Tag

annuity

What To Do When Rates Are So Low

By | 2021, Money Moxie, Newsletter | No Comments

All across America, CDs are coming due at banks and credit unions, and savers are appalled at how low their new rates will be. It is just a fraction of what the CD was making before. Low-interest rates are benefiting borrowers and punishing savers. If you have excess money in savings or CDs because you wanted protection, what do you do now?

We always counsel people to keep their emergency fund and short-term money in places that are easily accessible, like savings, money markets, or short-term CDs (12 months or less). That counsel hasn’t changed.

The need to have easy access to the money supersedes the need for a return. People should still have an emergency fund of 3-6 months of living expenses. In addition, any expenditures that will happen in the next year should be in short-term savings.

If your short-term savings buckets are full and you still have excess in the bank, there are some good options.

(1) Use a money market or short-term CD and hope that rates are better in 12 months. If you do this, protection is the main goal. Accept that you will make little on your money. Interest rates may come up a little over the course of a year, but don’t expect much improvement. Still, waiting 12 months to get a better rate is probably better than locking your money up in a 5-year CD.

(2) One step up from CDs are fixed annuities. Don’t let the annuity name scare you. They are like CDs on steroids. They are great tools to help protect assets with a slightly higher interest rate than CDs. However, they have much larger penalties than CDs if you pull your money out early. Because of this, we typically recommend no more than 20% of your investments here.

(3) Another option that should avoid losses while providing some potential growth is an Equity Indexed Annuity. The largest upside for this is that your original investment is guaranteed, and you have the potential to make more interest than a CD or fixed annuity, depending on what the markets do.

The downside is you have to lock your money up for 5-10 years. There are significant penalties for early withdrawal, so we would recommend no more than 20% of your investments in these types of products.

(4) If you are willing to take some risk for potentially better returns, then you can invest conservatively. This option may lose principal but has more potential. This can be done by using conservative investments like bonds or a combination of bonds and stocks to get some growth with limited downside. We typically recommend a ratio close to 80% bonds and 20% stock.

(5) If you don’t need the money for more than 5 years, you may accept more risk by investing. While this has potential for losses, it also has potential for more growth.

In considering any of these options, remember this is only one piece of the puzzle. Always make sure your investments fit into your overall financial plan. If you have any questions about how to implement these options or are wondering which one(s) are right for you, please contact our Wealth Management consultants.

This article is not a solicitation, offer, or recommendation to buy or sell any security. Annuities are insurance products backed by the issuing company’s ability to pay. There is a potential for loss as well as gain with stocks and bonds. Past performance is no guarantee of future results.

Tags: , , , , , ,

The Congruity of the Annuity

By | 2019, Money Moxie, Newsletter | No Comments

Too often we have people come into our office after having just attended a free dinner that preceded the purchase of an annuity. “A guaranteed return with no downside risk” is what they believe they now own. That sounds great. I would purchase that too. However, it isn’t until after a lengthy conversation that they begin to understand how their annuity truly works.

An annuity can be a great financial product if it is congruent with the overall portfolio. There are times we use annuities to accomplish specific objectives and are pleased with how they perform in these situations. The problem we often see with the annuity is not the product itself, but how it is used. In other words, the ambiguity of the annuity can lead to incongruity, and the solution could require some ingenuity.

Annuities can be complicated. If you are considering an annuity, make sure you understand how it fits into your financial plan…and also its policies, fees, expenses, commissions, terms, benefits, exclusions, riders, investment options, and waiting periods. Due to their complexity, they can be easy to misuse, which can create significant financial problems.

An annuity is a contract between you and an insurance company. There are three main types of annuities: fixed, indexed, and variable. Each type has its own objectives and fits into a financial plan differently. Each type also carries its own expenses, level of risk, and earning potential. Even within their individual types, they can vary greatly depending on the insurance company that issues them.

Annuities can be expensive. The average annuity costs approximately 3% per year. It is important to understand that there are often expenses you don’t see. Unfortunately, too many salesmen do not clearly explain the costs, nor how they are applied. I have seen annuities advertised with “No Fees!” In truth, however, these same annuities carry large expenses.

It is also important to understand that annuities are illiquid. This means you can’t access most, if not all, of the money in your annuity without surrender charges for a significant period (usually 7-10 years). Annuities are long-term investment contracts and you’ll pay hefty fees if you take your money out too soon.

Again, we believe annuities are great at doing what annuities do. It just isn’t often we meet with people who have a need for them. If you are wondering whether an annuity is right for you, come and see us. We will always be upfront and honest about the cost and structure of the products we sell. If an annuity does make sense in your financial plan, we’ll help make sure you purchase the most appropriate and cost-efficient annuity for you.

Tags: , , , ,

One-Trick Financial Advisors

By | 2018, Money Moxie | No Comments

It pains me to say this of a profession that I love, but too many financial advisors are just one-trick salesmen who want to make a quick buck.

How do you spot a one-trick financial advisor? Their answer to EVERY question is either life insurance or an annuity. However, they won’t tell you that is what they are offering.

You’ll hear phrases like, “If you invest with us you can take your money out TAX-FREE in retirement.” Or “Do you want double-digit returns with NO DOWNSIDE RISK?” These “advisors” are throwing out flashy fishing lures to hook you. Here is what those phrases really mean.

The way you can take out your money “TAX-FREE in retirement” is by using an insurance policy that is either whole life or indexed universal life. You build up cash value in the policy over years and you can take a LOAN that is potentially tax-free.

However, the “advisors” usually don’t mention upfront that this is a life insurance policy. They just want to get you hooked before they share all of the details. They also rarely mention that if you take out too much, then you surrender the policy and may be subject to a large tax bill, blowing up the possibility of tax-free income.

To “avoid DOWNSIDE RISK” you use an indexed annuity–also from an insurance company. You lose some upside potential to avoid some downside risk. Of course, the insurance company takes a healthy cut and the “advisor” gets a nice paycheck too.

However, the sales person usually glosses over the fact that your money will be locked up for 7-10 years and that there are hefty penalties to get out early.

Now, it may sound like I am against insurance and annuities, which is not true. I sell them when they fit a client’s needs. I am against how one-trick financial advisors use them as “the only thing you need.” They tout their products as the hottest-thing-since-sliced-bread, but there is no one-size-fits-all product.

In reality, there are many good opportunities to use life insurance and/or annuities as ONE PART of your plan. However, doing so should be tied back to meeting your goals.

Life insurance is essential to protect your family if you pass away too soon or great if you want to leave a larger inheritance. Indexed annuities are good as a CD replacement for money that you don’t need for 7-10 years. It should typically be 20% or less of your portfolio.

I’ve seen too many good people get stuck in products that they don’t understand and many times don’t even need.

To get what you really need, use a holistic planner with a CFP® designation, like the advisors at SFS. We understand the nuances of investment products and use your goals to determine which to use.

So, if you have any questions about something you heard on the radio or from a friend, call us. We are happy to talk about all investment products–how they work and if they fit your financial goals.

 

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, and CERTIFIED FINANCIAL PLANNER™, in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Tags: , , , , , ,