Buy the Simplest Annuity that Meets Your Personal Financial Goals

Annuities are definitely not one size fits all, and they shouldn’t be bought or sold that way.  I have to agree with Stan “The Annuity Man” Haithcock on this one.  In his Marketwatch article, “No all-in-one annuity cures; take a ‘PILL’,” he compares an annuity to a Swiss army knife to see if one annuity can have all the tools needed for your retirement.  Spoiler alert: it cannot and that is something that Annuity FYI works to help consumers with all of the time.  

Annuities should be used as part of a retirement plan and the annuity you choose must be based on your individual needs and goals.  The author of this article doesn’t like using annuities for their growth potential and that is certainly his prerogative, but variable and indexed annuities do have their place in some retirement portfolios.  While they won’t offer the growth potential of some non-annuity products, they often offer better guarantees on your money and other benefits as well.

Stan prefers annuities to be simple and often, simpler is simply better.  His motto of using the PILL approach to annuities includes the benefits of principal protection, income for life, legacy, and long-term care.  If you are looking to solve any or all of those four problems, a simple annuity with low fees and short surrender charge time frames is best.  When shopping for an annuity, look for one that is trying to solve your immediate need, as opposed to an annuity that has everything.  

The more riders you add onto an annuity, they more you will pay in annual fees.  There is no reason to add on a death benefit, income rider, or add on confinement care expenses if you don’t need those things.  It sounds simple, but a lot of people go into buying an annuity with the mentality that they need everything.  If you have life insurance or long-term care insurance, you simply may not need an added rider and cost for your annuity.

Newer annuity products on the market are sometimes advertised as being “hybrids” that offer benefits of multiple types of annuities.  Stan doesn’t believe that these new products offer additional benefits, and he is right that you should tread carefully when considering them.  If you are looking for two types of protection or guarantees with your annuity, a so-called hybrid could be right for you if the cost brings you value. 

Also consider looking at an annuity to cover your main goal, like a lifetime income stream, and see if adding a rider on for something else is a better value in your financial plan.  Shopping around is the key to buying the right annuity, not necessarily the annuity that has “everything.”  Buying an annuity solely for an upfront bonus or a confinement care rider is rarely a good idea.  If an annuity has exactly what you need and offers one of these bonuses, great.  An expert financial advisor can help ensure that you do not purchase more than you need or less.

Written by Rachel Summit
Follow Rachel, aka Finance Mama, on Twitter and Google

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Advisors Call for Variable Annuity Transparency, Inflation Protection

Date posted: September 26, 2013

An adviser isn't likely to sell you an annuity that they don’t understand, or at least they shouldn't.  Many advisers called out for insurance companies to make sure their annuities are straightforward at the IRI’s annual conference.  Darla Mercado’s Investment News article, “Annuities changes puzzle advisers,” talks about what advisers hope to see from annuity products.  Not only do advisers need to know the ins and outs of the annuity products, but it’s important that they can explain the way the annuities work to their clients.  More specifically, variable annuities’ features and investment options are puzzling some advisers, especially when changes are made during the duration of the annuity contract.

Variable annuities have helped many investors during the financial crisis because of their particular features, but advisers hope that some changes can be made.  Clients seek advice from advisers because they trust that the advisers can recommend a product to help their money grow the way they desire.  Advisers admit that some variable annuities may be a great fit for certain clients, but their complexity takes them off the table.  Even if the advisor can mire through a tricky contract, they can’t always explain it to their client and often worry that they missed something in the contract that could be detrimental to their client’s money.  Because of this, a variable annuity that is a good fit for a client might be overlooked.

Changes in investment options are the biggest worry for advisers right now.  They are particularly focused on products using hedging strategies to protect insurers from market volatility and how these changes will affect the return that their clients see.  New options don’t have a history to prove to advisers or clients that they will offer a decent return and perform how the clients expect them to.  But advisers point out that many clients are more concerned now with guaranteed income in retirement, rather than large returns. 

Even so, advisers want to make sure that they understand the contract options and can explain them to their clients, large return or small.  Some advisers are asking for more inflation protection with variable annuities in case there is no return based on market performance.  I have a feeling that insurance companies are listening to advisers and will work to make variable annuities transparent and maybe even add on some guaranteed inflation protection.

Choosing an Income Stream Immediately or Deferring It is an Important Decision

Date posted: September 30, 2013

Typically we think there are two choices when you decide the point at which you will receive income from your annuity.  Now, with an immediate annuity, or later, with a deferred annuity are your options.  But in Stan Haithcock’s Martkewatch article, “Annuities: Income now, later – or never,” he points to a third option that more people are actually using.  Believe it or not, a lot of the income riders attached to deferred annuities are never used.  

If you think there is a possibility that you will never use your income rider, make sure to add death benefits to you annuity policy.  That way if you are not using the income, your heirs will be able to receive income payments, usually over a five year time frame.  I am surprised that more people are not annuitizing their income rider, but I equate the actual low percentages to the fact that they have been most popular since the 2008 economic crisis and a lot of the people who bought them are still working.

It’s no secret that Stan recommends using annuities only for income and not for growth.  While we do think that some people will benefit from using variable annuities and indexed annuities to grow their money, we do believe that receiving lifetime income payments is one of the biggest benefits to using annuities.  The decision you have to make is whether you want to start receiving your income now or at a point sometime in the future. 

When using an annuity for income, your value enters the picture at the point in your life when all of the money you put into the annuity is depleted and you are getting your annuity payments from the insurance company’s funds.  The simplest way to receive income now is with a single premium immediate annuity.  Income payments start a month after your annuity purchase and continue for the rest of your life or even the rest of a spouse’s life as well.  Everyone who buys an annuity is hopeful that they will live long enough to enjoy the risk transfer to the insurance company, but the insurance against outliving your money is still worth the annuity regardless.

If you aren’t ready to receive income immediately, you can opt for a deferred annuity.  Just as with the former, the payments of the latter are based on actuarial tables that estimate your life expectancy.  Deferred income annuities are one option for waiting to receive income later.  You can even wait up to 45 years before starting your income stream.  Commissions are low and there are no fees with this pension-like income choice.  The other way to defer your annuity payments is to add an income rider onto any deferred annuity.  

Many people choose the annuity by the type of fixed, variable, or indexed benefits and then add the income rider on.  While Stan thinks the income rider should be the most important consideration, work with your advisor to see the best benefit to your future plans.  If you plan to use an annuity for lifetime income whether it be now or later, great.  

The option of never using the income stream may mean that you don’t need the lifetime income feature because of other sources of income.  If that is the case, look into a different type of annuity for different protective benefits.

Aviva USA's Fixed Annuity Business Sale Finalized

Date posted: October 7, 2013

It’s been almost a year, but the deal to purchase Aviva USA’s annuity business is finally complete.  The Des Moines Register, which has an active interest in this story since the company is located in Iowa, offers up the details in “Apollo completes Aviva USA deal for $2.6 billion.”  Victor Epstein writes that the deal ended up costing Apollo Global Management $800,000 more than their original offer of $1.6 billion back in December of last year.  State insurance regulators spent a long time evaluating the sale of Aviva USA to private equity firm Apollo.  They will be incorporating Aviva USA’s annuity business into their Athene insurance unit and renaming it Athene USA.  While keeping the majority of the annuity business in tact, Apollo sold the life insurance business to Global Atlantic Financial Group.

Retirees and financial planners like the steady returns of annuities, which has kept them popular over the years.  Athene plans to strengthen their place in the retirement services market through their integration of Aviva USA’s annuity business into their corporation.  They say that they will continue to offer exceptional service as well as consistent results for annuity holders.  The company’s annuity sales have decreased since Aviva USA was on the market, but that isn’t really surprising.  While overall indexed annuity sales increased 5.5% since the same time last year, Aviva USA’s indexed annuity sales went down 55%.  Unfortunately for the Des Moines area, employment at the facility has also decreased since Apollo took over the annuity company.  Iowa’s Insurance Commissioner says that he is sympathetic to those who have lost their jobs, but stresses that Apollo plans to keep their new annuity business in Des Moines.

Athene will now be one of the biggest fixed annuity companies in the United States after gaining the fixed annuity business of Aviva USA.  They now have $60 billion in assets and plan to expand their annuity business by more acquisitions in the future.  Athene’s parent company, Apollo, is increasing its assets under management more than threefold by this purchase.  Apollo will provide asset allocation and investment management services for the new Aviva USA business just as it does for Athene’s other annuity business.  Now that the sale has been finalized, we’ll have to continue watching to find out how Athene’s acquisition of Aviva USA’s annuity business changes the overall annuity landscape.  The large decline in indexed annuity sales was likely due to uncertainty related to the business sale, so the future sales will be a better indicator of the impact of this annuity sale.

Make Your 401k Savings Last Over Your Lifetime

It’s certainly not easy to save retirement funds in your 401k for many people, but most of us work hard and make cuts so that we have money saved.  Even more difficult can be the prospect of using those savings to create a lifetime stream of income in retirement.  No one wants to work hard to save and then run out of money while they are still living.  In the Marketwatch article, “Fighting to make 401(k)s last a lifetime,” Glenn Ruffenach talks about what employers are doing to help their employees understand the choices for turning their 401k’s into an income stream.  

The average American doesn’t know how to make their 401k or other retirement plan savings last over their lifetime.  In addition to that confusion, people are living longer and stock markets are volatile, making for a sticky situation when it comes to retirement income.  But there are ways to make your money last and more employers and savings plan sponsors are working to give knowledge to those of us who need it.

A lot of 401k plans are putting income calculators in statements, so that you can determine how much income you’ll be able to receive in retirement based on your savings and the assets outside of the plan.  If there is a gap between that income and the income you have determined you’ll need, many plans are working to help you find a way to merge those numbers together.  Blackrock is the largest money manager in the world.  Their “Cori indexes” help people determine how much they will need to save to obtain a certain lifetime income amount starting at age 65, or a later date if they so choose.

Annuities are being added to many 401k and other retirement savings plans.  While some argue that they bring liability because they are based on an insurer’s claims paying ability, you are highly unlikely to run into a problem with an insurer going out of business, especially if choose one with high financial ratings.  You will pay much less for an annuity purchased within your retirement plan than you would if you went out on your own and shopped for an annuity product.  One company in Connecticut started transferring older workers’ money into variable annuities last year to help them create guaranteed lifetime income starting at the age of 65.  They can opt out of that plan, but 20,000 workers have already gone forward with it.

Other companies are focusing on their employees buying an annuity right at retirement, or in some cases after the fact.  Seventy companies are in Financial Engines’ “Income Plus” program, where investors keep assets in bond funds and then use that money to buy an annuity sometime before the age of 85.  These longevity or deferred income annuities have been increasing dramatically in popularity.  Look into all of your lifetime income choices associated with your retirement plan and use all of the education tools offered by your employer or retirement plan sponsor.  Using an annuity to guarantee lifetime income from your 401k savings ensures that your years of hard work saving money are not lost in retirement.

Choose an Annuity Based on Your Top Priority

Date posted: October 10, 2013

Many annuity products claim that they can give you the best of both worlds or offer you everything you need in just one product.  The thing with annuities is that they offer you great benefits, but you really need to focus on the benefit that is most important to you first.  In the Marietta Daily Journal’s “Making annuities more effective,” William G. Lako Jr. suggests that annuities should be used for one main focus.  He means that instead of hoping to solve all of the issues related with finances and retirement in one product, solve the issue which is most important to you first.  This might be guaranteed income or it could be the growth of your money.  Growing your money in retirement in a safe way is important to many people.  Others would rather protect the money that they already have, but be guaranteed a stream of income that will last over their lifetime.

There are annuity products that can meet the needs of both of these types of people.  But you will give up a little bit of one to get both needs met with the same product.  Mr. Lako believes that the most effective way to use annuities is to focus your product purchase on your main goal.  You buy an annuity to transfer your risk to the insurance company.  Once you choose an immediate or deferred annuity, the insurance company will make payments to you for as long as the contract lasts.  Many people choose to receive income for the rest of their life, which is factored into the amount of your payments.  Insurance companies assume the risk because they will continue to pay you even if your account balance goes down to zero.  Your risk comes in if you die prematurely and don’t deplete your entire account balance.  With that being said, using annuities as the opposite of life insurance takes your risk out of the equation.  You are insuring against running out of money in retirement, whether or not you live a long life doesn’t matter as much when you think of it that way.

If income is your number one goal, you can work with a financial advisor well-versed in annuities to find a fixed annuity product that will keep your money safe and offer you income payments.  An immediate annuity allows you to transfer both longevity risk and stock market risk to the insurance company.  In exchange for this, you give up most of your growth potential.  But that is exactly what many people are looking for as part of their overall financial plan.  On the other hand, if growth is your top priority, there are many deferred annuities that offer guaranteed growth and principal protection.  Once you find a product that meets your top goal, you may be able to find the potential to cover other smaller goals as well.  But the author recommends starting with one goal in mind and letting everything else be the icing on the cake.  A financial advisor can look at your specific situation and determine the annuity product that would work best for you.

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Arguments Against Variable Annuities Often Include Misinformation

Date posted: October 15, 2013

There are some people who vehemently oppose variable annuities, often without knowing the details of these products.  In Tom Hegna’s Producers eSource article, “The 3 Primary Variable Annuity Objections and How to Handle Them,” the author lists the three reasons that most people dislike variable annuities.  While these reasons may make a variable annuity the wrong product for some people, they are not accurate arguments against them for many others.  Misinformation sometimes leads consumers on a road away from variable annuities when they might be the right product for them.  People in their late 50′s who don’t have a pension and people with high income who have contributed all they can to their 401k plan are just two groups who should consider variable annuities.

Yes, variable annuities have fees.  Yes, they are higher than some other products.  But the fees are fair given all of the benefits that variable annuities offer you financially.  The fees for variable annuities are directly related to the guarantees that they offer.  Some have a Guaranteed Minimum Accumulation Benefit (GMAB), while others have a Guaranteed Lifetime Withdrawal Benefit (GLWB).  These benefits are not available with any other products, especially not those with lower fees.  You are paying for the assurance that your account will not lose value and will increase in value depending on market performance.  Annuities offer better returns than many products, especially CD’s offering less than 1% returns currently.  The best way to minimize your fees with variable annuities, or any annuities for that matter, is to only pay for the risk protection that is important to you.  Don’t add on protection that isn’t necessary and pay added fees.

The second argument that some people have against variable annuities is that they are taxed at the income tax rate rather than the capital gains tax rate, which is lower.  One thing to remember is that not all of your annuity payments are taxable, only the portion that is not a return of your capital.  Capital gains tax breaks are only given when stocks or mutual funds are held longer than a year.  This is quite often not the case, especially for day traders.  Many mutual funds have high turnover rates as well.  Even though on paper this tax difference seems like an issue, when you see the details it might not make any difference at all.

Finally, annuities are not given a stepped-up cost basis at death.  Stocks and mutual funds do offer this, but some stipulations are overlooked.  With mutual funds, investors pay taxes each year on fund distributions, even if your mutual fund loses value.  You often pay for a lot of the stepped-up cost basis through your own taxes anyways.  Annuities don’t get the stepped-up cost basis, but they also don’t get the stepped-down cost basis at death either.  Annuities that have guaranteed death benefits protect one’s heirs from losing money when the annuity holder dies.  This benefit overrides the other when you take into consideration all of the investments that lost money over the past five to ten years.  Variable annuities are definitely the right product for some people approaching retirement.  Take all of the pluses and minuses into account to see if the peace of mind you will get from their guaranteed income and investment will make an annuity right for you.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google

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Fixed Annuities Provide Most Retirement Income When Future Markets Are Down

Life would be much easier for everyone if we had a crystal ball to see into the future.  Since we don’t, we need to be prepared for all possible scenarios in life, especially when it comes to planning for retirement.  Steve Vernon of CBS Moneywatch uses some helpful graphs to help us “Choose the best ways to generate retirement income.”  When you are figuring out how much income you will receive from your retirement savings, the current economic conditions should only be one of many things you look into. 

It’s important to see how your different options for generating retirement income will change based on good market conditions and bad market conditions as well.  So-called scenario planning is a good way to see how your income generator will work in both best and worst case situations, as well as everything in between.

In the first graph, made by Dr. Wade Pfau, six different retirement income strategies are evaluated in a negative economic future. 

The guaranteed income of the different annuity products performed the best when future economic conditions were negative.  Inflation-adjusted annuities provided the highest income after 30 years out of all six strategies researched.  They were followed by the immediate fixed income annuity, which provided the second highest income after 30 years.  Fixed annuities are not affected by market performance, so when markets decline, they certainly pay off as a good investment. 

Using constant systematic withdrawals, equivalent to the 4% rule, proved catastrophic in a negative economic environment.  Retirement income dropped to zero after 20 years and there was nothing left for the remaining 10 years that were studied, not to mention any additional years that you may actually live.

Both graphs use the same scenario to get their results: a 65 year old couple with $100,000 in retirement savings.  The second graph determines how your inflation-adjusted retirement income would change if economic conditions proved to be more favorable in the future than they are today.  In this scenario, you get the most income from strategies that invest your retirement income and pay you a percentage of that.

This makes sense, but are you willing to take the gamble on the markets being favorable right when you decide to retire?  Since the fixed annuities listed don’t change with the markets, they provided the least income of the studied methods when markets were up at retirement.  But their income was consistent in both graphs, something that provides peace of mind during retirement.

Behavioral science has shown that we as humans are more hurt by financial losses than we are pleased with unexpected financial gains.  What this and these graphs show us is that diversifying retirement income strategies may be the best way to protect and provide income in the future.  

Always be prepared with guaranteed income in case the scenario that you hope to happen is not the true life situation.  By assuming the worst and preparing for that with guaranteed income streams, you are protected either way.  If you want to use some of your retirement savings in the markets just in case the scenario is favorable, that could be a good option too.

Weekly Markets Commentary, David Joy, Chief Market Strategist, Ameriprise Financial — October 15

With Days to Go, Investors Still Banking on a Deal

It is now Day 15 of the government shutdown, and just two days away from presumably hitting the debt ceiling. Until we know how this standoff unfolds, it is nearly futile to focus on fundamentals. Government economic reports have been delayed, confidence indices have fallen, and third quarter earnings season and its accompanying guidance is just getting underway.

It is a fair bet that the shutdown will have a discernibly negative impact on fourth quarter economic growth, and on earnings growth as well. The full extent of any damage won't be known until the impasse is resolved.

Beyond the prevailing uncertainty, there are a few interesting aspects of current market behavior that may offer some insight into what investors are really thinking. The first, and most obvious, is that not counting the two day run-up to 1,725 that followed the Fed's no-taper announcement in September, stocks are trading near their all-time high, as measured on the S&P 500. And it is the cyclical groups that are acting the strongest.

Clearly, this is not a market that expects a default to occur.

This same attitude seems to be reflected in the price of gold, which has fallen 3.5 percent since the shutdown began. The VIX index is also lower now than when the shutdown began, although it did spike sharply last week when a deal seemed less likely than it does now. The yield on the ten-year note has risen while the shutdown has been ongoing, from 2.61 to 2.69 percent.

Each of these reactions betrays little concern for the possibility of default affecting investors in the intermediate to longer-term. Defensive positioning can be seen in short-term Treasury securities that would be impacted more severely in the event of a default. For example, the yield on bills maturing on November 7 has climbed sharply from 2 basis points to 25 since the shutdown began. But that is more a function of the calendar and the expected length of a default, should one occur.

So far, there is little evidence that any significant economic damage has been done. Research firm ISI reports that compared to the experience of the 1995 government shutdown, this time there has been a far less pronounced downturn in its proprietary company survey, particularly among capital goods firms. And, after falling at the steepest rate since 2008 last week, the three-day moving average Gallup survey of economic confidence actually rose on Sunday.

So clearly, the overwhelmingly prevailing view is that some kind of a deal to extend the debt ceiling will be reached in time. And that is probably likely. We have become inured to these episodes over time, and have come to expect last-minute resolutions. Reportedly, progress toward a deal is being made, albeit slowly. But we will all breathe a little easier when it is finally in hand.

However, even if a deal is reached, there will remain the lingering issues of fourth quarter growth and earnings, and what impact the shutdown will have on each. There is also the potential chilling effect of any new short-term debt ceiling deadline, if that, in fact, is part of any deal that is struck.

Already, some economists have lowered their fourth quarter growth rates by between 0.5 and 1.0 percent. But so far that has not been the case with earnings expectations. According to The Wall Street Journal, citing numbers from FactSet, aggregate analyst estimates for fourth quarter S&P 500 earnings were lowered just 0.14 percent between September 30 and October 10.