Annuity Questions Answered

Posted on May 11, 2012May 11, 2012

So many new clients come to me already owning an annuity or several annuites, and they do not understand them or know what types of fees are in them. I went back through my e-mails to clients and looked through the types of questions I get about annuities and thought I would answer some of them here by explaining some of the concepts around annuities.

An annuity is a product offered through insurance companies. It is tax deferred, which means the income and earnings from the investment stay in the account and are not reported on your tax return each year. That is the good news. The bad news is that when you take the money out of the account, it is taxed at your income tax rate, which could actually be at a higher rate than the rate you would have paid if you hadn’t had your money invested in an annuity, depending on the type of annuity you have. However, the tax deferral is a nice benefit.

Fixed Annuity

With a fixed annuity you get a specific interest rate for a specific time period. Sometimes you will get a higher rate for the first year and then a lower rate for the remaining years, but you know this when you make your initial purchase.

Variable Annuity

A variable annuity offers you the opportunity to invest in mutual funds. There are annuities that invest in multiple fund families, including index fund families.

Death Benefit

This is an insurance product, so one feature, or “insurance rider” that some of these products have is something called a Death Benefit. Sometimes the Death Benefit value can be more than the Account Value. Each product’s Death Benefit works differently. Sometimes it is as simple as saying the Death Benefit is the greater of current market value or what you invest minus withdrawls. Or it might have a Step Up feature. For example each year on the anniversary of the purchase date the value is recorded and the highest annual value or current market value is the Death Benefit if you pass away.

1035 exchange

One nice benefit to this type of product is that you are allowed to move from one insurance company to another without any tax consequences. Doing this is called a 1035 exchange (that is the IRS name for the procedure of moving the money, it seems like they put code numbers in the names of all of their procedures). If you cashed the money in you would have to pay taxes on the gains. If you just move it to another annuity, then you can continue to defer the taxes.

Fees

When looking at annuities be sure to compare fees. Fees are quoted in percentages. It is extremely important to convert the percentages to actual dollars based on the amount you are investing because when you do that you can sometimes see thousands of dollars of difference in fees between two annuities that when just looking at percentages seem to be pretty similar in fee structure. I would always rather see my clients with that money in their account rather than give it to an insurance company unnecessarily.

Surrender charges

A surrender charge is a fee you pay the insurance company if you take your money out in the first few years after you have had the annuity. A seven year surrender charge schedule is very common, for example the first year surrender charge would be 6%, the second year would be 5%, and so on until the surrender charge went away. You might be surprised to know that there are annuities that do not have surrender charges! So if you have an annuity and you are in the position of having to decide what to do with it, you can 1035 exchange it to an annuity that does not have a surrender charge. Most people are not aware of that.

IRA annuity

If you have an annuity that is an IRA, you can always move it directly to an IRA, and forgo the extra layer of fees that you find in an annuity. Things to consider before doing that: 1) are there surrender charges? 2) is the death benefit greater than the current value of the account?

Learn more about your annuity by reading the statement and the prospectus. If you don’t have the prospectus, many of them can be found online by Googleing the product name. If that does not work, give the customer service department a call, they will be happy to e-mail or mail you a copy of the prospectus which has the fee and investment information.

Retirement Planning: Easy Access to Your Social Security Retirement Benefit Estimates

Posted on April 27, 2012August 24, 2018

You haven’t lost it – you didn’t get it! Your Social Security retirement benefit estimate statement has not been mailed to you because the government is trying to save money.

But you can still get the information. Just go to https://www.ssa.gov/benefits/retirement/estimator.html and click on the button in the center of the page that says Estimate Your Retirement Benefits.

You will need very basic information such as name, date of birth, social security number, mother’s maiden name, and the state in which you were born.

Your Retirement Benefit Estimate will come up; it will give you the estimated benefit amount for:

1) early retirement at age 62

2) at your Full Retirement Age, which depends upon your date of birth

3) delay starting benefits until age 70

Click on the Save/Print button at the bottom.

It is very easy to do; it took me 3 minutes and 53 seconds from start to printout in my hand.

Social Security income is one factor of many when collecting data for the retirement planning process. If your situation has some complexity due to divorce, remarriage, etc., and you are nearing retirement, I encourage you to make an appointment with the St. Louis Social Security office to get your specific retirement benefit payments.

MOST – Missouri 529 College Savings Plan Offering Matching Grants

Posted on April 13, 2012August 24, 2018

The MOST – Missouri 529 College Savings Plan recently announced that they are offering a dollar-for-dollar match up to $500 per year per account up to a $2,500 lifetime maximum for qualified accounts. This is a privately funded grant, rather than funded by Missouri taxpayers.

Qualifying for the MOST – Missouri 529 College Savings Plan Matching Grant
In order to qualify for the matching grant, you must meet certain criteria. Quoting from the website https://www.missourimost.org/ :

* Applicant must be a parent or legal guardian of the beneficiary.
* Both you and the beneficiary must be Missouri residents.
* You must be the account owner of a MOST 529 account.
* The beneficiary must be 13 or younger (when you are first approved for the matching grant).
* Your household Missouri adjusted gross income must be $74,999 or less.

You must submit an application by June 30th. You will be notified by August 31st if you receive a matching grant. The matching funds will be applied to the account January 31st. You must reapply each year.

For details and to get the application, go to https://www.missourimost.org/.

Saving for college
There is $125,000 available for the matching grant program per year over the next four years for a total of half a million dollars. With the high cost of college constantly in the news, and frequently on the minds of parents, this seems like a no brainer if you are a Missouri resident with a child under 13 and an income under $75,000.

Investing
College can be so expensive; it makes sense to create a nest egg to offset as much of that cost as you can. People are often surprised to learn how much small regular investments can grow to over time. If you save $40 a month (think of it as just $10 a week) for 18 years assuming 6% annual growth you would have $15,611 for college. Length of time invested is such a terrific boost to your investment, the longer you have the better. However – being invested is the most important factor. The key is to get started.

Peter Cottontail Makes A Lousy Financial Advisor!

Posted on April 6, 2012April 6, 2012

Oh, I know he’s beloved by millions. And I can’t wait to bite off those chocolate bunny ears he will bring me on Sunday. But let’s face it; you wouldn’t want to get your financial advice from someone who puts all his eggs in one basket! You have probably heard that old adage, but do you know what it means?

Portfolio Diversification

Have you ever been in rush hour traffic and the lane you are in is practically stopped but the other lanes around you are moving faster. So you decide to switch lanes, but as soon as you change lanes, your new lane slows down and the lane you were in finally speeds up. That’s the problem with only being able to make one choice at a time, you have to pick the right one or you lose. With investments it is even trickier because there are so many different areas in which to invest. Luckily, with investments, you do not have to choose just one. You can diversify, and put a little bit of money in each area so that you are sure to be invested in the best performing area but you do not have all of your money invested in the worst performing area either.

Asset Classes

So what are these areas of investing that we are talking about? A portfolio should be diversified, or spread out, among stocks, bonds, and cash. Whether you should invest in an asset class or how much depends on your particular situation.

Depending on your situation, your stock portion can be divided up among the following asset classes:
* Large Company, United States stocks
* Mid-Sized Company, United States stocks
* Small Sized Company, United States stocks
* Developed International stocks
* Emerging Markets stocks

Depending on your situation, your bond portion can be divided up among the following asset classes:
* Short Term Bonds
* Intermediate Term Bonds
* Long Term Bonds

Portfolio Rebalancing

You have probably seen the investment pie charts, either in your work retirement plan materials or if you have an investment account, in the materials they provided you. Have you ever wondered “Why is it that everyone keeps telling me to use these darn pie charts?” Each different color of the pie chart represents a different asset class and that illustrates the diversification of the portfolio. So once you pick your asset classes and populate them with investments you are done right? Not so fast!

Annual Portfolio Rebalancing: The most important part!

The marketing materials give you the pie charts; they just don’t tell you how to use them. And that is a shame because, when used properly, in a disciplined fashion, they can take a lot of the stress out of market downturns. Here’s how.

Picture your pie chart, let’s say that your pie chart tells you that you should have 35% in Large Company United States stocks and that area of the market has had a terrific year and you have watched that portion grow from 35% to 38% to 40% to 45% in a year’s time! “Wow”, you say, “I have finally found an investment that makes money!” So human nature tells us, “Add more money to it”. But not so fast. Haven’t we all heard that to make money we are supposed to “Sell High and Buy Low”? Well, fortunately for us, the pie chart is going to help us do that. More on that in a minute.

Picture your pie chart again, let’s say that your pie chart tells you that you should have 15% in Small Company United States stocks and the market has not been kind to small companies this year. You watched your Small Company slice of pie shrink from 15% to 12% to 10%. Your first instinct might be to sell this investment because it didn’t do as well as the others. But that is not what you should do, instead, you should “Buy Low”. Without a plan, human nature makes us do the wrong thing at the wrong time.

Now that does not mean you buy a poor quality investment, speaking to the topic of diversification again when you buy a single stock it can go out of business, when you buy an investment that represents an entire asset class, such as an S&P 500 index fund, it is highly unlikely that all 500 companies will disappear at once.

Annual rebalancing is simply the discipline to evaluate the portfolio once a year to look for changes in the quality of any of the investments and then to check to see if your asset allocation (slices of pie) have gotten out of alignment over the year. If they are more than a few percent off, make some changes. Please keep in mind there may be tax consequences, unless you can make the adjustments in retirement accounts.

What Annual Rebalancing will do for you:

1) Help you sell high (the best performing asset classes) so you can take your money off the table.

2) Help you sell high so you can protect yourself if when “the bubble bursts”. Have you ever noticed that it is often the investments that have gained the most, that end up falling the most when the market corrects?

3) Help you buy low (the underperforming asset classes), when prices are low.

4) Helps you prepare for when the underperformer rebounds.
2008 worst performing asset class was MSCI Emerging Markets -53.18%
2009 best performing asset class was MSCI Emerging Markets +79.02%

5) Removes emotion! Emotion has you selling when you should buy and buying when you should sell. But having a diversified portfolio and using a pie chart with an annual rebalancing plan will get you through every type of market cycle.