Trap or boon: annuities require fiduciary analysis

Annuities became a popular refuge after the market crash of 2008. Investors, promised a guaranteed return, flocked to the annuity market as insurance companies ramped up their sales efforts. While a carefully evaluated annuity can play an important role in a well-balanced retirement plan, some annuities can work against an investor’s retirement goals and offer little of the liquidity necessary for successful active money management. We have seen some instances in which frightened investors fled to annuities and found themselves trapped by long surrender periods and guarantees they didn’t understand. Recently, a new client asked us to review the five annuities she owned. They ranged from a simple, fixed product, to indexed annuities with income guarantees. The annuities left her unable to access her money until between 2015, for the annuity with the shortest surrender period, to 2021, for the annuity with the longest. One of the more alluring qualities of annuities is the guaranteed growth, but those guarantees can be deceiving. For instance, in our new client’s case, she could never take a lump sum withdrawal from the growth account, which is the only account with the 8% guaranteed growth rate. The account values of annuities grow according to the indices into which it is allocated. Extra riders like lifetime income features cost extra money up to and exceeding 90 basis points. The only way our new client could access her 8% growth was to turn on a fixed lifetime income payment stream, which is age banded. This left her with the following options: Access it from age 60-69 and take 5% of the value annually for life Access at age 70-79 and take 6% Access from age 80 and up, and receive 7%. This feature is designed for investors with a larger portfolio who can justify putting a significant amount into something with these account limitations and can wait 10 years to get money out without penalty. We’re working hard… | Read More »

Active money management means taking advantage of market volatility

At a financial planning workshop we recently hosted at MomCom Austin, we fielded the following question: with the stock market so unpredictable, should I be putting some of my money in cash? The easy answer is yes, you should always have some money in cash. We advocate having six times your paycheck, or three month’s salary, in a money market account for easy access. This is your emergency fund for unexpected expenses like car repairs and medical emergencies. Keep this account replenished. But that’s just the first level of the “should I move money to cash” conversation. We are strong believers in transparency in your investments and the continuous ability to move your money to cash positions when the market calls for it. This is the essence of active money management and it allows us to avoid being fearful of market volatility. This is important because we know that market downturns can yield attractive buying opportunities. The key is to stay poised for investment opportunities when they arise. Your age and your risk tolerance level will determine how much risk you should be taking in the equity market. In general, the closer you are to retirement, the less risk you should be taking. As an alternative to cash, we look at individual corporate bonds with less than two years to maturity. The yield to maturity rate plays a key factor in our decision to purchase these bonds. We steer clear of bond funds and we avoid long-term bonds as well because we don’t like to lock ourselves into a rate for more than two years Overall, though, we would caution against pure volatility being the deciding factor in moving your investments from the stock market to cash. By definition, volatility means the stock market is moving up as well as down and active money management allows investors to take advantage of that volatility. These conditions create opportunities for both purchases… | Read More »