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Annuity Scams – Fear Factor or Reality?

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The Internet is full of warnings and alerts about annuity scams that create the appearance of  industry run amok with fraud. Should you be fearful of annuities and the people who sell them?

Dick and Eric delve into annuity scams and alerts in this weeks blog entry.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

For more information on Avoiding scams we have provided and excerpt from Dick’s book – The New Retirement.

Avoiding Scams

The SEC also offers advice on how to avoid scams. In the financial services industry, there are many scams. And unfortunately, every year a great many individuals fall victim to these frauds and lose some – or even all – of their savings. So, here are some of the things that investors can do that may help in preventing them from falling victim to a scam.

Ask questions and then verify the answers to those questions. Many scam artists will rely on the fact that a great many people simply do not follow up or investigate important information prior to placing their money in an annuity, investment, or other financial opportunity. It is simply not enough to ask the advisor for more information, as it would only be more of the same fraudulent “facts.” Instead, check out the information from other sources, verify then trust. Take some time to really research the investments and other products that are being offered in order to make sure they are what the advisor has said they are.

Research all companies before investing in them. Prior to investing in a company’s stock or other opportunity, one should fully understand that company’s business and its products or services. Before purchasing any shares of stock in particular, be sure to read over the company’s financial statements on the SEC’s website. It is possible to also contact each states securities regulator. Most companies are required to file financial statements with the SEC and states they are doing business in.

Know the advisor. As mentioned, spend some time doing research on any financial services representative before doing any investment of any money at all. This includes finding out if the advisor is correctly licensed and if he or she or the firm has had any disciplinary issues with regulators or clients.

Be skeptical about unsolicited offers. Should one receive a call or an email from an advisor out of the blue regarding any type of investment, be sure to research both the advisor and the investment opportunity offered.

Remember, if it sounds too good to be true, it probably is. Compare any promised returns with actual current returns on well-known stock indexes.

There is no such thing as **guaranteed returns in securities, so be careful. Even the safest of investments or financial opportunities carries with it some degree of risk. Typically, this will correlate with the return that can be expected on the investment. In other words, if money truly is perfectly safe, then it is likely headed for a lower return. Likewise, just the opposite is true as well; if high returns are promised, there is probably going to be a great deal of risk involved, too.

Pretty marketing materials do not mean that a firm or advisor is legitimate. Pretty websites and brochures are fairly easy to make in this day and age. In fact, a nice looking simple website can be created in just a few hours. Therefore, just because a company or advisor has nice-looking marketing materials, it does not mean that they are offering legitimate financial opportunities.

Do not cave in to pressure to invest immediately in a “great opportunity.” Scam artists will often tell their victims that they are offering a one-time-only opportunity and that if an investment isn’t made immediately, the client will lose out forever. Here again, research the “opportunity” prior to investing any money.

In any case, being an educated investor or consumer will be the best defense against scams. So take the time to do homework before putting money anywhere. It will be more than worth the effort to do so.

Annuity Guys® Video Transcript:

Dick: Eric, our topic today is one that I’ve been thinking about for a long time.

Eric: You trying to figure out the best scam you could run on somebody?

Dick: Well, when we start talking about annuities and folks, a lot of you found us by going on the internet, and you did a google search and you searched some term, and you brought up our website. So when you did that you probably, since you’ve been out there looking into annuities and things about annuities, you probably experienced a lot of material that, I would say an inordinate amount of material that warn can you about scams. Scams on annuities and this type of thing, and we’d just like to talk about that.

Eric: Yeah, if you’ll look at the sidebar, up and the ads around the thing when you search for the term annuity. They’re like, “Alert! Scam! Beware!”

Dick: Senior alerts, retirement scam alerts.

Eric: Everybody wants to pile on the negative, and you know why, because you click.

Dick: Right, it gets your interest.

Eric: It’s like everybody who wants to watch the car accident as you drive by. For some reason, negative sale sells and in this case scams; alerts are what draws people in so it’s a marketing term.

Dick: It is true that there really are scams, so it’s not as if we want it say, that you don’t ever have anything to be concerned about, but on the other hand you kind of want to understand, what’s really the driving forces, behind the information that you see on the internet.

Eric: Right, and financial services have gotten a black eye a lot lately, because you’ve got Madoff, you’ve got these big name accounting, not accounting firms but…

Dick: Investment firms and the like.

Eric: That people have run off with the money, millions of dollars.

Dick: Right and let’s be really frank. These large schemes that people put over on unsuspecting victims literally, they’re not that easy to discern. They’re not that easy to know, what’s really going down, underneath. I mean if you were to look up Madoff’s character at the time when he was flying high you probably wouldn’t find any fault with him.

Eric: One of the most respected guys in the investment world at the time. Unfortunately, they have all studied Ponzi schemes and that’s basically what they’re doing, they’re taking one person’s money and passing it off up the chain.

Dick: One thing Eric, that you and I have frequently told our clients, it’s just a standard theme. Always beware if an adviser asks you to make a check out with their name on it, so Madoff, a lot of people were making out checks to Bernard Madoff and his investment company directly to him. He had more or less full custody, full control over their money, and so at least there should be some red flags going up.

Eric: In fact one of the things when we’re doing paperwork here in the office, I’ll tell the person, “If anybody ever tells you to make a check payable to them, you run as fast as you can.” Here, you’re working with a company. And I don’t want to throw company names out there necessarily, but you’re making the check typically payable, to the insurance company or the investment company. Those are where those checks should be going not to the individual, even though that person is your adviser and you have complete trust in them, you still don’t make the check payable to them.

Dick: It’s a safeguard. Its checks and balances, and so now, if we switch gears from a lot of the big Ponzi type schemes, and the investment company scams that take place, and we switch over to annuities. Annuities are highly regulated by state insurance departments. These are companies that are perhaps 50 to 100 years old.

Eric: Most of them are…

Dick: Older.

Eric: Have significant time spans that they’ve been in existence for.

Dick: There are third party ratings that you can look at, folks that will tell you following them over a long period of years, how they have fared, how well they have done. It’s really a different realm when you get into annuities with the protections and the regulation that’s involved, and yet there have been some accusations of scams with annuities.

Eric: By whom?

Dick: Well, primarily what we run into and what we read in the news are those that go after the older people, the senior citizens.

Eric: The unsuspecting person that should never have bought an annuity.

Dick: In the first place.

Eric: The scam there is basically, it’s the suitability of the product for the individuals. It’s somebody taking advantage of somebody’s, I don’t want to say diminished mental capacity perhaps or just not understanding the product and how it works. That’s one of the things we stress a lot. You buy what you know and what you understand. There is nothing wrong with needing to understand how a product works before you purchase it.

Dick: Right, equip yourself. Do your research. Understand how third party rating agencies work. Look at the background of the annuity company and then you have to have a certain mind about your own finances, in the sense of how much do you put into an annuity.

We often say if an adviser tells you, you need everything in annuities you should run the other way. So there’s this balance of allocating the proper amount. In fact, you want the least amount in annuities as a rule that will produce the maximum amount of income that you need.

Eric: We talked about the foundational aspect. You know having a secure foundation. That’s what we utilize. We don’t want to put more in than you have to, but we want to protect a certain amount.

Dick: And on the other hand, there are reasons why folks use annuities. It could be for avoiding probate or just safety of the money and a reasonable growth on that money to get it over to heirs. You just have to weigh over what your purpose for that money truly is, and not let somebody talk you into something that is not going to be good.

Eric: Right and in the scam aspect with annuities, oftentimes we hear the things that really if you hear them on their face, they’re too good to be true; you know **guarantees of unlimited potential.

Dick: And no downside risk. I mean we do agree there is no downside risk, but when you couple that with unlimited upside potential, it’s not true.

Eric: Right. When you hear something that sounds too good to be true, it often is, is the rule of thumb. Somebody that doesn’t play out for your, layout rather, both the positives and the negatives of a product, really isn’t giving you the full picture. We all like to paint a rosy picture of what you can do on this side, but there is a reality of what actually will happen, and you need to understand all those, when you’re working with an annuity and any financial property.

Dick: Right and you know something that probably many different ones that have experienced or been invited to these free lunch and free dinner seminars…

Eric: Oh, those scams? Free food scams?

Dick: Are those scams?

Eric: Of course, they are.

Dick: What if it’s good food?

Eric: Well, then it’s good food, but still, nobody buys an annuity over dinner.

Dick: I would think it might be a scam, if I was really going to buy an annuity over dinner.

Eric: Never sign the check if it’s if the know that it’s free. No, when you hear about the free food and the free dinner aspects we always laugh, because from an advisory standpoint it’s a way of getting people and talking to a room of people, and that’s why you see them out there. It should be really thought of as an educational seminar, but it’s just like when you get that call to go see a time share. “Oh, we give you a free weekend in this great sunny…” The expectation is you’re going to sit through the sales presentation.

Dick: Right and that’s what you’re getting with the free dinner or free lunch. You may get some valuable knowledge about something, you may have a nice meal, but you are going to be asked to set an appointment.

Eric: Right, it’s the expectation. When you get something you’re expected that law of reciprocity, that see people want something back from you, and so don’t be surprised when you’re asked.

Dick: Yeah, and I think, folks that there’s really nothing wrong with that, when it’s done correctly without that scam aspect to it, where someone is trying to do something that is not legitimate, sell something that is not legitimate or talk you into something that is not suitable or just target people over 70, or something of that nature, because they’re easier to sell an annuity to. So I think that as long as you’re aware, that you look at both sides of the equation. You do a little research then your potential for being scammed in these situations is greatly minimized.

Eric: That’s right. It’s all about educating yourself, being realistic in what you’re getting. Going back to what we said, “If it’s too good to be true, it probably is.” The same goes for somebody sitting through any presentation, whether it be annuities, investments, whatever. We’ve all been sold that bridge that goes to nowhere, right?

Dick: Folks, never tie up more money than you can afford to tie up in annuity. Make sure you have liquidity. If somebody comes along and starts talking to you about the mortgage on your home to buy an annuity, reverse mortgage, this type of thing, it would be the rarest of occasions that that would have any validity. So you want some red flags to go up and think about it. That would go for any investment you know, “Hey, mortgage your home and here’s an investment.” I mean there may be certain situations where that would be warranted, but it would be very rare.

Eric: And let us tell you there are places that you can go online and the internet is a great tool to investigate if you think something is a scam or you’re concerned about the broker, the company, there’s ways of researching all of those pieces.

Dick: Let’s just reiterate just a little bit about what we started out talking about, and that is that many times on the internet, you’re going to see a lot of stuff that talks about scams and the real intent is just to sell you an annuity. So you have to see that thinly-veiled marketing aspect and it’s everywhere. It’s very pervasive.

Eric: People are just trying to get in front of you is really what they’re trying to do. Take your time, educate yourself. One of my favorite sayings is, “You only get to do retirement once, so make sure you do it right.”

Dick: No do-overs. You know I just might mention that, for any of you that would like, you can go on, you may have already had access to it, but you can get my book, which does have some interesting chapters in it that talk about annuity scams and talk about [unintelligible 00:12:04] and the SEC and how they can help you, also about advisers, the different types of advisers.

Eric: The broker-check pieces, and how you can investigate an adviser, excellent.

Dick: So, use that.

Eric: Thank you for visiting today. Have a good day.

Dick: Thank you. ‘Bye, now.

Annuities – The Best Financial Product No One Wants!

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Why would an insurance actuary call annuities the best financial product no one really wants? And why would he go on to say that in retirement he might not even purchase an annuity himself even when he knows they make good sense?

Dick and Eric discuss why individuals purchase annuities – even though they don’t want to…

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Annuities: The best financial product no one really wants

“Annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life”

People who save through RRSPs have a choice to make when they retire. They can transfer their RRSP balance to an RRIF and draw it down at their own pace (subject to a minimum) or they can buy an annuity.

The simple fact is, an annuity may be a great idea, but hardly anyone buys one.

It is easy to blame low interest rates, which depress the amount of annuity income one can buy these days. But annuities were not in vogue even when interest rates were much higher a dozen years ago.
‘Let me be honest. When I retire, I am unlikely to buy an annuity myself, even though I’m an actuary and know all the advantages’

Economists have come to refer to this phenomenon as the “under-annuitization puzzle.”

Buying an annuity seems like an elegant solution since it removes the risk of outliving one’s assets (what actuaries like to call “longevity risk”), it eliminates the hassle of making investing decisions after retiring and the income stream it provides is super safe (it really is, at least in Canada). So why are they so unpopular?

In recent years, however, the economics of annuities have improved greatly. Annuities in Canada now generally return 95% to 100% of premiums paid. In fact, with the recent fall in long-term government bond yields, annuities now return more than 100% return of premiums paid in many cases. The economics, then, can no longer be blamed.

Another often-cited reason for not annuitizing is that the retiree wants to leave a large lump sum to a survivor in the case of early death. This argument, however, does not hold up on closer examination.
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Even when people have little or no interest in leaving assets behind for their heirs, they tend not buy annuities. Moreover, annuities can come with generous survivor income options, if one is prepared to pay for them. Another excuse shot down.

There are other explanations for this puzzle, including: The desire to have money on hand in retirement for a rainy day; the recognition that income needs might vary and the fixed income from an annuity might not match up well; and a reluctance to give up the chance to do better by investing in equities within a RRIF if stock markets do well.

Let me be honest. When I retire, I am unlikely to buy an annuity myself, even though I’m an actuary and know all the advantages.

I would be the first to admit this reaction is not entirely rational. The reason, plain and simple, is that annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life. [Read the Full Article from Fred Vettese at the Financial Post]

Annuity Guys® Video Transcript:

Eric: The topic is annuities. The best financial product no one really wants.

Dick: Can you imagine that no one would want an annuity, Eric? Is that a true statement?

Eric: No, the people I talk to every day, everybody wants an annuity.

Dick: But that’s different. Folks, the people that we talk to may be someone like yourself that’s actually went to our national website, as Eric likes to remind me, international website.

Eric: International website.

Dick: But goes to our website and they’re already in the mindset of annuities.

Eric: Right, they’re doing their research. They’re doing the background on why this might work for them.

Dick: So we might be just a little bit skewed, do you think?

Eric: We’re taking it based off an article, and interestingly enough, it was written by an actuary who works for an insurance company. His comment and I love this, “Annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life.” Well, that sounds pretty pathetic, if you ask me.

Dick: I do have to say that, before I knew much about annuities, many years ago that never entered my mind, never crossed my train of thought. Would I rather have a new car, a new house, or an annuity?

Eric: Rather than an annuity. That’s not fair. Everybody would rather have a new car or a new house.

Dick: That’s right, and really when you think about it, and that’s a lot what this article gets into is we built this money up. We accumulate this money and we like the idea of hanging onto it, controlling it, investing it, whatever we choose to do with our money, but to hand it over to an insurance company and let them give us money back, it’s kind of a transitional state that we go through to make these types of decisions, and there has to be a pretty good reason behind it.

Eric: I come from a family of educators. I’ve talked about that before.

Eric: You know right now in Illinois, we’re fighting. They’re fighting to maintain their pension. Well, what’s an annuity really?

Dick: It’s a pension-style income.

Eric: I mean for today’s 401k investors they’re basically, when you get your retirement you’ve got this lump sum. Do you want to keep the lump sum or would you rather have a pension?

Dick: The vast majority of retirees before they retire and they have this choice, not all companies give this choice; but there are a lot of corporations that will give the employee the choice of a lump sum or a pension. Now the vast majority choose the pension. They’ve worked their entire life.

Eric: For the seemingly stingy income for life?

Dick: Yeah, and yet, even those that would take the lump sum, in many cases will turn right around with that lump sum, and buy a commercial annuity that they feel is a better option, than maybe the pension the company was going to offer. So we tend to get it when it comes to that lump sum that comes from the employer, but yet many times we’ve worked all of our lives, built up all of this money and what’s the purpose of it?

Eric: It’s mine. I want to keep it.

Dick: What’s it supposed to accomplish?

Eric: That’s exactly it. It’s just future spending. It’s not savings. Its future spending is what we’ve save for, but we don’t think of it in those terms. We think of it as “This is money I saved. I don’t want to give it to somebody and then have them, give me a seemingly small allowance.”

Dick: Right, and that’s where the insurance company’s job, their job is to look at risk, to manage risk, to know what’s realistic. You’ll have to read this report, folks and kind of get the gist of what this person’s saying, because he actually is an actuary and he’s really laying out that these insurance companies don’t always win on this stuff.

Eric: And he talked about annuities are much better—the design and what they payout in today’s era, is much better than they were 10-20-30-years ago.

Dick: Right, a lot’s changed.

Eric: You really do have an actuarial advantage to buying an annuity and he admits that, even though I know this advantage exists, I’m not so sure.

Dick: I might be standoffish when I first retire, but maybe as my age advances I’m going to be more apt to do this. This kind of brings me back to a lot of the buzz that is out there and things we talk about with the hybrid annuity but one of the things that appeals so much to folks, on a hybrid-style annuity is that they are able to control that lump sum. What we call majority control the first 10-years or so of an annuity. You have some surrender charges, so you control about 90% of it during that first 10 years, and those surrender charges decline, so after 10 years, you control 100% of it and you still have a lifetime income. And yet, if you haven’t used that money in your account, it can all go on to your heirs, your spouse, whatever is important to you.

Eric: Exactly. In his life point, I guess in summation here he talks about you know what? Everybody has, even if you have that lump sum investment you have, usually a portion that’s in equities and you have a portion as you get closer to retirement that we should all be moving into those fixed payments, bonds, CD-style. What would be wrong with taking those more conservative assets, turning that into an annuity and then just truly letting your equities run, and knowing you have that **guarantee that income coming on?

Dick: Well, Eric obviously this is what we talk to our clients about. We talk to them about balanced allocation. Not putting everything into annuities, not necessarily having everything in the market. Finding that balance that works for each individual, and so to me, he’s right along the lines of what we continue to explain to people.

Eric: Exactly, yes. He takes care of the foundation very well.

Dick: So Eric, would you say that an annuity is something that no one wants?

Eric: All right, there are a few people that want annuities.

Dick: Well, folks we’re not saying that an annuity is going to be the end-all and the be-all or exactly what you need, but you do want to look at it closely and determine where it might fit into your overall financial picture. We really appreciate you spending the time with us, today.

Eric: You have a great afternoon.

 

 

 

Why are Hybrid Annuities so Popular?

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What made fixed index annuities and hybrid annuities the fastest growing annuity type on the market according to a LIMRA report? Why would you consider a hybrid annuity when planning your retirement? Dick and Eric look at hybrid annuities and what makes them so special.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

What are Hybrid Annuities?

Hybrid annuities, also referred to as hybrid income annuities, are essentially a type of insurance contract allowing the account owner to allocate his or her assets into a fixed annuity with a market benchmark component, having an income rider or riders that give substantial present or future **guarantees to secure a variety of retirement objectives.

These annuities refer to a combination of several unique aspects of various types of annuities that have been combined. Technically, a hybrid annuity is a fixed index annuity with an innovative new generation income rider attached to it.

Some hybrid annuities can help to resolve the concerns with regard to other needs in addition to asset growth and retirement income––such as long-term care funding or wealth transfer to heirs––while still providing one with a secure income. These annuities are considered by many to be the answer to satisfying a combination of retirement objectives combined into one solution, thus having the potential to solve several issues in retirement.

Obtaining a hybrid annuity essentially works the same way that you choose any annuity, in that making an allocation begins by choosing the hybrid annuity after comparing rates, features and ratings that meet key retirement objectives and then funding the hybrid annuity contract with a licensed agent as the final step.

With some hybrids, if funds are required for needs such as long-term care, with certain hybrid annuities, owners can have access to withdrawals for that purpose by way of an accelerated cash account payout or a **guaranteed increased income payout, in some cases for as long as it is needed. However, if they do not need the funds for that purpose, they will receive their lifetime **guaranteed retirement income just as it was structured or use the annuity for moderate growth as a secure asset foundation to balance their portfolio.

Annuity Guys® Video Transcript:

Dick: We’re going to talk about hybrid annuities today. We’ve have a lot of different subjects, and a lot of times, Eric, we touch on hybrid annuities. But let’s talk about why they’re so popular and maybe, before we actually get into that, let’s talk about what they are.

Eric: Oh sure. I was ready to talk about why they’re so popular. What is a hybrid annuity? People call up and say, “Well, I’ve been talking to this guy about a hybrid annuity.

Eric: Then the first thing I do is I say, “Stop,” because hybrid unfortunately has become a marketing term for a lot of individuals.

Dick: A hybrid annuity, to us, is the fixed index or fixed annuity, usually with an indexing component, and then it has a rider typically that **guarantees income for life. These are like the newer, more innovative income riders. I know you run into this. I run into it. Folks will start describing a variable annuity# to me, and they’ll start saying it’s a hybrid. They may have just confused it with a hybrid, or they may have been told it’s a hybrid.

Eric: In all fairness to the variable annuity#, it was really the first one to have those riders that would give income for life.

Dick: That’s true.

Eric: So if you think of just that rider being that contextual piece that makes it more of a hybrid. Well, in my mind those pieces were always part of the variable. They weren’t part of the fixed. So the fixed has kind of morphed its way, to use a different term I guess, into that variable.

Dick: How long has it been that fixed annuities? I’m going back I would say . . .

Eric: I’m much too young to know.

Dick: I would say that it was about somewhere seven years ago that the riders on the fixed annuities really started to pick up steam. And like you say, on the variable annuities#, they’d already been kind of a mainstay for the variable annuities#.

Eric: Right. I think what they saw was the variable annuity# market had a lot of traction. People really appreciated for life without having to give up their assets.

Dick: Without annuitizing

Eric: Right, annuitizing. And that’s where we always talk about the immediate annuities, that’s the component they have. You can get income for life, but you have to give up your assets. So why people are attracted and what makes hybrid annuities so popular is that aspect of, basically, income for life **guarantees without having to give up your assets. You can still pass on money to heirs. You can still change your mind. You have majority access as we like to say.

Dick: Yes, or majority control.

Eric: Majority control. So the aspect of the hybrid annuity is actually very popular for those specific reasons right now. The other thing I see right now, especially in today’s economy, when you look at where rates are, as far as what’s being paid on the growth side, not extremely attractive.

Dick: It’s not very good. It kind of goes back to the bank CD rates, savings rates, and money markets are all effected typically by the ten year Treasury, and we have that same effect on the annuities. If we said they’re paying double what the banks pay, it’s still not very much.

Eric: No. Two times nothing is still nothing.

Dick: Exactly. So you might be looking at a 2% to 3% range maybe on a fixed annuity or even a fixed index annuity. And yet, on a recent report, Eric, that we were just talking about, the LIMRA Report, it showed that people purchasing annuities, those sales are down pretty dramatically, except for the fixed index, which is what we consider the hybrid.

Eric: Which is the base of the hybrid.

Dick: Exactly. And let’s just say that for the sake of conversation, folks, in today’s annuity world, the mainstream hybrid annuity is considered the fixed indexed annuity with one of the newer income riders on it. So just for the sake of clarification, when you’re speaking with people, you really have to clarify terms. Ninety percent of what’s talked about on the Internet and what’s talked about, advisor to client and advisor to advisor, is a hybrid annuity is a fixed annuity with a newer, innovative type income rider on it.

Eric: That’s right. And those are the pieces right now that are for the upcoming retirees, basically or near retirees, as I like to think of them. That’s what makes it really attractive, because those companies are still providing some of those **guarantees in deferral for the growth component on those hybrid annuities.

That’s the other aspect of that income rider usually. It’s I’m going to **guarantee a certain percentage of growth in deferral. Right now, we’ve got in the range of 4%, 5%, 6%, 7% still available in that deferred growth. So for somebody who’s thinking about retiring in the next five to seven years, if you’re uncomfortable with what you think is going to happen in the market necessarily and you want that **guarantee, it’s **guaranteed and predictable. Those are two aspects that give near retirees comfort.

Dick: Well, and this is where, when we go back and we compare it to the variable annuity# and we say sales are down in variable annuities#, and yet they’re up in indexed annuities, there’s not as much potential on an indexed annuity for growth. People aren’t interested today so much in potential and growth as they are in **guarantees.

Eric: Safety and **guarantees.

Dick: Safety and **guarantee of principal, and I also say there’s one more factor that makes these so popular and that is cash flow, because we spend our life, our careers building our money up and saving, and we look at growth. So we’re accumulating net money. But what are we accumulating it for?

Eric: To spend it.

Dick: We need to spend it, effectively and efficiently, and that’s what the hybrid annuity does, is it allows you to know what type of cash flow you’re going to have throughout your retirement, to ladder it, stage it, cover some inflation hedge aspects. I believe that’s what’s driving the popularity of this hybrid annuity.

Eric: Yes, I would agree. I would say 90% of the questions I get about annuities are about hybrid annuities. When I talk to people, I say the best thing about a hybrid you work backwards. Tell me what income you want and when you want it, and I can use a hybrid annuity . . .

Dick: And we’ll tell you the least amount of money to put in to get there.

Eric: To get there. People are like, “Yes, that’s what I want. I want that predictability, reliability, and **guarantees, those contractual **guarantees.”

Dick: So, folks, we hope that this has cleared up some of your concerns and potential misconceptions, or confirmed the things that you already know about a hybrid annuity. It’s very much a part of the financial planning community today and what’s being used and what’s effective. Anything that we can do to give you more clarity and maybe some direction on these hybrid annuities, we’ll be glad to do it.

Eric: And hopefully we explained why they’re so popular right now.

Dick: Yes.

Eric: Thanks for tuning us in.

Dick: Thank you.

Study Finds Near Retirees Get Crushed! Can Annuities Help?

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A recent headline from the Yahoo Daily Ticker caught our attention – American Incomes Are Falling And Near-Retirees Are Getting Crushed: Study.

The report was based upon findings from Sentier Research, a data analysis company, and (to the surprise of no one who works with individuals in or nearing retirement) they found that the inflation adjusted incomes of those age 55-64 were down nearly 10 percent from December of 2007.

Dick and Eric examine how interest rates hovering near zero have impacted savers and near retirees, in addition to discussing how annuities can be utilized in these situations.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

An excerpt of the Yahoo report.

Annual incomes in the United States have dropped sharply in recent years, and near-retirees are getting hit the worst.

That’s the conclusion of a new study by Sentier Research, which looked at the trend in median U.S. household incomes since 2000.

Twelve years ago, after adjusting for inflation, the median household in the United States earned about $55,000 per year, reports Catherine Rampell of the New York Times, citing Sentier’s data.

Now, the median income has fallen to about $51,000.

The two age-groups that have been hit the worst in this period are households led by those in the 55-64 age group and those in the 25-34 age group. The incomes of the near-retirees have fallen by nearly 10% in the past three years.

This data explains why our economic recovery is so sluggish. [Read the Full Article]

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Annuity Guys® Video Transcript:

Dick: Today Eric, we’re going to talk about a subject that . . . we’ve just looked at a study, and this study basically talks about those folks that are near retirement just being crushed by all of the negative economic factors that have happened; their income, their assets, and different things. I guess this is something that you and I have experienced our own practice with this age group.

Eric: In fact I just talked to a gentleman earlier today who talked about, the last 12 years in his 401K, it’s just now back to where it was 12 years ago. Here’s a generation, he’s in his mid 50’s preparing for retirement, what’s he going to do? He is literally grasping, because what he anticipated having and what’s reality right now just aren’t happening.

Dick: When you look at the way 401Ks have been affected; IRA’s, 401K’s, all of this qualified money, you look at the property values, retirees, or those near retirement in that age group, and this age group we’re talking about is about 55 years old to 64. They don’t have that equity in their home anymore.

Eric: We all approached homeownership. For a lot of us, it’s our biggest investment. We put dollar after dollar into our houses anticipating when we get to retirement the equity is there. With the depression in the housing market, boom, that option for a lot of us has gone away. Not only do we not have the amount of equity, in some cases, we don’t have any equity.

Dick: It can be negative equity.

Eric: It’s been just devastating. The study talks about, the [inaudible: 01:51] Research Study, they’re talking about declines for this 55 to 64-year-old households are age range, the average income. When you factor the median adjusted income, so you’re looking at it at inflation-adjusted number, incomes dropping since December 2007 to now; almost 10%.

Dick: Pushing 9.7%, I believe it was.

Eric: If you think about the cost of gasoline, the cost of food, the things that impact our lives, I see it, I feel it, so you know as you get closer to a fixed income . . .

Dick: You start to sense the old idea of stagflation: Inflation is increasing, and yet, the incomes are decreasing. We find ourselves in a position of saying, “Where do we turn?”

Eric: You’re traditional, ‘I am going to put it in my [inaudible: 02:40].’ As you’re getting closer to retirement, you’re supposed to become more conservative, you don’t want to lose money; you don’t want to go backwards.

Dick: Based on our fed direction right now.

Eric: We’re all going to be saying, ‘We were Bernake’d.”

Dick: We’re being penalized if we’re in this age group, because the savings rates are so poor.

Eric: We keep on saying we’re trying to boost the economy; we’re trying to get the engines fired.

Dick: At the expense of what? Our retirees

Eric: We’re killing our retirees. The headline was ‘Crushing the Retirees’. They are literally getting crushed by 0-returns in their options.

Dick: When we turn even to annuities, and that’s our headline up here, ‘Can annuities help?’ Annuities are affected by these low interest rates.

Eric: Yeah. Let’s be honest, these insurance companies utilize investment vehicles as they hedge.

Dick: Bonds, treasuries, and the like to . . .

Eric: To take those dollars, they grow them, and that’s how they return those dollars back to those retirees. They’re getting the same level of constraints placed on them as many of these individual retirees.

Dick: Eric, one thing that I’ve seen and I think it’s unfortunate; I’ve seen some retirees, or those that are near retirement, they panic a little bit. I can understand why they panic. They want to make up, maybe for lost time or they want to make up for market losses. Whatever has caused this, sometimes they’ll tend to take more risk on than what maybe they should.

Eric: That’s the black/red syndrome. If you keep betting red, it’ll hit red sooner or later, won’t it? If you’ve given away all your chips, you can only spin the wheel so many times before you’re done. It’s the gamblers mentality. Like the guy I talked to, 12 years to get back to where we were 12 years ago. He’s not where he thought he’d be.

Dick: You really have to start where you’re at. We have seen those folks that were fairly-well positioned, that came through the financial crisis very well, but those are few and far between as compared to those that were following some of the traditional methods of investment and found themselves not doing so well.

Eric: They always say, ‘There’s something that makes money in every economy, for somebody.”

Dick: Timing.

Eric: The hard thing is, as we’ve got people in this age range, what’s been my . . . if we look at an annuity that’s going to be a potential for some of these folks, I like for someone who still has over 5 years of, basically, working years left.

Dick: Before you’re going to need to turn on that income stream.

Eric: Let’s look at hybrid annuities, because they have those **guarantees that it will roll up and defer.

Dick: They increase your income dramatically if you can leave them alone.

Eric: Right, and that’s the key. You have to be able to leave it alone. Let it set in deferral. For people that are panicking because they’re getting close and they don’t want to sit in the market and have another 12 years of 0 gain . . .

Dick: Or go backwards.

Eric: . . . it’s an option. It’s an option for a portion of those dollars. As I say, we talk about the foundational aspect of income. You’ve got Social Security in a pension, and then if you can stack a . . .

Dick: That’s going to get you to that number that you need.

Eric: Your basement, cover the foundation.

Dick: It’s going to cover the basic needs of life.

Eric: That hybrid is one of those options; it works well in that situation. If you’re a little bit closer to retirement, there’s other options in the annuity world. It’s the immediate annuity; it’s your self-directed pension plan. You can turn it on, you can set them up so that you get little bumps in your income, or you can set up so that you just turn it on, you can set and forget it. It’s there as long as you are. Then there’s, of course, the pre-issued side if you’re looking for . . .

Dick: With the pre-issued I think that a person would look at maybe just taking the yield off of the interest that’s coming in off of it and preserve that principle to reinvest into another pre-issued annuity or some other financial vehicle that’s available at the time, that’s a better choice.

Eric: It’s the old CD mentality, when you’re going to take your interest earned and use that as your income stream.

Dick: The big difference right now between the pre-issued and the CD is about 5% or 6%. It just depends on the situation.

Eric: Those are annuity options, and obviously, there are other investment options out there, as well. You have to balance: Guarantees, its risk/reward. That’s why we like annuities for that foundational aspect; it takes a little bit of the risk out.

Dick: Exactly. Eric, when we start to think in terms of retirees getting crushed, and what is the answer, I think we, folks, we want to state pretty clearly that there really are no silver bullets; there’s no perfect answers. There’s different financial vehicles such as annuities or could be bonds.

Eric: Paying stocks.

Dick: That are going to be the best in your situation. That’s where it really takes a good advisor to help determine what is going to best in your situation.

Eric: It’s weighing your options. We’re not a big proponent of putting all your eggs in one basket. We like asset allocation, diversification of assets, and asset classes. Look at what’s available to, and then make that decision based off those factors.

Thanks for tuning in today.

Dick: Thank you.

The Love Hate Annuity Relationship

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Every financial product has negatives and positives, how these products are presented or utilized by companies and advisors can lead to a vast array of emotions and opinions…. Hence, annuities are no stranger to this love/hate relationship.

Dick and Eric discuss some of the rumors that annuities face that often lead to the conflicting opinions among individuals considering an annuity in retirement.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Below are some excepts of an article by “Coach Pete” D’Arruda president of Capital Financial Planning and host of Financial Safari Radio broadcast the stimulated the idea foe this weeks commentary. [Full Article]

Annuities Have a Negative Perception

Despite their benefits, annuities have received negative attention over the years for a number of reasons, including rival products seeking to discredit them, poorly constructed products in the space and inappropriate sales of the products. It is imperative potential annuity investors have all the right information on hand to make an informed decision.

While annuities are not for everyone, those who can benefit from them should not let common misconceptions dissuade them from using an annuity as part of a comprehensive financial plan.

The Top 5 Rumors About Annuities

  1. Every issued annuity is a variable annuity#.
  2. The impact of inflation is too great for fixed annuities.
  3. With penalties and surrender charges, annuities are just too expensive.
  4. Never use your IRA money to invest in an annuity.
  5. With a big name comes a better return.

Remember that securing **guaranteed retirement income in this volatile, low-rate environment is difficult – but not impossible. Do your research, tune out the conflicting opinions and don’t be afraid to ask the tough questions of your financial planner. It’s absolutely possible an annuity should be part of your financial plan.  Get your hands on an Annuity Owner’s Manual before purchasing an annuity and learn the good, the bad, and the fine print before you ever invest your money. [Read the Full Article]

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about the love/hate relationship that people have with annuities.

Dick: Why does that happen? I mean what is this love/hate relationship? But it really is there.

Eric: It is. We were reflecting on an article by Coach Pete, who’s on radio in the financial safari down there in North Carolina.

Dick: His radio station is really picked up all across the nation too, so a lot of people hear him.

Eric: He gets questions occasionally. One of the questions was, “What’s the true story?” Talking about the negativity of some of the annuities. Really, it’s looking at why annuities are so negatively portrayed in the media and these attempts to discredit annuities sometimes by their rival products.

Dick: I think it’s also important to recognize that there are these positive articles about annuities. There’s a lot of emphasis, even from the federal government, now that annuities could make a big difference. But yet we get a lot of negative press.

Eric: Sure. If you think about it, annuities compete for the same slice of the pie as mutual fund^s, stocks, bonds, and CDs. I mean all those pieces are options for people when they’re trying to determine where to put their retirement dollars.

Dick: Do you think that some people just might try to color it, I mean the wrong way, for personal gain?

Eric: I have never seen a mutual fund^ company advertise ever. Well, maybe . . .  You have to realize there are competing opinions, and everybody wants to think that theirs is the best. Yes, insurance companies compete against investment companies and the such. So there are conflicting opinions and approaches. You see sometimes people tend to go negative. We’re in the political campaign era. We don’t see any negative campaigning going on. I think that’s part of or one of the reasons that some people have such a negative opinion about annuities. That creates that hate relationship.

Dick: From our own perspective, when we’re working with folks that are just kind of entering that realm of understanding annuities, many of their questions center around variable annuities# because that’s all they’ve read about in the press. They don’t know the difference between the variable and the fixed and the immediate. They pick up this negative connotation that’s continually put out there by the press.

Eric: His first point was, yeah, every annuity is a variable annuity#. Well, that’s not true, but a lot of people confuse especially the variable annuity# and the fixed indexed annuity.

Dick: Correct. They have some similarities.

Eric: Exactly. If you use the S&P as a benchmark, well the S&P is an investment product, right? So they think that it’s invested in the S&P.

Dick: Yet a fixed annuity is just what it says. It’s fixed. It’s safe. Your principal is **guaranteed, which is the opposite of the VA.

Eric: Exactly. In a variable annuity#, your principal can go up and down with the performance of the underlying sub-accounts or the investment accounts.

Dick: Where with a fixed indexed, you’re not really invested into that index. You’re just using it as a gauge of rising and falling.

Eric: Exactly. That’s where the confusion comes in. It’s not necessarily a fixed return that you’re going to get with an indexed annuity. But the safety aspect of every fixed annuity out there, the worst you’ll do is a zero on the return.

Dick: Your principal is always protected.

Eric: It’s protected.

Dick: The other thing, Eric, that we run into a lot with the VAs is the idea that, “Hey, aren’t these annuities all high fees?”

Eric: Right. With a fixed annuity, everything’s built in. It’s what you put in is what goes in. There’s no load fee. That confuses the mutual fund^ aspect. “Well, what’s the load I have to pay? What’s the upfront cost?”

Dick: Sure. Right.

Eric: With fixed annuities, it’s all factored into the performance of the product. What you put in actually goes into your annuity.

Dick: I do find that from folks that are just setting up an annuity that they are kind of amazed. “Okay, so I give you $100,000 or I give this company $100,000 and then they give me a bonus. I start off with $105,000 or $110,000 in this annuity. And I don’t owe you anything?”

Eric: Yeah. “How much do I have to pay for that?” The insurance company has already factored that into the program.

Dick: Right. Yet, it is a little different with the variable annuity#, or a lot different, we should say. I’m just saying in the sense of the fee structure. With the variable annuity#, the fees are going to be right there on your statement. For the most part, you’re going to somewhere from 3% to 5% maybe, depending on the riders.

Eric: Depending on the riders. I mean you could get one of the barebones ones that have very low fees. But most of them, if you’re really looking at the income **guarantees or the death benefit **guarantees, you’re going to have significantly higher fees.

Dick: Yes.

Eric: All right. Rather than just focusing on the variables, we can talk about some of the other misconceptions. What about inflation? Can a fixed annuity combat inflation?

Dick: I think the answer to that is obviously yes.

Eric: Why is that obviously yes?

Dick: Well, there are different ways that you can either defer a fixed annuity with a very high rollup rate, high growth rate for future income. You know that when you turn that income on, that’s going to be an offset against inflation. Yet, there are also ways to actually have cost-of-living adjustments.

Eric: The other aspect that combats inflation is if you’re looking at something that’s going to be in the equities market, you have risk involved with the volatility of the market. That’s one of the things. You don’t have to worry about inflation on the side of you haven’t worried about taking a loss.

Dick: Yes. A lot of times there’s just this automatic assumption that if your money is in the stock market, it’s going up 8% a year. If we look at the last 10 or 12 years, you’ve made virtually nothing. There’s also the possibility that your money goes negative. Now how well does that keep up with inflation?

Eric: Oops.

Dick: Not good.

Eric: No, not good at all.

Dick: It’s not good for sleeping at night.

Eric: We’ve talked about, in previous videos, strategies for addressing inflation with annuities, whether it be through laddering. There are tools out there that can help you combat inflation with annuities.

Dick: Right, and I would, folks, recommend that you go back and look at some of the other videos that we’ve done on laddering annuities and various aspects of inflation.

Eric: Sure. All right. The third point he makes is with penalties and surrender charges, annuities are just too expensive. He points out that this is partially true. There are surrenders. There are penalties. Depending on the annuity you select, I mean it can have surrenders. I can think of one off the top of my head that has a 16 year surrender. So they are out there. There are surrenders.

We’ve talked about this also in previous interviews. Why are there surrenders built into it? It’s because these are not short-term products. If you’re buying it for the wrong reason . . .

Dick: Well, these companies have to secure the clients’ money. The money goes into long-term bonds, very high-quality investment vehicles, and US Treasuries. The idea is, to protect everyone, these surrender charges have to be there.

The key to setting up an annuity properly is making sure that it does meet the objective, that it meets the long-term objective. Then you’re not going to be in a situation where you’re going to suffer a penalty or a surrender if it’s done properly.

Eric: Exactly. I think that’s the key. If you look at something that has a ten-year surrender, it’s typically a long-term product. It’s been designed. Annuities are designed for lifetime income. They are safe, secure vehicles that have longevity, basically, as part of the quotient of what they’re built on.

Dick: I think the idea of the 10 years or 12 years or 8 years, whatever the surrender aspect of the annuity is, gives the client a sense of, “Well, if things change or I would change my mind, I have this escape.” But most folks that set up an annuity really look at the benefits way beyond 8 years, way beyond 10 years or 12 years. They want this to carry them through their entire retirement. It truly is a long-term solution to a long-term problem.

Eric: Exactly. That is really the solution it should be solving. It’s not a vehicle where you are going to trade in and out of different annuities each and every other year. If that’s your intent, you’re looking in the wrong spot.

Dick: Right. Go ahead. I was going to say let’s talk about what makes people love their annuities.

Eric: Well, they take out volatility of the market performance. If you’re concerned about volatility, people typically do that. The income aspect, you have for life. There’s a novel idea. Those are the two big ones that jump into my mind right off the bat. So **guarantees . . .

Dick: Safety. I can say this, Eric, from experience with clients, many times going into it the thought of, “Should I do an annuity, shouldn’t I do an annuity,” there’s hesitation. There’s this love/hate because of all of the negative press and propaganda from all directions.

Eric: What’s coming in. Yeah.

Dick: Correct. Yet, what I find is that those folks that actually have an annuity, that have had it for several years, especially those that have come through the financial crisis, that they’re very satisfied. There is an appreciation and a love for that decision that they’ve made. Very seldom is anyone not satisfied.

Eric: I would agree. If you buy it for the right purpose, if it fits like a glove because it satisfies what your need was, then you’ll be happy. That truly is where people who have purchased it and got what they wanted and are happy. If they educate themselves going in and understand what it’s going to accomplish for them, then they will be pleased with an annuity. Most often, you’ll love the fact that you’ve made that decision because, in some ways, it’s sleep medicine.

Dick: Yeah, it is. It’s sleep assurance. It’s sleep insurance in many ways. I know that we could end it right here, but let’s hit it on the other side of it. Let’s talk about the hate. Why would you hate an annuity?

Eric: You bought for the wrong reason. You thought you were going to buy it now thinking the rates were awful, and all of a sudden rates go up higher. “Oh, if I would’ve waited, I could’ve gotten a better rate.”

Dick: Or you like maybe living on the edge a little bit, you know?

Eric: You like volatility.

Dick: You like the up and down of the market, taking that calculated risk, hoping for the best.

Or you’ve got this discretionary money that you could put into the market. It wouldn’t hurt anything. You stuck it in an annuity, and now that annuity isn’t performing at the high level of the market.

Eric: Right, you have an annuity. You have the safety **guarantees. You’ve eliminated the risk. All of a sudden, everybody else is talking about how the market is doing . . .

Dick: They’re making all this money.

Eric: Oh, I’m making so much. You missed out. Timing is everything. But, you know what, the timing of an annuity is you’ve taken that **guarantee, and you shouldn’t have to worry about it.

I guess I’m not being negative enough.

Dick: Well, thanks folks for tuning in today. We hope this helps you in your overall decision to kind of balance all of this information out there, both positive and negative.

Eric: Well, we hope you don’t hate us, but I don’t know if you’ll love is either. Thanks for coming in.

Dick: Bye-bye.

28 Risks Retirees Face – Part 2

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What are the risks everyone will face in retirement? We recently received a list of retirement risks prepared by the financial planning team at Global Financial Private Capital. This list comes as close to encompassing all the risks that retirees face as we have seen. Annuities do not answer or alleviate all of these risks, but they can control a significant number of the risks retirees have to consider.

This week Dick and Eric discuss the last 14 risks retirees face and how an annuity can be utilized to address some of these potential concerns.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

  1. Tax Risk – Significant tax increases or elimination of tax benefits.
  2. Loss of Spouse Risk – Planning and financial hardships that arise upon the death of the first spouse.
  3. Unexpected Financial Responsibility Risk – When the client acquires additional unanticipated expenses during the course of retirement.
  4. Liquidity Risk – The inability to have assets available to financially support unanticipated cash flow needs.
  5. Legacy Risk – The inability to meet the philanthropic and/or bequest goals that the client has set.
  6. Financial Elder Abuse Risk – An advisor or family member preys on the frailty of the client, recommends unwise strategies or investments or embezzles assets from the client.
  7. Reemployment Risk – The inability to supplement retirement income with part-time employment due to tight job markets, poor health, and/or care giving responsibilities.
  8. Home Maintenance Risk – The inability or unwillingness of clients to continue household chores and activities that they once handled themselves, which may require financial resources to pay for these outsourced activities.
  9. Timing Risk, also known as Point-in-Time Risk – Considers the variations in sequences of actual events beginning with different time periods.
  10. High Debt Service Risk – Clients retiring with significant mortgage, student loan, and/or consumer debt that may erode the resources needed for retirement spending.
  11. Procrastination Risk – Clients started saving for retirement too late.
  12. Retirement Saving Opportunity Risk – Working for an employer that did not provide a retirement plan.
  13. Inadequate Resource Risk – Clients have not saved enough to provide adequate retirement income.
  14. Unrealistic Expectation Risk – Client makes poor choices because he/she was not properly educated, or remained unaware, about the consequences of insufficient retirement income planning.

Read the 28 Risks Retirees Face – Part 1, here.

Annuity Guys® Video Transcript:

Eric: Today we’re talking part two, of our 28 risks to retirees. We left off on number 14, so we’re going to tackle the second half here and start with number 15.

Dick: I’m ready for number 15.

Eric: All right, and its tax risk. It’s basically what happens if they eliminate certain tax benefits or if perhaps maybe, the tax brackets increase.

Dick: Let’s take an informal survey here, Eric. How many people think taxes are going to be going up in the future? How many people think taxes are going to be going down in the future?

Eric: So there is some tax risk out there especially when you’ve got things like IRA’s, which are not being taxed now, they’re going to be taxed when they come out on the other side.

Dick: Right. Well, we’ve got Roth’s, which offer a great tax benefit and there’s always the possibility that that could be taken away.

Eric: Right, that was with our public policy risk from last week, and if you don’t know what we’re talking about, I encourage you to check out last week’s video.

Dick: Life insurance. That’s another one. It has a lot of great tax advantages.

Eric: They’re tax-free, tax deferral, [unintelligible 00:01:14].

Dick: Annuities, so as we face all of these possibilities one thing we’ve told our clients, because they’ve asked us the same question, “Well, if I go ahead and go forward with this plan, what assurances do I have that the government won’t change the rules and disallow this for me?” Well, there are no assurances, but one thing that we have been able to say with some confidence, is that in the past, the government has grandfathered those that acted in good faith, and were using a viable strategy that was allowed by the IRS, but the new folks trying to get into that strategy…

Eric: Right, it goes away, usually. I guess what we’re saying on tax risks don’t wait for the rules to be changed, because then it is too late.

Dick: Exactly.

Eric: Interesting, the next one here we had a little too much fun probably with this; loss of spouse risk.

Dick: Yes. Well what can annuity do to replace your spouse, Eric?

Eric: Well, in this case replace the spouse…

Dick: I don’t think that’s what they’re talking about, do you?

Eric: It’s not go out and get yourself a new one, but it’s the financial. Each spouse brings a financial benefit hopefully to the arrangement, and what happens when one is gone?

Dick: It makes a big difference, and many times it’s not factored in properly, and usually there will be one spouse that will be in a better position, if they lost the other spouse financially, than the other spouse would be, because it would create a great hardship. So you’ve got to determine which one is, maybe at the greatest vulnerability in the plan.

Eric: And pension factors, social security impacts, what happens. And you hate to sit there and do the math on it, but you have to know what the impact is going to be if one spouse is gone, and how it’s going to impact, not just the financial aspect, but then there’s also replacing some of the service aspects and things that they do around the house. Little things go a long way, here.

Dick: Right, number 17?

Eric: Unexpected financial responsibility risk.

Dick: Where something blindsides you, and you’re caught unaware with a huge bill.

Eric: Yes, I always think of the kid that is going to move back home with me or the parent that’s going to move back in with you.

Dick: Or the child or grandchild that had an unexpected health need, that wasn’t going to be covered by insurance.

Eric: Right, what happens when the unexpected happens?

Dick: And you need to get your hands on that money when you need to spend some of it.

Eric: So it’s having that bundle, so to speak of dollars, available for that unanticipated need.

Dick: Right, right. And in some ways that isn’t a job for an annuity, so you really have to think in terms of an annuity, how can I position this money and leave it alone, so that I’ve got additional money for those unexpected things that may happen.

Eric: It’s having that resource though. Then we have liquidity risk, so by liquidity risk we mean having basically, cash on hand. It’s that ability to go get and take and walk away.

Dick: Which goes back to what we were saying, don’t put too much money in any one area without having some liquid money. Another good example of that area could be stock.

Eric: Right, stocks. It’s even annuities.

Dick: Sure.

Eric: If you over-obligate too many of your dollars into resources where, if you’re going to have to go get them out, and take a penalty for having to go get them.

Dick: What happens if the markets fall?

Eric: Well, you’re buying high and selling low, so you’ve just reduced your principle.

Dick: So you don’t have the liquidity, unless you want to shoot yourself in the foot.

Eric: And the same thing, if you’ve spent too much on a CD or an annuity, you’d have to go in and get it out early and there’s a surrender or a penalty. Those things can impact you negatively, as well. It is having the right amount in liquidity in place, and the flexibility in your plan to be able to go get those assets.

Dick: Another risk concern, it doesn’t really affect everyone but we do have clients that it is important to, and that is their legacy. They want to leave something behind.

Eric: Yes, charitable giving. I see hospital wings with people’s names on them.

Dick: A scholarship, some type of a benefit that they want in their memory.

Eric: That they want to leave money for this. Well what happens, if what you think you’re going to leave is depleted by either poor market returns, living too long, I mean sorts of legal things. So how is your legacy going to be impacted by [inaudible 00:06:32]?

Dick: And if it’s important to you, then you have to consider how you’re going to make that real.

Eric: Yes, so number 20 here is very interesting, financial elder abuse risk. Now we were talking a little bit about little known laws, that require children to provide for their parents.

Dick: Yes, yes. In many of the states; and I was just reading this recently and maybe we can do a little bit more of an expose on it in future videos; but that a lot of the states have laws on the books that actually require the children to take care of the financial responsibilities of the parents, if the parents cannot handle. So a few of the states have tested this a little bit, and some children have been called into play and even, may potentially face criminal activities, for not supporting their parents’ needs, when the parents thought that their poor planning or poor decisions would not affect the children.

Eric: Right, and then it goes back to more, I would say the more common aspect, where the children don’t make good decisions, or they have a financial adviser that takes advantage. Things that happen along the lines to basically deplete the resources, thus abusing the parent/child relationship, financially abusing it.

Dick: Number 21, in the time period that we’re in, with employment numbers the way they are, for retirees they do face the challenge if they would lose a job, a part-time job, a full-time job. Maybe it was supplementing their income. Will they be able to get reemployed?

Eric: Right, we joke somewhat and the Wal-Mart greeters are going to be…

Dick: Yeah, replaced by security cameras, and…

Eric: The jobs that you think you are qualified for as a retiree, sometimes you’re over-qualified, and it’s tougher to find those jobs. A lot of people didn’t really anticipate having to go back to work, and things have changed. So that reemployment risk or needing to be reemployed…

Dick: It can be serious, if you’re relying on it.

Eric: Number 22, is home maintenance risk, which if you’re a homeowner, you know what it takes to maintain it right now. Well, as your resources are depleting, all of a sudden you think your house is paid for and everybody talks about “my house will be paid for by then.” But will it need a new roof? Will it need a new furnace?

Dick: Right and another area of vulnerability on this Eric, that a lot of times folks don’t look at are reverse mortgages. A lot of folks say, “Well, I’ll get a reverse mortgage. It’ll take care of me. Give me that equity, out of my home.” But then you still have to maintain that home. If you cannot maintain that home, then you could be in default on the loan.

Eric: True, if it goes into a state of disrepair and the other aspect of even being elderly is being able to maintain, if you’re physically not able to do the chores. The lawn mowing, the upkeep, those things come into play, because you have to hire those things out, a lot of the time.

Dick: Right. Well, timing risk, that’s another thing in terms of what catastrophic things that might happen.

Eric: Yeah, I think it’s the actual events that impact all of us financially and some of them are unpredictable. A tsunami wipes out the entire town, an earthquake.

Dick: Tornadoes.

Eric: They can take away your business. They can take away your home.

Dick: Are you properly insured, this type of thing?

Eric: Exactly, and it’s that you can control and things that you can’t control. What’s going on in Europe right now is an actual event that’s happening that’s impacting our ability to earn and save, because of a financial crisis that wasn’t of our doing.

Dick: It all gets down to some point in time, that we have no control over, and so if timing is in our favor it goes very well, and if timing’s not, we can’t afford that in retirement.

Eric: Right, it’s just the times we live in, basically. You can’t change the time. All right, what about number 24 here, high-debt service risk.

Dick: Well, I think that most retirees want to say they’ve got their home paid off. They own their cars. They’ve got some money in the bank, and obviously we’re very fortunate ourselves but also a lot of the clients that we work with, that have gotten themselves in a very good position financially. But we do talk with some folks occasionally that will have some pretty sizable debt going into retirement. This can turn around and bite you, especially if you’ve got a variable rate mortgage or something of that nature.

Eric: Variable rate mortgages, buying that new house right before retirement sounds, “Oh, it’s beautiful. It’s what you always dreamed for,” but it comes with a new price tag. I always talk to a lot of clients especially in their 40’s, about spending money on college. Well, those college loans, they let you defer, defer, defer well all of a sudden, your son or daughter who’s the doctor now and 12 years of accumulated college loans that you’re on the hook for. You can pay them off over the next 20 years. Well, you’re in retirement now and you’re paying off your kid’s college loan still. How much of your retirement dollars, have you put into paying off those pieces?

Dick: Exactly, you’ve lost the time value of the money earning and growing. So I do think that when we look at the high debt situation, that we do have to also, recognize that there are way that you could have debt, and yet have the money set aside to service that debt. To pay that debt off in full and you could be earning some arbitrage, making some money on your money, and so there are ways to do that effectively. We don’t want to just say that everything has to be paid off. There are smart ways to be in debt.

Eric: Yeah, there’s strategies, if you don’t do number 25, which is procrastination risk.

Dick: There you go, I like that. Nice segue.

Eric: Yeah, we planned that very carefully. We hear this all the time, the rates are too low. The rates are going to improve. I’m going to wait til next year.

Dick: I can think of dozens of examples dating back to 2008-2009. “I’m just not going to do anything. I’m going to wait.” Well, how well has that worked for you?

Eric: What’s the impact on your retirement on waiting, starting too late? We always talk about, if you’re going to save for retirement if you put the same amount of money in between the ages of 20-28 and then stop; is the same as putting it in from the ages of 28 to almost age 60; so it’s just because of the compounding out there and my math’s probably off a little here, but it’s truly what you’re putting away. What it costs us to wait.

Dick: It’s what you can put away and how long you can let it grow and compound, so procrastination is probably the greatest enemy to achieving your objectives in retirement. Even though you might think, “Well, I’ve only got five years or ten years,” there are some wonderful things that can be done and annuities can accomplish a lot of these things with **guarantees, so that you know that you’re going to have, at least a certain reasonable income.

Eric: Right, right. All right 26, retirement savings opportunity risk. So in simple standard language it’s working for an employer that doesn’t have a retirement plan.

Dick: Or you just didn’t contribute much to it.

Eric: Well in this case, I think they’re blaming the retiree. It’s the employers fault, because if they were supposed to take care of me and provide for retirement.

Dick: Things have changed.

Eric: Yeah, if you don’t take the onus on yourself that really does impact.

Dick: Right, if you haven’t saved enough it doesn’t really matter if it’s the employer’s fault or your fault you haven’t saved enough.

Eric: And I think what we’re seeing is a generational change, from that defined benefit plan where you worked for an employer, and part of their obligation is they were going to give you a retirement that took care of you, for as long as you lived. That was going to be your benefit for working there for so long. Now we’ve got these 401k programs that are really more an individual’s responsibility.

Dick: Which really ties us into 27, which is the same thing, inadequate resource risk, you just don’t have enough.

Eric: And this is the speech we have with 401k participants, because their thoughts, “I’ll put in the minimum and the employer will put in this much, and I’ll be fine for retirement,” until they start running numbers.

Dick: Yeah, exactly. There’s no silver bullet. If you don’t have enough money set aside, you’re just limited in what you can produce for an income.

Eric: Well, you’re going to have to step down your living. Your standard of living is going to go down, because you haven’t put away enough resources, and it’s tougher to do later in life. That’s that procrastination thing.

Dick: Well and, this is a good place to wind things up. We’re on number 28 and that’s having unrealistic expectations of retirement, and what it’s going to produce. What the results of that retirement are going to be, based on what you’ve saved. The old saying, “We have champagne taste and beer pocketbooks.” That’s a job that an adviser has to help the client a lot times, understand.

Eric: It’s hopefully what we’re doing here with these videos. Talking about and making you aware. We’re trying to educate and present the scenarios here, but you have to take responsibility for going out there and answering some of these questions. You’re now aware. You’ve been educated. You’ve been asked, but you have to make the right decisions going forward. You may not have saved enough to maintain your lifestyle. You’re going to have to make changes.

Dick: Right, you’re going to have to cut back a little bit.

Eric: Your expectation was here, well reality is here, and you don’t have any time left to make it up.

Dick: Or maybe you saved a much larger amount of money than you really need, and you have discretionary income and you can have some in the market. If you lost it, it wouldn’t be the end of the world. On the other hand, you’re in a very good position financially, and you need someone to help you understand how to spend your money.

Eric: And if all of this is overwhelming to you, and you don’t know which way to go, that’s the time to sit down with an adviser. Get somebody that can ask you these questions, if you’re not sure how to answer them, to present you with these scenarios.

Dick: We’ve spent 30 minutes doing these two videos probably, and realistically this would comprise hours and hours and hours of planning with most clients.

Eric: Yes, so we encourage you to sit down, take the time, start working through these if you haven’t already done so. Hopefully you’re working with an adviser that is asking you these questions, and setting the scenarios for you so that you can be prepared. Our goal is for everybody to have a safe, secure comfortable retirement, so these are some of the risks that we hope that you can avoid, and basically have abilities to deal with.

Dick: Absolutely. Well, thank you so much for spending your time, looking at these different risks that retiree’s face. They’ll be on the website, so you can check them out, and read about them. Take them to your adviser and do some serious, good planning.

 

Top Five Reasons Not to Buy an Annuity

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What are the top five reasons not to allocate funds to an annuity? Based on many years of experience and an informal office survey the top five reason are…

  1. Too old or too young.
  2. A lack of sufficient assets.
  3. Expectation of an unrealistically high return.
  4. Probability of needing annuity dollars prior to maturity.
  5. Missing a reasonable understanding of how annuities work.

Dick and Eric examine these five reasons in this weeks commentary.

[embedit snippet=”video-specialist-button”]

 

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Annuity Guys® Video Transcript:

Dick: We have an empirical study. Is that correct, Eric?

Eric: The Top Five?

Dick: The top five reasons why a person should not buy an annuity.

Eric: Yeah, that’s right.

Dick: And where’d this empirical study come from, Eric?

Eric: Well, we did a survey here in the office.

Dick: Of you … and I…

Eric: That’s right, the two of us.

Dick: So we have a slight margin of error.

Eric: It’s plus or minus five.

Dick: Five, yeah. We don’t know why five.

Eric: The five reasons that you shouldn’t buy an annuity.

Dick: Yeah, but we do really run into some very legitimate reasons. Why folks should not buy an annuity and people should know about that.

Eric: That’s right.

Dick: Reason number one, too young.

Eric: Too old.

Dick: Or too old. Age, that’s right. Let’s take the extreme ends, let’s say, too old. How old is too old?

Eric: Too old is when you start to lose benefits, so it’s age 81.

Dick: They’re gone, basically.

Eric: Basically, very few choices left.

Dick: Right, a few companies will give you a little bit, but usually the yields are low and there are no additional riders or benefits, this type of thing. One real exception to that now, on the 80-year-old, is if we find that they have a younger spouse.

Eric: Okay, and then that makes it a good deal, because the spouse is…

Dick: The spouse can get a lot of benefit, by putting the annuity in their name.

Eric: Right, so really they’re still within the guidelines of getting some of those benefits.

Dick: Right, so that does work well. Let’s go to the other extreme. Let’s talk about the younger. When’s it too young?

Eric: Well, definitely before, I would say age 25, but anything younger than that…

Dick: 16-year-olds, no way.

Eric: It’s obvious, but most of the time there, you’re in your stock accumulation stages.

Dick: Right, you might make a case occasionally, for someone in their early thirties, but probably somewhere in your mid-thirties to early forties, before it starts to make real sense, depending on your risk aversion, I would say.

Eric: Most of these income benefits are usually set for a 10 or the maximum I’ve seen, is a 20-year period, so really it’s the 20 years prior to retirement. So if you think of 65 being the logical retirement age, really your mid-40’s; when you get to 50, you definitely should be…

Dick: Yes, you should be moving in that direction or have a plan.

Eric: So really before that it’s another bucket, you’d probably not fit. So that’s reason number one, reason number two…

Dick: You don’t have enough assets.

Eric: You don’t have a nickel to rub.

Dick: I mean really, folks, and Eric and I were discussing this prior to going on camera here. If you’ve got less than $100,000 dollars in overall assets and we’re not talking about your home, or your furniture, or your car. We’re just saying if you’ve got less than $100,000, realistically you just don’t know what’s going to come up. You don’t know what kind of an emergency situation you might have, and it’s probably wise, not to put that money into an annuity.

Eric: We call it the liquidity issue. You don’t have enough liquid assets, to be able to do and take care of the things that may come up, and you definitely don’t want to put all of your eggs in one basket.

Dick: Correct.

Eric: So when you’ve got limited assets…

Dick: Right. It’s really iffy, and there’s always an exception. There’s going to be some exception that’s going to come along, where someone has lots of income and they may not be worried about needing liquidity.

On the other hand, I’ve seen a few situations where someone had so little income that they needed an annuity to produce enough income, just so they could live on and know that they weren’t ever going to run out of money. So there is this balance. You have to look at each person’s situation and evaluate it to be fair.

Eric: But largely, basically you have to have, typically $100,000.

Dick: Or more, and then I guess the other caveat to that, though I would say is a lot of people may only want a $75,000 dollar annuity or $125,000, but they’ve got several hundred thousand dollars in other assets.

Eric: Right, it’s an allocation.

Dick: It’s an allocation.

Eric: So we’re not saying you have to use $100,000 up. We’re saying if you don’t have at least $100,000 available, then that’s not a wise choice.

Dick: Right, moving on.

Eric: Number three, expectations of unrealistic, high returns. Annuities are a safe, stable allocation.

Dick: That’s right.

Eric: So if you don’t get, if you don’t have high risk, you don’t have high reward. You have more of a level, safe, stable…

Dick: Right. Your reward is sleeping securely at night. Sleep insurance, and knowing that you’re not going to be affected by the ups and downs of the market or of a Japanese-style situation, where the market loses 75% of its value and it doesn’t return over a 20-year period.

Eric: Right. As long as you expect, if you’re using it for income, primarily it’s a great vehicle.

Dick: You don’t have of longevity risk. It doesn’t matter how long you live, right? So it’s great for the pension-style income.

Eric: Yeah, perfect.

Dick: And growth, growth can be reasonable.

Eric: We always talk about beating the bank, by a couple percentage points.

Dick: And then if we wanted to pre-issue annuities, it could be maybe higher than that, so maybe we’re beating the bank by thre3.0-4.0%.

Eric: Yeah, so it’s expectations. If you want your cake and eat it too, this is not the vehicle for you. Because I’ve had people ask me, “I want the cake-and-eat-it-too annuity.”

Dick: Right.

Eric: Well, you have to pick and choose, and it doesn’t exist in the double-digit community.

Dick: Well, and this is where I find that people have a lot of unhappiness with the annuity they purchased, when an advisor has told them that they’ve got this unlimited upside potential and no downside risk, and they’re expecting something pretty close to a stock market gain, when the market’s going well and they don’t have it and they’re disappointed, because they were over-sold, overstated, under-delivered.

Eric: No, so don’t buy an annuity if you have unrealistic high-return expectations. All right, so number four, the probability of needing annuity dollars prior to maturity.

Dick: Well and when we say probability, there’s always a possibility for anyone that they could need the money, but if we talk of it in terms of probability we have to use some reasonable assumptions. And if you’ve got plenty of income, you’ve got other assets then the probability when you put your money in an annuity should be very, very low that you’re really going to need this money for anything.

Eric: Right, I mean if you go into it with the expectation of saying, “I’m going to go buy a new house in three years, I might use that money.”

Dick: I might use that money.

Eric: Don’t put the money there to begin with.

Dick: No, it makes no sense.

Eric: It’s not a good decision. So that one pretty much stands on its own.

Dick: Yeah. And number five, this is probably my favorite.

Eric: This is my favorite. It’s truly the number one reason not to buy an annuity and that’s that you don’t have a reasonable understanding of how annuities work.

Dick: Right. Before you can make an intelligent decision on an annuity, and there is a certain degree of perplexity and sophistication to an annuity, you need to really work with an advisor that gets it. That has access to multiple annuities. That has a great understanding of these annuities. How they work, how they inter-relate and function, and someone that can help you to understand. Not that you’re going to have the same knowledge level that the advisor has.

Eric: And I don’t think they have to understand how every annuity works. You have to understand how what you own works, the ins, the outs.

Dick: And that it’s going to meet your objectives… your stated objectives.

Eric: I talk to clients about working backwards. You work backwards from the goal and then find the annuity or the pieces that fit that goal. But you have to understand how it works and how that piece works as part of your goal. If you don’, and if you’re not comfortable, don’t do it.

Dick: Yeah, you shouldn’t do it. You’ve got to be careful. There is a point sometimes where you do rely on the advisor’s expertise, because you do have certain stated objectives, so there is this balance that you have to hit, but you do want to at least a cursory understanding of what it is you’re doing, why you’re doing it, how it works.

Eric: Right. Don’t spend more time planning your vacation than you spend planning your retirement.

Dick: That’s right, or understanding your annuity. So folks, these are the five top reasons that we’re aware of.

Eric: And based off our empirical survey.

Dick: Yes, yes, and so we think that this will give you a good basis as you’re considering putting money into an annuity, doing an annuity allocation. If these don’t really apply to you, then an annuity may be a good choice.

Eric: Good deal, I think we’ve hit the top five.

Dick: Next week, maybe we’ll talk about the five least reasons not to buy an annuity.

Eric: We’re having too much fun, we’d better go.

Dick: Thank you.

Is a Pre-Issued Annuity right for you? – Part 2

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This is a two part blog on Pre-Issued Annuities. In part 1 we examined some of the reasons why someone might consider a Pre-Issued Annuity for a portion of their portfolio.

In this entry we highlight some of the concerns and and negatives that must be considered when examining a Pre-Issued Annuity.

[embedit snippet=”video-specialist-button”]

 

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

So now let’s consider some of the negatives on a PRE-ISSUED ANNUITY ™ :

  •     Limited liquidity selling your payment stream prior to maturity could result in a considerable loss.
  •     The court order process should be monitored by an expert attorney that is retained by you.
  •     The best PRE-ISSUED ANNUITIES ™ never make it to the internet or retail lists.
  •     The industry is controlled by a few power players catering to institutional investors.
  •     Contracts require a 10% to 20% escrow to secure your future ownership during the court order process tying up some of your money at low or no interest for up to 90 days.
  •     Approximately thirty percent of initiated contracts get rejected by the court and you get your escrow back to start over.
  •     The industry is full of highly motivated commission oriented sales people that will promise the world and then fall short on delivery they would prefer for you to not have your own expert attorney.
  •     Contracts are often discounted by two to four brokers away from the source diluting your potential yield.
  •     Most contracts available on the internet are older inventory that has been picked over already
  •     Life contingent contracts can end abruptly with an insurance company paying back your principal and yield early since the annuitant died unexpectedly.
  •     Not FDIC insured.

Is a PRE-ISSUED ANNUITY™ right for you? [Read More…]

Annuity guys Video Transcript:

Eric: We talked about IRAs, and this always my biggest concern with IRA’s because you have RMDs that you’re going to have to eventually get to. Liquidity is of one that concerns because you’re buying that stream, or that lump sum, it’s already predicated. It’s already set out.

Dick: You need to balance that, in terms of your overall IRA, that you’ve got money to draw your RMDs from, or that your income stream will be adequate from the pre-issued annuity to cover your RMD. That is a consideration that you have to look at.

Eric: Liquidity in and of itself.

Dick: Let’s just talk about liquidity. That is probably, in all fairness, folks, that is the biggest negative of a pre-issued annuity. Once you buy it you have to know that you’re in a good position to hold it to maturity. If you’re in a good position, it can be a great strategy, a great financial vehicle, but if you’re not and you buy one, then you’re going to be forced to sell it on the secondary market, go through the court order process so your payments streams. That will be at a considerable loss typically.

Eric: There’s a reason that there’s so many players in this market. They’re able to sell low buy high, or . . .

Dick: Buy low, sell high.

Eric: Unfortunately in this case, the people selling are selling at a low point. We really encourage you to know exactly that you can handle that payment stream as it’s been setup, or that lump sum, those criteria fit your situation.

Dick: Another aspect of this, that folks get a little bit frustrated. You talk to a lot of people out there that are basically a commission sales person, they’re claiming to be an expert, they may have done several of these transactions, but they really don’t have what’s called a fiduciary responsibility to the client. If they are incompetent, if they’ve not done well, they’re on to their next client after they’ve placed you with something that may not have been handled properly. This is where we highly recommend that you work with someone, first of all, that is very experienced, but in addition to that, that would be an attorney, because there is a court order process that these go through and you really want to make certain that it’s properly identified, named, that all the parties involved are properly represented, and your closing documents and everything have been reviewed by an attorney; and that that attorney actually has a certain fiduciary obligation to look out for your best interest. If they don’t, they’re in danger of losing their practice.

Eric: We actually would say, we’d encourage you to actually have a retainer with an attorney signed in order to ensure that client/attorney privilege that they’re obligated to basically act in your best interest. That’s that fiduciary responsibility.

Dick: Let’s be fair, that’s going to cut down on the yield a little bit, but when we’re talking about a substantial yield, way better than what’s available in the market and you have to put out $500 out of your pocket to ensure that’s done correctly, that’s a very small part of that yield. It might be 10 basis points over 10 years or 1/10th%. I’m just throwing out some approximations here. It could be way less than that, it could be slightly more.

Eric: Exactly. Next thing is you’re not just going to run down to the corner drugstore and pick one of these up off the shelf.

Dick: No. There’s really some major players in this, and there’s not that many of the major players, 4 or 5 of them. Of those players some of them sell pretty much exclusively to institutional investors, so that leaves less to pick from. There are some smaller entities that are in this distribution vein, but what you really want, and we always are telling our clients this or the website visitors, is you want someone that’s really connected to the sources. They can have multiple avenues to look at the better pre-issued annuities that come along with better yields and better payment terms in this type of thing that most people that are out on the internet buying from a commissioned salesperson, they’re not going to actually know about these.

Eric: The earlier you are in the process, the better return you’re going to get. Insider’s advantage.

Dick: It really is. There’s nothing illegal or wrong about it. It’s not like insider trading or something, this is just knowing how to get to the item first that’s paying the highest yield. There’s another aspect, Eric, that we need to be aware of. I’m going to look back here at my notes so I can make sure that I don’t just keep rambling on and on here, make sure that we hit all of these points.

Eric: We talked about the escrow.

Dick: Right. That was . . . go ahead.

Eric: Where you were going to go?

Dick: Where I was going on it, yes.

Eric: It’s basically when you start to work with somebody, and especially on the insider aspect where you indicate this is what you’re looking for; typically, you’re going to put an escrow out there in order to initiate the process.

Dick: Right. That is the aspect that we want to be aware of, and that is that about 30% of these that enter the court order process will not go through. They’ll be declared invalid by the court system. About 70% of them are going to go through. Just what you were talking about, you have to escrow, get ahead of the curb to get the better ones, you have to actually be willing to say, “That’s a payment stream I would like to have.” Like you said escrow 10%to 20%, to hold that particular contract, that particular pre-issued annuity while it goes through the court order process, and it takes about 90 days. The worst case scenario is you’ll get your escrow back.

Eric: You’ve lost time, that’s all you’ve lost in a sense. Again, the court is protecting your process so that’s a safety side. The negative side is there are procedures and pieces that have to go through in order for this to come to fruition.

How many people are competing in this world? There’s a whole bunch of motivated commissioned people that are in there, but it’s a very small insiders group.

Dick: Yes. When we start getting into attorney’s that work in this area, that are very proficient in this area, that have some real experience, a lot of those attorney’s are actually working for the companies that are buying the settlements, selling the settlements, and this type of thing. There are some available, you can find them typically on the internet. If you’re somehow connected to the industry, you may know some, and that’s something that we can do for our site visitors, is recommend an attorney that we can refer, that would assist them.

Eric: That’s the key, I think. Our strength in this area is working with insiders. We work with somebody that’s key in the industry, that has an insider advantage, and that’s what’s benefited our clients.

Dick: It really makes the difference. I think, folks, that when you look at this whole strategy and this direction for a higher yield, I think you just need to do a little bit more homework, a little more research, become comfortable with how it works. Once you understand it, it can be a very effective, very high-yield safe type of financial strategy.

Eric: It’s an excellent tool for your toolbox. Especially in this extremely low rate environment, it gives you another option.

Dick: For that portion of your money that you want to see grow with a good yield and you can structure the payment stream to fit your needs, it’s hard to beat.

Eric: Thank you for checking out our pre-issued annuities section.

Dick: Yes. We’ll come back with more on this at a later date, and maybe go into more of the mechanics of it.

Eric: Sounds good. Have a great day.

Dick: Thank you.

Is a Pre-Issued Annuity right for you? – Part 1

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This is a two part blog on Pre-Issued Annuities. In part 1 we will examine some of the reason why someone might consider a Pre-Issued Annuity for a portion of their portfolio.

Is a Pre-Issued Annuity right for you? If you think like most people in this low interest rate environment the answer is a resounding YES!

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Once you understand the high yielding yet safe nature of these financial vehicles it becomes apparent quickly that most of us have money that would be well suited to this type of strategy. The biggest question most individual investors have is how do I get started  without making a mistake that I will regret. The key is using an expert that specializes in this field having a legal and fiduciary interest towards you as the client. The best advisor for this will have experience in the industry, inside sources for access to the best available contracts, and be a practicing attorney to follow and assure the validity of the court order process.

PRE-ISSUED ANNUITIES ™ have several positive attributes in common that make them currently in high demand:

  •     High Yields – typically 4.5 to 8.5 percent.
  •     Safety – payment streams are **guaranteed by highly rated insurance companies
  •     Safety – Court order process protects both buyer and seller
  •     Safety – Issuers – regulated by State Insurance Commissions with **guarantee associations .
  •     Fixed and reliable income streams
  •     Diversification for portfolios of sophisticated investors
  •     Truly a non-market correlated asset
  •     IRA or Qualified Account compatibility
  •     Estate transfer to heirs
  •     Twenty year plus successful transaction history

Is a PRE-ISSUED ANNUITY™ right for you? [Read More…]

Annuity Guys® Video Transcript:

Eric: Today, we’re going to talk about pre-issued annuities, safety, and high-yield. High yield; we’re chasing numbers right now. In this day and age, everybody calls up and they say, “Where can I get . . .” and of course, it used to be, “Where can I get 5%?” now it’s, “Where can I get 3% or 4%?” Is there a place we can get 5%? Especially when they call us up, and based off the Annuity Guys® website, we get a lot of call that say, “Give me a number. Give me 5%”

Dick: This is probably the most frequent call that we get, folks. A lot of folks that are looking for CD alternatives, because CDs, as you know, Eric, what are we now? About 2% would be the max, 2 or 2½ on a really long-range CD. What we’re seeing more frequently is maybe ½%.

Eric: I was going to they all start with a dot in front of the number, unfortunately; 0.8.

Dick: Then when we come down to the new-issue annuities, new-issue annuities, again, are severely affected by this low-rate environment, which may be with us for quite some time because of our fed.

Eric: Just recently, companies are coming out and making predictions that this is the rate environment; get used to it. We’re going to see this for the next 2 to 3 years.

Dick: I’ve often brought this up, but Japan has seen this for the last 15 to 20 years and they’re the second-largest industrialized nation, their GDP, in the world. Is it possible that this becomes an extended 5 or 10-year cycle, because we’re trying to get out economy booted up and it doesn’t happen? Where can good, honest people go to get a good, fair return? That’s the big question.

Eric: The retail environment has always been, “This is what’s available to the consumer.” The nice thing is we’re breaking down some barriers and we’ve got some things that were just available for institutional buyers, banks, multimillionaires, basically people of means, or institutions of means, they dabbled in these markets before. Now you’ve got access for the consumer market.

Dick: If we go back and just do a little brief history, we’ll do something more in-depth later, but just a little brief history. Pre-issued annuities, which are called structured settlements.

Eric: Secondary market annuities.

Dick: Lottery annuities.

Eric: Life-contingent annuities.

Dick: Pre-owned annuities. There’s so many different terminologies, but pre-issued is a pretty accurate way to describe these annuities. Someone bought this annuity originally and they don’t need it anymore, or they were in an accident, they got some type of a settlement, or they won the lottery. They don’t need the income stream, but they do need some money upfront. Folks, you’ve probably seen Imperial Structured Settlement and some other ones out there that regularly advertise on television. Some of these will come through that type of avenue, or distribution. The whole idea of this is that somebody is willing to sell their payment stream for considerably less than what it’s worth, in terms of those final payments throughout the maturity.

Eric: It’s basically, ‘I have an income stream or an annuity that I’m going to eventually get this much money for. I’m willing to sell you that payment stream, or that lump sum, and you’re going to give me a lump sum now.’

Dick: You might sell $200,000 worth of payments for $100,000, that I’m going to collect over a period of maybe 10 years, which comes out to in the neighborhood of about 7%, maybe even a little more than that. That’s a way that I can get a very substantial yield and you can your lump sum of money that you need, that’s kind of the gist of how it works. Like I said, going back in history, a lot of these companies that you see advertising on television to buy these large settlements, they will actually package these up, securitize them, sell them to institutional investors, pension funds and the like, and investment banks, and they have lots of large buyers standing in the wings. Guys like you and I, Eric, and our clients, we couldn’t have access to these, just maybe 5 years ago.

Eric: The market wasn’t there. We didn’t even know it existed, probably, until the advent of . . . from an individual consumer talking to our clients.

Dick: Folks, what really happened was we went through this financial crisis and all the credit dried up, and now all of a sudden, these institutional advisers, Eric, they just weren’t walking in and buying these bundles of securitized pre-issued annuities, so what were they going to do? They found a new avenue to sell it to.

Eric: Yes. Now we have a lot of brokers, independents, going out there and basically finding these pieces out there that are available for purchase. They’re buying them and remarketing them. You’ve got brokers online that are all over the place.

Dick: There’s some negatives that we probably need to talk about, but maybe, let’s break it down and let’s talk about positives and negatives.

Eric: Let’s highlight just first the positives, Okay? Yields: We’re in a low-rate environment right now, so a new-issue annuity, if just were looking at a [inaudible: 06:11] or CD-style, you’re only going to see a return in that 0 to upward . . . 10 years will get you almost 4%. Here, we’re looking at yields.

Dick: We start at 4, 4.5, and we’re well-connected, we know the source that we can go to. We can do considerably better, and on some of different types of pre-issued annuities, they’ll pay out a little more, like the life-contingents. We can get upwards of 8.5% over a good length of time. It’s a huge difference in yield.

Eric: So the yield is much higher.

Dick: Yes. Then we come down to safety.

Eric: We got multiple levels of safety. Who may buy these, who’s underwriting all these contracts? Where are they coming from?

Dick: The ones that we recommend, or the attorneys that we work with, recommend are really coming from A-rated, A+ rated, A++ rated . . . I guess we can do a little name-dropping here, but maybe Allstate, Prudential . . .

Eric: John Hancock.

Dick: These are really strong quality companies.

Eric: We’re not just picking for our clients, it’s not just taking anything, there is a certain requirement of what we’re looking for, from a safety standpoint. They’re safe from the underwriting of that. Somebody owns these annuities. How do they get transferred into my name, if I want to buy them?

Dick: That’s another layer of protection, another layer of safety, and it’s the court-ordered process. When this whole industry got started, like we talked about, approximately 20 years ago or so, it was a little bit like the Wild West, and it was anything goes. A lot’s changed since then, and there’s been some rulings and things that protect the person that’s actually trying to sell their lump sum. Now, this all has to go through a court-ordered process. It really protects both the buyer and the seller. It’s also very important that you have some type of legal representation as it moves through that process, that it’s done where all the I’s are dotted and the T’s are crossed properly.

Eric: That’s safety from . . . so you got a court agreement that’s been placed, so the contract is basically a court-underwritten piece?

Dick: Exactly, and it really directs the insurance company, the A-rated or A+ rated company, where there payment streams are now going to. By court order, they are to pay those to the new owner of those payment streams, not to the new owner of the annuity. The owner of the annuity remains the initial person that had the annuity issued, and that’s why we call it a pre-issued annuity. It was issued previously, and all this person is doing is selling their payment stream.

Eric: It’s not taking the ownership away; it’s really just taking the ownership of the income stream and passing it off.

Dick: Exactly. Then we have the layer of safety that all of these A-rated companies, I should say highly-rated insurance companies, they are regulated by the states, The State Insurance Commission.

Eric: The State Guarantee Association.

Dick: They each have a State Guarantee Association. I would say, folks, you have to individually look into that, what your state does, but it is another layer of protection. You’ve really got about 3 very serious layers of protection. There’s another 1 or 2 that we could talk about, and I’m not going to get into it, it’s a little bit more complex from the structured settlement side, but there’s another layer of protection, sometimes, that becomes into play.

Eric: Are these like just buying them off the shelf, in the sense of who’s buying them?

Dick: This is the trick. Folks, you can go out and Google ‘pre-issued annuities’, you can look structured settlements and the like, and you will find some companies available out there on the internet that have a retail list of what’s available. Unfortunately, the best pre-issued annuities typically never hit the internet; they’re actually taken right from the source when someone wants to sell their payment stream or their lump sum. Again, this really makes a difference if you can be connected to a good attorney, someone who knows right where the source is and can kind of cut out the middle man, cut out the brokers that are in between, because typically, you’ll have anywhere from 2 to 4 brokers involved in sharing the profits before it actually get to the clients. The more that you can cut out of that, the higher yield you’re likely to have.

Eric: Less hands in the pockets, the more [inaudible: 11:26]. These are sophisticated instruments. How would they fit in a portfolio, in a sense? Is it . . .

Dick: This is still, even though there’s a certain level of sophistication to it, it’s like anything that you do in the investment world. If you look at your prospectus what, how many pages are in an average prospectus, Eric? You’re securities guy?

Eric: The phone book? [inaudible: 11:54] pages.

Dick: 100, 150.  You could say that investments are pretty technical, pretty sophisticated, and that would be true, we’ve just become familiar with them, we understand them; our stocks and our bonds, that type of thing. These, likewise, once you understand them, you realize that they’re very safe. The companies that are backing them, you can actually know your yield. You have a very reliable payout in the income stream. There’s really no volatility in it like there would be in an investment?

Eric: I think the key here is diversification, just like anything out there; it’s a key piece, to diversify your portfolio. You said it; it’s a non-market correlated asset. In today’s market, as we watch it bounce like a Wham-O ball, up and down, it’s taking that volatility out. You know exactly what you’re going to get from either the lump sum aspect or the payment stream aspect, so it becomes a nice piece to smooth out the waves with the rest of your portfolio.

Dick: I think we should also mention that it’s IRA-compatible. You’d have to setup a self-directed IRA, which there’s many different custodians out there that’ll help you with that, and we can recommend one to folks that we work with. It is just nice to know that it’s IRA-compatible. Then if you would end up passing early before you’ve received your lump sums or your payment strings, it can be paid directly to your estate or to your heirs.

Eric: Lots of pieces out there that make it an attractive option, especially for these people that, for me, this is for somebody who’s been in the CD world for a long time. They want safety, security, but they want a larger return, and it’s something that’s just going to be parked there.

Dick: It could be for somebody that’s been in the stock market, that are reaching, that are near-retirement age. They’re wanting something that’s much safer, takes the volatility out of it, but they still want to get the yield. That’s all the good things we’ve talked about.

Eric: There are some limitations. Those are on the con side.

Dick: We have to be fair about it.

Eric: We don’t have to, but it should, it makes the video that much better when we’re balanced.

Dick: Fair and balanced. We don’t want to take this away from Bill O’Reilly.

Eric: That’s right.

Why You Should Ladder Annuities…

By

When your financial advisor starts to talk to you about laddering, realize that they are talking to you about using financial products with varying maturities and that they are most likely not thinking about a trip to the hardware store.

In today’s low interest rate environment laddering annuities allows clients to potentially capitalize on increasing rates without forgoing returns that can only be obtained by committing to a longer maturity period. Laddering provides an opportunity for conversion of shorter maturity annuities to better options if they are available earlier – then the maturities continue to provide that option on a regular ongoing basis.

Perhaps the best option to ladder annuities is by staggering deferred hybrid annuities for future income. By laddering hybrid annuities you can create a income stream that will combat inflation and provide for added flexibility with future income.  It can also be an excellent strategy for financial security should you live a longer then expected life.

Eric and Dick break down some of the pros and cons for laddering annuities.

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Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

See how Scott Bulmer and  Kevin Hedstrom address this same topic in a recent issue of Life Health Pro.

Customize Annuity Options With Laddering

As an agent who has worked with hundreds of clients to help them build and protect their retirement nest eggs, I am now faced with helping my clients make the dramatic shift from the wealth management phase (gathering and growing assets) to the income management phase (preserving and distributing assets). With 78 million baby boomers racing toward—or already in—retirement, the need for retirement income protection has never been greater.

It’s been well documented that since Jan 1, 2011, about 10,000 baby boomers have and will continue to turn 65 each day. This demographic phenomenon forces our industry to be the catalyst in moving clients’ mindset from accumulation to income distribution strategies. Our retiree clients now need to draw down their assets to generate a reliable, secure income stream that will allow them to maintain the lifestyle they so desire during their retirement years.

With the latest gyrations in the stock market, historically low interest rates and the economic turmoil here and abroad still fresh in their minds; clients are looking for less risky solutions to creating a secure retirement income combined with growth potential. Those clients nearing or in retirement can’t afford to weather another pullback in the market as was experienced several years ago. They just don’t have the time horizon or risk tolerance to recover unless they want to continue working throughout their retirement. In addition to market shifts, we are dealing with traditional safe money alternatives, such as CDs, money market funds and saving accounts, that may be out of favor due to these low rates.

Fixed indexed annuities as a solution

All of these forces—demographic and economic—pose an interesting challenge to agents. The major risks facing senior clients today are:

  • Market risk—The ongoing volatility in the stock market
  • Inflation risk—The erosion of one’s purchasing power
  • Longevity risk—The increase in life expectancy

The average individual’s lifespan has increased markedly over the last 50 years, and people now have to worry about running out of money before they run out of time.

A product solution to mitigate these risks that I’ve incorporated in my practice is the fixed indexed annuity. Since their introduction in 1995, indexed annuities have given people the opportunity to participate in the upside of being linked to an index, such as the S&P 500, without having to worry about losing money. Clients are very receptive to the dual nature of this product, which, at its core, is an insurance contract. They get the opportunity to partake in the upside potential of the stock market, with the **guarantee they won’t lose money. In addition, over the years, these products have performed as they were designed to. [Read More…]

Annuity Guys® Video Transcript:

Dick: One of the things that Eric and I find ourselves involved in a lot of times with annuities is laddering those annuities.

Eric: Right. It’s a technique or a strategy that we employ that uses multiple annuities with basically different maturity dates. So you would start with perhaps a three-year or a five-year or a ten-year, different layers.

Dick: I think a lot of folks, Eric, are familiar with CDs. You’re familiar with CD laddering. You may not have called it laddering, but staging your CDs over a period of time.

Eric: Staging or staggering.

Dick: It works very well for annuities for different reasons.

Eric: Right. Well, what are some of those reasons? Safety because you could use three different companies.

Dick: Diversification helps with that safety.

Eric: Right. Then you’ve also got return.

Dick: If you’re wanting to grow your money. We’re in a very low interest rate environment. So what do we think is going to happen maybe over the next three to six to eight years?

Eric: We expect interest rates to rise because they’re at all-time lows. They’re almost at zero in the case of the Fed rate.

Dick: Sure.

Eric: So we expect to see growth. But what do you do now? In order to get the biggest return right now, you have to commit to seven, eight, nine, or ten years.

Dick: It’s a pretty long period of time. Right.

Eric: Is it a smart decision to say, “I want to put all my money in a ten year product right now,” knowing that rates are likely to go up in say three or four years?

Dick: It probably isn’t if you’re looking for growth.

Eric: Right. But are you willing to sacrifice three years of growth just waiting?

Dick: Well, the alternative to that though, Eric, is if we don’t do anything, we get no return at all.

Eric: Well, actually we lose money.

Dick: We lose money because of inflation.

Eric: Inflation.

Dick: Exactly.

Eric: Yeah, exactly. By looking at, in the case of return, staggering those things. Monies are coming due at various intervals. It gives you that.  The one thing I like to use annuities for in laddering is the income riders and the income **guarantees.

Dick: Right, which is a completely different way of looking at annuities and using them, but it’s been very effective for our clients.

Eric: The strength of an annuity right now, especially the hybrid annuities, is the **guarantees for income and deferral. You still have the five, six, or seven percent out there that you can get in a deferred for income. If you use a stage one annuity, perhaps turn income on right away knowing that you’ve got this **guarantee in deferral, your stage two or the second rung of the ladder you can turn on.

Dick: This helps us to offset inflation, because we know that, initially, we can start off with an income that would be adequate for that time period, but that we’re going to need to supplement that income five years, eight years, or ten years down the line. The next annuity kicks in at that stage, which is laddered.

Eric: Exactly. The it’s even nice to have an optional rung that may sit out there that you may never even anticipate turning it on. But if you have longevity that you don’t either anticipate or something happens, you’ve got that third one out there that’s in deferral getting those **guarantees. So it becomes that additional rung.

Dick: Right. It can pass on to the heirs, or you can turn it on if you need it. One of the things that we really don’t know right now is what is going to happen to certain pensions, what cutbacks or things might happen with Social Security. So it’s nice to have that contingency, that annuity out there that’s going long term.

Eric: Right, and it’s nice to have one that’s especially geared for growth. You know that it’s going to be at this level here, this level here, and this level here. The **guarantees, having those **guarantees out there.

Dick: When would it maybe not make sense to ladder?

Eric: Not use a ladder? Well, obviously if you have limited assets. There are just times when there are minimum deposit requirements, and if you have limited assets, you may only have an option of one annuity. That’s one.

Dick: Sure. When we say “limited assets,” maybe $100,000 or $200,000, somewhere in that neighborhood? I guess it depends on the income that you need. It depends on the growth that you need.

Eric: Right, it depends on all that.

Dick: I do know that the more money that you have, folks, especially when you start getting up there in the $400,000 to a million or a million plus, it makes a lot of sense to ladder and diversify as compared to maybe below $400,000. There can be some good reasons to still ladder and still diversify, but you have to look at it a little closer.

Eric: Right. One of the things we run into a lot is much of the time you’ll see one specific annuity that performs best for somebody’s situation, and there’s just not another comparable piece that does the same thing.

Dick: So the tradeoff is to get the diversification, the safety, and the laddering that maybe you’re looking for, you have to take considerably less in benefits.

Eric: It’s simply deciding to take a pay cut. If you value the other things you get in the willingness to take a pay cut, that’s what that balance is.

Dick: Then there are, again, some annuities out there, on the growth stage where it’s not just income or the pay cut, where they give a really nice death benefit. On top of that death benefit, they will give a nice return, so that you would maybe have the potential to see somewhere between a 6% to a 10% return from a very safe position with your assets. It may be a situation where a person would say, “Hey, because I want this to go onto my heirs, I don’t really need to ladder it,” depending on the amount of money.

Eric: It’s the **guarantees. You are getting a contractual **guarantee in this case from an annuity that is superior to something else that’s offered by anybody.  It’s if you’re willing to take less and go here and split them, that’s an option. If you know your best circumstances lays right here, sometimes you’ll decide not to ladder.

Dick: I would say, just for folks as we kind of wind things up here, that in most cases the laddering is a good thing, works, and should be looked at. Occasionally, though, it’s not. I mean occasionally you’re going to want to go with one company that gives you the greatest benefit, and it isn’t going to make as much sense to ladder.

Eric: The best way to say this is, “You know what? Sit down with someone who can run the numbers for you, talk to them about what the pros and the cons are, and then ultimately you get to make the decision.” Now, I think it should always be one of the things that’s part of the consideration and part of the discussion. For most advisors, that’s exactly how they’ll present it: Here’s option one, here’s option one and two, and here’s how that works out.

Dick: Right. What are you comfortable with?

Eric: Exactly. Where is your comfort level? You’re in control.

Dick: Right. Pick what’s best for you.

Eric: Exactly. Thanks for checking us out.

Dick: Thank you.