The Cost of Waiting


We’ve been in a declining interest rate environment for about the last 10 years, with historic low rates the last few years. These low rates are driven by the Federal Reserve in hopes of jumpstarting the economy by allowing consumers to borrow money cheaply. While lower rates may sound good, they also mean very low returns for products such as CDs and money market accounts.

Even in this low-interest-rate environment, it’s estimated that there’s still nearly $10 trillion on the sidelines in the form of CDs and money market accounts. Many of these investors are concerned that committing their money to an annuity at current rates won’t allow them to take advantage of higher rates in the future. What they may not be considering is that waiting could cause them to lose earnings that may require years to make up, even if they do get a higher rate of return in the future.

For example, if you put $100,000 into an annuity paying 2.25 percent for five years, you would be guaranteed $111,768. If you waited two years before buying that annuity and were earning 0.50 percent in a CD, you would have to earn 3.78 percent over three years in order to get to the same $111,768 you would have been guaranteed with the five-year annuity.  

Regardless of interest rates, annuities are really designed for investors’ long-term goals. Annuities offer tax deferral, principal protection, liquidity, lifetime income options and death benefits that are paid directly to the beneficiaries.  

The Bottom Line: With $10 trillion on the sidelines, now’s a great time to reach out to investors about the benefits of tax-deferred annuities.


History and a Math Lesson


Why do we study history? Because it’s all we have, and history tends to repeat itself. Well, what have we learned from the Japanese economic collapse of the early ’90s? Apparently, not much. 

Since their real estate bubble burst, Japan has been in a low-interest-rate environment for the last 20 years, yet we keep waiting for interest rates to go up. Right now, billions of dollars are sitting in low-yield fixed accounts earning less than 1 percent, waiting for a rate increase. 

We’ve now been waiting approximately five years for this “rising rate” phenomenon – when will we stop waiting and move on? 

So there’s your history lesson. Now, let me explain the math lesson. Do you know how significant it can be to find just one percent more yield on your clients’ conservative assets today versus five years ago?  

Five years ago, a five-year CD was yielding approximately 5 percent interest. If I could have found something to get that client 1 percent more yield, I would have increased their yield by 25 percent. As we stand today, a five-year national CD yield is averaging about 1percent.* If I could find something to get that client 1 percent more yield, I could increase their yield by 100 percent!  

You could certainly do that, simply by repositioning your clients’ assets in a fixed indexed annuity. With cap rates in the 3-4 percent range, it’s likely you will find your clients 1 percent more yield without risk to their principal. 

Don’t talk yourself out of presenting this option to your clients because YOU don’t believe they will be interested. Clients are seeking yields without risk to principal, and they are finally fed up with sub-1 percent yields.

So the next time your children ask you, “Why do we study history and math?” you now have your answer.


*As of Dec. 19, 2014


Retirement Through Air Travel


I fly nearly 60,000 miles per year. As I sit in a terminal, I’m still amazed at the size of the aircraft that manage to take off and stay aloft. But pilots will tell you there are four basic principles that make air travel safe: thrust, lift, weight and drag. I think most Americans can benefit from the same four principles in retirement.

Thrust: Now is the best time to buy a fixed annuity (as I already wrote in a previous post). Given the likelihood of low interest rates for the foreseeable future, an additional 100-150 basis points in rate make a surprising difference in accumulating money. Change your conversation to focus on the time it will take to double your client’s money. With today’s rates, it can make a 36-year difference – that’s thrust in a financial plan. 

Lift: One of the basic benefits of an annuity is tax deferral. Over time, tax deferral can make a significant difference in the accumulation value of nonqualified dollars. If nominal interest rates are similar, tax deferral provides lift in retirement planning. Tax considerations need to be evaluated during the distribution phase as well. Life insurance and exclusion ratios can be a tool to ladder income payouts at retirement. Positioning income with respect to taxation also allows clients to maximize their government entitlement programs. 

Weight: Weight slows an aircraft down and makes it inefficient, just as investment portfolios become inefficient when their asset classes have not been weighed properly. A diversified strategy to take advantage of all investment options makes returns more stable over long periods of time. Additionally, taking gains off the table allows an investor to reduce the weight of their portfolio. Rebalancing the portfolio regularly keeps the asset allocation in line, and allowing the client to take gains off the table with more conservative vehicles provides more consistent returns.  

Drag: When flying, resistance comes from many items on an aircraft. Reducing drag allows the plane to fly faster and more efficiently. Aside from taxes, fees are one of the biggest drags on an investment portfolio. Whether they’re advisory or product fees, they make the portfolio work harder to attain desired results. Client-friendly annuities and life insurance (during both the accumulation and income phases) allow clients to reach their goals faster.  

When talking to clients about their retirement goals, try to think about how to keep their retirement portfolio soaring. Provide thrust in form of better nominal rates; create lift through tax deferral; reduce the weight of equity-heavy portfolios; and minimize the drag in fees.

The Bottom Line: Flying may seem complex, but it can be broken down into four simple principles – use them to make your clients’ retirement portfolios soar like an airplane.  


Now is the Best Time to Sell Fixed Annuities!


Many may question my sanity when they read the title of this blog. You might think that you can’t put your client in a fixed account during some of the lowest interest rates in the U.S. history. However, in sales, it is all relative to the current situation, environment and client attitude. 

Try positioning the current fixed sale in relation to the impact the current interest rate can have on your client’s funds in terms of year. One of our top sales professionals challenges his advisors to change their mindset and look at ways to impact their clients – he uses the Rule of 72. This rule, discovered by Einstein, says you can take the number 72 divided by your interest rate and you’ll have the number of years it will take to double your client’s money. It’s an easy tool to show clients how you can impact their savings. 

Let’s assume that we were selling fixed annuities in the mid-2000s, when CD rates hovered around 4 percent. Using the Rule of 72, we know it would have taken 18 years for your clients to double their money (ignoring taxes and inflation). During the same time, fixed annuities were selling for around 5 percent. That would have allowed you to shorten their money-doubling time to 14.4 years.  

In today’s rate environment, five-year CDs are paying clients around 1 percent, while a typical fixed annuity is paying around 2.25 percent.* You might not think those rates are attractive, but change your attitude by focusing on time, not rates. It would take 72 years for clients to double their money with a 1 percent CD. For clients with a fixed annuity at 2.25 percent, you reduce that cycle down to 32 years. A 40-year difference is far more significant than the four-year difference you would have made in the clients’ situation in the mid-2000s.  

Re-examine how you think about fixed annuities in the low-rate environment. Focus on the client and how fixed annuities can positively impact their financial position relative to other solutions. When you look at the impact you can deliver, your clients will appreciate the conversation.  

The Bottom Line: We need to change how we look at the fixed annuity market. We can have more impact selling a fixed annuity today than we did when an annuity earned 5 percent interest. 


*Source: as of Dec. 15, 2014.


Fixed Annuities

Crediting methods: Options for filling your clients’ buckets


A lot of advisors think of crediting methods like buckets. Most fixed indexed annuities use a one-year crediting method, so your client gets whatever’s in the bucket at the end of the year. The bucket is dumped out annually (reset) and everything starts over.

If you have a three-year crediting method, the bucket isn’t emptied until the third year. So, if the market has a weak first year (little in the bucket or leaks), but it recovers in the second and third (takes on lots of water), your client could come out ahead. They would have a lot more water in the bucket at the end of the third year than at the end of the first. 

However, let’s say the opposite happens – the market has a good first year (lots of water) but stumbles in the second and third (a few leaks in the bucket). Your client could lose out on those returns from the first year and get less than they would have with the one-year option.  

Despite the potential for smaller returns, the multi-year crediting option offers several advantages. The pricing on these annuities is usually lower, with higher caps, lower spreads and higher participation rates. 

Remember, it’s possible to have a negative return with any crediting method, and we can’t predict market performance. Some clients and advisors simply can’t wait three whole years to see their results – others wouldn’t mind waiting for more. 

The Bottom Line: If you have a client who’s a little more patient and wants more upside potential, look at longer crediting options. It may take time, but their bucket could be filled to the brim.  


Crediting returns