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

Income Annuities: Nationwide Mixes It Up


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!


(800) 438-5121

Annuities: Income v. Accumulation


First of all, there are a lot of people that think annuities are only for income.  Longtime subscribers to AST know that’s not the case but for anyone new it is an important point to understand.  Annuities are meant for protection and each type offers an opportunity to achieve any goal.

Why is it important?  Because knowing that annuities can be used for several purposes will likely uncover some extremely efficient retirement strategies.  That’s what I am going to show you today.

I met Mark a few weeks ago and he needs to make a decision by the end of July.  He’s got some money coming in from selling real estate and wants to use the proceeds to purchase an annuity for guaranteed lifetime income.  He already has some annuities and likes how they have performed but doesn’t need the income for another five years.

When we first talked he said that his current annuities would already pay him more than he needs for steady retirement income and this one would just be extra cash flow.  In short, he doesn’t really need it but wants it anyway.

That’s a typical case of someone who wants to budget for discretionary spending and this exact scenario is how I came up with these ideas.  I have many clients who are actually spending less in retirement than they initially thought.  Or spending fluctuates from year to year and a flexible plan is more appropriate.

To illustrate this, I like to tell people the story of myself in 2018.  My wife needed a new car and I never wanted to shovel snow again so I bought a four-wheeler and put a plow on it.  The point is that I spent more money that year than I do every year because of large purchases that don’t happen all the time.  I think that’s similar to what many will face in retirement.

Mark doesn’t need extra income, he just wants it.  I could just sell him a product but I took the opportunity to show him a more lucrative strategy where he would have control over the outcome.

Details:  He and his wife are 63 years old.

He wants to put $500K into an annuity and take joint lifetime income in five years 

Best deal available, considering all factors, was around $34K per year

Guaranteed monthly checks that exceed his need for income

So what’s he going to do with the extra income?  Probably put the money in the bank and earn no interest.

This is important for everyone to understand.  If you’re not spending money you should be growing money.  Income and accumulation can be done at the same time.  Where you accumulate money is your choice.  Banks don’t pay interest and the stock market is risky.

I’m here to talk about what an annuity can do.

I ran an illustration for a deferred annuity that is built for accumulation and showed it to Mark.  To be on the safe side I ran some very conservative numbers.  He could take the same amount of income ($34K) and if he only earned 3.78% would have almost $350K left in the account after 20 years.

Now tell me, is there a better way to create income, avoid volatility, plan for inflation, have control over your money and leave a legacy all at the same time?  I’ll take your suggestions.  Perhaps Ken Fisher would like to come on the podcast and debate me.

It’s not always about the highest yield, although this annuity has potential to earn much more interest which would only create an even better result.

The highest illustrated index the contract shows more than 10% average with a remainder of more than $1.8M after 20 years.

What does he get out of this?

Discretionary access to income – could be more or less than desired.  It’s his choice.

Protection from market volatility – with no fees!

A substantial remainder that would offer true inflation protection

Control of the money with opportunity to reposition assets in the future.  He doesn’t have to own the annuity for the rest of his life.

If money remains in the account this offers the best chance to leave an inheritance while also doing all of the above.

The five keys of retirement is the lesson here and planning for those in the most efficient way possible is the goal.  Annuities are simple and can be used effectively for many different objectives.  Income, deferred growth, laddering, reinvestment and diversification are all the results of using an annuity the right way.  You tell me what you want to see…

Guaranteed Lifetime Withdrawal Benefits


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!



Annuity Sales Tactics


I’ve been working with Lester for about three years now.  When he found me in 2018 it was after more than a half dozen dinner seminars and several more meetings to see specific proposals from each advisor.  He was tired because the insurance guys wanted him to have nothing but annuities and the investment guys told him to forget annuities and just use stocks and bonds.  None of it perfectly resonated with him and he was exhausted.

Like a lot of people he wanted a different approach and found it here.  That didn’t stop a few of the salespeople from throwing a lot of interference at him while the transactions were processing.  Fortunately he gave me the opportunity to address each so with patience and consistency he learned a lot and was able to enjoy his plan with plenty of confidence.

His third contract anniversary is coming at the end of the summer and if markets hold he is looking at a very nice double digit gain.  But one of those advisors came out of the woodwork to throw another pitch at him, this time suggesting he surrender his annuity and take advantage of a bonus offered by another company.  This would totally wreck his plan so clearly the agent had no concern for Lester’s well being.  It was nothing but a sales tactic meant to create a sense of urgency.  Not only would he be out his potential interest earnings for this year but he’d also pay a surrender fee.

Just like before he sent me the email and asked what I thought.  I’m going to share it with you because it is dripping with misleading information.  It’s a sales tactic of the worst kind and I’m probably going to report it to the California State Insurance Commissioner.  The other agent’s comments are in block quote with my response below each.

The preferred annuity carrier I work with has made a fixed-indexed annuity with the remarkable features below available to my clients and me.

  1. 25% initial bonus on your premium – $100,000 becomes $125,000 on day 1

  2. 250% interest rate bonus each year you delay taking income – if you earn 3% the previous year, you are actually credited 7.5%

  3. 150% interest rate bonus each year after you start taking income

  4. No waiting period before you can start taking lifetime income – lifetime income is guaranteed for you and your spouse as long as one of you are still alive

  5. Each year, on the policy anniversary date, the guaranteed income is adjusted up by the amount of the rate of return the previous year.  If income is $1000 per month and it earned 5% last year, your new guaranteed income becomes $1050 per month.

  6. If you should prematurely pass away, your beneficiary or estate inherits the remaining balance in the policy, including all the bonuses.

It’s full of half truths, misleading claims and even contradictory information.  Bonuses only enhance income and do not create more cash value.  It’s not free money but this agent sure makes it seem so.  There is the potential for income increases throughout the contract but the likelihood of this annuity growing at 5% in any year is extremely unlikely.  I’ll explain more below because it also relates to the death benefit that is only enhanced if beneficiaries take the benefit over a five year period.  

In order to get income increases or an enhanced death benefit then the contract has to grow.  This one will not in any meaningful way.  Cap rates are a maximum of 3% and participation rates are as high as 60% on an index that has never really performed much more than 5% in a year.  So the maximum growth is only 3% but the catch is that there is a mandatory allocation fee of .95%.  Once that is subtracted you would be looking at an account value that is credited with 2.05%.  It’s not very good.

Here’s the real catch:  if you take the 250% annual income bonus then the company gives you only half of the interest earnings on the accumulation side.  Now we’re down to just over 1% growth in the best-case scenario.  Once income payments start the account value is going to drop like a lead balloon.  This company is notorious for creating illustrations that look magical and I’ve seen many for this specific contract.  In the fantastic growth scenario in the illustration it shows the cash value going to zero around year 18.  So much for that giant windfall for your beneficiaries.

The final pitch at the end of the email is my favorite…

Now, you may be asking yourself, “How can they do this?”  The short answer is that as interest rates have increased, this carrier has excess cash.  The best way to put that cash to work is to create an incentive to differentiate them from their competitors and attract new business.

While I run the risk of sounding like a salesperson, this truly is a limited-time offer and will no longer be available after June 21st.

Boy that sounds just like the opinion of a Certified Financial Analyst.  Interest rates are up so the company is throwing around cash!  I’m sorry but that’s not how this works.  The company certainly is trying to buy market share and they sold a bunch of it so they are pulling it back a little because the current offer is too expensive.  Sure you can’t get it after Monday but all that’s really going to happen is the company will probably trim the initial bonus down to 20% or something like that.  It will make a minimal difference with the income payments and that’s all.

This is an income contract and nothing more.  Don’t expect much growth.  Don’t expect giant income increases for any extended period of time.  And don’t expect to have a whole bunch of money left for the next generation.  If the income at a base level works for you then go for it.  I could sell this one but I think it’s a piece of junk.  In reality the guaranteed income payments run neck and neck with lots of other contracts that don’t have all the fine print.

I’d bet a fair bit of money that this contract will be the number one selling annuity in the country.  Why?  It’s nothing more than heavy sales tactics, a big distribution system and mass marketing.  It may work for you but there’s likely a better option.  Just be sure to evaluate all the details, not just the flashy stuff the agent wants to show you.

Have a great weekend!


A Firefighter Who Sells Annuities


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!


(800) 438-5121

Annuities for Inheritance


I met an older gentleman, Charlie, about a month ago whose wife passed away a few years ago.  He is managing assets mostly for his three children but is keeping the same investment philosophy going forward.  He wants to minimize risk and taxes.  His major concern is that with the newly proposed ‘American Families Plan’ a major key tax benefit for inheritance could be taken away.

For years one of the best ways to pass assets to the next generation was with highly appreciated stocks.  If you bought a stock at $10 and died when it was worth $20, your family gets a stepped-up basis to the current price.  If sold by your heirs they will pay no capital gains tax.  Had you sold it before you died you would have been liable for a $10 capital gain.  It has been a pretty big advantage for anyone who held stocks for several decades.

Well that could all be going away now that there’s a lot of federal spending that congress needs to pretend to pay for.  In fairness it only applies to large accounts over $1M, at least as the proposed law is written.  But these things tend to have a way of creeping up to include everyone regardless of assets so all of you should pay attention.

When the 16th amendment to the constitution was passed to allow for income taxes, it only applied to people making more than $4000 per year.  That was 1913 and no one paid attention to it because that was more money than the average person could ever dream to make.  Over time personal income rose exponentially more than the standard exclusion.  Draw your own conclusion on that.

Charlie doesn’t need any of his investment money.  Pensions and social security cover all his needs and all insurance is in place for any emergencies that may arise.  The stock market is high and he doesn’t want risk, plus he might lose the tax benefit when passing to his heirs.  He wanted to see if annuities would be a viable alternative.

Last week I talked about how variable annuities protect the base investment for heirs in case of untimely market volatility.  Now I’m going to explain how annuities in general work as an inheritance tool.  First let me state that there is no magic advantage to annuities and this is not about product features like death benefit enhancements.  It’s simply an explanation of how the law states an annuity can be passed to the next generation

Also I need to disclaim that none of this applies to a spouse.  With any annuity there is an unlimited spousal transfer.  Upon death your spouse can either exercise the specified death benefit or keep the contract as their own.  The following only applies to the next generation or anyone who is not a spouse.

The source of the money used to buy the annuity is the first key.  Qualified money is pre-tax and comes from accounts such as 401(k), 403(b), TSP, Traditional IRA etc.  If any of those accounts is used to purchase an annuity then the annuity would be qualified as a Traditional IRA.  If your annuity is an IRA then when you pass away, inheritance is dictated according to IRS rules for inherited IRAs.  Congress already jacked this one up a couple years ago and now options are more limited.

With an inherited IRA annuity your heirs have the choice to take the balance of the account out within 10 years of the date of death.  It can be done as a lump sum at any time or via systematic payments over ten years or the beneficiary can even wait until the very last day of the tenth year and take it all out at one time.  The big thing is that the stretch IRA was eliminated, which allowed beneficiaries to slowly liquidate an IRA over their own life expectancy, thus reducing the tax burden for the next generation.  But the Feds weren’t making enough money on that so they changed it.  Long story short:  If you have an IRA-qualified annuity then it is more IRA than annuity when it comes time to pass it to your heirs.

Non-qualified funds are post-tax, like money in a savings, checking, money market or brokerage account.  If you purchase an annuity with post-tax funds then it’s typically done by writing a check or executing a wire transfer to the insurance company.   The basis in any non-qualified annuity will be returned tax-free to your heirs but the gain is taxed as ordinary income.  This is where your heirs have options.

Your heirs could take a lump sum and pay all taxes upfront, or they can take equal payments over five years to reduce a big tax bill, or they can stretch payments over their life expectancy to further reduce the tax burden.  Each payment would have an exclusion ratio with a portion of tax-free basis and taxable gain.  Because of this feature there are many deferred annuities that have lasted for several generations.

Let’s look at a quick example to illustrate the benefit.  Charlie has three kids who will be equal primary beneficiaries.  When Charlie passes away, the annuity contract would avoid probate and pay directly to the kids who would each inherit an equal share.  Each beneficiary can elect a different choice.  One could take his share via lump sum to buy a house.  Another who may be in a higher tax bracket can choose to stretch his payments over life expectancy.  The third one might want to delay social security could take equal payments over five years while using the annuity proceeds to pay retirement expenses.

This all assumes three individual situations for Charlie’s kids which I don’t know but the idea is to illustrate the ways an annuity can be used.  Anyone who takes the stretch option can exit that strategy and take a lump sum at any time.  For those who have a hard time making decisions I usually recommend the stretch option because they can later revert to either of the other two options.  There is no major tax benefit to annuities as an inheritance tool but there is a fair bit of flexibility for heirs of anyone who purchases an annuity with non-qualified assets.

I focus on strategies that help people make more money with annuities.  Therefore, people who work with me will likely have money left in an annuity after passing.  Everyone should know and be able to plan how to deal with it.  If anyone wants to specifically address their situation I am available to personalize this information so you take comfort knowing how an annuity will benefit the people you care about most.

Enjoy your weekend!



When Variable Annuities Work


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.



(800) 438-5121

AST Podcast Now Available on YouTube


For those of you who enjoy the newsletter in Podcast format there is a new option.  All episodes will now be available with video on YouTube.  For awhile, Ashok and I were meeting in Spokane, WA to record episodes together but we have since purchased high quality video equipment so we can produce episodes from anywhere.

Check it out in any format you like.  The podcast is hosted on Castos and available on just about any app you prefer.  Just search for “Annuity Straight Talk” and it should pop up.  Click here to go to my YouTube channel if you’d like to see the video and please send any feedback or questions over to me.

All my best!


A Simple Guide to Variable Annuities


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.


  • 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.


  • 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

Ammo and Annuities


Lately there are a lot of people asking about safety.  Although that is something everyone should consider, it seems to be a more pressing concern in the past few months.  There’s nothing new that should have people worried but it takes a different trigger for everyone.  Sure, federal spending is out of control but that’s been going on for 40 years.  China and Russia are flexing military muscle but those two countries have always tried to exert dominance.

A few days ago, Joe Biden delivered an address to a joint session of congress.  That in itself is not very interesting to me but for some reason, the traffic on my website skyrocketed for 24 hours following the speech.  Nothing else remarkable was happening so that’s the only thing we could figure out.  I’ve watched stats and ad performance for years so I can tell when something is different.  It wasn’t a small difference; this was way different!

Like it or not the federal government is probably going to keep spending money and lots of it.  There are real talks about trimming social security benefits and tax increases are on the table, although they promise it will only affect the very wealthiest people.  We can believe them, right?  It’s all for our benefit, I’m sure.

Some of you may have heard the saying “beans and bullets”.  It’s popular in the prepping and survival community as a phrase that suggests the importance of only the absolute necessities.  All you need is something to eat and a way to protect it.  Don’t worry, this isn’t going to be a lecture on prepping.  You’re either into that or you’re not.  I’m somewhere in the middle only because of how I was raised and the hobbies I pursue.  

The difference between financial survival and physical survival is only a matter of perspective.  In either case it’s nothing more than being prepared for the worst case scenario.  I grew up in a Mormon family so we had staple foods stored on the shelves in our garage.  My friends used to make fun of me for it but all that kind of made sense a year ago when people were fighting over toilet paper as Costco.  And then that tanker got stuck in the Suez Canal and people are wondering why it’s hard to source some basic material that we all used to take for granted.

For years those who have prepared for the worst case scenario have been called crazy.  With the insanity of the world that surrounds us I think it’s crazier to not be prepared.  It makes no difference whether we’re talking about personal finances or basic living necessities.

Right now we have a stock market that seems to hit a new high every other day.  Many are bummed out by the low interest rates but that’s one of the fundamental reasons why values are so high in equities markets.  Cheap money for business expansion and real estate keeps a consumption-based economy hungry for more growth.  Thanksgiving expands your stomach so you keep eating all the way through Christmas and New Year’s Day.

Excessive government spending and increasing deficits cause serious inflation, or so it should.  You won’t get a straight answer from federal agencies as to exactly what that number is.  The Consumer Price Index has never been above 2.5% annually in any of the past ten years but I think most of us would agree that it’s much higher in reality.  I have never believed in the accuracy of numbers from the CPI.

Over the past 20 years there have been three periods of extreme exuberance in the economy and stock market alike.  First was the Dot Com Bubble in 2001 and then the Banking Crisis of 2008.  We don’t have a name for what’s happening now because it hasn’t happened yet.  For some reason this one seems a bit more ominous to me.  It kind of feels like coming home from a long vacation to find your front door wide open.  Everything looks fine but you’re going to enter that house with a little bit of caution.

Yes, inflation may be on it’s way and just maybe the central bankers will finally be honest about it.  The two best hedges for inflation are stocks and real estate.  But 100% risk is never a good idea because nothing is guaranteed.  What follows inflation is another concern and that’s deflation.  The best hedge against deflation is cash-based assets.  Annuities don’t always win in the short run but in the long run will prove their worth.

If you miss out on some yield now you’ll make it up on the back end.  All the while you’ll be set up with what you need so you don’t have to worry about the short-term ups and downs.  It makes more sense now than it ever has.

Beans and bullets… and annuities.


Annuity Straight Talk Podcast


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!



More Advisors Recommend Annuities


A lot of things this year have been changing in my business but not in a way I would have expected even six months ago.  Since the beginning my focus has been on providing solid information and advice to consumers and that’s not about to change.  But rather than focus on finding more consumers I’ve decided to concentrate on finding other advisors who share my philosophy.  It has been a positive experience and much better than debating those who don’t agree with me.

It came as no surprise that one of my new friends sent me an article that first appeared on NASDAQ titled “Why Advisors are Recommending Annuities More and More.”  Several other sites republished it so apparently it’s a popular topic.  It may just be a coincidence that I’ve discovered the same exact thing over the past few months.  Either way, trends are changing.

I’ve heard for years registered investment advisors don’t like annuities and more than one of them has told me it’s because an annuity takes away assets under management (AUM).  Since AUM is an investment advisor’s single source of income I certainly understand. But for a group of people who adhere to a fiduciary standard it reeks of hypocrisy to ignore an entire asset class that is perfect for retirees, simply because of compensation.

So for a while now I’ve held the ignorant belief that all investment advisors operated that way but it turns out I was wrong.  Over the past several weeks I’ve shown numbers that verify the efficiency of an annuity approach.  The math is not debatable and more people on the professional side of the business are realizing it.  The article mentions that it is 41% cheaper to use an annuity over bonds to fund retirement.  Who wouldn’t want to look at that a little more closely?

This type of information isn’t going to change Annuity Straight Talk, rather it once again reinforces the effort over all the years.  It’s something that I intend to build on so I want to let everyone know what I’m adding to the website.  The first advisor who signed up to partner with me lives in Washington.  Together we started recording podcasts last month and the first episode will be released sometime next week. It’s going to focus on many of the same topics as this newsletter but offer a different way for people to consume the information.

The main objective of the podcast is to highlight the “both” approach to retirement.  By that I mean the use of both insurance and investment products.  Advisors on either side have wasted too much time arguing about the benefits of one over the other and for a long time now I’ve worked to convince everyone that a blend of both are required for optimal results.  After creating several advisor contacts I’ve learned that a lot of people agree with me.

My co host came from the investment side of the business and I from the insurance side.  Both perspectives meet in the middle to form a fair analysis of all topics.  In the coming weeks we will have guests who primarily focus on investment management but also agree with the value that insurance products add in retirement.

Along with this addition is my plan to create a network of advisors who share the AST philosophy and can offer help to those who want to meet with someone locally.  I’ve resisted doing this for years because I didn’t want to be responsible for a bad recommendation made by someone else.  The answer to that is to only work with the highest level advisors who have years of experience and an excellent track record.

Next week I plan to introduce my co host from Washington in the first podcast.  So far I have others in California, Texas, Florida, Minnesota, Tennessee, Missouri and Oklahoma.  I believe in my message and feel it’s too good not to share.  Stay tuned for my methodical introduction of this group that is going to improve my ability to provide useful and unbiased content and advice.

I’m looking forward to improving this service for the benefit of all who enjoy it.  If you have any comments, suggestions or requests please let me know by leaving a comment below.

Enjoy the weekend!


Which Annuity Would You Choose?


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?




Annuities in a Retirement Portfolio


Using annuities in retirement is an obvious choice whether the purpose is to create income, manage a portfolio or just grow money over time.  I’m becoming more direct with my commentary because several people who don’t like annuities have failed to come up with a reasonable alternative.  Sure you can get bonds, dividend stocks, REITs etc. but each of those has even more shortcomings and none provide the same level of security and stability.

Starting with the traditional design for retirement income is a good way to illustrate several advantages for annuities.  For comparison purposes let’s look at a fairly standard portfolio example.  Generally speaking this is going to consist of a pre-chosen blend of equity stocks and bonds.  Traditional advice suggests that a 4% withdrawal rate is sustainable so assuming no major volatility issues, a $1M portfolio should be able to produce $40,000 income annually with inflation adjustments.

Bonds provide steady income, stocks and mutual funds provide some dividends and the growth from the equity side is supposed to offset inflation.

We can use current interest and dividend rates to see how a mix of 40% bonds and 60% stocks will produce the income needed.

Right now we can assume bonds will pay 2% interest and the average dividend on stocks in the S&P 500 is around 2.5%.

40% of the portfolio in bonds will produce $8,000 interest annually.

60% of the portfolio in US-based equities will produce $15,000 in dividends annually.

This is a portfolio that is not particularly risk-averse and well positioned for growth on the equity side.  But the mix will leave someone $17,000 short of the initial income goal.  Making up the difference will require selling into principal and growth on the equity side will be needed to offset inflation and maintain a growing balance over time.

Selling into principal compounds risk and damages portfolio growth over time.

If you sell bonds, you have interest rate risk that could devalue the withdrawal, plus it will decrease future income payments with less principal.

Selling equities is fine except when the market is down in value.  Selling stocks when down in value only compounds losses and also decreases dividend yields with a lower balance.

“Interest rate risk and low rates on the bond side and market risk on the equity side make it complicated to manage income and achieve optimal growth.”

Over time the market will rise but if the timing is wrong on any withdrawals it will only be more difficult to keep pace with the income difference and any necessary inflation adjustments on spending.  This is the issue that causes long-term problems and has puzzled academics and industry analysts for years.

In basic form, income annuities improve the bond side by increasing cash flow.  Generally speaking you can get about a 5% payout on an income annuity, which would increase total income from the safe assets to $20,000 annually.  Including dividends on the equity side the portfolio is now only $5K short of reaching the income goal.  The difference of $12K in one year is not massive but over the long run it creates a dramatic reduction in risk.

I’m pretty sure many investment managers would counter with bond ladders and use a projection of rising rates to show how money can be repositioned over time to create more cash flow.  It’s wishful thinking that comes with drastic consequences if it doesn’t work out but many settle for this, fearing a lifetime commitment to an annuity.  But it’s not necessary to make a lifetime commitment if you simply know that annuities can be used for more than just income.

By replacing bonds with an indexed annuity you are not making a significant change to your overall portfolio.  Similar growth potential exists on the equity side and I’ll show you why the indexed annuity improves the safe allocation.  You don’t have to take income but can just grow the money over time and have access to it when you need.

Rather than use the bonds in a portfolio to produce income, use the indexed annuity as a place to draw income.  10% of the account can be drawn annually without penalty of interest rate risk.  And to beat a bond it only needs to grow at 2% or better, which is a joke because that’s easy to do.  There is no interest rate risk on withdrawals which makes the annuity superior in terms of liquidity.

Free withdrawals in a deferred annuity are discretionary in nature so you can always choose exactly how much you pull each year.  Payments can be taken monthly, quarterly or annually.  Funds in the annuity can be used for income and can be increased to take pressure off investments in down markets or can even be used to continually rebalance a portfolio over time.  Once the surrender period is over you have full liquidity.  If rates are higher you can go get an even better deal but you can keep the contract if it’s working.

The details of this example are intentionally general in nature.  Average yields for both bonds and dividends can be increased by taking on more risk with lower rated bonds or by accepting less growth on higher dividend stocks.  The interest and dividend figures are also void of management fees so I call it a wash.  Yes, rates are low and I can’t do anything about that except try to help you figure out a reasonable alternative.  Index annuities offer nothing more than the opportunity to leverage low rates for potentially higher yield.  The liquidity and growth potential make index annuities the superior retirement asset.

If you have a better idea I’d love to know what it is.  Comment below or respond to the email.

Enjoy your weekend



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Part II: Adjustable Index Annuity Rates


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.



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Index Annuity Rate Adjustments


This is one topic I should have addressed a long time ago.  Insurance companies retain the right to make changes to rates inside an index annuity contract and lots of people take that to mean they are getting the raw end of the deal.  It seems to show evidence of less control for the consumer and plenty of people avoid buying an annuity because of it.

Last week, during an annual review with a client, I got the question directly from a man who purchased an annuity from me two years ago.  The second anniversary just passed so he is entering the third contract year.  He mentioned that a friend of his in banking told him he should be concerned about the insurance company’s ability to make rate changes during the surrender period.  It was the absolute best time to get the question since we were both looking at proof to the contrary.  After two renewals this person still has the same rates and opportunity that he had when he got the contract.

After years of doing this I can tell you that there’s nothing to be afraid of.  It doesn’t mean the rates will never change but it does show that there’s more to it than the whim of an insurance company.  Cap and participation rates are based on two variables.  Your money is invested in a pool of bonds and the interest earnings give the company money to buy an option on a market index.  So interest rates and options pricing determine the rates that gives you potential for growth with an index annuity.

If interest rates or the cost of the option change from year to year, you’re more likely to see adjustments to the rates.  Since option prices change constantly then you should expect some variability in the rates over time and it’s quite likely for them to increase as well, so long as the right conditions are met.  

Over time there are several things that can change the rates and everyone needs to understand why it’s not such a bad deal and how it’s really no different than just about every other investment.  A basic example using simple math is the best way I can illustrate this.

Let’s say you have $100,000 in an index annuity.  The company bought bonds that provided interest to buy market options.  After a couple of years with decent growth your account value is up to $110,000 so the company had to buy another $10,000 worth of bonds to back the contract and produce interest earnings.  Do you suppose that interest rates and option pricing was a little different each time new bonds were purchased?  New bonds mixed with old bonds will create blended yield that is different from the single rate when the contract was purchased.  If interest rates have dropped then you might see a reduction in your cap and participation rates.  If rates rise then it goes the other way.

Rate adjustments in an index annuity are no different than buying your own bonds or dividend paying stocks.  New money gets new rates with a bond and that blends the yield higher or lower than the starting rate.  It’s the same with stocks where purchase price determines the value of dividends relative to a return on investment.  If a stock price doubles the dividend will effectively be half what is was before.  There are several more variables that contribute to pricing and yield for stocks and bonds but the principle is the same.  People only complain about it when it relates to an annuity. 

There are other ways each insurance company operates to mitigate this risk from the outset.  Obviously we all know that on the first day, the bonds backing an annuity haven’t earned any interest yet but you still get an option purchase for the first year.  It’s an actuarial calculation that spans the term of the annuity and beyond.  Many companies have done a really good job of keeping things steady in the long run.  But every company needs the ability to make adjustments if there are dramatic changes in the economic environment.  It takes a much deeper level of understanding to be able to truly appreciate what Guaranteed money means.

If this isn’t enough for you then there’s one last thing I can offer.  There are literally a couple of contracts that offer cap and participation rates that are guaranteed not to change during the surrender period. It’s a feature that has been around for a few years but there’s one problem.  These guaranteed rates are typically a fair bit lower than top rates on the adjustable side.  A few years ago I passed up the locked rates and sold the adjustable rate because of more potential.  As of today my past contracts are still higher than those with rates that are guaranteed not to change.  Only time will tell if that holds up in the future.  I have a feeling it will depend on interest rates.

With the stock market high and bond yields really low, I think the insurance products are a pretty good bet right now.  Just don’t forget why you’re in this.  It’s all about protecting money and there is no better way than with an annuity.  Add a nice yield to it and it makes all the sense in the world.



Smart Annuities


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.



A Simple Stock Market Indicator


Many of you know that I read Bloomberg news regularly.  Any subscriber gets an email each morning and evening with a few bulletpoints suggesting which is the most important economic news of the day.  Some of it is benign and some rather telling.  Everyone seems to want specific advice but general indicators are far more important for long-term planning.  Last week, the bulletpoint below mentioned something that I feel has been very important to keep in mind for the last year especially and well before that if we are being honest.

The stock market has been shooting up but teetering at every record, suggesting mass uncertainty in the investment community.  The Federal Reserve pledges more money printing that should help us all avoid mass calamity in the stock market and overall economy.  This is nothing new since we’ve seen about the same thing happen in every administration over the past 40 years.  A good stock market has been bought and paid for with an endless expansion of the national debt.

The longer it takes for a bubble to burst, the bigger the collapse.  At this point we are running on hope with very few fundamentals to back it up.  The S&P 500 has recently traded as high as 40 times earnings per share.  When the ratio is high, you are paying more for less expected growth, indicating much more risk.  When the ratio is low you pay a lower price, with theoretically less risk and can expect more stability in price.  The average PE ratio is just under 16 and it has only been higher than now twice, in both 2001 and 2009.  Food for thought…

It certainly could spike higher but again that just means the other side will be more dramatic.  As you consider all options, think about what’s really driving prices today.  Is it government intervention or true economic health and prosperity?  Will the stimulus bill provide even more phony money to keep the party going?  That remains to be seen given that much of the money is earmarked for foreign countries.

I am not trying to tell anyone what to do.  This is just a simple indicator that should be considered if long-term financial health is your concern.  Fear and greed drive every financial decision and that may always be so.  If you’d like to talk about it then give me a call.


(800) 438-5121

Old Index Annuities Can Still Grow


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…


(800) 438-5121

Guaranteed Success in Retirement


Attending webinars is a big part of this job.  I probably have time for about two per week but there are dozens more available on topics relating to all sorts of retirement products and strategies.  There’s definitely an opportunity in this business to be a professional student and I have to be fairly picky with my attendance so I have time for the more productive stuff as well.

Last week I was invited to a presentation on a new type of retirement calculator it ended up being a very good use of my time.  The methodology behind the calculations is what most impressed me and it’s similar to how I’ve run hypothetical scenarios for people but the output is much more detailed.  This new way to analyze outcomes for retirees compares quite favorably to strategies of the past and there is one major benefit answers one common question in very objective terms.

Where did strategies of the past go wrong?  In the early days, financial managers and calculators used what is called straight-line forecasting.  Starting with your assets and add a spending, inflation and growth rate.  Income increases along with asset value over time and if it worked that way in the real world then it would make a lot of people very happy.

The problem is that markets don’t produce consistent returns year after year.  Yield is random and sometimes negative so it’s foolish to just assume something like exactly 8% every year in retirement.  So people started using Monte Carlo simulations to create random returns.  Computers can kick out several thousand random examples in a matter of seconds.  The results are graphed and you get a probability of success.  The problem with this is it also has no bearing in reality so it’s impossible to draw any useful conclusions from it.

The new solution is called Aftcasting, which is similar to what I’ve been doing but again with much more detailed than I have.  This uses real-world market performance, interest rates and inflation across an actual sequence of events in the past.  There are no assumptions in terms of growth rates or inflation, it’s just how things would have actually happened if you had retired in a given year.

For the past few years I have been running a basic form of this where I take someone’s numbers and run the plan over the worst 20 year period in the market.  For instance, had you retired just before the Great Depression, how would your portfolio have performed?  This new software will run a retirement plan over every 20 year period since 1900 to show how many times throughout history a plan would have failed.

Once all inputs are added, the software produces the number of times a plan would have failed, depending on the date you retired going back more than 100 years.  Real performance, real interest rates and real inflation.  Whether it’s something that everyone wants to use is beside the point, because there’s one major benefit that would appeal to just about everyone I’ve met.

When the original output is read, if the plan doesn’t have an acceptable success rate, the user can click a button to ‘optimize the portfolio’ and the calculator computes the exact blend of safe and risk assets to use in a person’s portfolio.  I hope everyone realizes how beneficial that is to know how to blend assets just the right way to retire comfortably and successfully in just about every year in modern history.

No more trying to guess who’s right and which person to trust.  It’s an absolutely objective answer to how much money you should protect in retirement.  Which type of safe asset to use is still a decision you have to make but at least you can test the output of different options to see if one asset in particular gives you an advantage.

This is going to be a great new tool for providing comprehensive information to those who are serious about getting answers to retirement.  If you really want guaranteed success in retirement, I have yet to see a better way.  As I familiarize myself with the new calculator I will be sending out more information as to how it will be available to you.  Because it’s not my software I can’t advertise or make demonstrations publicly but I will use it to help anyone who is done kicking tires.

Call or email if you have any questions.


Pros and Cons of Expert Annuity Advice


Late last week someone emailed to ask for my take on an article about indexed annuities from John, the Vice President of Research at Morningstar.  Given the writer’s experience with financial markets, I was curious to see whether he’d give annuities a fair assessment.  But it turns out that he doesn’t know a whole lot about them or just didn’t feel like doing the research this time.  He should have paid me to write the article instead of having one of his interns do it.

The advice itself shows that John doesn’t like indexed annuities and he should have just said that.  It’s called confirmation bias and I have a feeling that nothing I could say would change his mind.  In reality we are talking about two different things and if you correct a few things in the article then it’s nothing more than an opinion piece.

I’m going to give you several quotes from the article and tell you what is correct and what is not correct.  You can take the true with the false and make up your own mind.  The result is that you should probably listen to guys like John sometimes and other times listen to people like me.

“Also known as fixed-index annuities, equity-indexed annuities, and registered index-linked annuities, these are insurance contracts that combine features of both bonds and equities.”

This is incorrect.  Registered index-linked annuities are an entirely different product that fall outside the scope everything I write about on a regular basis.  Also known as buffered index annuities, this product deserves an entirely separate article if not its very own website.  This is irrelevant to the question that inspired the Morningstar article.

“…these are insurance contracts that combine features of both bonds and equities. As with bonds, indexed annuities pay interest; as with equities, their payments increase as the stock market rises.”

This is correct.  It is a balanced asset with elements of both safety and growth.

“Although the returns of indexed annuities are linked to the stock market, they are constrained. For example, an indexed annuity with a 10-year life might guarantee that, for each year in the contract, the investor will not lose more than 5% of principal no matter how poorly stocks perform.”

This is incorrect.  While the yield is constrained, a fixed index annuity CANNOT lose money.  When he mentions the hypothetical 5% loss that applies only to registered index-linked annuities.  That’s how they go the name buffered annuities; you can accept certain losses in exchange for higher cap and participation rates.  That’s why I don’t use buffered annuities.  Apples and oranges…

“However, in exchange for that protection, the issuer limits the investor’s gains. The annuity’s performance therefore moves in a narrower band than does the stock market.”

This is correct.  And I believe that’s the whole point anyway.  A mutual fund can go plus 20% or minus 20%.  A fixed index annuity can go zero and something like plus 10%.  It is a narrower band and that’s what people like about them.

John next brings up the SEC Investor Bulletin on indexed annuities which I’ve had a problem with and written about for years.  The SEC is not a credible source of information on fixed index annuities because they do not regulate the product and have nothing to do with implementation and oversight in this market.  Does anyone remember my test to become a Registered Investment Advisor a few years ago?  I had to answer a couple questions about annuities incorrectly to get them right on the test.

He gives us five points from the SEC and it should have been two points.  Three of them talk about pricing controls and two talk about protection from loss.  There’s not much interesting in the list except for the one below that brings up a good point.

  1. “Rate cap.–The annuity’s maximum annual payout. For example, if the annuity’s rate cap is 7% and its participation rate is 70%, then all stock-market appreciation above 10% would accrue to the insurer, not the policy owner.”

This is incorrect.  Yield above any cap or participation rate does not accrue to this insurer.  This is widely believed to be true because many consumers think that insurance companies are out to screw people.  The truth is that insurance companies use other financial institutions to run the options side of the contract.  Any profit over and above your cap or participation comes from additional options and accrues to the outside institution.  Curiously enough, Morningstar is one of those institutions that runs options on index annuities for a couple insurance companies.

The remainder of the article is more like an opinion piece and as mentioned before, it’s clear John doesn’t like index annuities of any kind.  Below is a quick list of the remaining arguable points.

“Indexed annuities differ sharply from index mutual funds.”

This is true and that’s the whole point, even if for different reasons than he feels important.

“Unfortunately, investors cannot research indexed annuities to determine which are the best values.”

This is true but mutual funds are anything but easy to research for the general public.  I pay for access to a database to research both mutual funds and annuities and you can too.  Information about stocks and mutual funds may be considered publicly available but you have to know what you’re doing to find the good stuff and even Morningstar charges a subscription fee to get the detailed information he says is readily available.

“In that respect, as well as several others, indexed annuities resemble their cousins, structured notes.”

This is not true.  Structured notes are a completely different animal.  There can be far more risk and far less liquidity depending on the option and it takes an incredible amount of expertise and you don’t get that for free.  If you wanted to build a structure note with the same amount of principal protection, liquidity and yield potential I doubt you’ll get one that’s got more upside than the average index annuity.

“The strength of those guarantees, of course, depends entirely on the creditworthiness of the issuer.”

This is true but there is no debate.  A highly rated insurance company is among the most stable financial institutions in the world and many have hundreds of years of consistency of making good on promises and guarantees.  If you want safety, strong insurance companies come first and there is no second place.

Index annuities are not the only asset, therefore should not be compared to every other asset.  It might make good ad copy to compare index annuities to mutual funds but it doesn’t make sense.  Those are two very different things.  If you are looking for maximum investment performance then you must accept the risk of losing money.  If you want to protect assets then you must accept a lower return.

There is a context for using annuities that is completely missed in the article.  If you are simply trying to compare assets to find which is better then you’ll find nothing but arguments from people who disagree.  No one is correct without defining a goal.  I can’t say that John is wrong because we are talking about two different things.  He needs to slightly adjust five or six sentences to make it factually correct and then it’s nothing more than just another opinion piece on index annuities.

If you disagree then go ahead and let me have it in the comment section below.