coughed up all the trail dust and be ready for anyone who wants to chat.

Enjoy your weekend!

Bryan

(800) 438-5121

Everyone needs to know this is just like having social security except with a residual balance.  With social security, all the money you put into it is gone, unless your spouse collects a portion of the payments.

With an annuity you can add a guaranteed income feature that acts just like social security.  Buy the annuity and for every year you wait to collect income, the payment amount increases by a certain percentage.  The difference being that if you or you and your spouse pass away before all the money has been spent then your heirs collect the remainder value with an annuity.

Monthly income is the only thing that social security and income annuities have in common.  The reason I bring this up is because most people see something like the big bonuses and grand interest credits and don’t realize what it means.  Many think that it’s nothing more than a 25% bonus and a guaranteed 7% per year, or something similar.  There are several variations to this so my goal is to explain how to evaluate these because a lot of advisors and consumers focus on the wrong thing.

First I need to explain the difference between income value and account value for those who don’t know the difference.  The account value is equal to the money you put in the contract, plus interest earnings each year, less fees for additional benefits like an income rider.  Many people either on the professional or consumer side mistake these two values and it has led to a lot of ill-informed decisions.  The account value is the amount of money you would have if you cancelled the contract and walked away.  The income value, also known by many other similar names, is nothing but a bookkeeping value used to calculate guaranteed lifetime income.

There are three major variables to consider when trying to determine which contract is best and everyone of them has to be accounted for.  Initial bonus, rollup rate and payout rate are all important factors.

Bonus- An initial boost to the premium that is most often only credited to the income value.  Too many people think that the insurance company is just handing out free money but nothing could be further from the truth.  Lots of agents use this feature and little else to sell their favorite product.  It’s sad but true.

Rollup Rate- This is the amount of guaranteed annual increase to the income value.  For each year you wait, the income value will increase by a set percentage.  The longer you wait, the bigger the income value gets.  Many people mistake this for an annual growth rate on their account value and opportunistic agents might not explain otherwise.  I can’t even tell you how many hundreds of people who have learned otherwise by finding this website, sometimes years after they bought an annuity with the wrong expectations.

Payout Rate-  When you decide to take income, all the bonuses and annual rollups are factored in and you’ll get a certain percentage of that number via lifetime income payments.  That’s the payout rate and in most cases has been given the least amount of consideration.

You have to put all three together to see which contract actually has the highest payout.  Like I always say, if you’re going to use an annuity then go for the strategy that gives you the most in return.  A contract with a big bonus might have a low payout rate.  In comparison you might see a contract with no bonus, a high rollup rate and healthy payout rate that offers more income.  No single option is right for every scenario.  It’s going to depend on who you are and what you want out of it.

Let’s look at a quick example to illustrate the point.  These are not real contracts but it’s a good representative example of the different types of annuities available.  To make it easy I’m going to use simple interest and basic math.  We’ll use $100K as the example premium but no age or specific client details need to be used because we are looking only at the general idea. 

Contract #1:  20% initial bonus, 5% annual rollup and 4% payout

Income Value after 1 year is $125K, creating $5,000 annual lifetime income

Income Value after 2 years is $130K, creating $5,200 annual lifetime income

 

Contract #2:  0% initial bonus, 10% annual rollup and 5% payout

Income Value after 1 year is $110K, creating $5,500 annual lifetime income

Income Value after 2 years is $120K, creating $6,000 annual lifetime income

Clearly contract #2 provides a better income stream but there are those who favor a big bonus.  It seems obvious which is the best choice but believe me, lots of people can’t get past the bonus.  One of the preferred contracts I use has neither a bonus or a rollup rate.  Instead the company just aggressively increases the payout rate for every year of deferral.  I’ve shown it to several people who couldn’t get past the fact that it didn’t have a bonus.  Why does a bonus matter if it doesn’t give you more actual money?

I guess I’ll never know why some people make the decisions they do but for those of you who care, I’m trying to make it clear.  Guaranteed Lifetime Withdrawal Benefits have been around for almost 20 years.  It’s a good solution to the retirement crisis because insurance companies are the only institutions who can offer a guarantee like that.

Is it the best option?  In some cases, yes, but there are plenty of instances where alternatives for protecting assets and creating retirement income can be done much more effectively with a different strategy.  Those who have been around for a while know that I promote a different strategy and have been doing so for a long time.  That doesn’t mean that guaranteed income isn’t a good deal for you.  But you should do your research and learn how to evaluate options at the very least.  I’m here to help if anyone needs it.

Next week I’ll go back to another case study where the alternative makes more sense.  Enjoy your weekend!

Bryan

800.438.5121

All of us on the professional side of this business come to it for different reasons.  For me it was a way of using my college education.  Some were similar to me, others found the opportunity simply because he/she could make money, while a select few came because of personal interests that turned into a desire to help other people.  Without realizing it, most of you have the same questions, problems and reasons for exploring this market as the man I’m ready to introduce to you.

Marty is a firefighter in St. Louis, Missouri.  He has a more pure reason for being in this business than me.  By trying to make use of my finance degree I eventually found something I love to do.  But Marty was forced to find a solution for his own retirement and his diligent research led him to the insurance path.  I’ve never seen a more pure example of motivation for helping others so I hope you will all pay attention to the story and realize how he came from your side of this debate to find the best solutions for retirement.

Long about a dozen years ago, Marty recognized when the fire department elected to eliminate the long-held defined benefit plan for all of their employees.  One sharp director noticed that the pension benefits were unaffordable given the municipal or county budget.  As everyone should know this harkens back to the passage of ERISA in 1974.  This act of congress gave public corporations the ability to stop offering traditional pensions and replace them with defined contribution plans like a 401(k).

It was no longer the responsibility of an employer to provide a pension to a loyal employee of 50 years.  At that time, the responsibility of funding retirement fell to the employee and relieved liability from the employer.  Businesses paid for defined benefit plans whereas employees were responsible for defined contribution plans.

This has been an issue for more than four decades.  Many people didn’t realize the problem, choosing to simply leave work at work, raise kids and let the future rest on the good Lord above.  But if pension plans became unaffordable with professionals managing it then how was the average guy supposed to solve the problem on his own?  Interest rates is the real answer but that goes beyond the scope of what I want to tell you right now.

Initially Marty thought about it in terms of his own retirement so he went looking for solutions.  His path led him through the camp of several “experts” of whom most said that insurance products should be avoided.  Confirmation bias will lead anyone to verify a pre-held belief if the mind is not open to receive new information.  

Again, Marty found the solution by searching just like you are.  He was trying to solve his own problems but found that most advisors didn’t fully understand the problem at hand.  Just like the regulators who passed ERISA in the first place, most advisors were of the opinion that it was no big deal.  Long story short:  pension providers didn’t want to provide insurance because, although valuable, it was too expensive.  That required every day workers to go out and solve the problem that the ‘experts’ had already admitted couldn’t be solved.  Insurance is the answer, in the appropriate amount but the investment industry is too greedy to be honest.  Marty knows that and so do I.

I’ll be the first to admit that many pension plans only failed because of self-dealing managers and directors.  Our own federal government has raided the social security fund to pay for future votes at the expense of those who they hope will die.  The truth is that money set aside for retirement will improve the chances for success in retirement.  It’s up to everyone to take charge of their own problems.

There are several people who still have corporate, federal or state pensions.  But most of them do nothing to cover basic necessities in retirement.  Underfunded pensions of the past create a retirement crisis today that has easy solutions so long as each retiree approaches the issue with an open mind and long-term goals in perspective.  

I wanted to make use of a finance degree.  Marty is an independent man who had to solve his own problems.  This led him to the type of deep research that uncovered the true solutions to retirement planning.  That fact alone makes him a highly qualified candidate to answer your questions.  He started where you are so take his word for it.

Marty is available to meet with anyone who is looking for a different perspective on my philosophy.  And I promise that he will offer nothing more than what he has already done for his own family.  I am proud to consider him a member of the AST team and going forward we will all work together to provide service to anyone who has questions about retirement.  If anyone in the St. Louis area wants to meet a man who thinks like I do then please comment below, respond to the email or make an appointment and I’d be happy to introduce you to Marty.

Enjoy your weekend!

Bryan

(800) 438-5121

Over the past few weeks, several people have called with concern regarding changes to a few of the longtime favorite vehicles for passing along assets to the next generation.  While I’ll talk more specifically about annuities in those terms next week, I thought following up the variable annuity article from a couple weeks ago would be the best way to start.

As mentioned before, variable annuities constitute the majority of annuity sales nationwide, by a wide margin.  But they also account for the majority of the negative information about annuities in general.  High fees and complicated contracts are most present with VAs whereas many other annuities are fairly simple and can be owned free of charge.

With all the negative information it’s surprising that so many people overcome the objections to buy one.  There are plenty of good things about variable annuities and I tried to make clear that the fees are reasonable when you calculate the cost of a guarantee along with market risk.  Variable annuities offer tax deferral for non-qualified assets so if you don’t have an IRA but want market investments free from annual taxation then there is almost no other choice.  Variable annuities offer income guarantees in addition to full market participation so a retiree doesn’t have to sacrifice a paycheck if the markets drop just before retirement.  No other investment offers that kind of protection.

Because of the two reasons above, there are lots of people who are satisfied with the choice to use a variable annuity.  But there is another situation where these products are the only option.  There is literally no other asset that will do it.  Let me tell you a quick story to illustrate the benefit.

I met Ron a few weeks ago.  He was looking for a place to put some money that could be left to his heirs, with the assumption that he would live at least another 20 years.  Ron didn’t want to risk the principal but also wanted the most growth he could get.  Another advisor showed him an index annuity with a ridiculously high rate of return so he contacted me to see if the offer was legitimate.

I thought the offer was total BS and during the evaluation I learned that Ron had been misled in a variety of ways.  My first offer was to give him some basic education about index annuities.  It is important first to understand a financial product completely, then decide if it’s something you want to use and only then consider potential contracts and options.  Too many people are introduced to this market only because of a sales pitch.

During our second meeting I explained index annuities to Ron and told him about the value of these products based on reasonable assumptions.  If you want maximum returns then you have to accept risk.  If you want ultimate safety then put the money in your pocket.  The solution lies somewhere in the middle for many people who love the idea of protecting assets and are willing to sacrifice some of the performance in exchange.

Ron holds the opinion that inflation is going to wreak havoc on the economy and that the stock market is going to go wild.  He wants the highest level of growth he can get but doesn’t want to sacrifice his initial investment.  Index annuities don’t give him the type of upside he wants and he only started looking at them because of the protection aspect.  I always find it interesting that while I help educate someone on financial options that same person often gets testy with me as did happen in this case.

Ron wants full market participation without risk of losing his investment.  It sounds like a fairy tale, doesn’t it?  If you want market returns then you have to accept the risk of losing money.  If you want to protect money then you will give up some yield.  It’s common sense.

After a fair bit of back and forth I had to remind Ron that he was the one who called me.  He thinks the stock market is going to skyrocket because of inflation.  He doesn’t want to risk his initial investment.  Enter variable annuities.  The basic fee that many complain about is the exact solution in this situation.

Variable annuities have a base-level fee that guarantees the principal investment as a death benefit.  So Ron can buy a variable annuity and fully participate in the stock market while knowing that no matter what happens, his heirs will never inherit less than his initial investment.  It’s a pretty powerful feature in the right scenario.  Again, ask any investment manager to guarantee the remainder of principal along with full market participation.  The ONLY solution is a variable annuity.

Your heirs get all the upside of the market but if the market drops right when you kick the bucket, they will receive every penny of your investment in return.  There are many instances where this is desirable and it’s one of two fundamental benefits of using variable annuities.  Inheritance is a major priority for many and this is the only way to pursue maximum growth without risking basis.  I don’t sell variable annuities but I told Ron to go buy one.

Curiously enough, Ron has an investment manager for some other assets who told him first to buy a variable annuity.  He only contacted me because someone showed him an overblown index annuity illustration.  After several hours of my time, I sent him back to where he came from.  He had the solution all along but didn’t know it because he wanted more.  As usually seems to be the case I was stuck in the middle just doing what I always do, telling the truth.

Check back next week for the second article on annuities as an inheritance tool.  If you have anything to add or any questions then comment below or send me an email.

Bryan

(800) 438-5121

Variable Annuities (VAs) constitute 60% or more of annuity sales annually.  This surprises me simply because most negative information about annuities in general is based on the structure of variable annuities.  To me it doesn’t make sense that 60% of people in or near retirement would want the associated complexity and cost.  Be that as it may, learning about the distribution system for all insurance products will shed light on why VAs are so popular.

Online you will find various ads from people who “hate annuities” and even a quiz so someone can tell you whether a VA is the right choice.  Both of these types of advertisements are nothing more than an attempt to get you to buy something else.  That’s not my goal because I believe you have it within yourself to make an informed decision.  You may decide a VA is the right product and you may decide one of my alternatives is more to your liking.  It’s up to you.

In this report I’m going to show you:

1. The traditional purpose of variable annuities
2. All additional available features and associated costs
3. Introduce you to the reasons why variable annuities account for most sales
4. Is there an alternative?

When it’s all said and done you should know enough to decide whether a VA is the right choice or if you’d rather take an alternate path toward security in retirement.  While I do not sell variable annuities I have met several people over the years who have asked me to give a second opinion on their decision to purchase one.  In many cases, so long as each person understood the benefits in return for the fees paid, I recommended they go ahead with the purchase.

For all intents and purposes, your satisfaction with a variable annuity will depend entirely on market performance.  For the past decade VAs have done very well but for the decade before it wasn’t pretty, to the extent that companies like Hartford nearly went bankrupt.  For this reason, whether you use a variable annuity might depend on how you think the stock market will do in the coming years.

If your outlook is pessimistic then perhaps an alternative would better suit you.  If you are ready to look at both sides then let’s get started… happy reading!

The Traditional Purpose of Variable Annuities

Unlike all other annuities, VAs give you the opportunity to invest in the stock market.  Most contracts have a fixed rate option just like a money market fund, in addition to the typical opinions of both bond and mutual funds.  Market risk and fluctuating account values should be expected in a variable annuity as you’d see with any brokerage account.

Way back when, the main use for variable annuities was to defer taxes on investments.  Before qualified plans like IRAs, 401(k)s etc. became available, most people who saved outside pension plans did so with non-qualified, or after-tax funds.  Being able to defer taxes until money was withdrawn was a major advantage over having taxable brokerage and savings accounts.

In the early 70s, traditional pension plans started to phase out for many private sector employees.  In the place of pensions came the opportunity to start saving via employer sponsored retirement plans like 401(k), 403(b), 457 and various other forms of individual retirement accounts, or IRAs.  All of these plans offered tax-deductible contributions in addition to tax deferral, so VAs lost some appeal because of it.

From that time forward, variable annuities worked well for only the highest earning individuals who could maximize contributions to retirement accounts and also have additional investment funds to squirrel away.  Early in my career when I didn’t know anything, my mentors told me that VAs were primarily meant for high-net worth individuals.  Basically those who had extra money and the need to shelter money from a high tax bracket would benefit most from the product.

Specific timelines aside, insurance companies began to add additional benefits to VAs so the product would appeal to a wider swath of the population.  Since most people now have the majority of assets in retirement accounts and don’t need additional tax deferral, it is these added benefits that need to be analyzed to determine whether this is the product for you.

It’s as simple as matching fees to the guaranteed benefits provided to see if a fee is worth paying.  If you don’t want the guarantee then don’t pay the fee.  If you don’t want to pay the fee then you don’t get any extra guarantees.  Let’s look at this more closely.

Additional Fees for Contract Guarantees

Since most people are looking for some type of protection from market volatility in retirement, the majority of variable annuities are sold with an additional guarantee.  Below is a list of each type of fee you may find in a VA and the associated benefits that you get in return.  Fees can be separated into two categories, mandatory and optional.

Mandatory:

• Mortality and Expense Charge (M&E)

Every variable annuity, save for just a couple, comes with this fee that guarantees premiums paid as a death benefit, less withdrawals of course.  It basically ensures the full initial premium is paid to heirs in the event of an untimely death.  In basic form this makes VAs a good option for those who want market upside without risk of depleting a planned inheritance.  Average M&E charge across this market is about 1.25%

• Mutual Fund Sub Account Fees

Each bond or mutual fund has separate management fees deducted from the account value annually or quarterly.  Fees on average range from .25% to more than 2.5% in some cases.  You can expect the lower cost funds to be more conservative while the more expensive funds will be more aggressive and likely to provide higher returns.

Optional:

• Guaranteed Lifetime Income

This is the most common additional option on variable annuities.  This guarantees a minimum level of lifetime income will be paid regardless of account performance.  If the market corrects and your account value drops, the income is guaranteed no matter what and if the market outperforms you may see increasing income as well.  Fees range from roughly 1% to 2% depending on the amount of guaranteed increases for the deferral years.  For instance you can pay 1% to use only your basis plus market growth to increase guaranteed income or you can pay close to 2% to get a guaranteed 6% or more income increase to your lifetime income for each year of deferral.  It’s kinda like social security.

• Guaranteed Death Benefit

M&E provides a base level death benefit of premiums paid but withdrawals reduce the basis for that.  If you add an extra death benefit then income withdrawals don’t reduce the death benefit.  Yes, you can take lifetime income and guarantee that your heirs will receive your initial investment.  Another use for the additional death benefit also includes the ability to pass the highest account value on as a death benefit.  If you own the contract and the value doubles, the death benefit locks in at each new high now matter what happens on the day you die.

Putting All the Fees Together:

I’m going to put all the fees together using a legitimate average to show you just how high it can all go.  In terms of the benefit provided it makes mathematical sense but the sticker shock creates an emotional response.  That’s why I say if you don’t want to pay the fee then don’t elect the benefit.

M&E- Industry average 1.25%

Sub Account Fees- Middle of the road average 1.5%

Guaranteed Lifetime Income- Reasonable average 1.25%

Additional Death Benefit- Let’s call it 1%

This comes to a total of 5% for all the bells and whistles, which could be higher or lower than this depending on company, contract and the amount of benefit guaranteed by each additional option.  It is high and fees are the #1 reason other professionals tell you not to use them.  But you have to put it into perspective.  Imagine walking into any investment advisor’s office and saying, I want to invest in the stock market and get 4% income for the rest of my life and a guarantee that no matter how long I live, the income continues and my family inherits every penny that I invested at the beginning.  What will he or she say?  How much would they charge for that?

Aside from them laughing you out of the office they’ll refuse to come up with a cost for that level of guaranteed protection.  Or, they could be smart enough to realize it, in which case they’ll just show you a variable annuity.  There may be a better way to do it with lower costs but the average investment advisor doesn’t have it.  Insuring against market risk is very expensive.

Why Are So Many Variable Annuities Sold?

Sales volume of any type of annuity is directly related to the distribution structure of each product.  Put simply, it depends on the advisor who is selling them and the wholesaler who is trying to convince advisors to sell them.  

In the case of variable annuities, all of them are distributed by banks and broker/dealers because it takes a licensed securities representative to be able to sell them.  Places like Wells Fargo, Bank of America, Edward Jones, Merrill Lynch and Fidelity are just a small sample of the companies that broker variable annuities.  That these companies manage a majority share of investment assets nationwide is no coincidence.  Much of the annuity sales volume contributes to but doesn’t displace assets that the company manages.

Most advisors can legally go out and get any product they want, whether fixed or variable, but in many cases the brokerage company limits licensed advisors to a specific list of approved products.  If you are working with one of these advisors then you’ll never know if you were truly shown all reasonable options.

On top of this, many advisors don’t want to lose management assets either because that’s where they make their money.  Selling away to a fixed insurance product reduces said advisor’s fee-based business.  At worst it is the highest level of hypocrisy for both company and agent, while at best it’s the right product for you and it doesn’t matter.  That, however, all depends on what you need.

Is There a Better Option?

It all depends on what you want.  It’s hard for many to accept total fees of 4% or more but it’s appropriate for the amount of guarantee provided with insurance against the stock market.  I’m not telling you to like it, just trying to explain why it is reasonable.  I certainly don’t think this product is the best answer for 60% of people who buy annuities.  But my goal is not to tell you why VAs are good or bad.  For some they work well but for others there are far better options.

While I was getting ready to write this I looked up contract specs for the #1 selling annuity in the country in 2020.  Just the basic spec sheet is 40 pages long.  There are around 60 fund options, five different guaranteed income options and four different types of additional death benefit.  The darn thing is about 12 different annuities in one and it gave me a freaking headache working through it.

There certainly are more simple choices you can make and many that come with little to no fees.  Blended the right way in a retirement portfolio it’s quite possible you’ll get equal benefit with much lower cost and less risk.  Just like variable annuities, those strategies aren’t for everyone.  Retirement decisions are among some of the most important you’ll make in your life so for peace of mind, take your time!

Annuity Straight Talk has been doing this for a long time and I doubt you’ll find many other people who will recommend a product that he doesn’t sell himself.  However, that’s exactly what I’ve done since the beginning.  Check out my site for more guidance.  I’ve got a newsletter that answers almost any retirement question you have and a podcast for those who want to see the video or have the information delivered verbally.

If you’d like a second opinion, I or one of my associates would be happy to give you some unbiased advice.  Feel free to call or make an appointment.

Download the full pdf here.

All my best,

Bryan Anderson

(800) 438-5121

This week I am happy to introduce the culmination of a side project. It has taken nearly two months to get off the ground but will be a mainstay on this website for years to come.  The Annuity Straight Talk podcast will give everyone another option for consuming the information that will lead to sound financial decisions for retirement.  A link to episode “0” is below this post.

My co host is Ashok Ramji of TOP Planning in Kirkland, WA.  We both arrived at our current styles from very different backgrounds.  Ashok started on the investments side of the business and my career started on the insurance side.  We have both come to the same conclusions about annuities but took different paths to get here.  That tells me a lot about how best to serve the retirement community and it should also give you an idea about how best to mix assets for both safety and growth in retirement.

Ashok will be a part of every podcast but we plan to introduce guests who mostly come from the investment advising side of the business in order to illustrate that the difference between insurance and investment advice is not a prevalent as many think.  As times change more and more investment advisors are recognizing the value of insurance products during periods of uncertainty.  The math is undeniable so the open-minded and versatile advisor will adapt.

Over the past six weeks I have made two trips to Spokane, WA to meet Ashok and record 10 or more episodes.  We only kept five because we are working to develop a style that works for both of us.  The first episode is live for anyone who enjoys the podcast format and it covers a newsletter topic from a couple years ago.  “Why People Don’t Buy Annuities” was my attempt to demonstrate that far more obstacles stand in the way of using an annuity in retirement.  Trust, understanding, communication, acceptance and confidence all play into one of the most important decisions of your life.

Below you’ll find the link to Episode-0, “10 Reasons Why People Don’t Buy Annuities.”  Give it a listen and tell us how we did.  The production side is more complicated than you might think but I have Ashok and his detail-oriented nature to thank for that.

Listen to it here on our hosting site Castos:  10 Reasons Why People Don’t Buy Annuities

This podcast is also available on Apple Podcasts, Amazon, Spotify, Stitcher, Pocket Casts and coming soon to Google for those that use Android.  We plan to release one episode per week and invite all the comments, suggestions and constructive criticism that you can give us.  Enjoy the podcast and keep an eye out for more good things to come.

Have a great weekend!

Bryan

800.438.5121

I ran into a standard example last week when Sharon scheduled an appointment and asked for me to review an annuity proposal she had received.  Without naming names I’ll say that the proposal came from a large national firm that advertises aggressively for index annuity sales.  I know well how the company works and have had issues with several of the advertised claims over the years.  

This time it was no different.  The proposed contract would produce exactly the amount of income Sharon needs in five years and she was also told she could expect healthy account growth giving her additional access to the money, long term income increases and a substantial remainder after 20 years or more.  It’s the last three things in there that are misleading.  It’s fine to purchase guaranteed income products but doing so under the wrong assumptions will set you up for disappointment.  If one of the overstated benefits is meant to provide something necessary then not getting it could cause financial hardship.  That’s why we have to be careful with recommendations in this business.

This is a different way of looking at the same issue I’ve been writing about for a long time.  Many other advisors are jumping on board with this strategy now but I can document my research on it all the way back to 2005.  Yes, I’m not afraid to claim I was the first person doing it this way.

Let’s talk about this case.  Sharon was planning to put about 40%, or $500,000 of her assets into a contract that when combined with social security would fully meet her income needs when she retires at age 68.  The illustration shows guaranteed income of $35,000 annually in five years.  That hit her goal perfectly so she is seriously considering buying the annuity.

Forget the specific companies or contracts, let’s just look at the likelihood of the additional benefits promoted by the agent.  As everyone should know, additional withdrawals in excess of guaranteed income payments will reduce future guaranteed income payments.  Substantial account growth is needed for additional withdrawals, income increases or to leave a remainder at the end.

In order to determine whether that’s possible we need to look at the growth potential in the contract.  It happens to be one of my old favorites.  The advisor suggested the JP Morgan Mozaic II index as the best way to make all the good things happen in the contract.  The only option within the contract requires a three year crediting term and the agent produced numbers that show the index has averaged more than 8% historically.  Why don’t we look at the past three years to see if it’s a realistic claim?

Over the past three years, the index grew from 358.86 to 390.58 which equals an index gain of 31.72 points, returning 8.84% for the term.  The contract offers 130% participation on the index along with an annual spread of 1.5%.  And we can’t forget about the guaranteed income fee of 1.1% annually.  Let’s add it all up to see what we have.

130% participation brings the yield to 11.5%

But there’s a 1.5% spread each year so 11.5% minus 4.5%(3×1.5%)

Final yield of 7% in three years

Also you need to subtract the fee for the income rider which is 1.1% annually

You would have guaranteed lifetime income but your account will barely grow and once income withdrawals start the account will drain quickly.  My educated guess is that the account value will go to zero sometime around the 20th contract year.  Sharon would still have guaranteed income but that’s with no additional withdrawals, no income increases and no remainder account value when it’s all over.

Sharon doesn’t want to pay a fee but she is beginning to come to terms with it because the product hits her future needs perfectly.  So I was tasked with finding options to see if it could work the same way without paying a fee.  Again, without mentioning product or contract let’s see how a different growth opportunity works to solve her problem.

This is not the first time I’ve mentioned  the S&P Multi Asset Risk Control index.  It is offered with one and two year reset options so let’s see how it did in the past two years?  That will get as close as we can get for comparison.

Over the past two years the index grew from 325.17 to 372.96 creating an index gain of 47.79 points for a total yield of 14.7%.  Participation rates also apply but there is no spread or income rider fee.

14.70% return multiplied by 105% participation rate brings the yield up to 15.43%

No fees to dilute the account value or spreads to drag down performance

Income rider is not necessary because you can have free withdrawals to take the income you need

Pure growth and efficient control of account

Contrasting account values:  JP Morgan Mozaic II grows to less than $520K in three years while the S&P MARC 5 produces more than $560K in two years.

If you are going to skip a guaranteed income rider because you want no fees, more control and more flexibility with your assets, there are several things to consider.  Most importantly, how much is left down the road and will the account hold up to substantial withdrawals?  Here’s how that looks with similar withdrawals:

3% average growth leaves remainder of about $250K in 20 years

4% average growth leaves a remainder of over $380K in 20 years

5% average growth never invades the principal

This is all when the other account would have likely gone to zero

Easy question:  Which option provides more flexibility?

A lot can be accomplished when you avoid fees but it’s not for everyone.  The payouts for a guaranteed income contract is higher in this case because it’s a single life payment.  For anyone wanting a joint life payment the alternative without the guaranteed income is going to look even more compelling.  Just imagine how much more money would be left in the account if the income payments aren’t as high.

There is also a faulty assumption that in either case you have to keep the annuity for the rest of your life.  If you have fees, low growth and high income payments there might not be much money left if you want to do something different but you still can.  Knowing that a change in planning may be needed the alternative without fees produces more growth and makes additional opportunities more likely if interest rates rise or plans change over time.

Curiously enough, the quoted income contract was not even the highest paying contract on the market.  I found one that produces a few thousand more annually in five years.  That means Sharon could spend less money for the same benefit.  She has a decision to make but at least I’ve got some good news for her.

So let me know.  Which annuity would you choose?

Bryan

800.438.5121

Last week I tried to explain to everyone how rate adjustments work within an index annuity contract.  It’s an objective matter that offers little insight as to the structure but there is plenty of room allowed for the inquisitive mind to make a rational decision.  Even still, there are those who feel as though the matter of interest rate adjustments relies simply on the mood of an insurance executive when renewal time comes.  I don’t blame anyone for feeling that way because my suspicions suggested the same years ago and only continued evidence to the contrary allowed me to change my opinion.

Yes, there are contract options that guarantee rates will never drop.  There aren’t many but just last week news broke that there are two more available now.  Anyone who doesn’t like adjustable rates has an option, although the guaranteed rates likely won’t have as much potential.  I expect to see more of this over time.

On the adjustable side, there are many factors at play that I alluded to last week and I received some sharp feedback that questioned my analysis.  Since I don’t believe anyone else goes to this depth to explain contracts, I would expect the benefit of the doubt for my efforts.  My objective has always been to give everyone as much information as possible so that each person can take control of their financial future for the right reasons.  If you don’t like what I say then take someone else’s word and run with that.

The truth is that rates change every year for fundamental reasons, not based on someone’s mood.  The price of bond funds changes daily, up or down.  The price of stocks and dividends paid change constantly as well.  Sure, you can sell a stock or bond at the current price at the moment you decide the terms don’t work.  If so, what else would you buy?  Maybe a bond that yields less or a stock at a higher price that creates a lower effective dividend?

There are many ways to poke holes in my argument based on bond yields and stock dividends but I’ll just come right back and talk about the volatility associated with either.  The biggest reason I’m right is because I’m talking about something that definitely doesn’t fluctuate in value. It only goes up.  Although there are several advisors who will take a different approach, this solution is for those people who want justification for taking the path of true stability for some assets.

Last week I heard from someone who decided not to buy a few years ago because he thought rates would drop without notice and the insurance company would work the game against him.  I have sold several similar contracts since then so I looked up the illustration from the initial proposal, wondering how much rates have changed since then.

Here are the index options and associated rates from the Great American contract I proposed in September 2017.

When I saw that I realized that those were pretty good rates and that anyone now would be crazy to pass those up.  Then I realized that there were a few other people who did in fact buy the same recommendation at that time.  I looked up one contract and found something that many might consider to be unbelievable…

The following numbers are from a contract that was issued in October 2017 so the timeline, given IRA transfer times, lines up perfectly with the illustrated rates from above.  This from the 2020 renewal letter so these rates are what is available entering the fourth contract year.

Here is objective proof that rates can in fact rise as well as drop, so long as certain economic conditions are met.  It is an adjustable rate that works in your favor just as easily as it can work against you.  It’s the same contract in both cases, one illustrated just two weeks before the other was issued.  My goal for each person was to find a solid growth contract and I think I did a pretty good job.

Many people had the experience of seeing rates decline with an existing contract mostly because benchmark rates have been declining since 1989.  It’s only a matter of economics that will work the other way in a rising rate environment.  There was a slight increase in rates between 2017 thru 2019 and it affected this contract positively.

This is why I’ve always recommended the adjustable rate contracts.  Sure you can have the guaranteed cap and participation rates but you must accept lower potential in exchange for the guarantee.  With rates possibly rising in the future I’m going to continue recommending adjustable rates.  Most of the time I am just happy to see rates on client contracts that stay steady, but in a few cases I’ve seen them rise, which is even better.  It’s a nice thing to know when rates are low and you’re having a hard time making the commitment.

Let me know what you think… comment below or respond to the email if you have anything to add.

Bryan

(800) 438-5121

Safety and protection is the primary objective of using annuities.  Each type of annuity was created to protect your assets from at least one major risk in retirement.  Variable annuities let you invest in the market but protect you from taxes with non-qualified assets.  Fixed and fixed index annuities protect you from violent changes in the stock market.  And income annuities protect against the potential of running out of money late in life.

At 42 years old I personally own some of each type, except variable annuities.  Yes I am kind of young to be doing that but I understand the market and am comfortable with the opportunity to simply protect assets and grow consistently.  A healthy retirement has always been more about saving money than achieving yield.  Once I figured that out I chose the gradual path into my own retirement.

I take pride in my recommendations because I will follow the same path for myself.  In every case, I have sought out verification of what I believed to be the best opportunity.  Recently my suspicions were confirmed and my objective is to make sure that people use annuities only to meet a certain objective.

Knowing that objectives are the key to finding solutions, I was delighted to hear that several weeks ago, Mass Mutual has chosen to buy Great American Life.  For anyone who doesn’t understand, in this case it’s a big company buying a smaller company, thus acquiring all assets and liabilities of the smaller company.  So you can’t tell me that Mass Mutual is aware of Great American’s value and you shouldn’t be.

Great American was the value I defined years ago when I first started believing in and selling index annuities.  If you want to know why that is you can call me.  There are dozens on this list who believed me and bought it but many more who trusted someone else or thought they could find a better deal elsewhere.

Almost all annuities are good but some are not.  Great American has been my primary choice for the past 10 years.  Some listened to my reasons and some didn’t.  Several of those who didn’t have come back to say they made a mistake.  If safety is the primary concern, then shouldn’t that be at the forefront of the decision as to where you put your retirement money?

Colorado Bankers Life was a small company that offered the highest fixed annuity rate in 2018.  The company is based in North Carolina but had Colorado as its name.  That’s like me from Montana calling a company “Bull Elk Insurance Co” and being based in Hawaii.  It’s all bullshit and I have always urged people to do as much research as possible.

Sure, Colorado Bankers had a good offer but it turned out to be total BS!  The company was unrated by any of the ratings institutions so that should have been a red flag for anyone looking at safe money options.  Needless to say, tens of millions of dollars went into the fixed rate annuity contract from Colorado Bankers Life.  I can’t say that I called it, just that I never personally trusted it.

So, anyone who didn’t believe me now has an annuity stuck in the purgatory of a state insurance guarantee fund, but I’m glad I don’t have that on my conscience.  My recommendation was validated by one of the most stable financial institutions in the world.  I’m not joking around when I tell you how to deal with this market.  I am trying to do the best for every retiree in America.  Take it for what it’s worth and do what you think is best.  If I disagree then it’s because I have your best interests in mind.

Bryan

800.438.5121

This is just a little something that may help those who have one of the biggest index annuity objections.  Many don’t like the fact that interest rates, meaning cap and participation rates in contracts can change from year to year.  Never mind the economics that explain option pricing, popular thought suggests that insurance companies are just out to line the company’s pockets with your money.

I’m going to give you some details from a seven year contract that I sold eight years ago.  That means for the past year, this contract owner was free of surrender penalties but decided to keep the contract because it still had potential and had done reasonably well over the years.

Based on market timing the owner locked in a nice gain.  In spite of the fact that the insurance company could have adjusted rates over time, excellent potential still existed so long as you know how to use the components.

Below you can see the index allocation and associated weight of each in the contract for the past year.  The money was more or less equally weighted to three S&P 500 options that include two based on annual point to point and one based on monthly point to point.  All grew but one was a little better than the others so it carries a greater weight today.

At each anniversary, the owner can change the weight of each allocation to pursue a more conservative or risky strategy.  Remember, risk doesn’t mean you can lose money.  Rather, it means greater upside potential with the risk of only getting 0%.

Now take a look at the credited rates for each index allocation.  Yes, the annual point to point options have come down a bit in capped potential but the monthly point to point is still high enough to create excellent yield in the right circumstances.

After allocation weight and associated index yields are factored, the contract had a blended yield of 7.42%.  Not bad for safe money with protected gains and no fees.  Don’t forget that the owner was not bound by penalty from moving the money.  She kept it because she liked it and was rewarded with another nice yield.

It’s neither magic nor scary, but easy to understand if you have an open mind.  Rates in an index annuity contract can and will move in either direction depending on interest rates and options pricing.  Old index annuities can still grow and this is proof.

Enjoy your weekend…

Bryan

(800) 438-5121