Clearing up the confusion that can surround the subject of commissions and compensation on financial services products is very important. Financial journalists routinely fail to differentiate risk-based variable annuities from guaranteed fixed annuities. This omission leads to consumer confusion and even greater retirement illiteracy. Let's look at some basic facts.
Common Misconceptions About Indexed Annuities
There is not one type of annuity. There are two types: fixed and variable. Typically, when it comes to articles relating to annuity fees and commissions, these two very different types of annuities are lumped together under the broad term "annuities". This common practice is very confusing to the reader and does not help them understand their annuity choices.
Variable annuities offer investment choices, and returns are determined based on the performance of the investment options chosen. The money placed in the variable annuity is not protected from market loss.
From a fee perspective, variable annuities can include insurance charges, investment management fees, surrender charges, and rider charges.
Fixed annuities promise that you will never lose money as long as you follow the terms you agreed to when you purchased the annuity. Fixed annuities also promise that you will at least receive a guaranteed minimum interest rate.
Fixed annuities pay a guaranteed interest rate for a set period of time. This rate reflects reductions for expenses and profits. The rate is clearly stated in the contract and is easy to compare with other fixed annuities or similar products. Fixed annuities typically have surrender charges.
A Fixed Indexed Annuity is NOT an investment product. Because an indexed annuity is not an investment, it is not designed to perform like one. Indexed annuities are not intended to earn interest that is comparable to investments during the best of bull markets. However, because an indexed annuity is an insurance product, and not an investment, your annuity will not lose value when the market goes down.
The costs of marketing and providing the insurance guarantees are paid for by the insurance company the same way all insurance product expenses are paid for, including homeowners, auto and life - under the general account of the insurance company. Most importantly, the annuity buyer's premium and earned interest (annuity value) is never charged to cover these costs. Optional income riders can be purchased and are paid for out of the annuity value.
The average commission paid on indexed annuities have continually dropped, and average around 6% (and even lower for annuities sold to older-aged purchasers). Keep in mind that this commission is paid one time, at point-of-sale only, and the agent services the contract for life.
How Insurance Agents are Paid
There are essentially three types of compensation structures in the financial services sector. The first type is a commission, paid to the agent at the time the annuity is sold, once the annuity premium has been paid. Since most annuities are purchased with a single premium, the agent is paid only one time; they are not paid again on that annuity. The insurance company pays the agent directly in this type of compensation structure. There is no need to pay continuous commission payments on an indexed annuity, as are paid out with the next type of compensation structure.
The second type of compensation is paid based on assets under management (AUM). This type of compensation structure is used by most financial professionals who manage asset portfolios or sell securities, which can both increase and decline in value. In this structure, the financial professional is paid continually, often at a rate of 1% or more annually, on all of the assets that he or she manages for the client. This type of compensation arrangement provides incentive for the financial professional to manage the assets responsibly, and minimize any losses. The compensation paid to such financial professionals is paid directly from those assets. Because the financial professional is being paid to manage the assets, they are paid continually, regardless of the asset performance.
The third type of payment structure is often referred to as fee-based. A financial consultant charges a fee to review the customer's financial objectives, design a plan to meet those objectives, and make recommendations on what products to purchase to achieve those objectives. When the plan is executed, the customer may pay asset management fees, the insurance company might pay the agent for the sale of an annuity, or both payments may be made, depending on the plan and the products purchased.
In closing, annuities are not perfect products - there is no such thing. Annuities are neither one-size-fits-all nor too good to be true. However, annuities are fantastic contractual solutions that solve specific problems. Your situation is unique to you. When making a decision to purchase an annuity, it's important to remember that you should own an annuity for what it will do (contractual guarantees), not what it might do (hypothetical returns).$
www.RayBuckner.retirevillage.com
Wednesday, April 30, 2014
Friday, April 25, 2014
The Importance of Guaranteed Income in Retirement (Why Guaranteed Income Matters)
Lifetime Income Stream Key to Retirement Happiness
Pensions that provide guaranteed income have become increasingly rare around the world, as employers have shifted from defined benefits plans to defined contribution plans. Studies in the U.S. have shown that retirees with a guaranteed income stream are more confident about their financial future.
The high costs of retirement mean that most people won't be able to rely on simply withdrawing from savings - they'll need to generate some sort of income through investments.
Far to many people believe they will be able to live in retirement by just drawing down their savings. But as people live longer and health care costs increase, this approach leaves people at risk of outliving their savings. Every withdrawal decreases the pool of assets needed to weather down markets, and rising inflation can make it necessary to draw more income than expected.
One in Three Americans Say Guaranteed Income is Top Retirement Priority
Two new TIAA-CREF surveys highlighted the troublesome facts of American retirement savings. Nearly three-quarters of Americans don't have or are unaware of lifetime income options through retirement plans, which could make it difficult for the 34% looking to retire early.
In one survey, just a third of workers who participates in a retirement plan say the primary goal is to generate guaranteed monthly income, but 72% say they either don't have or are unaware of this option. The second survey found that 21% of workers reported having not saved anything for retirement and 44% are saving 10% or less of their current income. Experts recommend saving at least 10% to 15%.
TIAA-CREF found that 44% of respondents are somewhat or very concerned they may run out of money in retirement while just 21% expect to receive income from annuities.
Retirement security is too important for wishful thinking and guesswork. All workers deserve a secure retirement, but many need help in setting realistic plans to achieve that goal. With life expectancies increasing rapidly, lifetime income options are essential to sustaining financial well-being over a lengthy retirement. A more reliable strategy is to guarantee a portion of savings as income you can't outlive to help cover essentials, like food and housing. Annuity payments create an income stream that lasts for life, even if your retirement stretches for 30 or 40 years.
Annuities sold through big insurance companies like Allianz, American Equity and ING have soared in popularity as retirees have come to understand that guaranteed lifetime income makes them more financially confident - and happier, too. In general, fixed annuities offer the best combination of certainty and cost.
So, the next time that you hear or read a financial "expert" downplay the importance of a guaranteed income stream, just remember that he/she has their best interests at heart, not yours.$
www.raybuckner.retirevillage.com
Pensions that provide guaranteed income have become increasingly rare around the world, as employers have shifted from defined benefits plans to defined contribution plans. Studies in the U.S. have shown that retirees with a guaranteed income stream are more confident about their financial future.
The high costs of retirement mean that most people won't be able to rely on simply withdrawing from savings - they'll need to generate some sort of income through investments.
Far to many people believe they will be able to live in retirement by just drawing down their savings. But as people live longer and health care costs increase, this approach leaves people at risk of outliving their savings. Every withdrawal decreases the pool of assets needed to weather down markets, and rising inflation can make it necessary to draw more income than expected.
One in Three Americans Say Guaranteed Income is Top Retirement Priority
Two new TIAA-CREF surveys highlighted the troublesome facts of American retirement savings. Nearly three-quarters of Americans don't have or are unaware of lifetime income options through retirement plans, which could make it difficult for the 34% looking to retire early.
In one survey, just a third of workers who participates in a retirement plan say the primary goal is to generate guaranteed monthly income, but 72% say they either don't have or are unaware of this option. The second survey found that 21% of workers reported having not saved anything for retirement and 44% are saving 10% or less of their current income. Experts recommend saving at least 10% to 15%.
TIAA-CREF found that 44% of respondents are somewhat or very concerned they may run out of money in retirement while just 21% expect to receive income from annuities.
Retirement security is too important for wishful thinking and guesswork. All workers deserve a secure retirement, but many need help in setting realistic plans to achieve that goal. With life expectancies increasing rapidly, lifetime income options are essential to sustaining financial well-being over a lengthy retirement. A more reliable strategy is to guarantee a portion of savings as income you can't outlive to help cover essentials, like food and housing. Annuity payments create an income stream that lasts for life, even if your retirement stretches for 30 or 40 years.
Annuities sold through big insurance companies like Allianz, American Equity and ING have soared in popularity as retirees have come to understand that guaranteed lifetime income makes them more financially confident - and happier, too. In general, fixed annuities offer the best combination of certainty and cost.
So, the next time that you hear or read a financial "expert" downplay the importance of a guaranteed income stream, just remember that he/she has their best interests at heart, not yours.$
www.raybuckner.retirevillage.com
Wednesday, April 23, 2014
The Truth About "Hidden" Annuity Fees
On a daily basis, consumers are bombarded with warnings from the financial press to beware of the "Hidden" costs and "High" fees associated with annuities. These misconceptions have undoubtedly kept some people from buying these financial products. Many annuities have come a long way in terms of lowering costs and clearing up confusion among shoppers. Also, stricter suitability standards mandated by State Insurance Commissioners have also made the annuity shopping experience a more transparent one.
While determining if an annuity is the right financial vehicle to help you solve for your specific needs, shoppers could benefit from knowing the rules of the road. By asking the right questions up front, and by having a better understanding of the features you might be paying for, you should be able to get a much clearer sense of whether an annuity may fit your needs.
Start by following some basic guidelines for evaluating the potential costs of annuities. Then, dig a little deeper into the details of any specific fees and determine whether it's worth paying for added features that may appeal to you.
Understanding the Big Picture
There are different types of fees that are specific to certain types of annuities. You should consider some general guidelines when contemplating annuity costs. For example:
Know your needs. The fees you pay for annuity features can reduce your overall return, so opt only for those features that you will use. If your situation and planning needs warrant these added features, then make sure you try to pay a reasonable price for a product with those features. For example, if maximizing money left to heirs is an important consideration, may be worth the added cost for a feature that provides more for heirs after you die.
Understand the product. Some annuities can be complex products to understand. When you're considering a purchase, it's important to understand how the proposed annuity works, what its benefits may be, and, perhaps most importantly, what role it can help play in your overall financial plan. Be sure to carefully read the marketing materials and prospectus (if applicable). If you don't understand what you're paying for, make sure to ask questions and receive full disclosure before making a decision.
Focus on value, including the price. It's important to evaluate any annuity's costs versus the guarantees it promises. Not all guarantees are created equal. Some guarantees involve cumbersome restrictions that may diminish their appeal, regardless of price. On the other hand, keep in mind that when you buy an annuity, part of what you are paying for is the creditworthiness of the insurance company standing behind those guarantees.
Get Familiar with Fee Types
While you don't have to become an expert on all annuity fees, knowing the most common types will help you evaluate products and ask the right questions. Generally, there are four typed of annuity fees:
Insurance charges. Also known as mortality and expense (M&E) fees and administrative fees, these charges pay for insurance guarantees that are automatically included in the annuity, and the selling and administrative expenses of the contract.
Surrender charges. Most insurance companies limit the amount of withdrawals one can take during the initial years of a contract, and place a surrender charge on any withdrawals above a preset limit. Be careful, as surrender charges can be significant and be imposed for an extended time period. Be sure to ask for details on any surrender charges to help ensure that you have enough flexibility.
Investment management fees. These are assessed depending on the investment options within variable annuities, and are similar to management fees on mutual funds. Check the annuity prospectus for any underlying funds to learn how much you might pay for investment management fees.
Rider charges. Riders are optional guarantees available in some annuities. There is typically an additional cost to purchase a rider in an annuity.
Fees Vary Among Annuities
It is really misleading to lump all annuities together when the pundits sound the alarm about "Hidden" and "High" fees. Different types of annuities - whether variable or fixed,- income or deferred - charge different types of fees (see the chart below). Generally, variable annuities charge explicit fees, while fixed annuities tend to embed their costs in the interest rate (like CDs) or income payout amount.
Types of Annuities and Their Key Expense Components
Getting Good Value
There are a few other important considerations before making an annuity purchase.
Consider the totality of all costs. Rather than focusing on any single fee component, it's wise to look at all the associated costs together.
Buy from someone reputable. Whether you're working through an advisor or directly through a distributor, get the facts on the firm's financial strength and business practices. What is the company's rating with third-party ratings agencies? Is it known for fair claims-paying practices? How reliable is its customer service? Dealing with a company that's fair and financially sound may help save you from financial headaches in the long run.
Educate yourself. Knowledge is power. The marketing materials and prospectus (if applicable) can be invaluable in determining whether the benefits offered by the product are worth the associated costs. But, if it's not clearly spelled out, make sure to ask your financial advisor about any potential costs that might not be apparent.
Recent economic challenges have made it more important than ever to do your homework comparison shop when it comes to major purchases. Buying an annuity should be no different. It's easier to understand what you're buying if you do your homework. For more information, visit our website.$
www.RayBuckner.retirevillage.com
Tuesday, April 22, 2014
Tips for Buying a MYGA Annuity
A Fixed Deferred MYGA ("Multiyear") Annuity is a tax-favored wealth accumulation contract issued by an insurance company. Its main advantage over a mutual fund or bank Certificate of Deposit is that earnings grow in your account on a tax-deferred basis. This means you pay no income taxes until you withdraw money from the account. Because of this, the value of your account is able to increase more quickly since the entire amount of each year's earnings works to create new earnings. You can fund a deferred annuity with personal savings ("after-tax" or "non-qualified" monies) or with a "rollover" from a qualified account such as an IRA or a lump sum distribution from a qualified pension plan. In this case, there is no tax advantage offered by the deferred annuity over the IRA, since monies in an IRA already grow tax-free.
In addition to compounded tax-deferred earnings, annuities may also offer a high degree of safety. Your premium and earnings are guaranteed by the claims-paying ability of the issuing insurance company. Insurance companies are required by law to set aside assets (known as "reserves") in order to cover the claims of their policyholders. Companies are also regularly monitored by ratings agencies such as A.M. Best, Standard and Poor's, and Moody's. By reviewing the ratings an insurance company receives from the rating agencies you may determine if it is operating on a sound financial footing.
The most common form of MYGA is a Single Premium ("SP") annuity. "SPs" accept a one-time-only deposit and accrue interest until the contract is surrendered or annuitized. A Flexible Premium ("FP") MYGA contract is one which accepts multiple deposits.
Virtually all MYGAs offer the contract holder a high degree of control over his/her investment. At the outset, there is a "right to examine" or "free look" period (10-20 days in most states) which allows you to return the policy for a full refund for any reason. Afterwards, you can cancel the contract at any time, although doing so will likely cause you to incur a surrender charge and also a market-value adjustment (a plus or minus "MVA") charge.
MYGA Interest Rates
The Initial Interest Rate and the length of time for which this rate is guaranteed (called the "Rate Guarantee Period or "RGP") are two of the most important features of a MYG annuity. Most insurance companies credit interest daily, allowing earnings to compound on a basis known as "day of deposit to day of withdrawal."
Some insurance companies offer "bonus" interest rates, which can tack on as much as 5% to the current first-year's interest rate, boosting the yield to 9% or higher. As alluring as these bonus rates may seem, they can also be confusing. Some companies only pay the bonus if you eventually annuitize with that company and take your money in monthly installments over a period of at least 10 years. If you want to withdraw your money in a lump sum, the insurer may retroactively subtract the bonus as well as the interest attributable to that bonus.
In a MYGA annuity, interest is credited at a declared rate for the full RGP. Some policies credit the same interest rate for the duration of the RGP. Other policies credit a bonus rate in the first year of the RGP and a lower rate for the following years. In either case, however, there is no uncertainty about the interest rate that your account will earn.
Expenses
Fixed annuities have no upfront sales charges. It would also be unusual for fixed annuities to charge maintenance fees. Because of this, 100% of your deposit - without any deductions - goes directly to work for you in your account.
Penalty-free Withdrawals and Surrender Fees
Almost all insurance companies let you withdraw interest as it is earned without having to pay a surrender penalty. Many also allow free withdrawals of up to 10% of your contract value (principal plus accumulated earnings) each year. If you want to withdraw more than 10% of your contract value, you are likely to be charged an Early Surrender Penalty. This is assessed as a percentage of the amount that exceeds the Penalty-Free Withdrawal amount. These charges are not the same as the 10% early withdrawal penalty that the IRS imposes when you take funds out of an Single Premium Deferred Annuity (SPDA) before you reach age 59 1/2.
Shopping for the Best Deferred Annuity
It is best to work with an agent that has the ability to comparison shop and find the best annuity that meets your particular needs. You can request a free quote on our website.$
www.RayBuckner.retirevillage.com
In addition to compounded tax-deferred earnings, annuities may also offer a high degree of safety. Your premium and earnings are guaranteed by the claims-paying ability of the issuing insurance company. Insurance companies are required by law to set aside assets (known as "reserves") in order to cover the claims of their policyholders. Companies are also regularly monitored by ratings agencies such as A.M. Best, Standard and Poor's, and Moody's. By reviewing the ratings an insurance company receives from the rating agencies you may determine if it is operating on a sound financial footing.
The most common form of MYGA is a Single Premium ("SP") annuity. "SPs" accept a one-time-only deposit and accrue interest until the contract is surrendered or annuitized. A Flexible Premium ("FP") MYGA contract is one which accepts multiple deposits.
Virtually all MYGAs offer the contract holder a high degree of control over his/her investment. At the outset, there is a "right to examine" or "free look" period (10-20 days in most states) which allows you to return the policy for a full refund for any reason. Afterwards, you can cancel the contract at any time, although doing so will likely cause you to incur a surrender charge and also a market-value adjustment (a plus or minus "MVA") charge.
MYGA Interest Rates
The Initial Interest Rate and the length of time for which this rate is guaranteed (called the "Rate Guarantee Period or "RGP") are two of the most important features of a MYG annuity. Most insurance companies credit interest daily, allowing earnings to compound on a basis known as "day of deposit to day of withdrawal."
Some insurance companies offer "bonus" interest rates, which can tack on as much as 5% to the current first-year's interest rate, boosting the yield to 9% or higher. As alluring as these bonus rates may seem, they can also be confusing. Some companies only pay the bonus if you eventually annuitize with that company and take your money in monthly installments over a period of at least 10 years. If you want to withdraw your money in a lump sum, the insurer may retroactively subtract the bonus as well as the interest attributable to that bonus.
In a MYGA annuity, interest is credited at a declared rate for the full RGP. Some policies credit the same interest rate for the duration of the RGP. Other policies credit a bonus rate in the first year of the RGP and a lower rate for the following years. In either case, however, there is no uncertainty about the interest rate that your account will earn.
Expenses
Fixed annuities have no upfront sales charges. It would also be unusual for fixed annuities to charge maintenance fees. Because of this, 100% of your deposit - without any deductions - goes directly to work for you in your account.
Penalty-free Withdrawals and Surrender Fees
Almost all insurance companies let you withdraw interest as it is earned without having to pay a surrender penalty. Many also allow free withdrawals of up to 10% of your contract value (principal plus accumulated earnings) each year. If you want to withdraw more than 10% of your contract value, you are likely to be charged an Early Surrender Penalty. This is assessed as a percentage of the amount that exceeds the Penalty-Free Withdrawal amount. These charges are not the same as the 10% early withdrawal penalty that the IRS imposes when you take funds out of an Single Premium Deferred Annuity (SPDA) before you reach age 59 1/2.
Shopping for the Best Deferred Annuity
It is best to work with an agent that has the ability to comparison shop and find the best annuity that meets your particular needs. You can request a free quote on our website.$
www.RayBuckner.retirevillage.com
Sunday, April 6, 2014
Inflation During Retirement (Makes Me Want To Holler)
"Inflation, no chance
To increase, finance,
Bills pile up, sky high
This ain't livin', no, this ain't livin'"
Marvin Gaye, Inner City Blues
Inflation. You can't afford to ignore it. People retiring today can expect to live another 20 years, according to Social Security figures. But, since roughly one in five of us will live past age 90, we have to account for 30 more years when making our financial plans.
Once you're retired, you live on a fixed income. There are no more raises, bonuses, or employer contributions to your retirement plan. Even if you can afford your lifestyle today, you have to worry about what's going to happen over the next 30 years as prices inevitably rise, some years more than others. Will Social Security keep up? Will your investments produce enough income?
Remember hearing about the era when grandma paid 20 cents to see a movie? Think back to your own childhood. How much did an afternoon at the movies cost when you were 10? A lot less than it does now! That's inflation.
The reason this matters to you and your retirement savings is that inflation can eat away at your money from two directions:
To increase, finance,
Bills pile up, sky high
This ain't livin', no, this ain't livin'"
Marvin Gaye, Inner City Blues
Inflation. You can't afford to ignore it. People retiring today can expect to live another 20 years, according to Social Security figures. But, since roughly one in five of us will live past age 90, we have to account for 30 more years when making our financial plans.
Once you're retired, you live on a fixed income. There are no more raises, bonuses, or employer contributions to your retirement plan. Even if you can afford your lifestyle today, you have to worry about what's going to happen over the next 30 years as prices inevitably rise, some years more than others. Will Social Security keep up? Will your investments produce enough income?
Remember hearing about the era when grandma paid 20 cents to see a movie? Think back to your own childhood. How much did an afternoon at the movies cost when you were 10? A lot less than it does now! That's inflation.
The reason this matters to you and your retirement savings is that inflation can eat away at your money from two directions:
- Inflation erodes savings. Inflation doesn't just literally reduce the number of dollars you possess, but it does reduce your purchasing power. The interest rate your savings account or CD is paying is likely well below the rate of inflation, which means that the cost of goods and services is climbing much faster than the value of each dollar in that savings account or CD. For example, assume that your annual budget for 2014 requires a net total income of $50,000. You can expect that purchasing exactly the same goods and services in 2019 will cost more with inflation. That's why many employers periodically offer cost-of-living raises to help you keep up. Unfortunately, your savings account does not get a comparable raise. On average, each dollar you own loses purchasing power and therefore value every year.
- Inflation depletes budgets. During retirement, when you're no longer a full-time wage earner, budgeting becomes especially important. To help increase the likelihood that your savings will last through retirement, you'll have to establish a budget. The problem is that $50,000 per year in 2019 is expected to buy fewer goods and services than it will in 2014. And in 2024, $50,000 will probably buy even fewer goods and services than it did in 2018. You get the picture. You can't plan to spend the same amount of money year after year and continue to meet your needs in exactly the same way. So, as a retiree, you'll need to give your budget a cost-of-living adjustment every couple of years in order to continue buying the same goods and services.
You'll need to be especially aware of inflation in a few areas:
Medical costs are on the rise, and they're significantly outpacing CPI inflation averages. In retirement, you're likely to need more medical care than you do at a younger age, so carefully consider medical inflation as you plan your retirement.
Food costs can be volatile. For example, dairy, beef and grains have seen pricing spikes in recent years due to factors such as drought, livestock illnesses and changing farming practices. Expect more of the same in the future.
Fuel costs, like the price of gas, tend to affect most goods since shipping prices increase with fuel prices. As shipping costs rise, so do costs for goods that are shipped. And if you plan to travel in retirement, you'll also feel the impact of fuel inflation on how much it will cost you to fly or drive.
What can you do to fight inflation during retirement?
First, as you calculate your retirement needs, you must incorporate inflation into your planning. You can find a variety of online calculators to help you do this, or else consult a financial professional.
Second, a portion of your retirement portfolio should remain invested even during retirement. Bonds, CDs, money market funds, and bank savings accounts alone, which are generally considered relatively safe places to put your money, may not provide enough growth to outpace inflation. A portfolio consisting of stocks, bonds and annuities can greatly enhance your chances of meeting your financial goals during retirement. For more information and online calculators, visit my website.$
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