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Why You Should Buy Annuities

So Why Do People Buy Annuities?

Most people have heard varying opinions concerning the reasons for and against the use of annuities for retirement planning. Sometimes it helps to have some facts that show why other people buy annuities and why they have chosen this route in the past.
 

According to LIMRA (Life Insurance Marketing Research Association) there four major reasons why people buy annuities. In order of importance and popularity those are as follows:

 
Safety– Annuities offer an unmatched level of security that attracts people with various objectives. Insurance companies carry very low or non-existent leverage ratios in comparison to their banking counterparts and are required by law to hold substantial reserves that further insulate the conservative investment portfolios from market shock. Throughout history there a very few cases of consumer losses associated with insurance company failure. To further mitigate any potential damage, each state has a guaranty association that provides an ultimate backstop to cover claims when an insurer goes insolvent. Many additional safeguards exist that contribute to overall safety. For a detailed discussion of these safety features, contact our office at 800.438.5121 or make an appointment via the website.
 
Tax Deferral– Most people recognize the importance of planning for the eroding forces of annual taxation on investment. It is also well-known that annuities offer tax deferred growth on investment that makes them preferable to many alternate safe money financial vehicles. Our website has several retirement and annuity calculators that clearly illustrate the differences between taxable and tax deferred growth. Visit AnnuityStraightTalk.com to run some comparisons and see if tax deferred annuities can make a meaningful impact on your retirement savings.
 
Guaranteed Income– Several types of annuities offer a quality source of guaranteed lifetime income. Whether your need for income is immediate or a few years away, it’s worth looking into the incredible benefits annuity contracts can bring. 
Securing a source of guaranteed income is the first step toward optimizing a retirement portfolio. It cannot be done otherwise… period! Look for a more detailed discussion of this in subsequent emails and feel free to call our office (800.438.5121) to discuss how available products and strategies can benefit your retirement income plan.
 
Rate of Return– That seems odd, doesn’t it? But that’s right, rate of return is the fourth leading reason people buy annuities. While it is true that the rates offered with annuity contracts is competitive in any environment, it is actually the safety, tax deferral and guaranteed income benefits that are higher ranked according to consumers. 
 
When it all comes down to it, the previous benefits hold much more value to people who harbor uncertainty after years of mixed results in the market. That may or may not represent your focus so if you’d like to talk about not only the return on your money but also the return of your money, call our office now. 800.438.5121
 
No matter what benefit appeals to you most, this shows reasons why people have seen the advantage of making insured products a vital component of retirement portfolios. If one or more of these sounds like something you can use, perhaps it’s time for a serious discussion.
 
Choosing the right product can be a challenge so we created The Annuity Report to make it easier to understand available contracts and find one that meets your needs. Add to that the fact that your individual situation is unique and you can easily see that an objective suitability is necessary to show how your personal finances will benefit from guaranteed products.
 
When you are ready to buy annuities, please call or set an appointment.

Trust, But Verify

When shopping annuity companies, we take a slightly different approach to Ronald Reagan’s motto.  We believe investors must be critical and learn how to Verify, before Trusting.

There are very few people you can trust with your retirement savings when considering annuities, and it only makes sense to learn a few things first.  Certainly, don’t trust annuity companies or annuity sales people.

Be critical of financial products, and learn to trust yourself. By educating yourself, you can make the best decisions for YOU- and you can learn how to screen all the other competing interests. Only then will you be a Smart Buyer and be ready to make an informed decision.

“Trust, but Verify” is great mantra for any confident person, and we give you the tools to Verify what you read and hear about Annuities.  Annuities, and the advisors who recommend them, must Verify against your knowledge and tools. Only then do these people and products earn your Trust.
Become a Smart Buyer- Empower yourself to Verify before you Trust.

So how do you do that?  It’s pretty easy.

Step #1 is to sign up for our Free Guaranteed Lifetime Withdrawal Benefit report. This free report is available to help you understand these popular products, and you may be surprised to learn some of their pitfalls. Simply fill in your name and email and we’ll send it to you right away.

Get Our Annuity Report Now!

Step #2 is to become a member of Annuity Straight Talk- membership is free and The Annuity Report is available to our members. This report outlines in detail the decision process and critical factors necessary in buying an Annuity.

Step #3 is a strategy session, available to our members. These simple questions help us see if an Annuity is right for you, and help us to design an Annuity solution for your needs.

When you have the tools to make an informed decision, allow us to recommend annuities that meet your specific needs. You will find our recommended products and companies come with the best combination of Safety, Flexibility, and Profitability for your situation.

Annuity Returns: Which 10% Do You Want?

Does market volatility leave you confused when trying to calculate your annual investment returns?  Or, is a flashy piece of marketing making it hard to calculate the actual gain you can expect?  Investment products and marketing can confuse even the simplest concept, so read on…

By learning the difference between an Average Rate of Return and the Internal Rate of Return (Or Effective Rate), you will begin to understand how increased volatility can decrease your real investment return… no matter what the ads and past performance milestones tell you.

Which 10% do you want?

Seems like a silly question, right?  It’s not- what we’ll demonstrate below is critical to measuring different investments.

But it’s important you read this whole post- the key point comes near the end (spoiler alert!)

Often you’ll see a mutual fund or other investment advertising its 1, 5 and 10 year historical rates of return.  The first thing to be aware of is that taxes are almost never factored in here, so take this return number with a big dose of salt.

The next concern we have with this return representation is the method of calculation.  Too often, you’ll read in the disclaimer or disclosure statement that the manager uses an Average Rate of Return rather than an Internal Rate of Return.  This masks volatility and can be highly deceptive.

The answer to ‘Which 10% Do You Want?’ comes down to how well you know the difference between these two measures of investment performance.  Understanding this will shed light on what I consider to be misinformation and possibly deceptive marketing by many well-known money managers.

The Internal Rate of Return is truly a discount rate at which the present value of the investment plus all the future cash flows equals $0.  In other words, a true ‘discounted cash flow’ measure.

This is a longer term, true measure of return for a variety of cash flows  and is equivalent to the ‘Yield to Surrender’ in Annuity products.  It is also the “Effective Rate” that we use to measure performance in Secondary Market Annuities.

The Average Annual Rate of Return is simply an average of the year-end rates of return. So, adding the percentage returns from each individual year and dividing by the number of years will give you the arithmetic average.

Many investments, mutual funds, and indexes may be reported using this method. (In the fine print!)

When a constant yield is used to illustrate an investment return, the Average and the Internal Rates are identical.  But when returns differ from year to year (as they always do in real- life investments) the two ways of measuring can be very different, and the effect on your portfolio is also drastic.


The key lesson- Volatility can destroy an account value but investment managers can calculate their returns in a rosy way that is technically correct, but that leaves you with less money.

Let’s keep this exercise simple to illustrate the point.

So, consider an initial $100,000 investment and analyze the dollar value of that after a two-year period under several return scenarios that all yield a 10% average.

We’re going to assume you leave your money invested over the 2 years and look only at what you went in with and what you came out with.

Scenario 1 shows an even 10% annual return on your investment.

 Rate of ReturnAccount Value Cash Flow
Opening Balance  $                   100,000 $        (100,000)
Year 110%$                   110,000$                       –
Year 210%$                   121,000$           121,000
    
Average Annual  Return10.00%Internal Rate of Return10.00%
  Ending Account Value $           121,000

This is an Average return of 10% per year, and an Internal Rate of Return of 10% also.

After two years, your account would be valued at $121,000.  Not bad, right?  Sure would be nice if the world worked this way…..

Now, let’s input some volatility-

Scenario 2 shows a slightly uneven but still positive return.  We’ll input 5% and 15% returns for years one and two respectively.

 Rate of ReturnAccount Value Cash Flow
Start  $                   100,000 $        (100,000)
Year 15%$                   105,000$                       –
Year 215%$                   120,750$           120,750
    
Average Annual  Return10.00%Internal Rate of Return9.89%
  Ending Account Value $           120,750

Notice, the arithmetic average is still 10% but the IRR is 9.89%, and the account is only worth $120,750!  Same stated “Annual Rate of Return” of 10%, but you have less money!

Now let’s look again-

Scenario 3 shows a solid 20% gain in year one and a flat zero in year two.  Guess what happens…..

 Rate of ReturnAccount Value Cash Flow
Start  $                   100,000 $        (100,000)
Year 120%$                   120,000$                       –
Year 20%$                   120,000$           120,000
    
Average Annual  Return10.00%Internal Rate of Return9.54%
  Ending Account Value $           120,000

This is another 10% average annual, but the account value is lower still….  Are you seeing a trend here?

How about one more?

Scenario 4 shows us a great example of what actually happens in the securities world.  Let’s earn 30% in year one and lose 10% in year two.  The results are even more depressing.

 Rate of ReturnAccount Value Cash Flow
Start  $                   100,000 $        (100,000)
Year 130%$                   130,000$                       –
Year 2-10%$                   117,000$           117,000
    
Average Annual  Return10.00%Internal Rate of Return8.17%
  Ending Account Value $           117,000

There it is again, that same solid average but the account is worth even less.  Do you think I manipulated the numbers somehow?  Remember, trust but verify.  At this point, you should all grab a calculator and check my numbers.

OK- now for the final blow—

Scenario 5 illustrates a major blow to the account- Sounds like 2008, right?- followed by a giant rebound (We make NO promises of this!)

 Rate of ReturnAccount Value Cash Flow
Start  $                   100,000 $        (100,000)
Year 1-30%$                     70,000$                       –
Year 250%$                   105,000$           105,000
    
Average Annual Return10.00%Internal Rate of Return2.47%
  Ending Account Value $           105,000

In this scenario, even a rip-roaring rebound of 50% gain in year 2 barely gets you above your original basis when you lose 30% in year 1.

In calculating returns, the Average Rate or Return of 10% is still technically accurate, but it masks the reality that you have only made a 2.5% annual appreciation, and have barely more than your original principal in hand after a wild ride.

So what’s the point?

The examples above illustrate the effect of volatility on an investment.  Has the stock market ever returned exactly 10% two years in a row?  The answer is no.

Now, imagine how long the odds are that it will return exactly 10% for ten, 15 or even 20 years…..  Volatility is a fact of life in the securities world, especially in recent years.

In retirement planning, volatility is a demon to be avoided.  Products that advertise a good rate of return can do so using the Average Rate of Return and be technically correct, and also be wholly inappropriate for a retirement investor.

Don’t expose yourself to unnecessary risks or technicalities! Safety first!

Action Items:

Make sure you read how any investment is calculating its rate of return.  “Average Annual Return” is very different than an a true measure of value- this is more properly titled ‘Internal Rate of Return’,  ‘Yield to Maturity’, or ‘Effective Rate’.
Slow and steady guaranteed rates of return over the long term, especially in tax deferred appreciation vehicles, often outperform even aggressive equity portfolio allocations that swing down as much as they can go up.
It takes a very large rebound, which is historically unlikely, to make up for a large portfolio loss, which is all too common.  Unfortunately, catching the loss is a lot more likely than timing the gain…
Remember, it’s YOUR money, NOT TheIRS. 🙂