Fixed Indexed Annuities On Fire

Fixed Indexed Annuities On Fire

September 24, 2018 – If you still believe that guy on the radio castigating you to hate annuities, it might be worth seeing what the top industry research association’s statistics reveal about 2018 YTD fixed indexed annuities (FIAs).

Hint: They’re HOT!

Through the first half of 2018, $32.1 billion worth of fixed indexed annuity purchases were made according to LIMRA Secure Retirement Institute. That’s up 14 percent from 2017 and its $17.6 for the quarter is an alltime high.

Compared to the $30 trillion market capitalization of the U.S. stock market, this is a drop in the bucket. But for an idea hatched just 23 years ago, fixed indexed annuities are making some important strides as people seek a reasonable blend of security and return for their money.

Besides, unlike the stock market, FIAs never lose money.

Fixed indexed annuities offer investors a simple proposition: In exchange for money today, you receive two promises:

You will never lose money; and,

You will receive guaranteed future income FOR LIFE, the value of which will be determined by the investment experience of the selected index and the timing of your withdrawal.

Admittedly, the nuances of the various life market offerings and index choices can be daunting. But millions of individuals have benefited from the peace of mind that comes with guaranteed lifetime income without fear of market downturns.

For those eligible to structure their personal physical injury settlements, including attorneys who structure their fees, Pacific Life has an Indexed-Linked Annuity Payment Adjustment Rider which can provide enhanced payouts over time depending on the direction of the S&P 500 – a nice option for those concerned about keeping up with inflation.

All in all, FIAs are worth considering for funds you simply cannot afford to lose. Because principal is protected, a down market doesn’t adversely affect your investment. When the market increases, so does your balance subject to any caps and limits imposed by the policy.

As more and more people take the time to educate themselves about the proven benefits of annuities, we expect to see this upward trend in annuity popularity increase.

Graph Up image courtesy of afe207 at FreeDigitalPhotos.net

The Sultan of Annuities

September 17, 2018 – The Los Angeles Angels have been officially eliminated from the 2018 postseason.

Drat!

The year started with such promise, too. Not only do we have a perennial MVP candidate in Mike Trout, but this year brought some new excitement when the Angels signed Japanese phenom Shohei Ohtani, a young player who is making comparisons to Babe Ruth for his ability to hit AND pitch at the highest possible level in professional baseball – a feat nobody has been able to successfully accomplish in over 100 years.

George Herman “Babe” Ruth – the Sultan of Swat – was a larger-than-life celebrity who, during his era, had no equal in terms of popularity. Idolized by kids, frustrated by opposing teams, he lived life to the fullest known almost as much for his excess on the party circuit as he was for his prowess on the baseball diamond.

Despite this tendency toward extravagance, however, Babe was not a big risk taker when it came to money. Early in his career, he was introduced to the concept of annuities by a player on an opposing team and he was an immediate convert to the concept.

In 1923, he purchased, among other annuity and life insurance products, a life annuity from Equitable Life Assurance Society (now AXA Equitable Life) for $3,300 a year. The annuity, which also contained a death benefit, gave Babe the option of receiving $1,683.66 per month for life beginning at age 65 or a lesser amount if he wished to begin drawing on it earlier.

“I may take risks in life, but I never risk my money. I use annuities and never have to worry.”

– Babe Ruth –

While many of his peers went broke during the Great Depression, Babe’s faith in the insurance industry allowed him and his family to continue living comfortably after his playing days ended. The annuities continued making payments when many stock certificates became worthless.

Whether you’re a prodigious baseball player or just someone who wants to secure your future free from worry about the direction of the stock market, you can’t go wrong if you do like the Babe when it comes to securing your future.

Or, as we’ll advise the Angels new star if he ever calls us for advice (even if we must do so through his translator): Buy annuities!

Baseball image courtesy of Nutdanai Apikhomboomwaroot at FreeDigitalPhotos.net

Football Annuities

August 25, 2018 – With college football upon us and the NFL’s 2018 season right around the corner, this is the perfect time to discuss fixed indexed annuities.

Hunh?

OK, so maybe I’m stretching a bit but as this year’s first kick-off approaches, it occurs to me there’s a perfect parallel between something that happens on the gridiron and the popular retirement income option that people spent $32.1 billion on so far in 2018 alone.

Here’s hoping my analogy helps the unconvinced better appreciate the value of indexed annuities.

First: What Is a Fixed Indexed Annuity?

An oversimplified explanation goes something like this:

A fixed indexed annuity (FIA) is an insurance product whereby an individual trades a lump sum of money today (or periodic deposits over time) in exchange for the promise of tax-deferred, guaranteed lifetime income, certain income, or a lump sum at some point in the future.

The money earns interest credits based on the direction of one or more indexes selected (S&P 500 is a common one) from a variety of strategies available depending on the risk tolerance of the individual.

The design of the FIA is such that if the market index increases, so does your account balance up to the maximum permitted by the contract.

The trade-off for having a cap on your upside potential is the floor which prevents your account from ever losing money.

The Indexed Annuity Leadership Council offers a Fixed Indexed Annuities 101 primer we recommend and think you’ll find helpful. (Be sure to watch the three-minute cartoon at the bottom of the page!)

Recapping: Put money in, never lose it, get tax-deferred, market-based growth followed by guaranteed income for life.

What’s not to like about that?

Got it. What’s This Got to Do with Football?

When football teams are winning late in the game, many defensive coordinators will go into the dreaded “prevent defense” to keep the other team from scoring a touchdown. The idea is that it’s better to let the other team gain a few yards slowly while the clock runs down than to give up a big play resulting in a touchdown. And a loss.

Theoretically, prevent defenses work great. But as any football fan can tell you, things don’t always work out the way it’s drawn up. Despite best defensive efforts, the losing team can mount a come-from-behind victory and the team that was supposed to win finds itself putting up an L in the record books.

What if the defensive coordinator could, instead, implement a “fixed indexed annuity defense” GUARANTEEING the other team couldn’t score?

A fixed indexed annuity is like a prevent defense with a 100-foot concrete wall across the end zone.

FIAs make it impossible for the market to defeat you once you’ve scored your points. Since your balance never decreases, you can never lose money once you roll funds into a FIA assuring you a retirement victory.

So just like a concrete wall can prevent a touchdown and a seal a victory for the wining team, a FIA can prevent you from losing the money you worked hard to accumulate and can make sure you end up on the winning side of your retirement dreams.

Football image courtesy of vectorolie at FreeDigitalPhotos.net

Harvesting the Bull

August 23, 2018 – As the current stock market is busy toasting itself for the longest bull run in history, at least one chief investment officer is keeping his bubbly on ice while cautioning investors about a market he believes is on a “collision course with disaster.”

Guggenheim chief investment officer Scott Minerd sounded two dire warnings over the past four months:

April 4, 2018 – “Guggenheim investment chief sees a recession and a 40% plunge in stocks ahead.”

August 15, 2018 – “‘If there were ever a moment to harvest gains . . . it is August 2018,’ warns Guggenheim’s Minerd.”

Many of us not-so-fondly remember the last 40% drop in the stock market way back in 2009. Minerd wonders aloud if investors have become lulled into a false sense of complacency since then.

Recession? 40% plunge? Who’s got the stomach for that again?

Take Two Annuities and Call Me in The Morning

Looking back over the decade since the beginning our our last financial Armageddon, one group of folks who don’t really have to worry about the direction of the market are those who bought annuities or entered into structured settlement arrangements as part of a personal injury settlement.

The safety and security of guaranteed income annuities, whether fixed or indexed to track with a market, provide a peace of mind that (no surprise) doesn’t usually accompany 40% market downturns. So, if we are at or near the top of a bull market, harvesting some of those gains now before the bears arrive, and allocating them toward something that will help meet fixed future expenses could end up being one very smart move.

This is particularly true for those at or near retirement since annuities help reduce one’s sequence-of-return risk. By choosing annuities to meet anticipated future monthly obligations (rent, house payment, car payment, utilities, insurance, etc.), the adverse impact of market losses is avoided.

S&P Without FANGs and Peaks & Valleys

A few interesting tidbits about the S&P 500:

Take out the FANG stocks (Facebook, Amazon, Netflix and Google), and the S&P 500 is essentially flat since January of 2015.

When the S&P 500 peaked at 1,561 on October 12, 2007, it never eclipsed that mark again until it hit 1,614 on May 3, 2013.

The truth is that nobody can ever accurately predict the direction of the market. And timing certainly matters. If Mr. Minerd ends up being right on his predictions, those who harvest their gains now and reallocate some toward meeting their secure income needs, will never regret their decision.

Farmer bull image courtesy of vectorolie at FreeDigitalPhotos.net

Dear Congress: This is Wrong!

August 6, 2018 – When the Tax Cuts and Jobs Act, as it’s known, went into effect earlier this year, many hailed the legislation for simplifying things and saving the average taxpayer money.

Others protested the legislation disproportionately benefits the ultra-wealthy who didn’t need and weren’t asking to have their taxes reduced.

Whichever side of the debate you happen to fall on, one category of taxpayers stands out as being most unfairly and adversely impacted by this legislation:

People who hire legal counsel for nonphysical injury claims.

That’s because, whether intentional or inadvertent, Congress failed to consider one disastrous consequence of the new law:

Going forward, taxpayers can no longer deduct attorney fees they incur for many types of nonphysical injury disputes they bring against their alleged tortfeasors.

In an ironic twist worthy of a Shakespearean drama, plaintiffs who “win” their personal, nonphysical injury lawsuits ultimately find themselves on the losing end of their own litigation come tax time.

This careless, shortsighted, unwise and downright mean oversight must be corrected.

Untenable

To illustrate how unfair this law, if left unamended, can be, assume Plaintiff A successfully resolves a libel (nonphysical injury) case against Defendant B, pre-trial, for $10,000,000.00. Because the plaintiff is taxed on the ENTIRE award (including attorney fees), the full ten million dollars is considered taxable income.

In California, the tax on this settlement is approximately 49% (married filing jointly) to 50% (single taxpayer), or, roughly $5,000,000.00.

Further assume, since the case was heading to trial, a 40% contingency fee agreement was in place for legal representation – a standard arrangement given the skill required and the financial risk of trial absorbed by the law firm.

Not counting additional costs associated with developing and trying the case which need to be reimbursed and could erode the total recovery further, the plaintiff stands to net a mere 10% OR LESS of this otherwise substantial settlement.

Is it fair that a plaintiff ends up with less than $1,000,000 of a $10,000,000 settlement?

“Let me tell you how it will be,

There’s one for you, nineteen for me”

In some cases where costs are exceptionally high, it’s not inconceivable a plaintiff might end up OWING money on a case they supposedly won!

If the whole point of the litigation process is to right a perceived wrong, to attempt to make someone whole again and to achieve justice, what reasonable person can find anything just about this outcome?

Unconscionable

Remember that $4,000,000 attorney fee? Even though that sum was already considered taxable income to the plaintiff, the attorney who earns and actually receives that money will owe taxes on it as well resulting in the same money being taxed twice!

“Should five percent appear too small,

Be thankful I don’t take it all”

What about the legal fees incurred by the defense? Most likely the defense can deduct their defense costs depending on the type of lawsuit and the status of the defendant.

Add it all up and there is nothing equitable about any of this.

Taxing an individual on money that isn’t theirs and which gets taxed a second time is, at best, a gross failure of the framers of the tax laws to recognize this parity gaffe. At worst, it’s their calculated effort to discourage litigation and allow egregious, harmful behavior to continue unencumbered.

(The irony here, of course, is that plaintiffs now have greater incentive to reject otherwise reasonable settlement offers and proceed all the way through trial. Why not?)

Some exceptions and a partial solution

There are some exceptions to this inability to deduct of attorney fees from the outcome of a nonphysical injury lawsuits.

Most employment and whistleblower cases still permit an above the line deduction for attorney fees as do sexual harassment cases not covered under a nondisclosure agreement. Certain damages, if attributable to one’s business, may also be deductible. Clients are always urged to seek qualified, independent tax advice to analyze their own situation.

NOTE: Income received on account of personal, physical injuries or illness remains tax-free to the plaintiff. Since these damages are not considered income, the attorney fees associated with them are also not subject to taxation to the plaintiff.

Fortunately, much of the headache that accompanies the grievous tax pain can be mitigated by choosing a Nonphysical Injury Structured Settlement during the litigation resolution process. By arranging to have portions of the taxable settlement or verdict paid out over time, a more tax efficient outcome can usually be achieved saving the plaintiff significant sums of money along the way.

While nonphysical injury structured settlements can help ease the tax-induced misery caused by this harmful change in the law, the root of the problem remains. Clients and fair-minded advocates everywhere should voice their concerns to their elected officials lest they someday find themselves on the losing end of a winning proposition.

“Taxman” song lyrics by George Harrison

Taxes gauge image courtesy of Stuart Miles at FreeDigitalPhotos.net

A Cure for the CD Blues

May 2, 2018 – Stored lovingly in the back of a closet in my house rests a box filled with vinyl record albums of (mostly) rock ‘n’ roll artists whose music I listened to growing up.

From The Allman Brothers Band to The Zombies, these Long Player, or LP, discs, once turntable-revolving staples of my high school, college and early professional career existence, now lie dormant, an undignified, coffined homage to my younger self.

Compact discs, or CDs, offering digitally enhanced sound, emerged in the 1980s and became the preferred medium for most of the music-listening public for several decades, easily outlasting 8-track tapes which had a brief run.

Now that streaming services have emerged, threatening to relegate CDs to the same passé status as the LPs they themselves supplanted a generation earlier, I am reluctantly making room in the closet for my CD collection even if I have yet to publish its obituary.

Non-Musical CDs

Certificates of Deposit (aka CDs – no relation to compact discs), offer investors a haven for funds they can afford to set aside for a period of time. Generally available at any FDIC-insured bank, they usually pay interest which is around 25 to 50 percent better than what’s available in a typical savings account, depending on the term.

Today’s available 3-year CD Rate = 2.80%

Individuals seeking the highest possible return with the lowest possible risk often choose CDs when they want to “live off the interest” and preserve their capital.

Even multi-million dollar trusts often have a CD component for the security portion of the assets under management.

What’s Better Than a CD?

No, not two CDs. Multi-Year Guaranteed Annuities. If you invest in CDs and never heard of MYGAs, you’ll want to learn about them. Especially if you are within a few years of or are already in retirement.

Today’s available 5-Year MYGA Rate = 3.80%

Multi-Year Guaranteed Annuities (MYGAs) work just like longer term CDs except you’re dealing with an insurance product (regulated by the state) instead of a bank offering (regulated by the Federal Government). You simply purchase a single premium fixed deferred annuity which guarantees a fixed rate of return through the maturity date.

The best part of MYGAs is that they pay roughly 33% more (5-year MYGAs) than bank CDs (which, remember, are already 25% to 50% better than savings rates).

Bonus MYGA Advantage: Whereas CD owners receive 1099-INTs each year for interest earned (unless held within a qualified retirement account), MYGA owners can roll funds over into the next year until maturity at which point all accumulated interest not previously withdrawn (along with original principal) becomes due and payable. Optionally, contracts can then automatically renew at prevailing rates or be rolled into another MYGA.

As with CDs, you forfeit some flexibility with MYGAs in exchange for the enhanced returns (penalties for early withdrawal are the same for both CDs and MYGAs) but by staggering maturity dates, some of the opportunity cost can be mitigated.

If your desire is to stash away some cash for a few years and get the best possible return with the least possible risk, MYGAs may be right for you.

Your ability to purchase a MYGA depends upon the source of your funds since different tax rules apply and not all funds will be eligible. Other factors to consider include age, suitability, minimum deposit requirements and risk tolerance but they’re certainly worth inquiring about if safety and principal protection are key objectives.

Just Put Those Old CDs On the Shelf

Whether funded using personal injury settlement proceeds or your retirement savings, MYGAs are an excellent choice for money that you can’t risk losing and won’t need until age 59½ or later. Often paying nearly a full percentage point more interest than CDs, it’s an easy choice for the CD-oriented crowd.

Within the broad range of structured settlement and retirement income options, Multi-Year Guaranteed Annuities can play a significant role as part of one’s overall financial plan for anyone desiring to safely set aside funds with specific target maturity dates of 3 to 10 years.

Now, if you’ll excuse me, I need to end this post because I feel this sudden urge to “. . . reminisce about the days of old with that old-time rock ‘n’ roll.”

(Even if I have to stream the music)

One final word of caution: DO NOT listen to those self-interested financial planners who say they hate annuities. Pull back the curtain to understand their feigned cynicism by reading one of my earlier blog posts: Great News for Annuities. You can thank me later when you didn’t lose any money.

CD photo courtesy of Giovanni Sades at FreeDigitalPhotos.net

The Interest Rate Dance

August 31, 2017 – Ever since the global financial near-apocalypse of 2009 caused everybody everywhere to rethink everything we thought we knew about money, saving, the market, investing, et cetera, I’ve noticed a pattern here in America. If you’ve been paying attention, you probably noticed it, too.

Once a year or more, we hear “they” are going to raise interest rates. They have to, right? Interest rates can’t stay depressed forever. Something’s got to give and we need to get back to normal, whatever that is.

So, the day of this big announcement arrives and everyone’s on pins and needles in anticipation of a big jump in rates that will make us all feel better. Then, at the prescribed hour, the keynote address is delivered ending with an ignoble “Ha, ha, made ya look” tease. Maybe rates go up a smidgen, or maybe they drop a whisker but usually, it’s just crickets. No change.

In 2009 when I began circulating this chart on Historical Long-Term Interest Rates, a lot of people scoffed at the notion of interest rates remaining low for an extended number of years. I feel no profound sense of pride in being right almost a decade later but it was just too hard to ignore 135 years’ worth of data however painful it was to realize.

Kiplinger even removes the mystery of their latest projection earlier this month with their unambiguously titled article, “Long Rates to Stay Low”.

Economists don’t get more straightforward than that.

There is no shortage of reasons interest rates are likely to remain at or near current levels for the foreseeable future, possibly for another quarter century. So, don’t be surprised if the next time “they” say interest rates are going to go up, nothing much happens.

Since nobody ever really knows what the future holds, it’s worth reminding clients that waiting comes with a cost. Structured settlements and retirement income annuities still make a great deal of sense for most people and will ALWAYS be in style. Why?

Because guaranteed future income has a good beat and you can dance to it.

Images courtesy of sattva and IceHawk33 at FreeDigitalPhotos.net

Future Income Balancing Act

August 21, 2017 – A lot of people pretend to know a lot about retirement income planning. But few are truly as knowledgeable on the subject as Dr. Wade Pfau, Professor of Retirement Income at The American College and retirement researcher extraordinaire.

Not only does he analyze retirement alternatives with the precision of a Swiss watchmaker, he willingly shares the results of his thorough research with others in an engaging style that simplifies a subject that can otherwise Wade (I couldn’t resist) into esoterica.

As one of his biggest fans and followers, I find his research refreshing in a world where far too often practitioners focus solely on one approach to financial planning to the exclusion of all other approaches or who try to over-simplify the process. If you, like me and most of our clients, are looking for insight into how to more thoughtfully plan for your own future, I highly suggest this blog post by Dr. Pfau where he asks quite non-rhetorically:

Which is Better for Retirement Income: Insurance or Investments?

Like so much in life, balance matters when it comes to retirement income planning. People who drive cars that are out of alignment or subscribe to diets lacking variety often end up worse off for their planning failures or over-reliance on a single solution.

Why not be smarter?

Adopting a balanced approach to future income planning by understanding the benefits and risks associated with ALL the various methods advocated by knowledgeable professionals and then matching the strengths of each with your own future needs should lead you to your own retirement Zen.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Managed or Mangled Money

April 20, 2017 – If you’ve had money in an actively managed large cap fund in the United States for the past five years, there’s an 88.40% chance your manager underperformed and you would have been better off in a simple, low expense S&P 500 indexed fund instead.

Would you board an airplane that only had an 11.70% chance of reaching its destination?

According to Spiva® Statistics & Reports, managers in the United States were particularly bad at coming out ahead when compared to the general market. Only in Chile were the fund managers less successful.

Remember when, nine years ago, Warren Buffett made a million-dollar bet that a simple, low cost, passively managed S&P 500 indexed fund would outperform an actively managed hedge fund? Absent something unimaginable happening over the next few months, the Berkshire Hathaway Chairman is poised to win his bet.

This report suggests Mr. Buffett knew what his odds were.

Injured Plaintiff Beware

For the past 25 years, I have helped thousands of individuals make decisions totaling hundreds of millions of dollars from $10,000 dog bite injuries to quadriplegics receiving jury verdicts and negotiated settlements totaling more than eight figures and everything in between. For most, dedicating a sizable portion of their settlement toward a structured settlement allows them and their families to move forward from their accident and live their lives with dignity and financial, if not always physical, peace of mind.

But somewhere along the way, a push from the fund management community managed to ingratiate themselves into the plaintiff bar and convinced them, the judges who approve certain settlements and plaintiffs themselves that a managed money fund (with high taxes, fees, and costs) held more promise than a structured settlement to benefit someone whose future has been compromised.

Not all settlement planners, trust attorneys and fund managers touting these managed fund options are intentionally leading their clients to a potentially more insecure future. But with data like those linked in this post, odds of a more positive outcome just don’t seem to be in their favor.

Structured settlements on the other hand, while perhaps too straightforward for some and somewhat boring by comparison, provide safety, certainty and tax advantages not easily replicated by ANY managed fund.

S&P 500 Linked Option

Fortunately for plaintiffs anticipating personal injury proceeds, the attorneys who represent them AND those with retirement accounts wondering how to best take advantage of the market upswings without the downside risk, there are annuity options available with a market component. A shield, if you will, against market loss.

Fixed Indexed Annuities are available in most states for those with savings and retirement accounts which allow them to invest their money which increases, subject to a cap, when a chosen index increases yet remains neutral when the market declines before ultimately converting it to cash flow they can never outlive.

For those anticipating personal injury settlement proceeds and the contingency fee-based attorneys who represent them, such an option exists with even more distinct tax advantages. Pacific Life introduced its Index-Linked Annuity Payment Adjustment Rider (ILAPA) for those settling injury claims three years ago and it continues to grow in popularity as the market performs well and familiarity increases. All future income is 100% tax-free to the plaintiff while any structured attorney fees are tax-deferred if established properly.

I’m sure there is contrarian data one could point to saying all this research is flawed and actively managed funds do perform better than the attached report suggest. But you know what? I’m not willing to bet too much of my own money on it given these poor odds.

If your injury settlement money or retirement savings represents everything you’re relying on for your future, common sense suggests not taking risks you can’t afford to take and you, too, would be wise to weigh your options carefully. For most, a balanced approach will yield (pun intended) the best outcome.

Image courtesy of Sira Anamwong at FreeDigitalPhotos.net

California DOI Press Release on Annuities

April 18, 2017 – Earlier this month during National Retirement Planning Week, the California Department of Insurance issued a Press Release urging Californians to “plan for retirement and carefully consider annuities.”

This statement serves as a timely reminder that annuities offer many benefits that simply cannot be matched by traditional retirement investing approaches and often go overlooked by those who continue to focus on asset accumulation in the years leading up to and during retirement.

The newsworthy announcement includes some excellent information and links, including cautions and warnings, designed to help people understand the law and to make the most informed decisions possible about their own financial futures.

Pensions, once a staple of retirement income security for the American workforce, have all but disappeared completely over the past few decades forcing workers to rely on their own skills to ensure they don’t run out of money once their working years come to an end.

Left to their own devices, most people fail to appreciate the statistical probability that any retirement funds they’re able to successfully accumulate during their working life could become fully depleted before they die leaving them dependent upon others for care.

Only annuities can provide guaranteed income for life.

Period!

Annuity guarantees are subject to the financial strength of the life company, naturally, but because life companies pool the mortality risk of large numbers of people, they’re able to help individuals achieve the goal of lifetime income in a fashion that somebody relying on traditional investing methods cannot.

Retirement income planning doesn’t happen by itself and it’s not a particularly fun exercise. But it’s a necessary step for those seeking to make the transition from working to the next phase of life and can be made much easier by dedicating some portion of their portfolio toward life income annuities.

And sooner is usually better than later.

Just like any purchase, consumers need to educate themselves on the pros and cons of ANY type of retirement income strategy and this California Department of Insurance press release is a good first stop.

We invite you to also check out the rest of our Retirement Income Blog for additional educational information and hope it helps you with your planning.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net