Annuities Explained
Traditional Fixed Annuities/CD Annuities
Immediate Annuity/Income Annuity
Fixed-Indexed Annuity
Long-Term Care Annuities
 Stock Market Realities
 Fixed Indexed Annuities with Income Riders
CDs versus Annuities
Who can benefit from annuities?
 Annuity Advantages
 Investing vs. Saving
 Common Sense
Retirement Planning
 Myths & Reality
 Variable Annuities - Dangerous times for retirees
 Managing money in retirement
 Reduce Taxation of Social Security
 How much will I need to Retire?
Never Outlive Your Income
 Recover Your Market Losses
 Income without using Principal
 Grow retirement saving with no market risk
 A Reverse Mortage
 IRA Rollover Opportunities
 Income Planning
Secure Your Retirement with a Fixed Indexed Annuity with an Income Rider!

Question: What do you get when you combine fixed-indexed annuities with guaranteed income riders?

Answer: Perhaps the safest and most cost efficient plan for retirement available from any source; banking, insurance, or investments in the stock market, plus more guaranteed income …guaranteed.  

Get ready, as you are about to go through a “Retirement Reframing Process”!

The information which follows is the opinion of American Annuity Advocates; American Annuity Advocates brings educational information to consumers and financial advisors, in an effort to enhance perspectives, and provide clarity which we believe they will not find from many other sources.  The information which follows involves a general discussion of various concerns related to retirement savings which we hope you find very interesting. No investment advice will be given in regard to securities products.  Any recommendation to consider the repositioning of assets found on the spectrum of risk and return should not be interpreted as investment advice. Some of the conversation will involve performance data, the data shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited.

In summary:When you combine fixed-indexed annuities with income riders, you will overcome the aversions that most people have when it comes to their money.

Specifically, fixed-indexed annuities with income riders overcome these aversions through the safe, protective attributes of these insurance products. 

Fixed-Indexed Annuities protect the consumer, in that they protect the consumer’s nest egg, and simultaneously their retirement income. Market sensitive investments (stocks, bonds, mutual funds, and variable annuities), just cannot provide this protection.  We can say this because fixed-indexed annuities with income riders provide:

  1. Safety of principal
    ….Plus, all gains are locked-in annually, protected, and yours to keep.
  2. Guaranteed retirement income
    …In fact, the consumer receives …more income, greater guaranteed retirement income, than that afforded by any other financial product available.
  3. Excellent liquidity, protected liquidity, (your principal plus your locked-in index-linked interest gains are available via 10% penalty-free withdrawals annually).
    Plus, many policies are 100% liquid if the consumer enters a nursing home, or is diagnosed with a terminal illness.

How can these products accomplish all of this, because I am unaware of any savings or investment product that can make such bold statements?   

When you use fixed-indexed annuities with income riders, you uniquely leverage the conservative nature of an insurance company’s investment strategies, alongside the actuarial life pooling principles of life insurance, in an extremely cost efficient manner.

Utilizing life pooling principles is really a unique advantage you can apply to your savings, and take the worry out of your retirement.

The following statement is bold, but true

“ Those who attempt to utilize stock market sensitive investments to provide their clients a secure retirement will fail in comparison to those who utilize fixed-indexed annuities with income riders, which are life insurance products”

We can say this because one instrument provides guaranteed lifetime income(insurance products)  and quite simply, stock market sensitive products  don’t.”  The public needs to understand, that stocks, bonds and mutual funds cannot … in any way, replicate the same level of retirement protection as that afforded by a fixed-indexed annuity with an income rider, because when you place your nest   egg, your savings, your IRA, your 401k, your 403b in market sensitive investments, you are essentially gambling , and most people really cannot afford to lose any retirement savings.    We will show you the data, the evidence behind such statements later in this piece.

Getting back to the real “AVERSIONS” people have when it comes to their money!

1) An aversion to having a loss of principal or to taking risk.

2) An aversion to having illiquid assets or not readily having access to savings.

3) An aversion to outliving one’s assets or running out of money in retirement.

4) An aversion to paying too much in terms of costs, fees, charges etc…, which   eat away at your nest egg.

5) An aversion to leaving little or no inheritance for children.

If you have any of these same aversions, continue reading.  You may discover that fixed-indexed annuities with income riders may be a much better option for you, your savings, your retirement, and your heirs!

First, “We should look at the primary appeal of the fixed-indexed annuity”

Safety, is traditionally cited as the #1 reason consumers place their savings in tax-deferred fixed and/ or fixed-indexed annuities. Your fixed and/ or fixed-indexed annuity is safe because qualified legal reserve life insurance companies are required to meet their contractual obligations to you.  Only insurance companies have the financial strength and the cash reserves to offer the guarantees found in an annuity.  Mandated reserve requirements mean that when a tax-deferred annuity is purchased, the insurance company, by law, must set aside dollar-for dollar reserves to cover all anticipated payouts.

The investment risk is assumed by the insurance company rather than by the owner.  Always remember that tax-deferred fixed and/ or fixed-indexed annuities guarantee your principal and interest.  When you purchase stocks or mutual funds, you, not your stock broker or the firm for whom they work, assume the risk of the stock market.  By investing in a tax-deferred annuity, this risk is absorbed by the financial strength and the cash reserve of the insurance company.  Plus, you should know that there is a state guaranty association to help pay claims, should an insurance company become impaired. The Guaranty Association provides a safety net.

Many people are concerned about longevity risk,  that is… the fear of outliving their money.  A fixed annuity can provide consumers a guaranteed lifetime income and remove such fear.  The study “Investing your Lump Sum at Retirement” from the University of Pennsylvania’s Wharton Business School states: “Trying to replicate this advantage of a secure lifetime income, but without the risk-pooling of a life annuity, will cost you from 25% to 40% more money, because you would need to set aside enough money to last throughout your entire possible lifetime, instead of simply enough to last throughout your expected lifetime.” All of this will make more sense as you continue reading.

Fixed-indexed annuities are an excellent savings choice for people who are a) planning to retire, b) are already retired, or c) simply don’t want the risk of the stock market, and, are willing to accept moderate upside potential, in terms of credited interest on their savings.  Fixed indexed annuities, simply put, shield consumers from stock market-risk, and provide for the upside potential of only positive market-linked interest increases.  And, not only is there "Zero stock market risk"1 associated with fixed-indexed annuities, but when your annuity receives interest, based upon the upward movement of a stock market benchmark (for example the S&P 500), producing a gain in the account value of your fixed-indexed annuity, that gain is locked-in and yours to keep.1 It cannot be taken away. 

Second, “If what you have just read about the general appeal of fixed-indexed annuities is appealing , (protecting your savings from loss and locking-in your gains) …it gets better when you add a guaranteed income rider”. 

As you just read, the insurance industry, through the application of life insurance pooling principles and actuarial life expectancy tables, mathematically, produce s  the only “investment” or savings products that can actually guarantee protection of principal, lock-in annual interest gains, and also provide guaranteed income -greater guaranteed income than any other retirement product -period.

If this were not true, we could not say so…
Based upon the claims paying ability of the insurance company to be utilized.

“Greater guaranteed income than any other retirement product -period.”
If we are going to put our money into a savings, insurance, or investment product, we should have a clear understanding of how the product works!

Since no one cares about your money more than you do, it would be helpful if you agreed to go through a simple exercise.  Let’s start by describing a fixed-indexed annuity with an income rider on a white piece of paper.  Really, whether or not you actually break out a piece of paper, or you are able to do this exercise in your head, is up to you.  However, you should understand how the income riders work, and why the fixed-indexed annuity with an income rider could be a perfect combination for most people planning their retirement, as these products uniquely enable us to insure our ability to retire with more guaranteed income than we ever thought possible.

We hope the steps listed below will make things clear for you.   And just in case, we provide you with a picture of a worksheet that hopefully replicates your understanding after you have read Step #1 through Step #8

Step #1:  I want you to imagine the following, take a piece of blank paper, draw a line down the middle of the page, write the words “account value” on the left, and the words “income account value” on the right.

Step #2:The account value on the left is your real value, the income account value on the right is an income base, and is not available as a lump sum cash withdrawal. However, this income account value/ income base is used to determine your guaranteed lifetime withdrawals.   

Step #3:The left side, your account value, is made up of your original premium, plus any applicable premium bonus (for example 5% or 10%), plus any interest credited, plus any additional deposits, minus any withdrawals .  

Step #4: Your income account value is made up of your original premium, plus any applicable premium bonus, growing by a guaranteed income account interest rate ranging from 4% to 10% (our example shows 6.5%). Any money you withdraw reduces the income account value by the same percentage as that withdrawal reduced the account value, so if you were to withdraw 5% of your account value prior to exercising your guaranteed lifetime income benefit, your income account value would be reduced by 5% as well.

Step #5:So, on the left side, your account value, will grow based upon the actual interest credits you receive via the fixed-indexed annuity and the crediting strategy you choose, where some years you will receive positive interest credits when the benchmark index increases in a year, and 0% when the benchmark index decreases in a year. 

Step #6: The right side, the income account value, will grow regardless of whether or not the account value on the left grows, (meaning the stock market could go down or stay flat for the next "10" years, and you would still have guaranteed growth in you income account value, or "income base"). In fact, it will grow by a rate as described earlier ...4% to 10% (6.5% in our example below), every year, guaranteed, for a minimum of ten years while in deferral, and depending on the insurance company, the income account value will grow for 10,15, 20 years or longer while in deferral, guaranteed.

Step #7: Now, if your account value on the left is reduced to zero at some time in the future (for example 26 years from now, making the consumer in our example 86 years old at that point in time), due to all of the guaranteed withdrawals youhave taken from your policy, understand, your guaranteed withdrawals will still continue for as long as you live, as you cannot outlive “your guaranteed lifetime income benefit”.

Step #8:  If the owner passes away, and the owner had chosen a single life payout, the spouse, and/ or beneficiaries/ heirs, will receive the remaining account value on the left, probate free, directly from the insurance company, according to the beneficiary designation section on the annuity application. However, if the owner chooses a joint life payout option (covering both the husband and wife), the surviving spouse will continue to receive the guaranteed withdrawal benefit, as long as he or she lives. When the surviving spouse passes, the beneficiaries/ heirs will receive the remaining account value on the left, probate free, directly from the insurance company.

*While the proceeds are passed along free of probate fees, they may be subject to state and federal income taxes. Consult your tax advisor.

I hope what you see below replicates what you drew on a piece of paper, or conjured up in your mind. Understanding how the fixed-indexed annuity works, is not difficult, as long asyou keep the left (the account value), and the right (the income account value), straight in your mind. The account value figures shown on the left are considered end of year values. Withdrawals are taken at the beginning of each year, and credited interest is applied after withdrawals. The cost for the income rider is 6/10 of 1%.

(Click here to enlarge)

As you view the worksheet example above, the fixed-indexed annuity, when combined with a guaranteed income rider, just as we stated earlier, provides the consumer with safety of principal and locks in annual gains on the account value side of our worksheet (the left side). Plus, it provides a guaranteed interest rate of 6.5%% in the income account value (the right side), which is used for calculating a consumer's lifetime income benefit payment, that cannot be outlived. Add a potential upfront premium bonus of 5%, or 10%, and you now may have everything retirement minded people could ever want, provided they are willing to accept moderation in terms of the upside potential of their nest egg.

Today, many more people than ever before realize the importance of moderation, especially if you can simultaneously receive safety of principal, and guaranteed minimum returns.   Insurance agents, financial advisors, registered investment advisors, and fiduciaries of 401k plans, and pension plans, are now turning to the insurance industry and these specific products, to provide protection of account value and greater guaranteed lifetime income.

Really important –market sensitive investments, those financial products tied directly to the stock market, stocks, bonds, mutual funds and variable annuities, where the consumer’s nest egg is subject to the ups and downs of the stock market, plus the costs and fees associated with such products, can cannibalize the account value, and potentially leave little or nothing for the investor later in their retirement,nor their beneficiaries.  This occurs due to what is known as reverse dollar cost averaging.  Jack Bogle, the founder of Vanguard, expresses it this way;

Technically speaking,…there is a mathematical reason that a person’s retirement fund will usually perform worse than the assets in which it is invested.The reason has been dubbed Reverse Dollar-Cost-Averaging.”

“Rather than get too technical in this essay,I will explain it more simply.When a retiree invests in assets such as stocks,bonds and mutual funds whose values fluctuate widely over time, it becomes more difficult to withdraw money from the savings pool without doing harm to the portfolio. “Suppose a retiree wants $5,000 per month to sustain her lifestyle.

Suppose further that the market value of her portfolio fluctuates up and down.

When the value is down, she will have to cash in more of her securities or mutual fund shares than otherwise in order to generate sufficient cash to reach her $5,000 target.”

“Then she has fewer securities or shares remaining that can ride the markets back to their higher levels when the cycle reverses and benefit from the price gains.

Her nest egg will become increasingly depleted over time by these market cycles and she may run out of money a lot sooner than planned, had her portfolio provided a similar, but steady rate of return.”

“Over time, such as the typical 20 to 30 year period of retirement, there are usually enough up and down market cycles to let the mathematical rules of reverse dollar-cost averaging reduce significantly the amount of time a nest egg may last.

The effect of reverse dollar-cost averaging is particularly pronounced if, shortly after retiring, the downward part of a market cycle commences.”

“For example, one study showed that if you had a portfolio that yielded a steady 8% return, an individual could withdraw 6% per year, and increase that amount annually by 3.5% to compensate for inflation, and the portfolio would always last longer than 30 years before it ran out of money.

However, under the same assumptions regarding an average portfolio rate of return and average inflation, but allowing for the fluctuations realized in the US market over the past 100 years, a portfolio mix of 60% fixed income and 40% common stock would have failed to last the full 30-year period more than 80% of the time.”

“In fact, in some cases the portfolio was empty after as few as 12-13 years.
During that same period, had 100% been invested in a diversified portfolio of common stock, the portfolio again ran out of money in over 80% of the cases before 30 years had passed, often in far fewer years, and in a couple of cases, the portfolio was empty after only 6-7 years, although if your timing was lucky, the portfolio would have generated this desired income far longer than 30 years, allowing higher withdrawals!

Numerous other studies have confirmed the eroding power of reverse dollar-cost averaging on a retirement portfolio, which is particularly powerful in volatile markets.”

So, does the general public …those approaching retirement and those who are already retired, -know all about “Reverse Dollar Cost Averaging”?

How may you avoid the pitfalls of “Reverse Dollar Cost Averaging”?

Keep on reading!

American consumers are looking back on the last decade of stock market turmoil, commonly referred to as “The Lost Decade” (January 2000 through December 2009), and they are re-evaluating their retirement situation. 

As one can tell by reading the headline/ story below from the Wall Street September 4th 2010, many are removing their savings from the ups and downs of the stock market, in favor of fixed-indexed annuities.

“Money has hemorrhaged out of U.S. stock funds for 18 weeks in a row, with an estimated $15 billion flowing out in August alone. Much of that is being soaked up by a form of insurance sold as a safer alternative to stocks.  Fixed-indexed insurance products, commonly called "equity-indexed annuities," offer the promise of protection on the downside combined with a guaranteed minimum upside. They racked up a record $8.2 billion in new sales in the second quarter and hit an all-time high of $168 billion in total assets as of June 30, according to LIMRA and Beacon Research.

Let me give you a practical example to illustrate how the income rider benefits the consumer, which we hope will make perfect sense to you.

Assumptions: A client is age 60 (you may be 50 years old or 70, the concept works the same way), with $250,000 in retirement savings, in a 401(k), in a 403 (b), in a CD, or in a brokerage account, and he or she transfers $250,000 into a fixed-indexed annuity, with a 10% premium Bonus, with an "6.5% compounded income account/ income rider interest rate". At attained age 70, the client is guaranteed a withdrawal rate of 5.5% for life, or 5% for a husband and wife.

What if you were the client in our "assumption"? In 10 years, after you transferred $250,000 into a fixed-indexed annuity with an income rider, you would be guaranteed to have $516,213in your "income account" value ...that you could "live off of" in retirement, (your $250,000 deposit + a 10% bonus, compounded at an "income account interest rate" of 6.5%, which you can see on the right/ income account value side of our worksheet). In this example, your guaranteed income account value of $516,213, along with a "guaranteed 5.5% withdrawal rate" when you reach age 70, would provide you with $25,811 a year whether you are retired or not retired ... forever ...guaranteed, (which you can again see on the right/ income account value side of our worksheet).

We don't know and you don't know how long you and/ or your spouse are going to live ...whether or not you will live to age 90 ...but let's say you did. After taking your guaranteed lifetime withdrawals for 20 years, you would have received a total of $542,023 regardless of the ups and downs of the stock market, regardless of what you actually earned in your account value on the left, via the interest crediting strategy you choose. (See the running sum of withdrawals column on the right/ Income Account Value side of our example). Is that the financial peace of mind are searching for today ... terms of your retirement?

(Click here to enlarge)

In our example, we show you examples of; 1%, 2%, 3% and 4% interest returns on the left, the "Account Value" side of our example, to give you some perspective, as to what your account values may look like. No one knows what the S&P 500 benchmark index returns will be in the future, to which fixed-indexed annuity interest credits are linked, we only know what the benchmarks have done in the past, *which you will see in a 20 year summary shortly. Everyone knows there will be both positive and negative years in the stock market, guaranteed. Depending on the crediting strategy you choose, you will have returns that go from "0%" to hypothetically ..."1%,2%,3%,4%,5%,6%,7%,8%,9%,10%+ ". Whatever you do earn, via your interest credits to the account value, will be locked in annually and protected.

Consider that a hypothetical average return of 4% in a fixed-indexed annuity ( plus the 10% bonus, which is only available with insurance companies, offered in conjunction with   contracts of 10 years in duration or longer), would provide you with a hypothetical account value of $383,292 over the ten year period. 

So think about something …what if you had earned 4% on your original deposit of $250,000 in some other savings or investment product, (perhaps from a portfolio of stocks, bonds, mutual funds, or Certificates of Deposits etc…), after any costs or fees,  which would then have  accumulated to $370,061, and you were now  70 years old.

Let’s say you were to ask your financial advisor “how much you could withdraw, as a percentage of your account value, and have it last the rest of your life?”  Hypothetically, an advisor is more likely than not, going to tell you … that he or she cannot know what future returns will be, and therefore he or she cannot know for certain,but if they had to guess, you may be able to withdraw approximately …5% …or less, if you are expecting …that your money would last you the rest of your life”.  

It is worth emphasizing here, that because no one knows what lies ahead in terms of future stock market returns or future interest rates, you again, really don’t know if 5% / $18,502 (5% of the $370,061, which for conversation sake, we are saying you have in “some other financial product”), is too much to withdraw, or not.  Meaning if you were to withdrawal $18,502 a year in retirement, and the savings or investment product where you happen to have your money does not perform well …you could run out of money in retirement, in that “some other financial product”.   Do you want to be in a situation like this?

You see, that is the real comparison ...that everyone, who takes the time to really understand their personal retirement situation, needs to think about. We need to reframe our perspective ...which would you rather live off of in retirement, $25,811 a year, which is guaranteed, or $18,502 ....which is not guaranteed"? Obviously, one would rather be guaranteed $25,811 a year versus $18,502 which wouldn't be guaranteed, and only a fixed-indexed annuity with an income rider could do this for you, while simultaneously giving you access to your account value. So is it worth it? Is it worth taking your chances in the stock market? Or, should you pull your nest egg out o f the stock market, in order to protect your retirement, in order to receive the guarantees provided by the fixed-indexed annuity, and in order to receive greater guaranteed income?

Don’t forget, the $18,502 …could be less  …if that “some other financial product”, earns less than 4%, and doesn’t quite grow to $370,061.  Also, we all know it could be more, as one can invest in the stock market, and perhaps through skill or luck, experience tremendous gains in a particular investment. However, you must be willing to accept the possible risks: the risk of loss to your principal, the risk of losing any gains you may have had , and, accept the cost of investing your money, which magnifies the problems of reverse dollar cost averaging.  Relative to the reverse dollar cost averaging essay by John Bogle of Vanguard which you read earlier, you could run out of money, and you could find yourself in a situation where you end up leaving nothing to your heirs. Do you want to be in a situation like this?

I know that all of this could be confusing, even alarming …but I hope you see that we have laid things out as simply as we can, to explain things clearly, and to help people reframe their retirement perspective.  It is important that we all make informed decisions, but one can only do this if we understand the benefits of the fixed-indexed annuity with an income rider …in comparison with other retirement planning choices.   If you were not aware of fixed-indexed annuities, or fixed-indexed annuities with income riders, you certainly are now.

Why these products work?

This $25,811 of guaranteed lifetime income in our example is only possible when you are one person who is benefiting from leveraging the lives, of all of the other policy holders, of all the other people who bought an annuity just like you. And all of the other policy holders have the same opportunity, the same benefit of the leveraging of life insurance pooling concepts, and actuarial life expectancy tables, that you have.

The following series of questions should help make things even more clear.

Let’s pretend 1000 people buy an annuity with an income rider:

1) Will all of those people live to age 100?  No. 

2) Will all of those people, simultaneously exercise their guaranteed withdrawal benefits as described earlier, when they reach age 70?  No.  

3) Will some people decide to take all of their money out of their annuity, regardless of performance, to do something else with their money?  Yes.   

4) Will some people live to age 70, exercise their withdrawal benefit, and after just a few  years of income, decide to take all of their money out of the annuity, and do something else with the money?  Yes.  

5) Will some of the people who live to age 70, exercise their withdrawal benefit, and live to age 100 or more?  Yes.

6) Will some people, unfortunately, die before their average life expectancy, leaving the remaining account value to the beneficiary, and in turn, doesn't that mean, that the life insurance company who issued this annuity, will no longer have the contractual obligation of paying the $25,811 forever, to this person. Yes, and Yes.

You see, the actuaries understand that some people live long lives, some folks live to the average life expectancy of a 60 year old buying an annuity today (age 87), and unfortunately, some people do not live long enough …to make it to the average life expectancy of a 60 year old  buying a fixed-indexed annuity today.  And unfortunately, some people die before they ever get a chance to exercise their guaranteed withdrawal benefit.  But if you live to age 87, or to age 100, it doesn’t matter.   Your guaranteed income keeps coming!

Also, you need to know that you don’t have to wait ten years; only one year in deferral is all that is necessary, before exercising most lifetime withdrawal benefits, as 10 years was just an example. You may exercise your guaranteed lifetime withdraw benefit after 2, 3, 4, 5, 6, 7, 8, 9, 10 years etc… it is up to you.  Some people may exercise their lifetime withdrawal benefit, and then decide they would like to cash out their annuity, take all of their actual account value and do something else with it, whatever that may be. 

So I hope you are beginning to see how the actuaries and the insurance companies are able to guarantee to all policy holders ...a guaranteed withdrawal benefit like the one in our example here, of $25,811, (based on an initial $250,000 deposit), for the rest of one's life! I hope you got the message, that a guaranteed lifetime income benefit rider is based on actuarial life pooling principles, which you only benefit from if you choose a life insurance product, and a fixed or fixed-indexed annuity is a life insurance product, they are not investments, they are not securities!

Protecting your account values from loss, in exchange for minimum interest rate guarantees and moderation in terms of upside potential, and the guarantee of greater income in retirement …deserves the attention of anyone who is searching for a safe retirement planning strategy.  A fixed-indexed annuity can again provide peace of mind in retirement versus, the roller coaster of the stock market. With market sensitive investments, and the costs/ fees associated with them, you may see a cannibalization of your account values, causing you to run out of money in retirement, and potentially leaving little to your heirs.

If all of this sounds good to you, I want you to think about what the ideal attributes of a sound financial product would be. 

Recalling our earlier discussion, most people, when it comes to their money, especially retirement savings, have an aversion to loss, a loss of principal, a loss in their account value …right?  Well, it is becoming increasingly clear to all of you reading this, that no one has to suffer losses, if they are willing to accept moderation; in terms of upside potential.  Quite simply, if you invest in the stock market, your money, your principal, your account value, will be subject to loss, it will go up and down with the stock market, and you must account for the associated costs/ fees etc… which detract from your earnings and deepen your losses,  because that is how it works.  If you have an aversion to loss, with a particular sum of money, or even all of your money, you must ask yourself; “Why am I investing, speculating, or gamblingin the stock market?”

Sudden declines in the stock market over recent years,  have spelled tragedy for many  investors who placed  their  retirement savings in market  sensitive  products.  Unfortunately, many of the people who suffered market losses, could not afford to take the risk, but were  invested  just  the same.  IT  TAKES  REAL WISDOM  TO  KNOW  WHEN TO  STOP  TAKING UNNECESSARY  RISKS. Market sensitive products may help you and I build retirement savings in good times  …but  they cannot guarantee preservation and protection of those savings in uncertain times. ASK Yourself: “Am I taking on too much investment risk now, which may negatively impact my ability to achieve  a  comfortable retirement  tomorrow?”

Also, when it comes to retirement, most people do not want to have their money “invested”, in an illiquid asset, because in retirement, if you need your money, it needs to be somewhere you can access it.  Well, it may help if everyone were to adjust their perspective, so I suggest that we reframe the situation, as there are at least two different types of “illiquidity” concerns here.  One involves investments in real estate, artwork, antique cars, as these types of assets are considered relatively illiquid, because you need to find someone that is interested in your particular investment property, your favorite piece of artwork, or the hot rod in your garage, and such assets will fluctuate in value.  If such assets are worth less, when you need to sell them  …if you can sell them, these assets are considered “not very liquid” or perhaps, “illiquid”.  

The second type of “illiquidity” concern we may have is more common.  These exist when we own marketable securities, stocks, bonds, mutual funds, variable annuities etc….  In reality, we may have liquidity when it comes to marketable securities, but only at a price, the price at which someone else is willing to pay for our securities.  So, if the value of our investment portfolio is worth less when we need to access our money   …that is the cost of our liquidity.  We will receive market value.  So we may have “liquidity” in terms of the ability to withdraw our money from the stock market, but we may have never considered the ups and downs of the stock market, like the ones we have just experienced in the “The Lost Decade”.    

In contrast, fixed-indexed annuities with income riders which we are advocating here, provide excellent liquidity comparatively, protected liquidity, as your principal plus your locked-in index-linked interest gains are available to you via a 10% free withdrawal.  And, if you need to take more than 10%, there will be a surrender charge, but at least you know what it will be in advance, via the surrender charge schedule in your contact, and in the disclosure paperwork.  In contrast, with a market sensitive investment, you don’t know what the cost of accessing your money will be, because, you do not know what the future value of your investments will be …will the stock market be up or down?  Plus, many fixed and fixed-indexed annuity policies are 100% liquid if the consumer enters a nursing home, or is diagnosed with a terminal illness.

Let’s examine the cost of market sensitive investments …the loads, the fees, etc...

People generally have an aversion to paying too much, for anything.  However, being invested in a variable annuity with it’s version of an income rider, will cost you approximately 3%, or more, today.  Paying someone to manage your money on your behalf will cost you approximately 1% - 2% today, plus the cost of the underlying securities these “managers” buy, and sell, on your behalf.   Are you paying too much?  Consider the slide below.

How many people understand the practical math involved with investing as described above?  

Let me describe a scenario that you will never forget.  “If you are investing in market sensitive investments, such as mutual funds or variable annuities, and the underlying securities in your investment portfolio increase in value 10%, and you are being charged costs/ fees of 3%, your account value increases 7%, right?”  “If the underlying securities in your portfolio decrease in value by10%, and you are being charged costs/ fees of 3%, your account value decreases 13%, right?”  And you now need your market sensitive investments to rise in value by 18%, just to get back to where you were the year before, that’s the practical math involved with investing.  This is why your chance of getting your money back can be so difficult!  “Do you like the sound of that scenario?” This is an example of your gains being diminished by high costs, and your losses deepened by these same costs.  Consumers must bear the costs of market sensitive investments, regardless as to whether the stock market goes up or down.

In contrast, most fixed-indexed annuities have no cost subtracted from your earnings, but keep in mind a cap will be placed on your yearly upside earnings, and some may see this "cap" as a cost, which is fine, but in reality, it is simply a cap on your upside earnings. Also keep in mind you can never earn less than "0%" in any year with a fixed-indexed annuity. For example, if you had a 5% "annual reset point to point cap", and you received index-linked interest based upon the performance of the benchmark index S&P 500, and the index increased 10%, you would be credited 5% interest to your account value. But keeping in line with our overall subject of a "fixed-indexed annuity with an income rider, you would receive the guaranteed 6.5% interest on your income account value. And if the benchmark index S&P 500 went down 38% in a particular year, as it did in 2008, your account value would simply be credited "0%" that year. You would not lose any of your account value and you would still receive 6.5% interest in your income account value!

Anyway, you must be willing to accept this cap of "5%" per our example as "moderation", which we believe most people are willing to accept, in exchange for the positive attributes of a fixed-indexed annuity with an income rider, stated once again below.

  1. Safety of principal (….plus, all gains are locked-in annually, protected, and yours to keep),
  2. Guaranteed retirement income (in fact, we believe, the consumer receives more income, greater guaranteed retirement income, than that afforded by ANY OTHER financial product available),
  3. And excellent liquidity, protected liquidity, (your principal plus your locked-in index-linked interest gains are available), and again, many policies are 100% liquid if the consumer enters a nursing home, or is diagnosed with a terminal illness.

Relative to the cost of the income rider we have been discussing, as this "income rider" is an option for the consumer, the insurance company will offer this "income rider" free of cost, or for a modest cost, customarily .40% to 1.25% of the account or income account value.

Let me give you a real example brought to us by a financial advisor who wanted to look back in time, and examine a particular client’s situation.  But before I do that, please understand the following information is provided for informational/ educational purposes only. This information involves a general discussion of various concerns related to retirement savings.  No investment advice is being given in regard to securities products.  Any recommendation to consider the repositioning of assets found on the spectrum of risk and return should not be interpreted as securities or investment advice.

The client was age 60, and the advisor wanted to figure out two things, first how much money his client would have today, if a) the client had placed $500,000 into what is probably the most popular index mutual fund that tracks the benchmark S&P 500, with reinvested dividends, at a cost of 18 basis points (18/100 of 1%),  Jan. - Dec. 1990 – 2009, with his client remaining “invested” for the past ten years (the advisor provided us with the fund data) 2.  And second, the advisor wanted to know what kind of retirement income his client could expect, based upon the “would be” account value and a reasonable withdrawal rate.  

He then asked us to show him how much money his client would have in his account today, if b) the client had placed $500,000 into a particular fixed-indexed annuity instead, and what kind of retirement income his client could expect from this insurance product, a fixed-indexed annuity with an income rider.  
2 Taxes are not considered for purposes of this illustration, but normally a 1099 would be generated to the client, and therefore taxes would be due on the index mutual fund, relative to distribution of any dividends.  Fixed-indexed annuities are tax-deferred and therefore no taxes are due until 1099/ distributions are received.

Well, the advisor’s client was age 60, and after placing $500,000 into a) the index mutual fund described above, for 10 years (January through December 2000-2009), the client would have $449,808 in their account.  Understand the popular index mutual fund we reference here can be obtained at a very low cost of only 18 basis points, that’s less than 20% of 1%. The point is, that this cost of “18 basis points” is as cheap as it comes, and most people, who work with a financial advisor, will have additional fees, advisors fees, of approximately 1%  more, on top of this …if the advisor bought this fund or one similar on your behalf.  Also, the advisor tells us that he, and/or other advisors will often be purchasing or putting together a “personal portfolio” of mutual funds or other investments, so most people will likely pay even more than 1% plus the “18 basis points”, maybe 2% to 3% altogether, the advisor says.

Now, b) the fixed-indexed annuity, looking back in time, would show an account value of  (using an assumed annual reset strategy with a point to point cap of 5.75%) $733,483, which is $283,675 greater than the $449,808 the client would have in their popular index mutual fund account value.  The advisor said he would recommend a 5% withdrawal, maybe less, of a) the index mutual fund account value of $449,808, which would provide $22,490 of yearly income,  which would not be  guaranteed to last the client their entire life.  The advisor pointed out that, in reality, a typical client working with an advisor would have approximately 1.5% or more in fees, which would now total 1.68%.  If that was the case, the index mutual fund/ portfolio  account value would stand then at only $384,633, meaning a client withdrawaling 5% of such an account value would produce yearly income of only $19,231, which again, would not be guaranteed.**

The advisor himself was amazed, because he can now see that with b) a fixed-indexed annuity with an income rider, not only is he able to show …1) that he would have protected his client’s $500,000 from the stock market downturns of “The Lost Decade”, he was in fact able to see that by applying the benchmark S&P 500 numerical values from the same period with an annual reset point to point cap of 5.75%,  January through December 2000-2009 (without dividends),  he would have grown the client’s nest egg to $733,483.  In addition, 2) the advisor would be able to show a contractual, a guaranteed yearly income of $71,245, for as long as the client lives.  And 3) while the client is withdrawing this $71,245 a year for life, the client’s account value, which started at $733,483 when the client would have exercised their lifetime withdrawals, is still being credited with interest-linked interest, and they are only being charged 60 basis points for the benefit of the income rider, just over half of 1%, which we believe, is extremely cost efficient.

For reference, an example illustrating the numbers you have just read about is below.

**This information is not intended to be investment advice. Its purpose is intended to be informational and educational, to help facilitate a better general understanding of the risk, the reward, and the effect of costs and fees relative to investing in market sensitive investments.  In that regard, the column “Hypothetical *S&P 500 Total Return with **Additional Cost (Input Cost Below)” is intended to present a hypothetical scenario  where a consumer would incur costs in addition to the 18 basis points, (equal to 18/100 of 1%) . “If the consumer, was working with a financial advisor responsible for assisting/ managing the client’s assets, either by purchasing this same fund for them, or by putting together a custom portfolio to replicate, mirror, or compete with a fund meant to replicate the performance of the S&P 500, the consumer is more likely than not going to have some additional costs on top of the18 basis points in our example. The performance data shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited.

It is also worth noting, that sometimes an advisor will tell a consumer they can accomplish all of the same benefits of a fixed-indexed annuity, using other products, quite frankly, they are misinformed, or just wrong. 
The  strategy some market oriented advisors suggest, usually involves  dividing your money into two buckets; the first is used to purchase CDs which will provide the consumer a guaranteed future value (original deposit plus interest), and the second bucket is used  to purchase index mutual funds in hopes of capturing  stock market gains.  Ok, but consider the facts: this strategy cannot protect the entire principal, cannot lock-in annual gains, cannot provide the highest possible guaranteed income, and cannot provide the same level of liquidity, of a fixed indexed-annuity with a guaranteed income rider.  

Perhaps the most important concept to get your arms around is this; you get the liquidity features you need, as your ability to access your life savings is excellent with a fixed-indexed annuity when combined with an income rider.  You get excellent peace of mind because you know exactly what your guaranteed income will be, the day you sign the annuity application.  Additionally, if you ever have to reach in and take some of your money before you exercise your guaranteed withdrawal benefit, that’s fine.  You can access 10% of your principal/ or account value free of any charge whatsoever.  And if you need more than 10% in a particular year, that’s fine too, although you may incur a surrender charge on the amount above 10%.  This liquidity feature gives you the peace of mind you are looking for in retirement.  “Why?” Simply stated, if your money is invested in the stock market, you do not know what it will be worth in the future. 

In terms of liquidity, the ability to preserve your nest egg, either for your own use, or for your heirs/ your beneficiaries, is a key point. We say this because with a fixed-indexed annuity, you do not subject your nest egg to the roller coaster of the stock market, and you don’t have the high costs/fees. Also, according to “reverse dollar cost averaging”, negative stock market performance, plus your withdrawals, plus high investment costs/fees, can cannibalize your account value. This can occur anytime your nest egg is invested in stocks, bonds, mutual funds, or variable annuities, all of which are market sensitive investments. 

In Summary:  A premium bonus of  5% or 10% helps to make up for stock market losses experienced by many consumers, and are  made available through annuities, typically, with  10–year surrender charge schedules, or longer.  The fixed-indexed annuity provides the safety and guarantees …only made available though the legal reserves of an insurance company and their products.  An income rider providing guaranteed lifetime income provides more guaranteed income than any other financial product on a guaranteed basis, while simultaneously providing you access to your account value.  Furthermore, the optional income rider allows your account value to continue growing, even as you are taking lifetime income, and you always have excellent, protected liquidity, because you always have access to your account value, customarily through a 10 %penalty-free annual withdraw feature.  And finally, consumers benefit through the protection afforded by the state insurance department’s examination processes and the membership of all insurance companies in the State Guarantee Associations. 

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1 Based upon the claims paying ability of the insurance company to be utilized.