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Managing Retirement Alternatives

People that are about to make decisions on their retirement are often faced with the task of choosing between annuities and mutual funds for their retirement fund.  Many find investing to be something of a mystery. Should you buy stocks, bonds, T-bills or real estate? It seems that for every person that gets rich investing in one spot, a hundred others lose a fortune.

The alternative is to manage your own investment portfolio of individual stocks and bonds.  This is out of the question for folks who have not the knowledge, experience nor inclination to do so.  In a mutual fund your principal fluctuates in value. That means you might end up with less money than you started with. If that happens, it’s a bad vibe but it is part of the game. Expect fluctuations.

Many are already invested in mutual funds through their 401k, IRA’s, But how do you know if you’ve chosen correctly?  With over 13,000 mutual funds from leading fund families can you pick the right ones?  Before buying funds, please do your homework, there are thousands out there and many are good investments, while others are not so good.

There are literally thousands of funds that cover the spectrum of small, mid, large cap growth and value stock sectors. There are also a host of aggregate, income, short and long-term bond funds available. And then there are many offerings of both in what are considered blended funds.

This is when a combination of stocks and bonds are combined in certain ratios to create a portfolio based to be conservative, moderate or aggressive. Choices are further complicated depending on the goal, asset size and management style of the each fund.

Stocks and mutual funds go up and down. Eventually you will need income whether your portfolio is up or down. Taking income from a down portfolio can be disastrous to your recovery chances.  Fixed indexed annuities can go up with the market but they cannot go down with the market. The major issue with income from equity investments is that you do not want to take money out of equities when they are down in value.

A mutual fund is a managed investment that is set up and maintained by professionals. The professionals that manage mutual funds make their money by charging a variety of fees to fund investors. The fees are added to the cost of the fund and passed onto the investors.

An investor has to pay close attention to these fees because they can significantly increase the cost of the fund and eat up investment gains. All of the fees will be listed in the prospectus which anybody selling mutual funds is required to give you by SEC regulations. Fund prospectuses should also be available online at the fund company’s website. A careful reading of the prospectus can tell what the fees are and how much you will pay. There are several different mutual fund fees you will have to watch out for including:

The Expense Ratio – The expense ratio is the total cost of the fees charged to administer the fund. It is usually represented as a percentage of the money in the fund. The expense ratio indicates a percentage of the money in the fund that the investor will not receive. If you can determine what the expense ratio is you can determine the cost of operating the fund and use it to determine what your investment gains will be. A mutual fund analyzer can tell you what the expense ratio for most funds will be.

The expense ratio is usually composed of the investment advisory or management fee, the distribution fee and the administrative costs. Adding these up will give you the percentage you’ll pay for the operation of the fund.

Fees that Make up the Expense Ratio – The investment advisory or management charge is a percentage of the funds’ assets used to pay the investment professional that manages it. It is usually between.5% and 1% of the fund’s value.

The administrative costs are the percentage of the fund taken out to pay for the operation of the mutual fund company. In a good fund this fee should be around.20% but it can be higher. If it is higher, be leery because part of your investment could be paying for the fund company’s fancy building and its CEO’s private jet rather than your retirement.

The distribution fee or 12b-1 distribution fee is used to pay for the marketing and sales of the fund. This goes for advertising and for commissions to salesmen and brokers that move shares. It can range from.25% to 1% of the assets.

Taxes take a big bite out of performance.  Even if you don’t sell your fund shares, you could still end up stuck with a big tax bite. If a fund owns dividend-paying stocks, or if a fund manager sells some big winners, shareholders will owe their share of Uncle Sam’s bill. Investors are often surprised to learn they owe taxes – both for dividends and for capital gains – even for funds that have declined in value.

Load and No-Load Funds – You will not be able to avoid paying the charges that make up the expense ratio but there is another higher fund fee you can avoid. This is called the load fee and it is charged when you purchase shares. An equity or stock mutual fund can have a load fee as high as 5.75% so somebody who purchased $1,000 worth of those shares would pay a fee of $57.50.

Fortunately this can be easily avoided by purchasing no-load mutual funds which do not charge those fees. These instruments are called no-load mutual funds and most financial professionals have them available. You can spot load fees or front loads by reading the prospectus. By carefully examining prospectuses you should be able to find funds that meet your needs and will not charge high fees.

Fixed indexed annuities – can be a great fit for individuals that are heavy into stocks or mutual funds. In an up market the fixed indexed annuity will not perform as well as mutual funds but in a down market there will be no losses. It is not a comparison that we are looking for here it is a realization that at some point you are going to need income.

Stocks and mutual funds go up and down. Eventually you will need income whether your portfolio is up or down. Taking income from a down portfolio can be disastrous to your recovery chances. If you are heavy into stocks and mutual funds then consider this alternative in addition to your current portfolios.

Fixed indexed annuities can go up with the market but they cannot go down with the market. The major issue with income from equity investments is that you do not want to take money out of equities when they are down in value. Annuities can solve this problem for you. Why not try another angle?

Annuities have no fees or charges – they are a spread product, which means the insurance company has to make more money than what they are paying in order to make a profit.  Any “loads” are part of the pricing of the product.  You will know exactly how much you will receive for the stated period of time and the premium you give them.

Commissions on common stock, bonds, and mutual funds come right off the top of the funds invested, meaning less actual money invested.  The largest difference is: “100% of the deposit” earns interest from dollar one in an annuity.

Surrender charges are a much maligned advantage of fixed annuities-not a disadvantage. If you have to sell a stock, bond, mutual fund or other investment vehicle – 1 year, 2 years or more down the road to meet an unexpected emergency, can you say for certain what that investment will be worth at the time?

The advantage of the fixed annuity, including Indexed Annuities, is that the minimum value after surrender charges is clearly stated in the contract and in the disclosure statements. The value can only be higher, never lower, than what is expressly stated.

If you compare a mutual fund, Investors must pay sales charges, annual fees, and other expenses  regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive — even if the fund went on to perform poorly after they bought shares.

Your income needs can be met with fixed indexed annuities. Consider this idea…Invest exactly the amount needed to provide your income needs into fixed indexed annuities. Then invest the rest into stocks and mutual funds. Your annuity will grow in value until you need income and then you use an income rider and start taking out guaranteed income every year.

You retain access to the principal, if it is not annuitized. And your market investments can be invested in whatever you choose, even more aggressively if that is what you want, without worry of losing your base income generating assets.

When you have a good return on your stocks or mutual funds you can take some out for extra things like new cars and vacations. Your regular income needs are not affected. And due to you new ability to invest more aggressively without worry of losing your livelihood you might even make more money with your stock investing.

The thing that I like most about this plan is that you don’t have to start taking income from the annuity until you are ready and it will grow along the way. It could be this year or it could be 5 or 10 years. And when you do need income, as long as you follow the rules, you have guaranteed income for life and you do not lose access to your lump sum that you invested initially.

The fixed indexed annuity idea changes the investment stress that most retirees feel. With mutual funds and stocks your investments must perform to be able to take care of yourself and your family. With indexed annuities and this plan you are taken care of no matter what and if the market is up you earn some extra money. See the difference?

In the final analysis, there may be no real right or wrong in this issue. The only real requirement that planners must satisfy is ensuring that their clients understand the costs (both real and opportunity costs), fees and risks involved in their investments, whether they are annuities, mutual funds, CDs or any other vehicle.

As any other financial product, there are pros and cons. When included in a retirement plan, the annuity contract could definitely contribute to your retirement base income and reduce your risk.  Annuities should be viewed as a complimentary product to your retirement plan. The security offered by such a contract is quite interesting and ensures you will always receive a base income.

Fixed annuities are a wonderful product for people to consider using.  They are the only products that allow individuals to accumulate retirement savings, protect those savings from market losses, and turn those savings into a guaranteed income for life.

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Saturday, September 14th, 2013 Wealth Accumulation, Wealth Management, Wealth Preservation Comments Off on Managing Retirement Alternatives

Stretching Retirement Income

Retired, and soon-to-be retired are extremely uneasy right now about equity positions in their retirement portfolios. We’re seeing a combination of economic events unlike anything ever experienced. Recession, stagnation, inflation, overbearing taxes, war, terrorism, oil, on and on and on…retirees and near retirees need to take many new risks in to consideration when planning for their future. Risk is very expensive.

Over the next decade, the stock market will either be higher or lower.  While a severe pullback in equity prices over the next couple of years is possible, the likelihood that the markets will be in down over the next decade is minimal unless our nation’s economy suffers some sort of catastrophic event (Banking crisis, US$ crash, Terrorism etc.). The consequence is that many in retirement’s red zone have their plans derailed by a market meltdown. Remember 2000-02 and late 2007-present?

Rising stock prices produce risks as well as gains. At current levels, U.S. stocks offer a paltry dividend yield of just about 2.1%—meaning a retiree investing $100,000 in the S&P 500 will earn just $2,100 a year in dividends.

The 10-year Treasury note offers a yield of just 2.5%, and the Barclays index of corporate bonds isn’t much better at 3.2%. Inflation-protected Treasury bonds are so expensive they offer a guaranteed loss of purchasing power for the next seven years.

In the wake of that kind of financial devastation, one learns the importance of a conservative approach to money management. Millions of retired, and soon-to-be retired, Americans are frightened about their financial futures and want to turn to safety. With the pension amounts shrinking each year, it is important you make well-informed decisions after retirement to stretch the pension-pot as far as possible.

An Annuity is a simple, concept and converts the pension-pot into a regular income stream which funds you after the retirement for rest of life. Many retirees are uninformed (or even worse – misinformed), of the unique benefits that the various types of annuities provide. Two of the most common practices I observe of securities people on the web and with investors are lumping all annuities together and imparting the worst characteristics of one type of annuity on another type of annuity.

Many “professional money managers” try to scare you away from safer money strategies by jumbling annuities together and using the disadvantages of one type of product (like a risky investment in a high cost variable annuity) to be superimposed on all annuity products.  With a Variable Annuity your money is “invested” instead of saved, your money is at risk.

There are two main reasons I never recommend variable annuity products. The first is you can lose your money when most retirees want safer money, not more risky money. The other reason is most variable annuities have high annual costs, so if the markets you invested in are down, you also get to pay the high fees on top of your other losses. Not a pleasant scenario for most people, you would do better to just invest in a mutual fund directly.

This is most troubling because these retirees often do not have pension plans in their retirement portfolio to help ensure adequate lifetime income.  Investors’ two biggest questions about retirement are: How much money will I need and how do I make it last?

“Successful retirement is defined as the ability to replace current income in retirement.”  When people talk about safety, what they often mean is “I don’t want to think about it.” That’s not really safety; it’s just avoiding a tough, scary problem.

Fixed index annuities are similar to fixed annuities, except for a couple of key differences. First, a fixed index annuity (formerly called an equity indexed annuity) is a type of fixed annuity with the potential to return more credited interest if the index employed does well over the crediting period. This means that your money isn’t in the market, so you can’t lose your money if the chosen index goes down. You still participate in the upside, but you do not participate in the downside.

The basic advantages of fixed index annuities are the same as fixed annuities, only with the additional potential for an upside return compared to the fixed interest rate return of a fixed annuity. The main disadvantage compared to fixed annuities is that if the index you chose to link to does not perform well, you may not make a lot of money for that period. Of course if you didn’t make a lot of money because the index went down, you most likely would have still been much better off than your friends in a mutual fund who probably lost money when you didn’t.

The other aspect many people don’t understand about fixed index annuities is that you never make the market return when the market is up. This is the trade-off for never losing money when the market goes down.

Typically fixed index annuities credit about 82% of the market return. This is analogous to loaning your money to a bank in a certificate of deposit. The bank may make 6.4% on your money, but the bank only credits 4.9% to you, the lender to the bank. Unlike a CD though, you don’t pay taxes until you remove money.

FIAs offer very unique features to you, like:

Safety: This can be considered a solid and safe way to invest in the market, as it is tied to a major index like the S&P 500. This product often outperforms other debt-based products such as bonds or CDs over the long-term. One of the greatest features is the guaranteed minimum rate that ensures even in a bad year, you still see minimal growth, and potentially much greater growth depending on the market performance.

A locked-in interest: An FIA’s indexed interest is locked in each and every year by a feature called annual reset and can never be lost due to a market downturn, on the contrary to your other investments. That means, any interest you earn is protected and therefore your principal is too.

Timing: Whether or not you know exactly when you will retire, you cannot predict how the markets will be performing at that time. For example, many investments had a negative return multiple times over the last ten years. What if your wish to retire was at the end of those negative years? With an FIA, the accumulation value will never be lost due to market ups and downs.  So when you choose to start taking income from the contract, it is possible due to the locked-in-interest that you will have gained.

So it can make a difference when you retire. The sequence of returns is crucial, for example: if a person retired a few years ago, when markets were at their lows. If their portfolio was down 10 or 15 per cent and they were withdrawing in that environment, they would be in a much different position than someone who has a stable first couple of years of returns.

Lifetime income: One of the most important features of an annuity that no other retirement planning vehicle can do is to provide a guaranteed lifetime income. An annuity is the only retirement vehicle that will guarantee that you will never be able to outlive your retirement savings. This protection makes annuities for seniors a great retirement income source.

One of the greatest attractions to this annuity is its low risk. The fact that you cannot lose your principal, and are guaranteed to see at least modest growth, is a factor that cannot be ignored in today’s economy.

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Tuesday, August 27th, 2013 Wealth Accumulation, Wealth Management Comments Off on Stretching Retirement Income

Hedging Longevity Risk

Hedging longevity risk is a challenge. While we know average life expectancies, it is difficult or impossible for particular individuals to know how long they will live.  As a result, many retirees are exposed to the risk of outliving their savings or, alternatively, unnecessarily limiting their spending in retirement because of the fear of outliving their savings.

Whether you are trying to maximize the tax deferred growth of your money without market risk or guarantee a future income stream that you will not outlive, or both, there is a solution which will best fit your individual goals and objectives.

An annuity is an investment vehicle primarily for accumulating retirement savings or creating a retirement income.   During the accumulation phase, you pay premiums to the insurer and earn interest on a tax deferred basis.

During the second phase, called the Payout phase, the company pays income to you, or to anyone else you choose. Unlike many other retirement savings instruments, you will typically have flexibility in how you receive your funds. For instance, you can choose to receive a certain monthly payment that will last until the money runs out, or choose a certain period of time that you want to receive you money like a 10-year payout, 20-year payout, a joint and survivor option, or even a lifetime payout of income.

Life annuities are the mainstay of a pension plan throughout the world.  They are the only instrument ever devised capable of hedging Longevity Risk. Without them, pension plans will be unable to perform their fundamental task of protecting retirees from outliving their resources for however long they live.

The two primary reasons to invest in an annuity are:

  • Saving money tax-deferred for a long-range goal (like retirement)
  • Receiving an income stream for a certain period of time.

There are other strategic estate planning situations where annuities may be warranted as well. However, these will be dependent on your specific financial situation.

A fixed deferred annuity pays a guaranteed “fixed” interest rate (based on the current market rates of interest) where the earnings compound and grow tax-deferred. Fixed annuities offer safety of your principal from typical day-to-day market fluctuations in the stock, bond or other investment markets.

One of the key issues facing every investor is to find the right balance between risk and reward. Playing it safe means getting minimal returns back, with some pre-specified interest. Going for high profit means a higher risk factor which will be something that you will need to learn to live with.

Faced with these opposing current, the insurance industry has come up an innovative solution in the form of equity indexed annuities (EIA), which give an investor the best of both worlds – a percentage share in profits, if any, from investments in the stock market, coupled with the security of a guaranteed minimal amount.

An equity-indexed annuity differs from a fixed deferred annuity in that the rate of return on your investment is based upon the better of either a) the growth of a named stock market index, such as the Dow Jones Industrial Average, S&P 500 index, bond market index or b) a minimum guaranteed interest rate.

The returns from these annuities are based on the increase in the stock or index, such as the S&P 500. If stocks go up, you get a share of the profit. If the stocks fall, you won’t lose any money, since your contract assures you minimal returns of principal amount plus pre specified interest.   In effect, you have a chance of making a profit, but you are not liable to bear any losses.

Many equity-indexed annuities offer you an interest crediting method that is tied to the index gains. Still, this type of annuity does allow for potentially higher returns than a typical fixed annuity, since you can participate in a rising stock market or index, yet be protected on the downside by the minimum guaranteed rate of return.

Indexed annuities offer so many more benefits above-and-beyond the potential for gains. In a market where caps are lower than the rates being offered on fixed annuities, these features have come to the forefront.

The guarantees of indexed annuities, so little discussed but so invaluable, are the primary driver for sales today. To savers who lost money back in 2000, the guaranteed return-of principal that comes standard in indexed annuities is invaluable. It is the guarantees of indexed annuities that make them an invaluable part of Americans’ retirement portfolios – not the potential for gains.

To those who lost not only their principal investment, but also their gains in 2008, the indexed annuity’s guaranteed protection of gains is a Godsend.

Every individual that buys an indexed annuity today is guaranteed that their beneficiaries will receive the full value of the annuity upon their death; without the application of surrender penalties.

Those who need the ability to access their annuity’s cash buildup, they are guaranteed the ability to withdraw 10% of the contract’s value each year without penalties (after the first policy anniversary). And if these guarantees are not good enough, I can give you another that is unmatched by any other financial services instrument offered today:  a guaranteed paycheck for life, regardless of how long you live.

An Immediate Annuity is most appropriate for those who want to receive an immediate and predictable payout.  The immediate annuity allows you to deposit a lump sum and begin receiving regular payments normally within one year after the deposit. It is usually funded with a single premium, and purchased by retirees with funds they have accumulated for retirement.

Many fixed indexed annuities offer a benefit called a guaranteed lifetime withdrawal benefit (GLWB).  However, with the new Guaranteed Lifetime income riders that come free or can be added for a fee to most deferred annuities today,  using a deferred annuity and simply turning on the income rider may be a better choice. The income rider may produce a higher monthly income and offer some flexibility and control which the immediate annuity cannot.  In many ways, it can be even better than the part lump sum, part lifetime annuity option that 401(k) plans will be able to provide.

A client who puts their retirement savings into an annuity with a GLWB will have the benefit of a guaranteed lifetime annual payment based upon their entire retirement savings, yet still have access to the remaining balance of their entire retirement savings.

Ultimately, the most important benefits from an annuity are safety, tax deferral and guaranteed payments. No other investment vehicle will continue making payments without management or risk, even if you live well past retirement age. Either your existing capital gets depleted, or you have to continue managing, with some risk, an investment portfolio.

With an annuity, the accumulation and distribution phases of investment are merged together and what you get is an investment vehicle which offers substantial and continued returns with relatively low or no risks in the long term.

We specialize in both fixed annuities and equity indexed annuities to meet the needs for our clients.  There is not “one perfect product” to meet everyone’s needs and the industry that offers new products and carriers on an ongoing basis is constantly evolving. We stay current on the best carriers and products so that we can best match the growing needs of our clients to the best products available.

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Monday, February 11th, 2013 Wealth Accumulation Comments Off on Hedging Longevity Risk

Paying For Your Retirement

The recent economy has not been cooperative for investors attempting to build a nest egg. The financial turmoil brought about from the “lost decade” of investing will never be fully recognized. Baby boomers have had to endure a dot-com bubble, a housing crisis, a war on terrorism, and the financial crisis of 2008 and that was just in the last decade. Perhaps we should shift our strategy for those baby boomers away from rate of returns and toward lifetime income guarantees.

Those nearing retirement age have the most to lose if the market declines and limited years to continue contributing to retirement accounts. At the same time, the average life expectancy continues to rise, which is even more years of retirement baby boomers need to save for. Probably the most expensive thing that you will ever buy in your lifetime is your…..retirement.

The cost of those future years is getting more expensive. Those boomers 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.

Longevity risk, or the risk of outliving your money, is the greatest threat people face in retirement. With life expectancies increasing all of the time, and with the second-worst financial crisis of modern times only a few years behind us, this risk is very real to people. We can expect to live to 90, meaning that we will be drawing our pension for 25 years.

Paying for your retirement is ultimately your responsibility as individuals have had to shoulder a greater chunk of the cost of their retirement because fewer companies are providing traditional pension plans. Most retirement plans today, such as 401(k)s are paid primarily by the individual, not the employer. This puts the responsibility of choosing retirement investments squarely on the individuals shoulder. This may sound like an impossible task.

The typical pattern is that people build up a sum of money inside their 401(k) through their working life and then use the majority of it to buy an annuity after they retire, thereby securing themselves an income over and above what they will receive via Social Security. In 2011 the Associated Press took a survey of baby boomers: half of them are delaying retirement and a staggering 60 percent lost value in their investments during the 2008 financial crisis.

There is a distinction between “safe” assets – those that gave or promised a predictable pension – and riskier ones. Social Security is completely unique in that it is the only asset that insures against all three major retirement risks—inflation, market (sequence risk) and longevity. That’s because it’s the only asset that is adjusted annually for inflation, is tax-advantaged, will pay as long as you live and is backed by a government promise. Simply put, Social Security is the best annuity money can buy.

The most aggressive investment vehicles are those that go up and down with the market. Since that’s just what the market does, investing using these methods will mean riding out the lows so you can take advantage of the highs. These vehicles include stocks, mutual funds, exchange trade funds, bond funds, and variable annuities.

On the other end, there are investment vehicles that do not go up and down with the market. These are the safest places to put your money, though you’ll only get 2-4% growth, depending on the term of your investment. These vehicles include CDs, government treasuries, TIPS (Treasury Inflation Protection Securities, or T-bonds), and tax-free municipal bonds.

Between the aggressive market-dependent vehicles and the safer ones are moderate investments. These offer some protection against loss, but give you a greater chance for growth at the price of income risk. You can usually get between 5% and 8% growth each year on these, and they include corporate bonds, preferred stocks, indexed fixed annuities and REITs (Real Estate Investment Trusts).

A fixed indexed annuity is for long term growth as well. It has slightly less earnings potential but does not lose value when the market is down. An indexed annuity is an in between investment. Think of it as a safe alternative to mutual funds or stocks. It is also good alternative to bonds or alternatives to CD’s. It was designed for safety conscious investors that either want to lower the volatility of their portfolios or find alternatives to low rates.

Both of these annuities can also be used to plan income from during retirement. The fixed interest annuity is for safe money or income only investors. It does not grow other than providing stable fixed interest for income or savings. The immediate annuity is for immediate income, no growth.

It’s important to note that each of these types of investments have both positive and negative aspects to them. In fact, the terms of each investment are often more important than the type of investment itself. You’ll also want to be sure that your investments are diversified across these categories, and not just within a single category.

It is important to note that No stock, bond, mutual fund, CD, or other investment in the world can offer retirees’ guaranteed income for life. If baby boomers want lifetime income guarantees and a stable, predictable retirement standard of living, a social security look alike, then annuities are unquestionably the answer.

Sunday, October 28th, 2012 Wealth Accumulation, Wealth Management Comments Off on Paying For Your Retirement

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