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

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

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

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

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

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

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

130% participation brings the yield to 11.5%

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

Final yield of 7% in three years

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

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

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

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

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

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

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

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

Pure growth and efficient control of account

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

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

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

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

5% average growth never invades the principal

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

Easy question:  Which option provides more flexibility?

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

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

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

So let me know.  Which annuity would you choose?

Bryan

800.438.5121

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

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

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

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

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

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

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

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

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

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

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

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

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

Bryan

(800) 438-5121

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

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

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

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

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

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

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

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

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

Bryan

800.438.5121

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

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

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

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

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

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

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

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

Enjoy your weekend…

Bryan

(800) 438-5121

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.

Bryan

Well it turns out that there is something of a fourth installment of my series that I was supposed to have finished last week.  I’ve told enough stories and you all are probably tired of it.  Let’s add some numbers so I can show you how my learning, evolution and solutions stack up to a real time example.

I showed something similar several weeks ago but this is a new case that generally represents the fundamental reasons for looking at a different option.  Most people who adopt my strategy do so because the market doesn’t offer the amount of income expected.

Don has been on my email list for a few years and now that retirement is a few months away he needs to shop for some income to cover expenses when he stops working.  His request was simple.  He and his wife had earmarked $230K and wanted to produce an additional $1200 per month in order to comfortable enjoy retirement.

With both people being 65 years old my gut instinct told me that he would be close.  It’s no great achievement to find the highest guaranteed income payments if you’re in my shoes.  Most consumers would need to visit multiple advisors in order to verify the best options, without any way of knowing for sure whether they had the best.  But for me it takes one email and a five minute database search to confirm the best deal for any situation.

So I looked it up and my best guess was not even close.   The money Don had earmarked for income would only produce $950 per month and it was an index annuity with guaranteed income rider that beat out everything else, including SPIAs.  It doesn’t seem like a very good deal, does it?  Well I have spent the past few weeks explaining how it has been a career habit of mine to find ways to get more income and an alternate strategy is never more useful than when rates are low and you need an alternative to meet expectations.

First of all you need to calculate a break-even for the income stream.  In this case, Don and his wife would take income for 20 years and two months before finally receiving aggregate payments that equal his initial purchase price.  The couple would be 85 years old before finally beginning to profit from the contract.  After the break-even point is when the insurance kicks in.

Let’s take it back to my roots and see how a fixed annuity would do.  Right now you can get about 3% so if he did that instead and used free withdrawals to take income, after 20 years he would have $103K remaining in the account.  If you bump the yield up to 4% there would be over $150K left and at 5% he would barely invade the principal.

In order to get much more than 3% you would need to use an index annuity.  Knowing that the basis will last for 20 years, any growth will put you on the positive side while keeping control over assets the whole time.  If you can approach 4%-5% then you would have the opportunity to increase income to the desired $1200 per month.  Another thing with doing it this way is that if rates rise when you get older the combination of flexible assets and higher payouts could potentially put someone in position to switch strategies and take the guaranteed income later.  It takes growth but it’s only possible when you keep control of the money.

This isn’t for everyone, rather it’s an option for those who can’t find what they want, or for anyone who wants more control over the funds.  What’s interesting in this case is that when Don told me about the assets he plans to combine to buy an income annuity, I found out that one of the assets is an index annuity he has owned for a while with a few years left before it was surrender free.  He was going to surrender it, take a small hit and purchase an income annuity.  When he told me how much was in the account vs. what he originally put into it, I calculated the average yield to be over 5.5%.  He’s already part of the way there without realizing it yet.

He shouldn’t surrender his current annuity.  He should buy another one since he already knows to expect the kind of performance needed to get to his desired level of income.  But I don’t know what he will end up doing.  For some, the peace of mind provided by guaranteed income is worth taking less and there are all sorts of factors that make the decision different for each individual.  Yes, there are substantial benefits on either side of it so what you do will depend on your own personal factors.

Sometimes my numbers don’t work.  Single life payments, older starting age and even deferral years will make the guaranteed income contracts more appealing.  But in most cases it’s close so I always run the numbers to at least verify the best path.  When payments are much lower than expected but people are still interested in protecting some assets then it works well to use an annuity with good growth potential and the flexibility to make changes as time passes.

A few times every year someone comes to me and just wants the highest income payment.  There’s nothing wrong with that and for those who want more income, more control and more options then I have that covered too.

Have a great weekend…

Bryan

Like I said last week, it was all fixed annuities for me in the beginning.  It may sound boring but if those same rates were available today then I’d spend every hour of the day completing applications.  The pain from a market correction in 2001 was real and several people understood the value of asset protection but the market rallied back in a big way and greed made just as quick a comeback.  As silly as it sounds now, it was really hard to sell a true 7% guaranteed rate to most people.  But for those who didn’t care for risk, it was an easy choice and solutions were simple, just like my career in the first few years.

Sometime around 2006 a wholesaler came to our office and started talking about variable annuities with a guaranteed income rider.  From that point it became one of the most difficult products to understand and it still is.  Most people by now can explain the difference between an account value and income value but thousands of people before got the two mixed up and ended up regretting a purchase.  This is where Annuity Straight Talk came to life.

When the wholesaler talked about the contract he put focus on the fact that no matter what the market did, the income value was guaranteed to increase at 7% annually.  The account value would float up and down with the market but the contract owner could take lifetime income from the ever-increasing income value, regardless of what happens in the stock market.  After the market correction in 2001 this sounded pretty dang good to anyone thinking about retirement.

I was confused because my fixed annuities guaranteed 7% growth.  Which 7% would you rather have?  Do you want growth on your money or growth on a phantom value?  The superior value of the fixed guarantee seemed obvious to me but it would take a little more math to bury the argument from all angles.

The only real argument anyone could give me was that the phantom income value offered guaranteed lifetime income whereas the fixed annuity did not.  Well I knew that wasn’t true because EVERY SINGLE annuity can be commuted in value for lifetime income, whether you have an additional rider or not.  And you can buy guaranteed income at any time in your life through an immediate annuity.  To that point I had only sold one SPIA and the payouts were much higher than what was offered in the variable annuity.  It stands to reason that if you can literally grow your money just as well as the phantom value will grow then you can get more income when you need it.

Back to the library I went to look through the books one more time and run the numbers from every possible angle I could think of.  My idea was mathematically better, not to mention the additional benefits of zero fees and far more control over the money.  I was just a kid so the older guys didn’t listen to me and started churning out variable annuity contracts.  They were selling and I was advising.  I didn’t make as much money selling fixed annuities but I did feel better about myself for disclosing all the information to prospective clients.  My solution produced more income so it wasn’t hard for a critical thinking person to understand.

Fast forward several years and I can tell you there is one major advantage to maintaining flexibility and control over your safe assets.  Everyone who has gone this route is not spending what they thought they would in retirement.  Some people dialed it back and don’t need as much and others found they needed more.  A flexible solution that can produce more income or none at all if you don’t want it seems like the logical path for every material reason you can imagine.

I had lunch with one of my mentors a couple weeks ago.  He’s a tremendously decent human being and I love him like family.  He made a lot of money selling variable annuities with guaranteed income.  Wanna know what he’s doing with them now?  He’s replacing them all with fixed annuities because most of the people who bought them don’t need the income and don’t like the fees.  It’s a similar story for millions of people across the country who bought an annuity in the past 15 years.

From 2006 to 2008 I stuck to my guns and kept doing what I felt was right.  Money kept rolling into the office from variable annuity sales and I wanted no part in it.  That’s not to say all variable contracts were bad.  To the contrary, many of them have done quite well over time but the market crash in 2008 put many of them in trouble.  Hartford nearly failed, AXA started offering buyouts for the variable contracts and Ohio National stopped paying management fees to advisors who sold the contracts.  All of them underestimated the actuarial cost of the guarantee when the account value dropped by 40%.  The credit bubble was a black swan event that no computer simulation could predict.

2008 made me look like a rock star and I had my best year ever.  Even so, the sales pitch for variable annuities was a hard thing to battle.  The seasoned agents had more money and influence in our community and I’ll admit it’s not easy to convince people to ignore trends.  I had to cast a wider net so I started a website.

Around this time, index annuities became very popular and of course I was skeptical.  As interest rates changed, however, I was running out of options to maximize income but I had learned a lot about the context of different planning situations.  It truly was an evolution in my thought process and if you understand the basics it will open up much more opportunity for you in retirement.

Stay tuned for part III next week…

Bryan

Before we look forward to all the things that may change this year let’s get our bearings and review the past year.  You’ve all heard me say over and over that perspective is important and that’s never truer than when we may be facing a dramatically different financial environment.  2020 was an interesting year to say the least but I’d have to say that annuities were probably the most consistent thing and I’m going to show that by sharing a link to several newsletters last year and adding a little commentary to each.

From the standpoint of market valuation we are no different than one year ago.  When markets are at record levels, no one wants to get out, thinking that some extra yield will be left on the table.  I can’t predict the future any better than the next guy but looking back to last year I am reminded of the cyclical nature of this stuff.  A year ago no one wanted an annuity after an up and down 2019 that ended on a good note.  Does this seem familiar to anyone else?

January 4th, 2020.  Why Would Anyone Want an Annuity in 2019?

Many people feel like using an annuity will eliminate the potential for yield.  If you’re not in the stock market then how will you make any money?  Thinking like that defeats the purpose.  Annuities are meant for some of your money, not all of your money.  Protected assets insulate a portfolio so market corrections don’t have the same negative affect.  The right combination leads to MORE growth over time with less time needed to recover asset values.  Traditionally bonds have been the choice for safety but I showed you how annuities can give you even more.  And who can argue when you see proof of double digit yields?

February 21, 2020.  Double Digit Annuity Yield

We all know that the party didn’t last forever.  Last year in March brought a rude awakening for many.  Aside from a few US Senators who had the privilege of some early briefings, almost everyone was hit hard with assets in the market.  It was a nervous time for many reasons and much of that persists to this day.  Consistency is what gets you through uncertain times and there were several good lessons we all learned from the experience, not the least of which is that safety helps you sleep at night.

March 12, 2020.  Don’t Sell Stocks. Do This Instead.

March 21, 2020.  Fixed Annuities Have Never Been So Sexy

April 3, 2020.  A Look at an Insurance Company’s Balance Sheet

Only a few of the people I work with came through the year with little to no yield.  Obviously it was the timing of the purchase and the correction last year wasn’t kind to anyone.  The market crawled back and it didn’t seem logical.  Analysts kept telling everyone not to buy the dip and it makes sense considering the fact that many businesses are still struggling and our economy has a bruise that seems like it may never heal.  The Federal Reserve came to the rescue and saved corporations and retirement accounts alike.  Plan on seeing plenty of this in 2021 as well.  I am a firm believer in the fact that federal spending deserves credit for much of the economic expansion over the past 20 years.  I try to tell the kids all the time that it’s more important for them to understand than me but they just think I’m crazy.

June 18, 2020.  What’s Your Plan with All the Free Money?

Uncertainty seems to be the only thing we can be certain about.  I can’t think of a single year in the past 20 where everyone was optimistic.  It’s consistency that’s important and having a plan for the alternative, whether good or bad.  You don’t have to protect everything and you sure as hell should never risk everything.

July 11, 2020.  Consistency is the Key to Index Annuities

July 25, 2020.  How Mules are Like Annuities

Those who don’t know me well naturally think that I’m just trying to sell as many annuities as possible.  While I do have some big goals, nothing could be further from the truth.  There’s not enough time in the day for me to have a 30 minute conversation with everyone who signs up on this site, let alone spending the time it takes to work through the process for those who do come forward for more help.  My goal is to offer information that helps you, period.  It’s all about providing useful advice and being a sounding board for people when big events suggest more uncertainty may come.

August 8, 2020.  I Don’t Care If You Buy an Annuity

September 24, 2020.  Will This Election Ruin Your Retirement?

Looking back, through the summer and into the fall, life seemed to return to normal for most of us in Montana.  Much of that has to do with my semi-hermitic lifestyle.  I get to see what’s going on everywhere else but it doesn’t usually affect me the same way as those of you who live near big cities.  A wakeup call was in store for me and I got a real taste of how that damn virus disrupted so many lives last year.  Everyone in my home is just fine and my thoughts and well wishes go out to anyone who had a similar experience.

November 13, 2020.  Annuities Can’t Solve All Problems

When I finally got back on track, I finished 2020 the same way I plan to start this year.  We’re going back to the basics.  I often take for granted my evolution of thought that has occurred over the past 18 years of studying annuities.  Reviews like this are good because some of you have been reading this for a couple years but many others have not.  I no longer plan to expect people to know how I have arrived at the conclusions I have.  Annuities are meant for consistency and security.  You can accomplish just about anything with an annuity including market protection, inflation hedging, retirement income and even just overall portfolio management.  Opportunities with annuities have changed over time to offer a solution for almost every situation.  Don’t hesitate because of low rates that may be here for a while.  A different approach may be just what you need.

November 27, 2020.  Index Annuities Have Evolved

December 12, 2020.  20% More Income

I want to thank everyone on this list for a solid 2020, in spite of all the things that could have made it go the other way.  Communicating with all of you this way provided a diversion for me and I hope that it likewise gave many of you an escape from the insanity of everything else.  Many things in this world change, but I’m not one of ‘em.  As we look toward 2021 please freely offer your thoughts, ideas and any feedback so I can make this as high-quality as possible.

All my best,

Bryan

Payouts on income annuities have been low for years.  It’s a situational problem since in some scenarios a person can get a really good deal.  But for the average retiree the numbers don’t always seem to be compelling.

Early in 2020 I decided to introduce people first to the most complex use of the Flex Strategy to show just how much better the numbers can be if you use the right strategy rather than relying on an annuity alone to produce a safety net in retirement.  For anyone who has been around a while it wasn’t much of a jump to see an index annuity used primarily as a portfolio management tool.  For those who are new, however, I left out some critical points in the middle.

I’m going back to the basics so that anyone who doesn’t have enough information to make the connection will hopefully add these building blocks on their way to a complete understanding of how best to use annuities in retirement.

Over the past couple months I have run into several cases that are similar to the one I’m going to show you.  The specific premium amount doesn’t matter so much because the math works out the same no matter how much money you have.  Rather than explain the full details of this case I’m just going to show the numbers to illustrate the difference between two ways to approach retirement income.

For one couple in their late 50s we looked at using $300K to fund guaranteed lifetime income that would start in about one year.  It’s easy to find the highest guaranteed income payout for any situation and takes no more than a 5 minute search in a database.  In this case it was Protective Life that would offer the couple $13,260 annually, guaranteed for life.  Age, single or joint life and the number of years you will defer will produce different results for every person and that’s why an independent broker is important.  What works for you most certainly won’t work similarly for another person.

The table below shows what this contract would look like with growth, fees and income all taken into account over a 20 year time period.  I didn’t call the company for an illustration because I don’t plan to sell this but the numbers are plenty easy to recreate using the past 20 years of the S&P 500 along with the maximum cap rate for growth offered in the contract.  In exchange for the year of deferral, the income base is increased by 4% to $312K and a 4.25% payout rate produces the income figures, while the annual fee is taken from the account but calculated using the higher income base.

As you can see, after 20 years, fees amount to nearly $75K, total income is still less than initial premium and there’s not much money left in the account.  For these guys to not only get their money back but also capitalize on the contract they would need to live well into their 90s.  For older individuals the payouts would be higher but you’ll collect it for fewer years.  In most cases it’s six of one and a half dozen of the other.

Why do people do it?  Aside from not knowing about any other options, there are two major benefits to doing it this way.  First, bonds would only provide about half or maybe less than that for income.  While the bonds would have a residual value that is greater, a person would need additional funds in something else to match the income so that essentially says that using bonds would be much more expensive and definitely more risky.  Second, some people enjoy the carefree nature of knowing a check is coming in the mail every month and will continue for life.  It’s easy and takes a lot of pressure off retirement concerns.

Still it’s been hard for me to justify a low payout even if the actuaries and Monte Carlo simulations prove that it helps a portfolio.  Plus, most everyone else is selling it this way and if I can’t differentiate myself then there would be no point to any of you doing business with someone in Montana.

I realized there could be a better way years ago when I added up the fees on one contract and added them back to the residual value of the account.  Let’s also not forget lost opportunity cost.  If those funds had not been subtracted they would have grown also.  In the above contract, the $74,880 paid in fees would amount to an additional $90K remaining if the fee had been zero.

You may also notice that in the above contract there isn’t much growth to begin with.  2.35% maximum annual returns shouldn’t get anyone super excited about signing away a big sum of money.  Where other contracts without income riders have no fees and also come with growth potential that can be more than twice as high.

The below example shows just such a growth contract with a similar premium, no fees and a conservative blend that produces an average yield of 4.21%.  Using free withdrawals that match income payments from the guaranteed income contract you can see that the residual value matches or exceeds the initial premium throughout.

Click here to expand for a larger image

The benefits of doing it this way cannot be understated, even if you doubt the ability of the contract to yield that well over time.  If this contract yielded 0% then income payments would last for almost 23 years.  If you split the difference on yield then more than half the money would be remaining.  Of course you all should know that we can take this even one step further and make it even better but that’s not the point.

Why an annuity at all?  Perhaps any doubters can tell me which asset would be better.  As for 20% more income, use your imagination.  Clearly a larger remainder means you could withdraw more aggressively or even allocate less to the annuity in the beginning.  Either way you slice it, you get more by doing it this way.

Again, there are several benefits to using this strategy, not the least of which is more control over your money and flexibility to make changes throughout retirement.  There are all sorts of caveats, disclaimers and unique situations that make this different for everyone so comment below or respond to my email if you have a question, suggestion or disagreement.  For my benefit and yours this doesn’t need to be four times as long.

Enjoy your weekend…

bryan

Using a good indexed annuity, with the right perspective and strategy, can solve all the concerns a person might have in retirement.  This week is a shout out to Carl in Florida who bought one from me about five years ago.

Carl came to visit last summer and after several years of working together we have become good friends.  He’s not the only one but he is more vocal than most and is more than happy to tell me when his expectations are not met.  I don’t know about you but my best friends are the ones that give me the most grief.

Casey, Jim and Chunk are my fishing and hunting buddies.  None of them would hesitate to give me a hard time if I did something wrong in the field or on a stream.  And it goes right back at them if I see something that isn’t right.

Carl reads just about every one of these newsletters and he asked me a direct question after seeing what I sent out last week.  The link is at the bottom if you missed it.  He basically asked me how one person can get an average over 6% in two straight years when he’s never been able to do more than 4%.

Well, I think he is averaging over 4% so he has done better at times but it’s not his job to give me the benefit of the doubt.  Now, part of it has to do with timing as annuities all hit differently at any given time of the year.  Carl’s contract resets in July while Neil’s contract resets in October.  Each is going to perform differently in any given year.  It stands to reason since index annuities are tied to the market and the market is always changing.

But what’s more important is that several changes have happened in the annuity market since Carl bought his contract.  Diversity of index options has increased across all products which has provided more opportunity for people with newer contracts.

Back in the day, or 5-10 years ago, most products had simple options like a basic cap rate on the S&P 500.  I’ve seen a lot of old contracts that don’t have much else.  So it’s not a bad thing but in many cases the yield potential is more limited than it is with the new options.

Over the past few years, insurance companies have continued to offer new indices that offer more potential using participation and spread rates with no cap.  A new index with very little performance history doesn’t always inspire confidence so you have to be selective and it pays to have at least a couple years or real data to analyze so you can see how it tracks with the general stock market.

There are a couple reasons why this happened.  First, insurance companies want to differentiate and all of them are trying to beat the competition so partnering with an investment firm to create an index is something all companies have embraced.  Some of the indices work out and others don’t so you have to hope you guess correctly.  Second, the S&P 500 is a heavily traded index with lots of volatility and speculation involved in the pricing so options are expensive.  That brings cap and participation rates down and limits potential.  Using a proprietary index, an insurance company can much more easily predict cost so rates are higher and more likely to remain stable throughout the contract.

The benefit for consumers is that you now have more options.  Carl and Neil have the same contract but Neil’s was purchased three years later so it has a couple more options that Carl doesn’t have.  There’s the performance difference, along with the timing of Neil hitting two good performance years back to back.

Many contracts in the past were limited to a few index options whereas some of my favorites today have more than a dozen.  When I look at a new contract in its entirety, I always tell people that there’s a double digit yield in there somewhere and a solid 5% average if we do it right.  Choose wisely and be patient.  Everyone with a good contract, including Carl, has the upside potential.  Index annuities have evolved and that provides more opportunity for growth on safe money.

Have a nice weekend…

bryan