When I started this website it was all about fixed annuities.  A good fixed rate will solve any problem in retirement and beat the projections of every long-term guarantee.  Running the numbers and learning how to analyze solutions provided the inspiration to start spreading my message.  Unfortunately it wasn’t long before rates started dropping.  Multi-year guarantees that started over 6% steadily decreased and in just a couple years it was hard to find something over 3%.

The rate wasn’t the only thing that changed.  In order to keep a competitive yield in contracts, insurance companies had to limit liquidity.  Most quality fixed annuities came with a full 10% free withdrawal but that changed and now most offer interest only withdrawals and some come with no liquidity at all.  It works fine for parking some money but you can’t do any sort of dynamic planning with it.

Before someone calls me on it I need to tell you that 10% free withdrawals are still available in some fixed annuities.  The problem is that you’ll sacrifice yield to get it.  New York Life will give you the full free withdrawal and a whopping 1.5% over seven years.  That rate is an educated guess as I didn’t take the time to look it up.

Since fixed annuities were the first contracts I ever sold there will always be a special place in my heart for them.  In the early years I got people into contracts with a 7% guarantee over ten years.  In the mid-2000s those people were comfortable and happy.  Others with market exuberance before we hit the financial crisis would consider 7% guaranteed to be a big mistake and some of my clients second guessed the decision.  But 2008 happened as such things always do.  A return to reality is inevitable, we just never see it coming.  That’s when a guarantee makes the most sense.

The really cool thing about those contracts is that after the initial guarantee period there is a minimum guaranteed rate that comes after it.  For the early contracts it was 3% and we had no idea in the beginning that would be a competitive rate after the surrender schedule expired.  We came out of the recession ten years ago and woke up in a whole new world.  With fewer and fewer options for risk averse people, most decided to hang on to the 3% contract.  It was fully liquid and could be taken at any time without penalty so staying put made sense.  How many of you would take that rate with no restrictions?

This is one of the main reasons why I’ve never replaced an annuity I had sold in the past.  The base contract was better than anything available since so there’s no reason to mess up a good thing.

There have been plenty of times in the past 8 or 9 years where others would scoff at the idea of a measly 3% but the last month reminded us all to not be greedy.  Things have evened out and the fixed annuity caught up because it never lost money.  The old fable of the tortoise and the hare is the lesson here.

On the other side of 2020 is going to be a different world.  We have no idea how long this will take but I do know it will take new ideas to prosper from it.  There is going to be some incredible opportunity going forward and those who were prepared will get the most out of it.  People rushing to safety after the collapse are like the same people fighting over stuff at the grocery store right now.

If you were prepared then pat yourself on the back.  This year will be a whole lot easier and you can worry about more important things like spending time with family in uncertain times.  That’s what I’m doing.  With my back up against the mountains I can look out and see everything going on without being directly affected by it.  In a time when the CDC tells us not to get within six feet of another person, maybe the guy who does business remotely from Montana finally has the advantage.

I wish you all the best as we navigate the unknown over the next few months.  Rest assured knowing that as things change I’ll adapt to provide ideas so you can be on the front line of the recovery.  If you get bored with your social distancing routine then give me a call.  I’d like to know how everyone is doing and the phones still work, at least for now.

Do your best to enjoy the weekend and look below for related posts from the past…

Bryan

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One of my favorites because this was so easy:  Why I like Annuities

Don’t forget three months ago when many thought the rally would never end:  Why Would an Annuity Make Sense in 2019

I’ll be damned if this doesn’t make a pile of sense right now:  The True Cost of Volatility

This one shows that last August most people were fairly uncertain.  My oh my how that has changed in such a short period of time.  A Wild 2019 and How Annuities Fit

That’s it for now… I love you all!

There must be some value in all the things I’ve written about on this website.  After all, I live in the world you are trying to figure out.  My job is meant to help people plan for times like these.  Loyal readers have heard it a hundred times and clients/friends know exactly what I’m talking about.  Everyone puts focus on the stock market when interest rates are the far bigger story and I’ve tried to convince people to no avail.

For me it was obvious about a year ago when a real estate agent tried to talk me into buying an overpriced house.  He told me that rates would never be lower and could only go up so the timing was as good as it would get.  I laughed and said, “mark my words, rates are going lower and there will be a better time to buy.”  No matter who was right, it taught me a little bit about popular sentiment.

Interest rates have been shrinking since I started in this business.  My mentors at the time were giddy at the thought of a 30 year mortgage at 6%!  Now we may be going below 3% which is great for a borrower but you guys are all lenders.  At low rates you go short as a lender and long as a borrower.  It’s simple economics and I truly hope that fact hasn’t escaped you.

Who cares about what could have been?  I want to give you some ideas that help.  So if you are justifiably concerned about how recent events might affect retirement then I’d like to offer some thoughts on how to go about allocating assets.  Basically, you need to do something now!

Dividend stocks have always provided steady values and consistent cash flow.  And everyone else your age knows that.  Could that rush have increased prices to an unrealistic level?  What happens to those consistent dividends as the economy slowly grinds to a halt and profits shrink?  This one is probably going to be like the February unemployment numbers.

Bonds have added a little juice to most portfolios over the past year.  Lower rates lead to increased values but the opposite will happen when things turns around.  My guess is that anything over 2% for a high-grade corporate bond will be pretty good in the coming months with serious risk to value when the economy stabilizes.  That sounds like a great idea for a big chunk of protected retirement assets…

If you want a CD then buy it now.  The yield may not look that impressive but it is likely better than anything you’ll earn over the next year.  Don’t ever forget that the majority of the developed world has negative interest rates so stop being so picky.

Go to cash if you don’t know what else to do.  Don’t be greedy and spend too much time wishing you would have sold last month.  I’m sorry if I wasn’t more direct then, but some people just weren’t satisfied with an all-time high.  Whether you left something on the table or not, things will get worse before getting better.

Since this is not about annuities, I’m not going to tell you again that you can get a 0% floor with a double digit upside, more liquidity than bonds and safety that beats everything else.  If that’s not good enough, go ahead and stick with another assets based on a .70% ten-year treasury.

Last week during the first stage of the meltdown I went and spent a couple days with my dad on his farm.  He’s getting things ready for the upcoming season and one thing we needed to do was replace a tire on his ditcher.  If you don’t know what that is, it’s like a plow you pull behind a tractor to clear out irrigation ditches in the spring.  That damn tire had threads popping out everywhere and was completely worn through on the sidewall, with inner tube fully exposed but still holding air.  I don’t know why we replaced it because it still did the job after 40 years or so.

Most times all it takes is for one little piece to work the way it should so that everything else runs fine no matter what the conditions.  It’s never too late for a change so think about that as you wonder if your tire is feeling a little ragged right now.

Call or email any time…

Bryan

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Everybody wants it.  Salesmen promise it without regard to reality and I always say it’s possible but don’t expect it consistently.  Honestly I’ve seen it happen several times and the likelihood depends a lot on crediting methods or the index tracked, not to mention a pretty hot stock market.

This is not the highest I’ve seen, just the most recent and performance is always a popular subject so I’m sharing a statement from a renewal last month.  The owner purchased this contract in January 2019 and just completed the first year, during which the market did really well as you know.  But a year ago everyone was pretty nervous so we didn’t know to put all the funds in the S&P 500.  Instead we split it up with a hedge on the gold allocation and some diversity with a balanced mid-cap index.  All performed well so the blended yield came out well ahead of our reasonable projected average.

Here’s the statement, redacted of all personal information:

I’ve had some people complain that earnings are never expressed as interest on these statements.  Maybe some do but not the ones I use.  So unfortunately we have to do a little math.  The contract was purchased with IRA funds for a total premium of $166,669.48.  This gentleman was over age 70 so an RMD was taken before the year was up.  $8,546.56 in withdrawals did not earn any interest because it was taken before the end of the crediting period.  So interest earnings of 16,008.59 was credited only on $158,122.92.  This results in total interest earnings of 10.12%.

Interestingly, his surrender value is over $161K.  With the RMD taken into account his earnings more than offset the surrender charges just one year into the contract.  He could walk away today with more than he put in the annuity just one year ago.  But why would he?  Yes the market did better over the period but the annuity is locked in value.  If the market keeps going the contract will yield again and if the market drops he won’t lose a penny.  He certainly doesn’t have to worry about losing a few percentage points of value just because an infected bat attacked a scientist in China, or whatever explanation is making the news today.

It’s about security and consistency and getting the highest yield on your safe money.  Simple as that.  Plenty of people passed up the opportunity but those who didn’t were fortunate to have money protected and still achieve a healthy gain.  I’m not going to blow a bunch of smoke this week.  You all know how to get a hold of me.

Until Next Time…

Bryan

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This year started just like the last ended.  The stock market continued to climb early in January and the prospect of the bull market reaching new highs in 2020 was a real possibility.  I’ve talked to several people who had a lot of fun watching assets grow substantially during the second half of 2019.  What a change from the prior year!  Last January, most people were lamenting the losses of solid 2017 gains.  And so it goes with the stock market.  However cliché it may seem, the comparisons to a roller coaster are appropriate.

Even after all the talk last year about the economy slowing down there are several indicators suggesting the expansion could continue.  A new negotiated trade deal with China, the USMCA with Canada and Mexico and Brexit finally set to happen before you all read this.  Wall Street likes certainty and these are just a few of the uncertainties that caused skepticism in regards to whether the economy would continue to grow.  Regardless of where you stand on the benefits or risks of current events, having things settled gives the business community confidence to operate without fear of rules changing.

Now this is not the place to talk about all the economic indicators or make assumptions on how current events will affect your assets but I do want to remind people that most corrections happen because of things that hadn’t been predicted.  The virus in China is the perfect example of something no one expected that causes enough panic to roil markets and stall economic expansion.  Uncertainty has and always will be the greatest threat to stability and continued growth in the markets and economy.

The key to succeeding in retirement is not to predict these events but to insulate yourself from the fallout.  You all know where I stand on the issue.  I sell annuities and you signed up to receive information about how to use them.  That’s not what I’m going to write about this week.  Some of you have annuities and some of you are still thinking about it.  Many of those still thinking about it may never make the change but that doesn’t eliminate the need to protect assets.  So I decided to give you a couple ideas for asset protection that don’t involve annuities.

If you’re new to the site and would like to read about my justification for using annuities just click the green button at the top that says “Newsletter” and you can go see just about everything I’ve written on the subject.  For the rest of you, it doesn’t matter if you’re the type that will never use an annuity or person who already has one but wants more protection without the commitment.

One by one I’ll go through all the options and let you know what might be a good idea and what might not.

Money Market or Savings

There’s nothing wrong with simply taking some gains and waiting on the sidelines for a while.  I’ve seen plenty of people, motivated to make a move but paralyzed by over-analysis who got stuck because market positions deteriorated before a decisions could be made.  If you are worried about a long term market correction but have no confidence in a an option that requires a commitment then pull some money out of equities and keep it secure for a while.  Even a stop loss can be how you get there if you don’t want to try timing it.  Retirement accounts might look good but you honestly don’t have any money until you sell the holdings and sometimes you beat the market by staying out of it.

Bonds

This has always been the favorite way to reduce risk in retirement and regardless of what I say that probably won’t change any time soon.  But I’ll try again.  There’s nothing wrong with protecting money and getting steady interest with bonds but you need to understand the risks and/or limitations.  Values fluctuate with interest rates so individual bonds must be held to maturity as selling with rising rates will create losses that defy the reasons for protecting money in the first place.  Bond funds are the number one culprit because you have no control over buying and selling.  A lot of news was made last year with the bond rally.  It only happened because rates dropped making asset values go higher.  It was some relief for those who rode the rates up from the lows of 2015 and saw steadily shrinking values along the way.  With rates back down and bond values back up, there’s not much opportunity.  Interest payments are consistent so that’s a benefit but rising rates could make bonds a longer commitment than you think.

Hedging Strategies

Options trading in most ways is actually even more speculative than staying exposed to the stock market.  But people who want to keep chasing growth can use puts, covered calls and other options strategies to create profit that can offset losses during a correction.  The problem here is that I think a lot of people who don’t know what they are doing give this a shot anyway.  For most it’s like playing poker at a table full of pros.  Successful options trading take knowledge, experience and skill so be diligent, humble and do your homework before executing the first trade.  I have a close friend who made his fortune trading options for an institutional firm on Wall Street.  He laughs when I tell him about anyone who thinks they can just open up an account and start playing the game.  It’s not impossible and I do know people who have successfully entered this market but it isn’t for the faint of heart.  And just like anything else it costs you something to do it so you have the weight the cost against potential gains to determine whether the risk is worth it.

Dividend Stocks

Here’s a recent trend that is probably the best way to stabilize assets and stay in the market.  Lots of asset managers, in light of low bond rates, are recommending dividend paying stocks as an alternative.  Blue chips have a long history of consistent dividend payments.  The asset value doesn’t grow much but it typically doesn’t drop much either.  Last week I read a report that indicated 40% of all growth in the stock of S&P 500 companies came from dividends in the last ten years.  It doesn’t mean you have to get into individual stock picking as there are plenty of low cost funds with diversified holdings of quality dividend stocks.  It will take a little research but this one’s not that hard and there are plenty of deals out there to be had.

I could keep adding more but then I would veer off toward things like true diversification and modern portfolio theory.  I sure as hell didn’t want to bore you by talking about CDs.  The truth is that any idea that protects money and keeps you in the stock market takes work so you have to pay someone to do it or set aside plenty of time to make sure it’s done right.  It all comes at a cost and none of it is without risk.  It just has to be done with a cost you can afford and a risk that’s acceptable.

If you have any other ideas you think are worth mentioning leave a comment below.  If it’s a good alternative to using annuities in retirement then I’d be happy for the extra education and you may be helping others on the list as well.  Don’t be shy and let me know what you think.

Until next week…

Bryan

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Last year at about this time I got a call from Roger and it inspired me to make his situation the subject of a newsletter.  A few years prior he had put a plan into place based on advice from a CFP and had started to question the plan.  He found this website and wanted my opinion.  There wasn’t much I could do for him except cross my fingers and hope it all works out regardless of the limited potential he now has.

You can read that story here:  I Can’t Believe a CFP Designed This Plan

I was thinking about it because I am three weeks away from a client review for a couple that started about the same time as Roger and the two situations were roughly similar back in 2016.  The difference between the two plans will underscore the importance of blending safety and growth potential.  The events of the past year have made me grateful to have clients that are adequately protected but still able to capitalize with substantial profits.

So let me tell you about Lee and Barb.  I met them in early 2015 while spending the winter in Puerto Rico.  They were each 59 years old and had planned to retire in four years when they could collect social security.  With a combined $900K in two 401(k)s and a projected income need of $30,000 annually I determined that retirement was possible.  In order to hit the goal they had to protect assets but they also needed growth for discretionary spending and inflation protection.  The asset to income ratio was right on the line but there was no choice but to blend protection with growth potential.

If you remember back to early 2015 you might recall plenty of uncertainty in the markets and economy.  It was only two years after the S&P 500 had recovered from the calamity of 2008 so there was a mix of people who were relieved to have stayed in the market and those who got out at the wrong time and had been too scared and unsure of what to do.  It was the perfect time to add some assurance but keep open the possibility for continued growth.  That was about the same time Roger’s CFP had him put everything in cash and annuities.  If I only had a time machine…

Lee and Barb had their assets in a 50/50 mix between corporate bond funds and market index funds.  Aside from a short visit with a Ken Fisher rep the only other plan they’d seen was a recommendation to put $600K into a deferred index annuity with an income rider.  Boring, right?  That contract would have perfectly hit the income goal in four years so it was suitable but I felt they would be leaving too much potential on the table and I also knew that an annuity would work well with far less investment in the beginning.

The solution was simple and the reasoning obvious.  Swap the bond funds for and index annuity with no income rider and no fee for maximum growth.  It actually took less than half with $400K going into the annuity.  The remaining assets could float with the market and in four years, withdrawals would come from the annuity if market assets were down and just the opposite if the growth side had done better.  With a seven year annuity contract, in a worst case scenario, they could pull income via free withdrawal for three years until the contract was surrender free, at which point all assets would be rebalanced depending on portfolio weight at the time.

The first year was pretty weak on both sides.  The market was more or less flat with the annuity growing about 1% and the market doing about the same.  However, in early 2017 the market was well into another good run and the annuity came in for a 5% yield and the market investments were up about 15%.  Things were looking good for Lee and Barb and they considered taking some gains and protecting them but with no real need I didn’t think it was necessary.  The market continued to race forward and in 2018 the annuity had another modest return in the neighborhood of 5% or so but the market assets had grown to nearly $700,000 after an exceptional 2017.  Lee decided to retire early and Barb made a plan to follow him in a year, which was also earlier than planned.  In doing this they activated part of their long-term plan and shifted $200,000 to more stable blue chip stocks with a history of consistent dividends.  This would reduce risk a bit more and provide for some diversification and consistent income to take pressure off other parts of the plan.

It was a good call to go a little more conservative because the market had some losses in 2018 and they held steady with the rest of plan given no reason to overreact to the modest correction.  I’m excited to talk to them again in a few weeks.  If things hold the market side of the portfolio will be valued at more than $900,000 after a historically exceptional 2019 and the annuity is looking at a yield of close to 8% which will lock in a value of about $480,000.  Without a specific calculation I can tell that’s a blended yield of roughly 12% over four years.

I remember writing about Roger’s story last year and saying something about how I would have done things differently four years ago and it occurred to me that this was a great example of why it’s important to stay consistent.  Obviously it’s not the annuity that gave Lee and Barb all the great performance but it was the annuity and the overall strategy that allowed them the opportunity.

If you were to do things the same as Lee and Barb I can’t guarantee the same results over the next four years but I do know if you do it right you’ll see that happen at some point.  Any other annuity strategy would have cost too much to achieve the above results and some advisors would even have you put so much in there that you’d have no real growth to look forward to.

I’d rather see you succeed than me so my goal is simple.  Prove that you need to protect just enough for a backup plan while leaving plenty available for maximum potential and flexibility in the future.  With rates staying stubbornly low, it takes just a touch of creativity to find an alternative that doesn’t lock up your money for the long term.

Enjoy your weekend!

Bryan

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Annuities barely get a passing thought when the market approaches record returns.  Short-term exuberance is addictive and very few people can remove emotion from investment decisions.  Well 2019 was a year that paid off for everyone who stuck with it.  Trade tensions have eased and the economy seems to keep growing steadily so it may continue for a while.  Then again, there’s some real political risk after Thursday night’s news from Iran but that’s an entirely different subject.

Yes, the market was great in 2019 but it was not easy to get there as many people were continually nervous along the way.  It seems as though pain is much easier to forget than I used to think because this time last year plenty of people were lamenting the end of a bull market and moderate portfolio losses through 2018.

I remember a year ago I told plenty of people to stick with the market after big losses but I’m not quite as confident this year since many of you have the opportunity to take some nice gains out of play.  2018 wasn’t great and 2019 was.  So what is the average of those two years?  After all, retirement planning is a long-term proposal so short-term gains or losses are not where you should focus.

I started thinking about this a couple weeks ago and sat down last night to run some numbers.  In a post about volatility a few weeks ago I brought up something a lot of people know.  It takes a larger gain to make up losses and since 2018 was negative that should decrease the actual yield after a stellar 2019.  And of course I wanted to test to see how an index annuity might have affected the outcome.  Now, two years is still too short-sighted but it’s a good exercise nonetheless and the difference will no doubt be more pronounced in the long run.

So I took the level of the S&P 500 at the beginning of 2018, 2019 and 2020 to test the value of different portfolio mixes to see what performed best.  In 2018 the index was down 7.7% and in 2019 it was back nearly 29%.  Starting with a direct investment in the S&P 500 the results are below.

As you can see, after the drop in asset value, rather than being up big the yield was good but a fair bit more muted.  The two year effective yield comes to 8.967%.  Not a bad average at all but far from knocking it out of the park.

Let’s see how the same thing would look with an index annuity and 50% participation rate…

Instead of risking it in the stock market, had you protected it with an index annuity it would have caused you to come up $4,396 short in portfolio value.  But it’s more about what you went through to get the respectable 6.931% effective yield.  A year ago most people couldn’t stomach the losses experienced and I don’t know exactly how many stayed in the market.  Plenty of others who had annuities were bummed to make little or nothing but no one lost money and there was much less stress involved.  Let’s take it one step further and see what a blended portfolio would have done with a 50/50 mix of annuity and stock market.

Half of the risk resulted in cutting losses as well and staying in position with a portion of assets to capture more gain, resulting in an improved yield of 7.954%.  That’s pretty good considering half the risk.  Since you all are in or near retirement then it makes sense to see how withdrawals would affect the outcome.  Remember, withdrawals from the market in down years will compound losses so it’s more necessary to protect assets in order to maintain growth potential.  Take a look at the final table below where I assume a 5% withdrawal for income in each scenario.

Please allow me to summarize the important points below:

• Taking a withdrawal from market-based assets alone causes a total portfolio drawdown of $6,434, which includes the lost opportunity cost of the growth on the withdrawal. Over several years this will create an exponentially negative affect.
• Using only an annuity gives you a higher starting base for the second year and results in a smaller difference of -$3,679 ending account value. Remember that without a withdrawal the difference between the two was more than $700 greater.  This gap will become tighter over several years and will quickly turn positive on the annuity side in times of extended or consistent market turmoil.
• A balanced portfolio again reduces risk but also provides for more growth. The withdrawal was taken only from the annuity side, allowing the market assets time to recover and capture as much gain as possible.  This gives a growth advantage over the annuity-only strategy and further reduces the difference between balanced and market-only to just $1,434.  Over time this will also swing positive to the side of a balanced portfolio but it happens more quickly and the difference is far more dramatic over periods of high volatility.

What does this tell you?  Cutting risk in half more than offsets the limits of only a partial gain.  It’s simple and I don’t understand why more people don’t see it that way.  Of course the effects are compounded in a scenario where you may be taking systematic withdrawals.  Whether you need the income or not it makes sense for anyone who would rather spend retirement on hobbies and family rather than worrying about running out of money.

Stress is bad for your health so why worry about it?  Make the decision to blend your portfolio correctly and enjoy a higher standard of living because of it.

Not all annuities achieved double digits in 2019 but some did.  If you got every piece of the market or more than you probably don’t need my help or you just got lucky.  In reality, emotion caused many to enter or exit at the wrong time and lots of you even paid someone a handsome fee for the pleasure.  Get realistic and give me a call if you’d like to see the no risk, no fee approach to growing your money.

Happy New Year!

Bryan

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There are all sorts of good things a person can do with annuities.  Some annuities work better than others, depending on your goals.  But there really is only one BEST way to use annuities that will help solve nearly all the problems in retirement.  I’m not trying to convince everyone to like the products.  Each person is entitled to an opinion but if you signed up on my website and continue to read this weekly post then you might as well hear me out.

For some people it takes time for the solution to sink in.  Others quickly notice the difference between standard application and a creative strategy that produces superior results.  Most often, people who have purchased an annuity in the past finally understand exactly how an annuity fits in a portfolio and recognize the benefits of my approach right away.

Last week, one such person sent me an email to that effect.  Dan signed up on the website last Thursday and by Friday evening sent me a note to thank me for giving a clear explanation of the products and helping him avoid an additional and unsuitable product.  With his permission I have posted the email below…

Greetings, Bryan;

I Googled the 222 and your three segment videos came up.  Listened to all three of them and decided that since I’m 72 years old, 10 years is too long to wait.  In 2015, I signed on to $ 250,000 or so of Security Benefit, “Secure Income Annuity”, in three contracts including one IRA.  I’m satisfied with this arrangement, guess I need to be at this point.

So, my wife and I have approximately $ 90,000 in 401-k’s; I still work part time and mine is parked in Money Market for the most part until after the next 10%+ correction when I would normally place it back into the S&P equivalent, Fidelity FXAIX.  A local purveyor of insurance products and nice evening dinner explained the Allianz 222 without mentioning it by name until we went for an interview.  She knew just how to sign us right up that afternoon.  It all seemed a little too quick so I requested the brochure which she turned over somewhat reluctantly.

What you are saying is so true.  If in addition to performance and stability, you want to retain discretion over your investment, a simple limited duration fixed index annuity is a great tool.  This is especially true for folks who just want to be able to expect decent income but are not interested in picking and watching their way through.  My 401-k has been successful because I study when to move it all the time but only make up to a couple moves a year at this point.  I have trading and hedging strategies for my Schwab based investments in the market.  Don’t do anything with bonds.

I wish to thank you for the straight scoop on these investments.  They surely have a place in the portfolio of retail investors such as myself.  And, as you say, I know there is a right way to handle them.  If I were 10 years younger, I would surely be wanting to have the half hour of your time.

You helped clarify my suspicions regarding appropriateness of this product for me at this time.

Thank you so much.

My broad reaction to a message like this is to feel good about spreading a positive message about annuities.  Only buy what’s right for you and stay away from the products that don’t work for your situation.  Dan is happy with what he’s got, has a good strategy for growth investment but someone tried to sell him another contract that didn’t apply to his situation.  I’m glad that he found me and was able to avoid throwing some money at a contract that wouldn’t benefit him.

To speak in specifics I can tell you that Dan seems to be the type of guy who is good at figuring things out.  I can look at the wording and overall message and tell you that he knows exactly what I’m trying to help people accomplish.  Going piece by piece through his message will give you several indications of how best to approach investment and income planning in retirement.  Securing what you need will open up opportunities for greater long-term growth, but you should maintain a calculated approach when taking on risk.

Most importantly I want to remind everybody that my top priority is to help people make good decisions.  I’ll make a living from those whose timing and ideology matches mine.  But for the rest of you I am always available to lend a critical eye to what you are considering.

If Dan and I had met ten years ago we likely could have done some pretty good things together.  But he’s done just fine on his own and there are plenty of you out there that might look back in ten years and say the same as him.

Christmas is approaching and I wish you all the best!

For access to all past newsletters click here…

Bryan

800.438.5121

Make an appointment now…

Gains in the stock market are great but losses create stress. It’s high times on Wall Street right now and any painful experiences of the past are distant memories for most people. Even so, volatility is the top concern for a majority of people who are exploring the possibility of using annuities in retirement.

Most people think about volatility in terms of losing money. There’s more to it than that. Losing money is temporary but there’s a long term affect that can cause more damage and reduce the probability of success in retirement. Volatility also reduces long term yield so the more you have the less your assets grow over time.

It may seem obvious but have you ever really looked at the numbers? I mean, everyone is likely familiar with the idea that a 50% loss in one year requires a 100% gain in the next year to break even. As bad as that loss would be, the worst part is that bad luck followed by great fortune only gets you back to the starting point so you would have gone nowhere over a two year period.

I’m going to share with you a basic exercise to drive this point home. I’ve been doing this with people since the beginning of my career and it’s a simple way to show you how more volatility reduces the final yield. Refer to the table below to see several examples of a two-year time period with alternating returns. Add the yield from each year together and divide by two. Every example averages 10%.

Curiously, as more variability is introduced to the yields, the result drags down the ending account value. The highest value comes from a steady 10% each year and the lowest value comes from 30% growth followed by a 10% loss. The explanation lies in the difference between arithmetic and geometric average. Basically, one provides an average of the yields and the other gives the actual yield on investment.

Managing risk properly leads to greater yields over time by reducing volatility to improve performance. It matters even more in retirement because systematic withdrawals compound losses and limit gains. If you want to visit the archives you can look at something I wrote in 2011 about Reverse Dollar Cost Averaging. The game changes when you retire and start living off your assets. Your strategy needs to change so you can play the new game effectively.

In my last post I showed you how the opportunity cost of management fees drag down performance. Volatility makes it even worse. I had promised to offer the solution but felt it necessary to include this as well since the eroding effects of volatility can cause even more damage.

Next time I’ll put down some hard numbers that show clearly the benefits of reducing fees and managing risk properly. It’s all about making the most out of what you have. If anyone feels like jumping the gun then give me a call and I’ll show you how it works before sending it to anyone else.

Until next time…

Bryan
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I talk a lot about how my strategies are different so this week I’m going to show you a real-life example.  Not all recommendations were my idea in the beginning.  I learn as much from my clients as they learn from me.  As cheesy as it may sound, teamwork is the key to financial success in retirement.

Frequently this year I have been mentioning a new idea for conserving assets while maintaining growth potential through retirement.  Annuities dramatically reduce the probability of failure and that’s been shown with academic studies and economic analysis by people who don’t even sell the products.  There is no debate as it has been proven over and over again.

What I consider to be the best retirement strategy available has grown from seeds planted by many different clients over the past 17 years.  During a recent review of one couple’s plan I was pleased to see just how well the plan had worked so far.  And this strategy is one of the most important seeds that was planted several years ago.

Neal and Barb are a wonderful couple in their mid-70s.  They are the kind of people that make me feel better about the world.  We met a little over five years ago as they were trying to plan for a very specific financial request.  Aside from a nice lifestyle, Neal and Barb have a family cabin on a lake in the mountains as a meeting place for all the children and grandchildren.  The goal is to provide funds to pay for maintenance and expenses for the cabin in perpetuity so the whole family can enjoy this meeting place for years to come.

Neal correctly assumed that his Roth IRA would provide the best shell for accumulating assets since there are no distribution requirements and it has the best tax treatment one can get.  He didn’t want to take risk so he was interested to see if annuities could provide a solution.  Most of their assets were inside traditional IRAs and at the time each Roth had a relatively modest account value.

Together we chose to use an index annuity with flexible premium option so funds could be added.  These guys live within their means and when each turned 70 had RMDs from the traditional accounts that they didn’t need.  So, each year Neal and Barb diligently added additional funds to each Roth contract.

After skipping the first year, they essentially made consistent Roth contributions each year.  Both accounts started at a relatively small combined value of about $46,000.  As of today both accounts have a combined value of over $134,000 and it’s going to be a fair bit higher as they are positioned for a nice additional interest credit at contract anniversary in the next couple months.  So, they’ve almost tripled what they started with and in only five years. 

Calculating the interest is difficult as you need specific dates of investment to produce the actual return.  I did this since I can look at the account and the actual yield on each contract is just over 4%.  For a conservative investment I consider that to be very reasonable.  There are other options available with risk if you’d like more yield but that’s a personal decision.

I’ve told a lot of people that you can do accumulate plenty in a Roth IRA by starting contributions in retirement.  A couple of weeks ago someone almost shuttered when I mentioned the idea.  But if Neal and Barb did it with just annual contributions in five years then imagine how it would look over 20 years. And larger amounts can be added via transfer or Roth conversion so there really is no limit to what can be accomplished.

Now I’m not here to say that everyone needs to adopt a strategy like Neal and Barb, but it does shed light on something that I think all people can use.  Flexibility with assets in retirement cannot be understated.  There’s nothing wrong with playing offense in retirement.  Safety first with the ability to move funds between investment options will greatly reduce risk and also provide for the type of long-term yields that will have you increasing wealth in retirement.

Consistency and discipline is all it takes.  Every one of you already possesses both qualities, otherwise you wouldn’t be here.  Aside from that, all it takes is the right products to put yourself in position.

Have a great weekend!

Bryan

800.438.5121

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There may seem to be an obvious explanation but then again maybe not.  It’s not at all because of how much money can be made, although more than one person has declined to do business with me simply because each thought I would be making too much money on the deal.  Being able to make a living justifies the effort but the reason I like annuities goes much deeper.

Many of you know I went on an elk hunt a couple weeks ago.  It’s been quite a while since I really took a break and this is the time of year I like the most.  Getting the mules out on the trail and exploring a beautiful and remote part of this state is about my favorite thing to do.  If I can fill the freezer it’s all the better.  My wife lives on organic food and there’s nothing cleaner than grass-fed elk meat from the Rocky Mountains.  Annual success gives me all the hall passes I could ever want.

It can be hard to leave for extended periods of time because this business is a one-man show.  Nothing gets done when I’m not here so most of the time I take a vacation, the computer comes with me and I leave my calendar open and keep working.  But that’s not possible with elk hunting when I need to stay out of sight, downwind and quiet at all times.  Talking on the phone is forbidden.

If you are ever able to get deep into the mountains and high in elevation you’ll often find a pretty decent cell signal in some of the more isolated areas of the country.  Each morning we would start the climb out of camp and after the first 1000 feet of elevation I’d be able to check my email as the sun came up.  Then the phone would be turned off and I’d check it one more time before dropping back down to camp for the night.

If anyone needed something I’d be able to quickly answer questions or just let them know I’d take care of it in a few days.  Aside from those emails and a few text messages I was cut-off from the outside world.  I watched no TV and read no news.  When we got out of the woods I learned that I had been gone at a pretty good time.  The DC soap opera was running hot and economic indicators had continued to trend toward the negative.

None of that mattered and that’s why I like annuities.  In spite of all the accusations, finger pointing and negative reports not a single one of my clients was negatively affected.  While I was never as available as usual, nobody was in a worse position than before I left.  Monthly income payments continued to flow and account balances were protected regardless of all the noise and drama.

Isn’t that more or less what you all want?  There are all sorts of ways to use annuities and the greatest benefit is that annuities are probably the most consistent asset available.  I’ve not seen even one fail to deliver on a promise, no matter how bad things may seem.  Annuities do what they are supposed to do so I and my clients don’t have to talk about the negative.  We talk about why we are both glad they don’t have to worry about the same issues as lots of other people.

I like annuities because my business is protected just like a client’s portfolio.  In turn I get to spend more time testing creative strategies to find ways of getting more yield.  I like annuities because I spend zero time putting out fires.  It’s a much more positive experience and in my opinion leads to greater health and happiness.  Whether that works for you is a personal decision.

As you all continue to search for the right approach to retirement, always keep in mind the most important benefit of annuities.  Regardless of politics or economics, annuities are safe and allow you to focus on your passions and hobbies in retirement.  Contract details and all options aside, consider what you’d rather spend your time doing.  Those who don’t care for financial stress might find the annuity to be a pretty reasonable choice.

Enjoy the rest of your weekend…

Bryan

800.438.5121

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