In the game of investments, how many times have we heard the old adage, “Buy low and sell high”? In a perfect world, that’s what all investors do. In reality, the opposite happens – more frequently than we’d like to admit.
The game of investments isn’t really a game because all players are at risk of losing – losing assets they need for income, retirement, savings, etc. An imminent market correction increases that risk. We’ve enjoyed the market’s highs, but we know it will likely see some real lows. When is the next correction coming? Tomorrow, next week, next month? History tells us it will be soon, though we can’t predict exactly when.
So how can players protect their assets from a market correction? Annuities are one option. A fixed annuity guarantees a fixed rate of return over a time period you choose. As a general rule, the rate of return increases with the length of the time period.
Some investors want more than just guaranteed returns, however. They don’t want to miss out on market gains. A fixed indexed annuity allows both. Its rate of return is tied to gains in a specific index, such as the S&P 500, and its principal is protected from market losses.
The Bottom Line: Both of these annuities are guaranteed to protect assets when the next correction comes. Talk to your clients about their options before they lose anything in the game of investments.
Born and raised in Indiana, I, like many Hoosiers, came to love the game of basketball. In 1995, the New York Knicks were playing my Indiana Pacers in game one of the eastern conference semi-finals, and I can recall when one of the most spectacular 18.7 seconds left in the game unfolded. Reggie Miller, a shooting guard for Indiana, scored 8 points in 11 seconds and sealed the victory for Indiana. If you’re a fan of the sport, you have to see it – if you haven’t already, Google Reggie Miller to watch this unlikely feat.
I share this great moment in sports to remind everyone it’s never too late. Clients nearing or in retirement can still protect their savings – for themselves, and potentially for their beneficiaries! There are countless strategies to lean on, and not enough space or time to begin to reference them all. With that said, there are three common sense ideas that are widely recommended by financial advisors across the country.
The Bottom Line: Reggie Miller always believed it was never too late to win the game. Employ some common sense strategies today, and it won’t be too late for your clients, either!
*Guarantees are backed by the financial strength and claims-paying capability of the issuing insurance company
As kids, we all learned the story of the tortoise and the hare. As a matter of fact, I ran across an old Bugs Bunny cartoon last week, and it took me back to my childhood. Anyway, the hare reminded me that this story can be used in today’s economic environment.
If you can eliminate the downside of any portfolio, you don’t need to have nearly the upside possibility to keep up. Let me explain.
You have an equity portfolio of $100,000, and the market is up 12 percent in the first year. What’s your balance? One hundred percent of people answer correctly: $112,000.
But if the market is down 12 percent in the next year, most people will answer that they still have $100,000 left, because the average return mathematically is zero. The answer is actually $98,560 – you’ve lost 12 percent of the $112,000, which is $13,440.
Now, throw a fixed index annuity into the mix with a 5 percent cap rate. On the surface, it’s not terribly exciting, like the tortoise. But the beauty is that in the first year you lock in the 5 percent gain, and your balance, even with the down 12 percent year, is $105,000. It beats the equity portfolio by $6,440.
I’m not here to tell you that an FIA will beat a market return in the long-term. What I am saying is that a percentage of every client’s portfolio should have the protection of an FIA to smooth out market fluctuations.
The Bottom Line: If you can eliminate the risk of losing money with a portion of your assets in an FIA, you don’t need the full upside of the market to keep pace.
Within the fixed indexed annuity (FIA) marketplace, volatility controlled (VC) index options are the talk of the town. Developed to increase the attractiveness of FIA returns in a low-interest-rate environment, these new crediting strategies present something new and interesting to consider.
However, without a full understanding of the underlying mechanics and, more importantly, the setting of realistic expectation of their potential returns, these new indexes could turn into a new reason for a client to be confused and turned off.
It’s easy to lose sight of the forest for the trees when discussing these indexes. It’s critical to remember the attractiveness of an FIA rests in its simplicity, insulation from market losses, periodic lock in of gains, and its ability to provide lifetime income, even increasing income, all for no to low annual fees. No individual index should overshadow or distract from this package of benefits.
VC crediting strategies were designed to potentially increase the overall return on FIAs. A VC option should be used if a client is looking to increase their accumulation value, increase or extend their residual death benefit, or increase their lifetime income by either outperforming a rollup or providing more punch to an increasing income option.
VC indexes vary significantly in structure and design. Some use spreads, while others use participation rates and/or longer crediting terms. Many are uncapped. It’s important to understand the underlying indexes and to be comfortable with their transparency. You should also understand how the indexes are managed and will respond under various market conditions.
The Bottom Line: Make sure you understand the latest hot topics and how they could impact your clients before you start making recommendations. Ash Brokerage has access to top carriers in the industry with exposure to a variety of VC indexes, and we’d love to discuss the intricacies and opportunities they may present for your clients.
How important is guaranteed income? Ask any retiree or near-retiree, or read most any survey about concerns in retirement, and the most common fear is running out of money. Financial planners must consider what assets are available and what tools they have available to create and generate guaranteed, lifetime income.
Today, one tool often used in financial plans is an annuity with an income rider. An income rider guarantees an income payment for the life of the insured, and can even be set up to guarantee income payments for the insured’s spouse. Clients may even have the option for increasing income payments under some annuity contracts.
Here’s how it works: The average payout factor at age 70 is 5 percent. If your income base amount is $200,000, then the resulting payout is $10,000. In most cases, this would be the amount the insured would be guaranteed on an annual basis for their lifetime.
With an increasing income payment option, when there is any interest credited to the annuity, the insurance company increases the last annual payment amount by the interest earned, expressed as a percentage. Say your annual income payment was $10,000; however in the last contract year, you earned 4 percent in interest. The insurance company would then increase your lifetime annual income payment to $10,400. Choosing this option would help you keep pace with inflation, and potentially help you offset higher health care and other costs.
The Bottom Line: Guaranteed lifetime income is important to many of your clients. Show them options with annuities and income riders.
© 2018 Ash Brokerage LLC.