Annuities Weatherize Your Investments

It’s not every day that you find the opportunity for potential growth with true safety in the same financial  vehicle.  Usually investors are compelled to make one of two choices, either they give up a degree of safety in exchange for a greater potential for growth or they accept less growth in exchange for a higher degree of safety.  

Thanks to an innovation in the insurance industry, you can have the potential high returns available in the stock market and the security of a guarantee—it’s called an equity indexed annuity.

There is so much conflicting information out in the media world about what to do with your money at retirement to make sure it is safe and lasts throughout your lifetime that all this information can just be mind numbing…causing a person to take a ‘do nothing’ approach and keep losing their life savings to the unpredictable stock market.

There have been other periods in the past where retirees would’ve lost their shirt in the U.S. stock market due to inflation and no ‘real’ gains on their money over an extended period of years. If we take a snapshot of a 17 year period of history from October 1, 1965 to October 1, 1982, the Dow Jones Industrial Average of the 30 industrial ‘blue chip’ stocks actually finished lower at the end of that 17 year period than it did at the beginning of that 17 years, including dividends and splits.

Consider a snapshot of the last 11 years of the S&P 500 Index. If you had invested in the index 11 years ago (from mid 1998 to 2010), you’d be at about the same place then that you are at today in terms of value of your portfolio, because of the losses of any gains you would’ve experienced during that period due to the S&P 500 Index’s volatility.

What about “Long-Short Funds?” “Market neutral” and long-short funds both have the objective of protecting investors when the market drops. Management typically engages in short selling (betting stocks are going to go down) coupled with traditional long-term investments. The typical expense ratio for this category is about 2%.

There are significant differences between fund strategies.  Most long-short funds invest a majority of their assets in common stocks. They then short other stocks with the remaining 20-30% of the portfolio. “Market neutral” funds, by contrast, usually invest an equal portion of their assets in “long” (owning the stock) and “short.”

Long-short funds do better than their market-neutral rivals when the market is rising (since the majority of their assets are “long” stocks). In down markets, investors should expect to make very little, if any. During negative periods, market neutral funds should hold up better because they have pretty much hedged everything.

Management skills and trading costs are magnified in long-short and market neutral funds. A bad long-short manager can consistently lose money; a bad long-only fund manager may lag his or her benchmark but will still make positive returns most of the time.

Interest rates today are at all time lows and even financial institutions are buying ‘one year U.S Treasuries’ that are paying zero percent interest! You see, it’s part of the Federal Reserve’s ‘zero interest rate policy’ to stave off a great depression by lowering interest rates to unheard of levels. Financial institutions and large companies would rather invest their money with the U.S. Government and earn ‘zero percent’ on their money than risk it in the not so safe stock market or alternative investments. Their philosophy is that even though they are earning zero percent, it’s better than losing money.

Even the longer term 10-Year Treasuries are only paying rates in the mid 3% range today…and that means you’d need to hold that investment for the next 10 years!

This same scenario plays out for Corporate Bonds, and Municipal Bonds. So again, as interest rates rise, these bonds values will fall. And bonds are not as liquid as stocks. They can take longer to sell and, again, could force you to sell them at a discount once interest rates begin to rise. You can lose principal with owning bonds! You could keep the bond through its maturity to recover your principal…maybe 20 years on a 5% bond today…but if you’re 70 years old, doesn’t 20 years for an investment sound ridiculous?

A bond mutual fund does not have a ‘maturity date’ like a regular individual bond issue does. Therefore, as interest rates rise and the value of the bond mutual fund goes down, because of the underlying bond portfolio,…you may not ever get any of your principal back, unlike a regular bond where you could wait out the maturity date and get a full recovery of principal.  Today a portfolio of bonds could be a course for disaster in the not so far off future once interest rates start to make their rise.

Why not just ‘put it in the bank’. That seems like a logical solution…right? Well, even in the ’safe’ FDIC insured bank, your money has typically not even kept up with long term inflation…so you can still lose buying power at the banks current 1% or 2% rates of today even though your money is principal safe.

This brings us into a final class of financial products…Annuities. There is a hybrid product called a ‘Fixed Indexed Annuity’.  Equity indexed annuities are excellent alternatives for investors seeking safety in a low interest rate environment or a volatile market.  Here’s how they work, your return is based on the increase of a stock or equity index, such as the S&P 500.  If stocks rise, you benefit from the increase.  If stocks fall, you do not lose any money, most contracts guarantee a minimum return, typically 3%.  This is what makes these newer products so attractive to retired persons and to those approaching retirement.

With this, you don’t have to accept the insurance company’s stated rate…instead you can opt to ‘link’ to a stock market index, typically the S&P 500. If you link your performance to a stock market index, you might do better than the rate the company is declaring. But the index could also go down. But with these products you will not lose value or any previous year gains if the stock market goes down.  .

Those previous gains are locked in and ‘ratchet’ up. The downside is you will not get the full up ride of the market…typically you’re ‘capped’ on your interest gain and there are different ‘crediting methods’ which allow you to perform differently depending on the volatility of the market. But you’ll never lose that gain in a down market. The worst you could do in a given year is ‘zero percent gain’

A Fixed Indexed Annuity also offers a ‘lifetime income’ rider which will also guarantee that your ‘income value’ of the account can increase at 6% to 8% per year no matter what the stock market or interest rate market does.

Another false concept about annuities is that you ‘tie up your money’ when you buy one. This is just not true. With the Fixed or Fixed Indexed annuity, you can take 10% per year…each and every year…without any penalty at all.

If you take 10% per year out of “any” account…you’ll be out of money before you die…pretty much guaranteed!  With the ‘lifetime income rider’ that I mentioned a minute ago, even if the annuity runs to ‘zero’ balance, you’ll still get the same income stream for the rest of your life as when you started. If properly structured, these can also be setup to allow a spouse to takeover the income stream when you die.

In today’s market environment it’s hard to beat an annuity that only goes up. Many seniors who fled the stock markets, locked in gains and purchased equity index annuities.  They are now waiting for an upturn, which will produce further gains for them, not just a recovery to former highs.  The use of these vehicles has allowed them some comfort during market declines. 

You don’t put all your money in an annuity…just the serious money you want to guarantee will be there to generate a lifetime income to you or that you want safety and principal protection on.

Medicare Drug Sign Up Period

Choosing the right Medicare supplementary plans is an important part of retirement planning.  Medicare Part D is a supplemental insurance plan available for people on Medicare who wish to have prescription drug coverage.

Open enrollment for those covered by Medicare health and prescription drug plans begins on Nov. 15 and ends on Dec. 31. During this time, you can make changes to an existing plan that you are enrolled in or choose a different plan. The new coverage starts on Jan. 1, 2011.

New Medicare recipients can sign up within a three month time frame before and after their age of eligibility.

You will need to choose which Medicare Part D plan you want.  Because private companies set up the plans for Medicare, each plan will be a bit different.  Some may use only certain drugs.  The cost may also vary.  It is important to pick the plan that meets your needs.

To help you make a decision choice you can visit the official Medicare website at Medicare.gov.  The website has an online tool to help you pick a plan based on where you live, what kind of prescription drug coverage you want and how much you want to pay.

To use this calculator, you’ll need a list of every drug you take — with the name spelled correctly, because many drugs are similarly spelled but aren’t the same thing at all. Once you have all your drugs identified, the calculator will figure out the cost per dosage, taking into account the gap in coverage known as the “doughnut hole,” and give you a total and a list of the drug plans that cover your needs at the lowest cost.

In 2010 and 2011, the prescription drug deductible is $310. But in 2011, the initial coverage limit — the point where you reach the doughnut hole –increases $10 from $2,830 to $2,840. At that point in 2010, you would have paid 100 percent of drug costs until you had spent an out-of-pocket total of $4,550. Then catastrophic coverage kicks in and pays 95 percent.

In 2011, thanks to the beginnings of health care reform, once you hit the (slightly smaller) doughnut hole, you’ll pay 93 percent of the costs of generic drugs, while the government pays 7 percent (in 2012, it will pay 14 percent), and 50 percent of the cost of branded drugs, while the drug companies eat the other 50 percent.

One thing the calculator can’t do is take into account the $4 for 90 generic drugs plan available at stores like Costco and Walmart. If you’ve already identified that this price for the drug you take is the lowest available, then just leave that drug out of the calculator.

If you’re not yet retirement age, you can still use the calculator to estimate how much you are going to have to pay. If you’ll turn 65 in 2011, the calculator will figure out a partial year total. Or just fudge your birthdate and get an estimate for planning purposes only. This is a totally anonymous tool.

You can sign up for the plan you choose directly through the Medicare program by calling (800) 633-4227 or by using the enrollment tool on the Medicare website.  You can also contact the drug prescription insurance plan provider to see if you can enroll through their website or if you can mail in an application.

Medicare is a national health insurance program for people age 65 or older, created by the Social Security Act of 1965.  The program helps pay the cost of health care, but it does not cover all medical expenses or the cost of most long-term care.

Medicare is financed by a portion of the payroll taxes paid by workers and their employers.  It is also financed in part by monthly premiums deducted from Social Security checks.

The Centers for Medicare and Medicaid Services is the federal agency in charge of Medicare program but you apply for Medicare at Social Security.  Medicare has four parts:  (Part A) Hospital insurance (Part B) Medical Insurance (Part C) Medicare Advantage (Part D) Prescription Drug Coverage. 

Anyone who has Part A, Part B or Part C, is eligible to sign up for Part D, prescription drug coverage.  Coverage begins January 1, of the following year.  Joining the prescription drug plan is voluntary and you pay an additional monthly premium for the coverage.

You can wait to enroll in a Medicare Part D plan if you have other prescription drug coverage, but if you don’t have prescription drug coverage that is, on average, you will pay a penalty if you wait to join later.  You will have to pay this penalty for as long as you have Medicare prescription drug coverage.

So even if you don’t use a lot of prescription drugs now, you should still consider joining a Medicare drug plan to make sure you have coverage for future needs. 

For more information about Medicare prescription drug coverage, visit www.medicare.gov or call 1-800-MEDICARE (1-800-633-4227).

Annuities-A Straightforward Investment

Investors are on edge. Many investors high tailed it out of stocks after the market’s downward spiral in 2008, searching for a safer place for their money. Many people understand the value of saving, but not the risk of investing.

Markets rise and fall on a daily basis and investors assume the risk of loss. This could not be clearer than it has been over the past decade when millions of Americans lost trillions of dollars they worked hard to accumulate.

They now recognize that the number one job of a retirement portfolio is to produce the cash flow necessary to fill any gap between your retirement expenses and guaranteed sources of income.  With dismal interest rates on savings accounts and other cash vehicles they are especially concerned.

Interest rates on safe investments are too low to meet return goals.  The stock market and other risky assets such as mutual funds, hedge funds, stocks, bonds, CDs, options or even commodities like gold along with all the other “new” investments under the sun are volatile and generating poor long-term returns.

When you retire, your cash flow must come from your assets.  Every household needs a stash of cash held in a readily accessible, risk-free parking place that can be drawn on in the event of an emergency.. This particular bucket of cash is known as your emergency fund.

The emergency fund has a single job. It is to smooth out the ups and downs of markets and the economy. While you are working, that means the emergency fund is used in the event one or both spouses lose their job, became disabled or otherwise can’t work. In retirement, the job of the emergency fund is to smooth out the inevitable fluctuations in investment income.

Is it possible for EVERY investment manager to exceed the performance of the market? Just the opposite, it is not possible. The goal they have set is not at all achievable. It is like telling 100 percent of the people you meet that they going to do better than average. It is just not true.

From 1994 through 2008, the average large-cap mutual fund that was in existence for the full 15-year period (some 400 funds) posted an annualized return of 5.61 percent compared with 6.64 percent for the S&P 500. … These funds … pay their managers millions of dollars in fees and yet they fail to provide you, the investor, with a consistent market return.

If everyone is making the same decisions and getting the same results, you will naturally have more volatility. When things go up, everyone will flood into that space. When things go down everyone will vacate that space. This increases the rate of volatility.

Unfortunately, if a person’s investments don’t do as well as planned, or if they live longer than expected, they find themselves running short on money. An annuity is protection against that: You can have guaranteed income that will last for as long as you live. 

Annuities are about the most straightforward investment product you can find.  They convert a single investment into a stream of payments that can be guaranteed to last the rest of your life.

The annuity can be thought of as longevity insurance; it ensures that the bearer will not outlive his retirement savings.  This eliminates the main worry with a traditional retirement fund, which is what unless you withdraw less than the amount of appreciation, your money will eventually be gone if you live long enough. With annuities, you could live to be 100 and you’ll still get your check every month.

The trouble with many people’s retirement planning is they set up their investments to give them enough money to live for a only few decades after they retire. This seems like a strange thing to say – why would you want to bet against living a long time?

How would you like to own an annuity that locks in stock market gains when the market is rising, but also protects your investment against any losses when the market is falling? That’s right, your policy value is never reduced because of negative stock market performance. There are instances where an EIA makes sense within the overall financial plan of a risk-averse investor.

Believe it or not, there is such an investment product and it’s called an Equity-Indexed Annuity.

Protection of Principal and Past Interest

Equity Indexed Annuities were praised largely because they did what they were supposed to do: Protect investors from losses in the stock market.   For conservative investors they are a valuable savings plan. What do they do? In short, it’s an annuity, “the returns on which are based upon the performance of an equity market index, such as the S&P 500.  The principal investment is protected from losses in the equity market, while gains add to the annuity’s returns.

These products work this way: “During the accumulation period — when you make either a lump sum payment or a series of payments — the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index.

The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

Indexed annuities use a combination of bonds and index call options to credit interest to the indexed annuity account. Index call options are stock options purchased on an equity or bond index. A call option gives you the right, but not the obligation, to purchase a stock at a set price, called the “strike price.”

Call options on an index allow you to capture the gains of the underlying index without owning all of the stocks in the index. No dividends are paid on the options. When the index value rises, the insurance company trades the option and captures the gain, crediting part of it to the account as interest for the annuity account holder. Bonds function as a guaranteed “safety net” to make sure that if the options do not perform as expected, then the insured annuity holder will not lose any money in the contract.

Equity-indexed annuities (EIAs) are rising. It’s not surprising. Investor interest in EIAs and other structure products surges during difficult markets.  EIAs guarantee safety of principal and often a minimum return with the potential for a higher return when a stock market index does well.

401(k) Annuities

People feel insecure and far less wealthy after the market crash and bank failures of 2008. With higher life expectancies, nowadays, and longer lifespans, retirement can last 25 years, and uncertainties around investments are prompting a reassessment of traditional retirement amongst individuals.

Poor equity returns over the past decade and excitable markets capable of crashing a thousand points in a day have created a lot of insecurity about investing in stocks. People are looking for a way to get back on their feet and plan for a decent retirement, now more than ever. 

Seven in 10 (70 percent) survey respondents said a 401(k) plan is their only or primary source of retirement savings and fewer than half (47 percent) said they are very confident when it comes to making investment decisions.  The reality is, more often than not, procrastination, distraction or confusion prevents them from doing so, it has to do with financial illiteracy, and the fear of looking ignorant.

401(k) Plan participants also often lack confidence and knowledge about how to allocate 401(k) plan funds, as well as how to withdraw them when they retire. Conservative investors in particular just want some form of guarantee.

An annuity creates both the need and the opportunity to provide a perspective to offset today’s pervasive gloom and doom.  We don’t do that by suggesting that everything is wonderful, of course, but by pointing out real and concrete positives that are being overlooked—in other words, annuities can provide balance.

Annuity’s design, balances some of the extreme pessimism many investors are feeling. This negative sentiment is understandable, given the real challenges facing the U.S. economies, but it is also a function of the overwhelmingly negative media coverage inundating investors.

The sharpest divide in our pension programs is between advocates of the defined benefit system, which has stood for decades as the preferred way to provide retirement security for thousands of employees, and the 401-(k) system, in which workers do most of their own retirement planning and risk investment losses in the market. 

The past decade has seen the slow decline of defined benefit or final salary pension, where the employer guarantees the pension paid to the former employee. Now there are clear signs that the trend towards defined contribution pension, where the amount paid to the employee is linked to investment performance, is accelerating.

Why are employers so desperately seeking to opt out of providing defined benefit pension plans?  Over the past decade, pension plans have been hit by the perfect storm of increased life expectancy, falling investment returns and lower interest rates. 

The fact that people are living longer means that employers providing defined benefit pension plans have to pony up more money to meet this increased liability.  Unfortunately, at the very same time, investment returns were collapsing. The average managed pension fund has been essentially flat over the past ten years.

Defined benefits, with their promise of a guaranteed monthly retirement check, to defined contributions, in which workers pay into a non-guaranteed savings account that the employee draws from upon retiring.

Pension funds can be:
* Defined benefit. You are provided with a pension that is calculated by taking account of your years of fund membership and your final salary. You take no investment risk that your savings will be sufficient to provide the predetermined pension.
* Defined contribution. Only what you and your employer contribute to the fund is defined. The risk that you will not have saved enough for retirement lies with you, the member – not the fund or the employer. Your final benefit will depend on how much is saved and the investment returns on those savings.

The 401(k) has become as commonplace at work as the cubicle—and about as loved.  The big problem is most people have no idea how much their plan really charges to manage their money. And some of the investment decisions seem downright arbitrary.  If you asked a group of 401(k) investors how much their plans cost, half of them wouldn’t know, and the other half would say there are no fees.  

401(k) itself is just a tax provision that allows employees to save money for retirement on a pre-tax basis, and gives employers a convenient way to match employee contributions or make additional contributions at their discretion. It’s a good idea, and works great if you adequately fund it.

 Many financial companies that run 401(k) plans are compensated through revenue-sharing agreements with the mutual funds in the plan, which pay them part of the fees they collect from investors. But for workers, deciphering those agreements is frustrating at best.  It costs around $1,580 a year, on average, to invest $100,000 in retail shares of U.S. stock funds.  Compounded over 35 years, the difference could be tens of thousands of dollars to employees in the plan.

No matter what kind of retirement system you have, if you don’t put any money into it, there won’t be any money available to support you when you want to stop working. In general, for any retirement plan system to  provide a reasonable level of retirement security, you must save about 12% to 15% of pay every year for about a 35 to 40 year working career. 

If you’re putting in less than that, or for a shorter period of time than that, then don’t expect to be able to retire on an income that is anywhere close to the income you were making when you were working.

Simply reaching the normal retirement age is no longer regarded as an automatic reason to retire. Although many 401(k) participants need more guidance with their plan, very few actually use the help offered to them.

A deferred annuity is most appropriate for somebody who needs to accumulate assets on a tax-deferred basis — in most cases for a specified period of time — and then at some future date most likely will have an income stream.

The initial investment is a perfect investment for those with a low tolerance for risk, or those with a short period of time before they need to access the fund. The investor gets a decent yield and the yield is tax deferred until you withdraw the pension rate money.

Immediate annuities are guaranteed for life. This means that even if you outlive your principle investment you will continue to draw an income in the same amount.  For retirees, an annuity offers an assurance of a stream of income for life or for a specified period of time.

 For those who fear the potential loss of their money due to poor investment choices, that “guarantee” can be attractive. Having an annuity will help you sleep better at night and bring peace of mind.  This type of annuity is a good tool for people who would like to have a specific income over a set number of years.

• Annuities may help retirees manage distributions from 401(k) plans.
• There is a guaranteed payout that lasts for life.
• There may be a death benefit
• Greater choice for plan participants

For many workers having savings in a 401(k) plan, smart financial planning can make the difference between security and struggle in retirement. Making the right choices now is going to be crucial to your retirement and how you spend in.  Making the right financial decisions is one very important part of retirement planning. 

The quicker you come to terms with the costs of funding your own retirement, the better the odds are that you’ll take the steps necessary to do it.