This is a question that has a different answer for every individual.  I try to keep things a lot more open than the traditional management crowd that suggests a specific blend of stocks and bonds depending upon age and retirement needs.  Some people replace stocks with annuities and some replace bonds.  Some people put almost all of their money in annuities while others put none.

Most people approach retirement faced with the decision whether to make a major change to their current asset allocation.  While a major change may be the right answer it is still emotionally difficult for everyone.  This week I had a second meeting with one man who had seen my videos and was curious about this new approach to retirement allocation.

When we first met, he sent me specifics about his assets and spending goals for a pending retirement date of two years from now.  Like every other time, I take what he writes and form a basic opinion of an appropriate course forward but that’s before we even speak.  In talking to him the first time, I learned more about his personal preference and pre-conceived ideas about how to approach retirement.  It’s never my job to change your mind, rather it’s my job to offer solutions that fit with your expectations.

I can give you the math all day long but it never means that my solution is what suits you.  That’s why communication is the key to proper planning.  I can tell you how the math works but it’s up to you to tell me how the math works for you.  When someone gives me the right amount of feedback I can more properly offer solutions that not only work mathematically but also work emotionally.

Before we spoke the first time, I had already decided that this man could mathematically put 50% or more of his assets into an annuity.  Big payday for me, right?  But I still sat down to run the numbers just so I could verify my recommendation.  My advice needs to stand up to scrutiny so I never take the math for granted and try my best to walk slowly into the eventual solution.

Before the second meeting, I ran his numbers through my spreadsheet so I could find the perfect balance of safety and growth.  His income goal is relatively high in relation to assets so he needs growth and protection at the same time.

I ran the numbers through several historic scenarios and found something very interesting.  Because he was saving a substantial sum for the next two or three years, an annuity would only improve his long-term outlook if he placed a modest amount in it now.  If I showed him putting more money in the annuity now, his long-term profitability decreased.  The right amount of protection truly did give him all the protection needed to weather any storm presented in the market over the past 100 years.  Less in the annuity created a worse result as did more money in the annuity.

It pays to take chips off the table at some point, it’s just that no one knows how to identify the perfect point in time.  I continue working and analyzing different scenarios to come up with solutions that work for you and recommendations that I stand behind.

Therein lies the challenge.  The result for this man was based purely on the sequence of returns for his investments, but depending on what period you choose, the results were roughly similar no matter what period was used.  So for this guy it made sense to put about 15% of his asset into the annuity, which would provide the security to deal with volatility while keeping the opportunity for growth that he needs.  His entry into using annuities for retirement will likely be easier than it is for most others.  A relatively small financial commitment now is a much easier way to get started, so if annuities ever become a larger part of the plan, it will be a much easier transition.

How much should you put into an annuity?  That all depends on assets, spending needs and risk tolerance.  For everyone it is different and the results at times might surprise you like it did me in this situation. Factor in all the variables and run some numbers to see if there’s a magical allocation for you.  Almost every person who has bought an annuity from me in the past has come back to buy even more.  Once you realize it’s not that big of deal then it’s easy to see annuities are a very reasonable safe asset.  It works for retirement income, asset allocation and everything else.  There is a justification for every amount but the starting point is entirely up to you.

Have a great weekend!

Bryan

I graduated from college almost 20 years ago.

When I think back to that single point in time it seems as if those 20 years just disappeared. At a college reunion last year it took me by surprise to truly feel as if those times happened just last week. Many of you may feel the same way at different points in your life because time flies by as we get older.

It helped me put things into perspective when, instead of thinking about two points time, thinking about all the points in time between. Then it’s fun to realize all the things that have been packed into that time period. In the midst of my 18 year career in financial services, I took a trip to the Olympic trials, spent more than 40 weeks fishing in Alaska and traveled all over the US by either highway or horseback.

Being a bachelor most of that time certainly helped because it gave me lower living expenses and more freedom. If the next 20 years are similar, it will all add up to a rich life and for that I am grateful.

Yes, time speeds up as we age. Each year that passes is a smaller percentage of our lives. For a child, birthdays and Christmas seem so far away but for me they seem to come and go so quickly that it’s not quite as exciting as it used to be.

Right now I’m headed for my annual fall elk hunt. It has been a year but it seems like yesterday. Time slows down if I stop to think about all the little things that happened in between. 50 weekly newsletters is a great way to help me realize how much has been fit into the past year.

Annuities slow down time because it gives you something to expect that may seem a long ways away. Owners are always waiting for a check to arrive, for performance on anniversaries or for surrender periods to end. When the world is zipping past the annuity just sits there, doing what it’s supposed to and giving you something to look forward to.

Obviously I know this because I deal with people who own annuities and it happens all the time. On an annual basis things may seem to move slowly, but it balances your life just like it does a portfolio.

As I ride into the hills today, I’ll be moving slowly and will take time to think about all that has happened in the past year. For many people, annuities have been the best part of life on the financial side. The world is changing faster than it ever has but annuities will slow it down for you and keep things consistent for those who like more gradual changes.

Wish me luck on the hunt and please be patient with any response. I’ll be able to text and email at least once per day so I’ll get back to you as soon as possible.

Bryan

Most of you should know by now that I operate differently than others who advertise online for financial services.  Last week my marketing partner, Jeremy, came here from Texas so we could brainstorm some new ideas for getting people the exact type of information they want.  Keeping this environment low pressure for you is a major priority for me and it’s important to send just enough but not too much information.

That lies in stark contrast to most others who operate in a similar fashion.  I know with certainty that if you sign up on another website you are likely to receive endless phone calls until you change your phone number or give in to the sales pitch.  All those guys want is a warm body with a rough demographic match and they will do everything they can to sell you an annuity.

I’m different because I don’t care if you buy an annuity but I do want to make sure you find useful information regardless of the outcome for me.  Over the years I estimate that more than 30,000 people have signed up to get more information from AST.  I have probably had extended conversations via phone or email with maybe 20% of those people.  We had interactions and some became clients because they called me.  The others have received the same information as you without being harassed or bothered in any way.

I keep track of all the appointments I have and run numbers to analyze whether my ad spending is worth the eventual payoff.  So far this year, of all those meetings, I recommended an annuity for just about 43% of the people who asked me for advice.  That means more than half of all people came to me, shared their information and goals and I told them that they didn’t need an annuity.  Some people who don’t need an annuity buy one anyway because they like the security and opportunity provided but most do not.

It’s safe to assume that this year matches prior years and that I have communicated directly with about 20% of the people who signed up on the website.  If I only recommended an annuity for 43% of those people it translates to an annuity recommendation for only 8.6% of the people who come here.

That’s seems pretty low-pressure to me, especially considering how far others will go to get you on the phone.  I don’t expect any sale to make my week, month or career so it won’t do me any good to shove you into something that doesn’t work.  All advisors, whether fiduciaries or not, are looking out for self-interests but I promise I’ll never look out for mine at the cost of yours.  Knowing that my pitch rate is so low should allow you to relax and be more comfortable reaching out for a fair assessment.

Just this week I emailed back and forth with a man who has been reading this newsletter since the beginning.  He was interested in buying a product that I could sell but didn’t want to.  There are some that fall outside the scope of what’s appropriate for the type of planning I do.  He understands the product and likes the opportunity provided.  I recommended he go for it with another advisor who had shown him the contract but reminded him to reach out to me any time for a second opinion on the advice he gets elsewhere.

He got what he wanted and I kept my principles intact.  That approach makes what I do more enjoyable.  I sell annuities for a living but I will never sell one that doesn’t fit.  I don’t care if you buy an annuity because it’s not going to change my life.  You should only buy an annuity if it changes your life.  As you field the constant phone calls from others, take some time to consider which approach works best for you.

Have a nice weekend…

Bryan

This one is sure to hit home with a few critics but there’s an important lesson here.  Surrender fees are probably the biggest negative that come with annuities.  Since most other investments have nothing like it, declining fees over the years are new to everyone who is a first-time user.  There is a reason they exist and several reasons why it doesn’t make a difference for the average person with an annuity.

Most of you have been saving into retirement plans and accounts for 30 years or more without ever touching the funds.  So what’s wrong with being able to pull 10% each year from an account penalty free?  Plus for portfolios with a long-term objective, it’s not common to move more than 10% of a single account for rebalancing or any other adjustments, especially while in retirement when you should be focused on other, less stressful things.

While some may think it’s a raw deal to have money held hostage by a large fee on the back end, others understand how it works and it doesn’t bother them.  Most of my clients who have had annuities for several years have never touched the account.  For those it’s just safe money without fees and some good growth on top of it.  No cares or worries at all…

Those are just a couple of the ways I’ve always explained it but I’m not sure it resonates.  It’s justified to want a better explanation for how commissions and state premium taxes affect the contract and there is more to it.  Consider that the insurance company invests in long-term bonds to back an annuity.  If you bail out early the company would have to sell assets in a potentially unfavorable environment.  Within an annuity, the insurance company bears the interest rate risk which is one of the primary threats of income planning.  The fact that you can get 10% per year without fees, penalty or risk of loss is actually a pretty good deal.

Well aside from the mechanics there are some other reasons that might make sense.  Two things I’ve seen consistently over the years actually give you more control over the outcome.  The first is the fact that most index annuities have growth in the first few years that exceeds the surrender fee.  The account goes up and the fees decline meaning a person could walk away with more than the initial investment.  This is the point where most realize they have a pretty good deal.  Because they realize it’s a good deal, no one walks away.

The second one is something I have mentioned in passing for several years.  I always told people that you can maximize the withdrawal from a potential contract and get a substantial amount of money out of it before the surrender period ends.  I was recently running numbers on an income scenario for one couple.  We thought about maximum withdrawals so retirement income could be combined with Roth conversions in the first ten years of retirement.

I looked at the illustration and did some basic math.  At the guaranteed minimum, meaning no growth in the account, this couple could maximize free withdrawals each year and at the end of ten years would have drained more than 68% of the initial contract value.  If consistent growth of 4% is achieved the withdrawals would be bigger and amount to almost 80% of the initial value plus leaving behind an even larger remainder value.

Take a second and think about how big a change you’d need to make in order to shift +/- 70% of an account over the first then years of retirement.  If you end up with an annuity you don’t like then don’t just sit there.  Doing nothing is the worst thing.  Or maybe you should just start with a good one.  There’s all sorts of opportunity with that kind of liquidity on safe assets.  I showed you all an example last week of what can happen using withdrawals and incremental investments.  There’s a link to last week’s video near the bottom if you missed it.

There are all sorts of examples and ways to improve an annuity.  Eliminate fees and use the protection and liquidity to your advantage.  Yes, I make money if you buy an annuity from me but I don’t make money for writing this letter every week.  You may have a surrender fee on the annuity but my advice is free.  As long as you get a plan that works then I’d say it’s a pretty cost effective way to plan for retirement.  All things consider, surrender fees are really not a big deal.

Enjoy your weekend…

Bryan

About a week ago, someone signed up on the website, maybe read a couple emails and watched the Flex Strategy videos.  Rather than schedule an appointment to see whether it would work for him, he went and posted a question on the Bogleheads forum.  You can only imagine the response he got from all the “experts” hiding behind an anonymous screen name and a photo.

Here’s the question: Anyone familiar with the guy at Straight Talk Annuity and his flex plan?
Fixed Index annuity with no income riders to get fees as low as possible. Maybe use it instead of bonds in combination with your equity allocation.When stocks do well withdraw from your stocks.When stocks lose you withdraw from your annuity to preserve your stocks.

I have to compliment the guy.  That’s a great synopsis.  But, of course they didn’t answer the question because they have no idea about how to distribute assets in retirement.  I mean no offense to anyone who lives off CD interest, bond coupons or stock dividends, but these guys are all about parking money and not touching it.  I like to talk about using money.

My first problem is I never met the guy.  I had no idea about his financial situation but he apparently took the videos to mean I thought he should buy an index annuity.  Well of all the people I’ve talked out of buying index annuities, it’s hard for me to believe that someone I’ve never met would accuse me of trying to sell one.

What you’ll see on this forum is a perfect example of confirmation bias.  These guys will say anything to back up what they already believe.  I started to respond to each claim but got bored.  No one ever really said anything of substance.  A quick page from a contract or illustration could refute any of the arguments.  Just remember that the question posed was drawing attention to a strategy, not a product.  I’m sharing this because it’s exactly the kind of crap you’ll run into when trying to verify things on your own.  But you have to push through and that’s why I’m doing this.

One guy kept asking for a prospectus.  Aside from the fact that I never proposed an annuity to this individual, fixed insurance products don’t have a prospectus.  A prospectus is a legal disclaimer for securities contracts.  It lets you know all the information about the company and investment offer so you fully understand that you can lose money but can’t come back later with a lawsuit.  A couple other guys thought they were smart and posted links to an annuity prospectus from both Brighthouse (MetLife) and TransAmerica which are obviously from variable annuities because those have mutual funds as the underlying investment.  Since the underlying investment is a security and can lose money then the SEC regulates variable annuities and requires a prospectus.

FINRA is the Financial Industry Regulatory Authority and does not regulate fixed insurance products.  So, I don’t expect them to have completely accurate information when it comes to guarantees in an insurance contract.  I’ll take what the insurance company offers in the guaranteed summary of values over what FINRA insinuates any day.  What FINRA did in this case is highlight how some contracts guarantee less than the initial premium in exchange for higher cap and participation rates, except they left out the part about higher growth potential.  This is a thing of the past and there aren’t many contracts that do this anymore.  It’s much like the fact that I’ve changed a lot of information on this website because annuities have evolved over time to become much more user friendly.

My proof of misleading information from FINRA and the SEC is that I took the series 65 test to become a Registered Investment Advisor a couple years ago.  I passed easily.  All of the questions about index annuities were written as if the products haven’t changed in 20 years.  I had to answer incorrectly to get them right.  And I answered all the questions about index annuities correctly, according to my results.  You can disagree if you want but you’re wrong.

The following comment is one of my favorites…

Stinky says that there is an excessive internal cost to these products.  While the investment banking team required to administer index annuities would certainly add cost over a traditional fixed annuity, the fixed rates on both products are within a half percent.  So I call this one bullshit.  At least he’s somewhat fair and doesn’t think an index annuity will kill a portfolio but I still say he’s off the mark.  You can trust the guy named Stinky if you want but let the current contracts speak for themselves… Below are a couple I shared in the last six months that show no fees, good growth potential and a surrender value that is no less than the initial investment, plus interest in both cases.

Double Digit Annuity Yield

What it’s Like to Own a Good Annuity

Time for a definition for those of you who are new at this.  The ‘surrender value’ is the amount of money you get back if you surrender the contract.

What is really funny is that the thread has evolved throughout the week.  It went from being a criticism of me to being somewhat comical.  Toward the end all the guys seem like they are trying to figure it out; talking about CDs, bonds, dividend stocks, taxes etc.  And they haven’t even come close to designing an income plan for anyone.  It’s not like there was a case study they were asked to comment on, these guys are just trying to be relevant.

The guy who asked for a prospectus added a laundry list of items anyone should look for when verifying if an annuity is legit.  I’m pretty sure that’s the same guy who says he worked at an insurance company for 40 years but obviously doesn’t understand that a prospectus is a very specific legal document that doesn’t apply to insurance products, unless it’s a VARIABLE annuity.  His list of required disclosures is more or less what I go over with everyone before a transaction occurs.  But he doesn’t know me and just assumes I’m an illiterate salesman.

There are lots of individual things I could pick apart if I wanted to start an argument.  They called me out by name and I almost went there and started to respond.  But I have better things to do and didn’t really have time this week.  If I’m going to write a response to anything I’m going to write it to the loyal readers on my list and ask you to decide for yourself.  This actually was some pretty easy material for my weekly newsletter.

Fortunately, the man who started the thread, eventually admitted that we had never spoken and only exchanged a few emails.  I think he actually bought a fixed annuity from a never-heard-of-before insurance company and it seems as though the Bobble Heads are impressed with daily account values.  Either way, there’s proof I never proposed anything since I never had the opportunity, aside from quoting a couple fixed rate annuity options.  That was enough for the Bobble Heads to jump to conclusions and assume I’m trying to do something I’m not.  If any of them had a better idea, they didn’t share it.

Bottom line:  I can prove what I say but they can’t.  One guy claimed to have evaluated three annuity contracts.  Wow!  I’ve reviewed thousands so you can choose who you trust.

Talk to you next week, where I plan to show you something that will make those Bobble Heads spin!

Bryan

Boy would I ever love it if there was a best time to buy an index annuity.  Let’s say there was a three month period in the year that always produced the best returns.  I’d work 18 hours a day and seven days a week then spend the other nine months fishing saltwater flats and riding the mountains of Montana and Wyoming.  Sadly that doesn’t exist so it doesn’t warrant a newsletter but timing in other ways causes hesitation for lots of people.

Everyone tries to time the market whether intentionally or subconsciously.  But rarely does anyone pay attention to all the indicators and make every move at the right time.  Market rallies, interest rate changes, politics and dozens of other indicators all give clues but it takes an algorithm to sort it all out, and those are still wrong a lot of the time.

Not only have I heard this a bunch recently but also it has been a common theme with people hesitant to pull the trigger on an index annuity.  Many times I’ve heard someone say, “this looks good but maybe I should wait until the market drops to get it.”  The thinking goes that if you are using a contract with growth tied to the market then a lower starting point gives more upside potential.  Buying low and selling high, right?

On the surface it makes sense but going a bit deeper, I don’t understand why anyone would want to play the market while trying to get out of the market.  It’s going to go one way or the other and most of the time the result isn’t positive.  Bigger money is always moving by way of faster computers and we all have no control over the day to day and year over year swings.

Did you ever think that maybe the ‘buy and hold’ mantra is promoted by institutions because they want you to stay in one place?  That way they can make more money by shaving pennies off of millions of shares and thousands of transactions.  It’s kind of beside the point but these things pop into my head from time to time.  Try reading the book Flash Boys by Michael Lewis for a real eye-opener.

If you are thinking about trying to time the market before buying an annuity it’s not so simple.  And in all honesty it doesn’t make any difference in the end.  An index annuity is built to time the market.  If the market drops in the first contract year then you start the second year from a lower point, giving more upside potential.  What if the market doesn’t drop?  Well you had less risk and probably locked in some gains.

2017 was a really good example of this.  Lots and lots of people thought the market would correct and decided to sit it out in cash.  The S&P 500 was up something like 23% that year so all those people who were risk averse missed out on a year where I saw plenty of double digit annuity yields.  Just remember that big gains are nice but it’s all about consistency, like I wrote about last week.  Hit the green button at the top to go to the main page if you missed it.

Index annuities are all about averages.  People often comment about how the sequence of returns might affect cumulative yield.  While that is very important in stocks and mutual funds it matters much less with index annuities.  Instead of the up, down, up the index annuity goes up, flat, up.  This product alone solves the problem of reverse dollar cost averaging for retirees.

Just look at the lost decade from 2001 to 2010.  It was one of the best times to have owned an index annuity.  The S&P 500 was down around 20% at the end of it but index annuities were positive by a healthy margin.  Volatility creates opportunity when your downside is protected from loss.  Many analysts suggest we are headed for another lost decade and using that as a reason to not buy an annuity is just an excuse.  If any of you really feel that way then what the heck are you doing in the stock market?  In another lost decade index annuities will shine bright.

Is there merit to timing the market before buying an annuity?  Maybe but in the end I just don’t think it will swing the needle.  At best it will give you an extra couple percentage points in one year but you’ll get the other side of it somewhere so I’m sure it will all even out.  If you think this is your reason for waiting I’ll bet that the real hesitation comes from somewhere else.  This would be a perfect spot for me to send you back to an old newsletter:  9 Reasons People Don’t Buy Annuities.

Enjoy your weekend!

Bryan

It’s a common misconception that truly comes from an uneducated place.  You’ll often hear, “annuities would be fine if not for the hidden fees.”  In almost every case that is nothing more than a scare tactic because all but one annuity that I’ve seen has the fees clearly disclosed up front.  There is a reason why fees are valuable and a reason why fees don’t exist on a lot of products.  You need to understand both.

Ken Fisher does a really good job of warning people about annuity fees.  So much so that many people disregard annuities altogether because of the perception that what he writes pertains to all annuities.  That is not the case.  Many are surprised to hear that I actually agree with most of what he says.  I do, however, think his writing is misleading because he never says that he is speaking specifically about variable annuities.  So what he writes doesn’t apply to the majority of products available.

For purposes of this article I’m going to reference fixed and variable annuities.  I’ll use the term ‘fixed’ to generally apply to both fixed rate products and fixed indexed products.  Both have the same foundation so that’s where you need to focus.

Fixed annuities don’t have fees.  Before anything else is added, every basic fixed contract is a spread product.  It means an insurance company invests your money, earns yield and subtracts a portion for expenses and profits.  What’s left is the yield stated in the contract.  You don’t buy a higher rate minus a fee, you get the advertised rate and the insurance company took their piece before you even came into the picture.  Anyone who complains about this should look into just how much money a bank makes when you buy a CD.

Fees only come into play when you add something to the base contract.  Some people want an income guarantee, additional death benefit or some kind of long-term care payment.  If you want the additional benefit you will have to pay a fee.  If you don’t want to pay the fee then don’t take the benefit.  Fees are a choice in fixed annuities.

Variable annuities have fees for many similar reasons, only to add benefits you may or may not want.  Again, the base contract has no fees but the costs go up when you add mutual fund expenses and any insurance you want on the account value, future income payments or even a protected death benefit.  Total costs can approach 4% only because insuring all those things against market risk is very expensive.  The blend of risk and insurance inside a variable annuity makes for a complicated list of considerations so if you don’t want the benefit, don’t pay the fee.

In most cases, the difference between fees for Ken Fisher’s management and a variable annuity only come down to the cost of a guarantee.  Go ahead and ask him how much he would charge to guarantee what he says, and he might pull down that one-sided report of his.

I don’t sell variable annuities, not only because high fees create sticker shock but also because I’ve found you can do better with the right mix of a fixed annuity and market securities.  On one side you have the protection you need while on the other you get the upside growth you want.  This combination can reduce fees to near-zero, depending on how you invest in market securities.  If you want to see how much this saves you over time then check out my newsletter from last year:  How Fees Affect Investment Performance.

Fees always cost something in the end.  Aside from the out-of-pocket cost there is always an unrealized cost, which is often much bigger.  I suggest you avoid fees if at all possible.  Knowing how to do that requires you to understand why fees exist and how you can avoid them if you don’t want the benefits provided.  Like everything else this is very simple and it’s best to avoid the hysteria if your goal is to find the best solution.

I have sold some contracts with fees to those who wanted an additional guarantee.  But, 90% of the contracts I’ve place with customers have no fees whatsoever.  I wouldn’t mind a few comments from current contract owners who can confirm my claim, for the benefit of any pessimists in the crowd.

Enjoy your weekend…

Bryan

This started just one year ago.  A standard case came across my desk and I showed one couple how my approach might give them more control over retirement assets.  They had been to a seminar and got the usual pitch.  Being a few years from retirement they had already decided to protect some assets and an annuity is a good way to do that while also making sure all retirement income is secured.  But as is common, they felt like there might be a better alternative to the usual pitch.  At the time I wrote the below newsletter to remind everyone of the benefits of a different approach.

How to Beat a Guaranteed Income Contract

It works for some but not others.  Many people are skeptical of annuity performance and a common sentiment is that an insurance company is going to change the rules and offer nothing on the back end.  For those it’s a risk to not take the guarantee but I’ve tried for a long time to convince people it’s not that hard to beat a guaranteed income contract.

On a side note, there was something really cool about that post last year.  An advisor left a comment to the article asking if I’d recommend a contract for his personal portfolio.  It’s not the first time that has happened.  I know of at least a dozen retiring advisors who have designed their personal plans based on information from this website.  Food for thought…

This couple decided to skip the guaranteed income contract and go with something that had no fees and much more growth potential.  It was a good move that just paid off in the first contract year.  It may have been hard to see the money not moving when the market was at an all-time high earlier this year and then a relief in March when 30% of the value was stripped away in a matter of a couple weeks.  Sure it’s coming back now but what a wild ride.  For anyone who isn’t a professional trader the past year has not been a settling experience.

Over the past few weeks I showed you some things to avoid and then something that works.  Rather than another hypothetical performance, below is actual proof of something that worked well in spite of all the global drama.  I’ll explain a few important points below but first click the link below to view the pdf.  It should be all the explanation anyone needs.

Annual Statement

Yes, this contract gained a hair over 12% when the market had one of the wildest 12 month periods ever.  The market is up from a year ago by about the same amount, but which was the better ride to get here?

Correct, there are no fees in this contract.  Interest credits are net to the account value and death benefit.  Many have a hard time believing this but it’s quite true.

They could surrender this contract and still walk away with a 4.5% yield, but that would be silly.  Having those out of the way in the first year opens up a tremendous amount of flexibility

Don’t forget, the earnings are now locked and guaranteed in the contract and can never be lost or taken away.  Again, no ongoing fees to drain the principal if it doesn’t grow next year.

For the critics who think insurance companies are out to take advantage of people, all cap, participation and spread rates for the available indices remained exactly the same for the second year.  You’ll have to take my word for it.  You only get to see what I show you with consent from the client but you can always buy your own to get a look at the full five page document in a year.

Annuities aren’t scary or too complicated.  Protect money and get upside growth potential.  You can take the guaranteed income and there’s nothing wrong with it but it’s a good idea to explore alternatives as well.  Some contracts are good and others aren’t all that great so it pays to work with someone who is used to competitive situations and has a broader view of all the options.

I am happy for these guys and I really just want to see all of you be successful in retirement.  It won’t always produce like this but it’s nice to see at a time when the world seems to be falling apart.  I’ll continue working to dispel myths and offer education so people can make objective decisions.  It is just not as hard as you think.

Enjoy the weekend…

Bryan

It’s time for me to pick on a couple different products that have proved to not be worth the hype.  About once a month, on average, I get an email touting the incredible opportunity of some new contract or index.  I look at all of them just to see if the claim merits me adding something else to my list of recommendations.  Most things that gain traction with other advisors don’t immediately get my attention but when I start seeing a change in sales trends, I keep track so I can compare performance.

Just like when a first-round draft pick never makes an all-star team, plenty of these past ideas have not lived up to the hype.  I have more inside knowledge than other because I service several contracts that I never sold in the first place, which suggests the agent didn’t stick around to explain the lack of performance.  That’s why I feel I’ve earned the right to label some contracts at overrated.

Two companies come to mind since both have been popping up a lot lately.  I’m going to specifically explain why I don’t like the New Heights products from Nationwide and speak more generally about why Athene seems to be pushed harder than it should.  Each of these companies has products that many agents claim to be the absolute best opportunity so I’m calling that out and will show you why.

Six or seven years ago, Nationwide got into the index annuity business with the New Heights line of products and to this day they don’t have much else.  This is a good company and the products are safe but the growth potential was tied to the JP Morgan Mosaic Index and according to sales literature the index had never returned less than 8% in a single year.  Agents clamored to sell the contract using illustrations that would turn Warren Buffet’s head and I just kind of sat there and watched it.

The problem?  I will always be hesitant to push something that does 8% every single year but whether that was true or not, the contracts required a three-year reset on all options.  That means you had to wait three years to see if you made any money.  Longer resets come with higher participation rates so the illustrations looked outstanding but the longer resets also bring about a lot of risk.  And that’s exactly what happened.  The index never did quite as good as promised and at a few key points the market cratered and several people went three years while making little or nothing.  That puts a whole lot of pressure on the next period since one could theoretically go a whole six years without earning interest.  One quarter of retirement could be gone and you only have two chances to lock in money.  I don’t recommend it.

Athene was a B rated company back in 2013 when it acquired the US operations of Aviva, a major British insurer with roots going back to the 18^th century.  It’s not often that a small company buys a big one but it’s beyond my pay grade to explain that one.  Since then, Athene has been growing rapidly and at times is creating new products faster than they process applications.  To me it seems like this company has too many things going on at once.  When another agent says this is the best opportunity available, it really depends on which contract.  Athene has 21 index annuities up for grabs.

This is one that I hear about nearly as much as Allianz and that’s because of the distribution structure.  Athene is paying marketing organizations a lot of money to push the products so you have a really good chance of running into one of them when someone solicits you.  It’s hard to pick one specific product but if we’re talking growth, just about all of the 21 have the same index options so it’s easy to lump them all together.

The index options are just OK but participation rates are not very high right now so I think most of them will do well to yield 3% on average.  That wouldn’t be the worst result but it’s not that exciting and that’s not my problem with Athene.  All contracts offer a blend of one and two-year resents.  Again as above with Nationwide, longer resets come with higher participation and more risk of not making any money.

It’s fine if you want to pursue that strategy but agents are pushing it mainly for one reason.  It’s not because it’s best for you, just that it is the only way they can make an illustration look good.  My experience from the past suggests you are better off sticking with the consistency of one-year resets.  You have to think about more than the potential of an index and right now is not the time to enter a long crediting period.  The market is down from the historic top but up about 5% over the past year.

Again we have an overvalued market and an absolutely miserable economic outlook.  Going long on an extended market run right now makes no sense to me.  Go short and reevaluate next year.  If you have a Nationwide contract you may not have much choice and the agents for Athene are more interested in making a sale than giving good advice.  Maybe they should switch to or at least branch out to other companies to provide more opportunity for clients.

The best contract is partially a matter of opinion.  Certain things can be verified but in the end it comes down to what you like and who you trust.  Beyond any opinion, Nationwide and Athene do not have the best contracts.  As I was writing this I realized I should have done more detail on each individually because there’s a lot more to it so comment below or send me an email if you’d like me to work on the extended version.

Enjoy your weekend!

Bryan

I’ve never been too successful talking about interest rates.  Most people have a pretty light appetite for fundamentals which unfortunately leads to the majority settling for something less than the best deal available.  So I’m going to give a simple example of how recent conditions have changed annuities in a way that will underscore my recommendation to defer and grow money safely.

In a case I’ve been working on for the past few months, I started by showing a 65 year old couple the payouts for a single premium immediate annuity.  In the beginning they could expect to receive 5.3% of the investment as guaranteed annual income for life.  This was back in February when the 10 year treasury was trading at about 1.5%.

As many of you understand, my first objective was to compare the guaranteed income payout to a deferred contract while using free withdrawals to match the income.  With modest growth, you can match income but have a substantial remainder down the road while staying in control of your money the whole time.  It’s so simple that a redneck from Montana can figure it out.

The main point of me suggesting you approach income that way is because most people think rates will rise in the long run.  Payouts increase with age as well so if you defer the income decision there is a high likelihood you will get greater cash flow in the future and quite possibly much greater.  Whether or not it’s the easiest way to do things, it is the most profitable.

As with many people, this couple had a hard time making a decision for several reasons relating to a general skepticism of annuities.  That’s ok because I promote detailed research as the best way to make a decision you can live with.  As time dragged on we entered into some serious economic calamity and interest rates dropped significantly.

Last week, I ran the numbers again and the same couple was now looking at a 4.9% payout from an immediate annuity.  In just two months the payout dropped by a meaningful amount because the ten year treasury had come down by almost a full percent.  When things turn around the exact opposite will happen and you will get paid more for the money you put in.  Or it will take less money upfront to meet the same income goal.

Please don’t argue with me about deferred products or bonus rates and the like.  Waiting to take payments is a lost opportunity cost and with all factors considered the IRR is identical to immediate income payments.  I love to argue so call if you’d like to be proven wrong.

Low interest rates are not the problem as commentators will suggest.  You just have to think outside the box and I’m not talking about anything complicated like finding a vaccine for a rapidly mutating virus.  It’s only a matter of a few simple principles that make sense.

A return to normal is the first thing that needs to happen before payouts recover.  Low rates have required the insurance industry to dial back offerings and several companies have been rated with a negative outlook.  That speaks more to company profitability than safety of your money, but such is life for those insurance companies who not only need to protect policyholders but also appease stockholders.

Private companies, however, don’t have to worry about stockholders and can build greater levels of reserves to keep business running smoothly during volatile time periods.  There’s no more magic to it than finding the stock with consistently high dividends.  The ability to reinvest profits without concern for stockholders sets them apart when you find slim pickings elsewhere.  These few companies are currently standing above the crowd with reasonable offers while others are pulling back in order to maintain stock values and financial ratings at the same time.  Where would you rather have your money as we wait for a recovery?

About seven years ago I helped a similar couple find the highest payout for an immediate annuity.  Their annual lifetime income equated to a 7.2% payout of the initial premium.  That amounts to 50% more annual income than the same couple could get today.  Rates don’t have to go to hyper-inflationary levels in order for you to get substantially more income for the money.  Modest growth will keep you in position to capitalize on the opportunity when it becomes too good to pass up.  The right strategy along with the best companies will put you in position to do just that.

I approach things the way I do because of what I’ve seen in the past.  Grow your money safely and access the funds as you see fit.  As conditions change you’ll be in position to make the most of it when the timing is right.  It’s really not that hard to figure out.

Let me know what you think… comment below or send a response to the email.

Bryan