If You’ve Heard Annuities Are Bad Investments, You’ve Heard Right (What?!)

If you've heard that annuities are bad investments, you've heard right

Annuity expert Stan Haithcock says that there are only four reasons to purchase an annuity. He came up with a clever acronym to help you remember those reasons in case some shady annuity salesperson stops by your house.

According to Stan, you should only buy an annuity if you need to solve one of the following issues.

  • P = Principal Protection – Do you want to lose the money you put into a product or would you rather keep it safe?
  • I = Income for Life – Do you care if you have a stream of guaranteed income that you can’t outlive, or do you prefer surprises every month?
  • L = Legacy – Is leaving your kids something when you die important to you, or do you think it’s better if they pull themselves up by their own bootstraps?
  • L = Long Term Care – Do you worry about your money getting eaten up by nursing home costs or are you so amazingly fit and genetically superior that you will never need long term or confinement care?

Did you notice that nowhere on that list was a question that said, “Do you want a red-hot investment vehicle with the potential to rock your portfolio?”

That’s because I agree with Stan, annuities are not investments. At least the types of annuities I most often recommend to my clients are not investments. Nor should they be marketed as such.

For retirees and those about to retire, an annuity has one primary purpose.  That purpose is to convert a portion of your idle cash into a contractually-guaranteed, tax-advantaged income stream.

In a previous blog post, I wrote about the old-fashioned “three-legged stool” approach to retirement that is faltering in our unstable economic environment.

As you might recall, the stool’s three legs are personal savings, pension, and Social Security. Devouring those legs to the point of fragility are the money-eating termites of inflation, ineffective qualified plans, taxes, and useless politicians. Having an annuity in the mix can help you slow down the erosion and keep your stool from tipping over.

An annuity is the only contractually-guaranteed way to grow your wealth with less risk than you incur using more speculative vehicles.

As Stan says, you choose an annuity for what it WILL do, not what it MIGHT do. When you invest in other kinds of products, you are willing to assume more risk because the investment MIGHT pay off. There are no guarantees and zero predictability. That makes planning for retirement challenging and stressful.

When you choose the right kind of annuity to meet your goals and objectives, you will get safe, sane returns, and reliable income you can never outlive.  I can help you discover more about annuities, life insurance, and other fun and useful products to grow and protect your wealth.

In other words, if you want a non-sleazy, credible, dashing young financial professional on your money dream team, contact me. I will help you design your perfect post-work life and help you clarify your goals, risk tolerance, and attitudes toward money.

Five Things Most People Don’t Understand About FDIC Deposit Insurance

Five things most people don’t understand about FDIC deposit insurance

Some retirees object to moving their cash from a low-interest-paying bank account or CD to another type of “safe money” instrument because there is no FDIC insurance on those financial vehicles. 

This common fear stems, in part, from the fact that many younger retirees had parents who grew up during the Great Depression and have told them horror stories about bank failures. Nearly 9,000 banks failed between the late 1920s and 1930s, and Americans lost deposits equivalent to $140 BILLION in today’s dollars.

Since its creation by Congress in 1933 and through its deposit insurance coverage created a year later, the Federal Deposit Insurance Corporation (FDIC) has gained Americans’ confidence and trust. Since that time, no depositor has lost a penny due to a bank failure.

Unfortunately, some retirees continue to cling to a handful of myths about the FDIC and deposit insurance that can mislead them into overstating its’ ability to protect all their savings and investments.

Here are a few of the most common myths about the FDIC and its deposit insurance.

1. The FDIC will keep your money safe from fraud.

Typically, if your bank account has been compromised through unapproved access, fraud, or theft, you are only responsible for the first $50 of unauthorized funds. But this is due to Federal regulations and NOT FDIC insurance.

2. If I keep all of my accounts in the bank, the FDIC protects me.

Some people refuse to move their retirement money from their bank’s investment office because they believe that FDIC insurance covers every dollar they have in the bank, regardless of the type of accounts. However, FDIC insurance only covers specific kinds of accounts, like checking and savings. It does not protect any investments or insurance purchased through the bank.

3. FDIC insurance covers mutual funds.

Many people favor investing in mutual funds because they promise higher rates of returns than things such as Certificates of Deposit. They often purchase these from a bank, thinking that the FDIC automatically protects them. However, funds invested in mutual funds are NOT deposits. The FDIC or other federal agencies do not insure them.

4. Treasury securities are protected by FDIC insurance.

Treasury securities, including T-bills, are not covered by deposit insurance. Redemption proceeds, interest, and principal from treasury securities are covered, however, when deposited into your bank account, up to the $250,000 limit.

5. Safe deposit boxes are insured by the FDIC.

FDIC deposit insurance offers no protection for money, and valuables kept in a safe deposit box. 

As you can see, FDIC insurance covers actual bank deposits and no other products a bank may offer its’ customers.

Other types of financial vehicles, such as annuities and life insurance, have their own unique protection protocols in place if the company fails. At the same time, the Securities Investor Protection Corporation (SIPC) provides coverage for securities investors.

If you are hesitant to move your money out of underperforming bank accounts because you fear losing FIDC protection, I suggest that you do a bit of research.

Learn more about the FDIC and SIPC and the different ways annuity and insurance companies work to protect their clients.

While bank and insurance company failures do happen, a tighter regulatory environment, along with a more educated consumer base, has made those failures a lot less likely.

8 Pieces of Financial “Wisdom” Which Have Gone the Way of VHS Tapes, Leisure Suits, and Parachute Pants

8 Pieces of Financial Wisdom

“Times are changing, society’s values are shifting, and the financial system is evolving. Are you still following 20th-century advice?” – Andrew Winnett 

A rapidly-changing economy and constantly morphing financial systems have rendered much of the sacred canon of money advice incomplete, obsolete, or just plain wrong.

So, whether you are getting your financial wisdom from your parents, colleagues, or television pundits, you need to avoid these tarnished pearls of wisdom. Economic survival post-COVID-19 requires all of us to take a different approach to our finances, especially if we plan on ever being able to retire.

Here are a few nuggets of financial wisdom that are long past their expiration date. Unfortunately, these stinky nuggets continue to spread through the population like bad cat memes and ice bucket challenge videos. Check these out before you make an embarrassing and potentially costly money mistake.

1. You should buy term insurance and invest the rest.

Buying term and investing the difference, also known as BTID, is a philosophy developed by insurance advisor A.L. Williams. It is regularly spouted by financial entertainers such as Suze Orman and Dave Ramsey. Because tons of books already exist on this subject, let’s not get bogged down in details in this short article. 

Succinctly stated, the problem with BTID is that you have to invest the difference for it to work. Most folks don’t, especially in perilous financial times. When their premiums start to go up, insureds tend to let their policies lapse and spend the difference. It’s a flaw in human nature that all the slick BTID marketing has failed to overcome.

Insurance does have a place in your financial health plan. But that place is not what you may think. Do yourself a favor and make an appointment with a financial advisor conversant in how smart people use life insurance to grow and protect wealth. Hint: They rarely buy term and invest the difference.

2. Find a great company and work there until you retire.

Back in the good old days (the 70s and 80s,) Dad donned his lime green leisure suit and headed off to work at ABC Widget Company. After 25 long years of ingratiating himself to his bosses and never missing a single sales meeting, Dad retired with a pension and a gold watch. He probably still believes that you will too.

Bureau of Labor Statistics reports make it apparent that a scenario of starting and ending your career with a single employer is highly unlikely. The Bureau says the average American changes jobs ten to fifteen times in their lifetime and spends under five years in every position. 

This isn’t necessarily a bad thing, though. Because if you transition strategically, improving your salary and benefits each time, you have a chance to improve your financial situation dramatically. Staying at one job might give you a sense of stability and security, but the trade-off is less money than you might have earned elsewhere. Toss the gold watch and go where you are valued.

3. Your home is your biggest ASSET.

No, Virginia, it’s not. When you have something that puts money IN your pocket, it’s an asset. When you have something that takes money OUT of your pocket, it’s a LIABILITY

Unless you rent your home out, it won’t be putting money into your bank account. Instead, your house will probably be a black hole that vacuums up every penny of disposable income you have. You’ll be paying for things such as roofs, HVAC, appliances, landscaping, and plumbing, to name just a few. Homes can be more expensive than you imagine.

Think long and hard before deciding to purchase one. If you’d like to own real estate, consider investing in a duplex or small apartment complex. Doing so will allow you to live in one unit and rent the rest to create cash flow for investing.

4. The correct asset allocation can be determined using your age

Your parents, siblings, or co-workers might have told you that you should invest your age (in percentages) in bonds and put the rest in stocks. The “60-40” rule means that if you are 40, you should have 40% in bonds and 60% in stocks. But, in an age of artificially low interest rates, bonds are no longer the profitable investment they used to be. Even government-backed bonds are sitting at deficient levels. You can and should do better.

5. A student loan is "good debt."

In the 1970s, only around 10% of the population had college degrees. Spending time and money to get a degree made sense because it helped set you apart from all those other job candidates. A degree demonstrated initiative and drive to prospective employers.

These days, thanks to a tsunami of student loan money, nearly everyone has a degree. From the Uber driver to the local barista to that guy walking around with a sign that says “Zombies Are Coming, ” we are now a population for whom degrees are a given.

In 2019, over 35% of Americans had at least a 2-year college degree. Yet, it is now evident that college is no longer the golden ticket to success. 

The Economic Policy Institute identified this shift as far back as 2015 when it observed that “…
Workers with a four-year college degree saw their hourly wages fall 1.3 percent from 2013 to 2014, while those with an advanced degree saw an hourly wage decline of 2.2 percent.”

(https://www.epi.org/publication/even-the-most-educated-workers-have-declining-wages/)

Our current higher education is a bloated, inefficient, and overpriced relic of bygone days. Having a student loan hanging over our heads has not proven to be synonymous with financial success.

6.You should always pay off your mortgage early if possible.

The keyword here is “always.”

You see, paying off a mortgage early, like many financial decisions, depends on your goals, risk tolerance, and current financial situation rather than some set-in-concrete rule.

Intuitively, getting out from under a heavy debt load seems like a great idea. But what if you have a low interest rate on your mortgage? What if you had a mortgage that was, say, 2.7%?

Would the extra dollars you use to pay off that mortgage early be better used to invest in an alternative investment where you might be able to earn twice as much? It’s something to think about.

The opposite is also true.

If your mortgage is locked into an uncomfortably high rate, paying it off early might make sense. Either way, you need to seek an expert’s advice before doing something you might later regret.

7. You should have an emergency fund to last 12 months.

You hear this a lot, especially during the pandemic. Overall, the concept is sound. You DO need an emergency fund. However, if you are financially stable with little debt, six months of emergency savings should be sufficient. Remember, unless you are following specific cash management strategies that allow your money to work more efficiently, emergency dollars become lazy money. That is, they sit around in low-interest money market accounts or CDs and do nothing. 

Once used, you lose these dollars, along with the opportunity for them to work harder for you. The current financial crisis has made it clear that every dollar you have needs to do the work of three or four.

8. Retirement should be built on a three-legged stool

Personal savings, pensions, and social security are the legs of a formula for retirement bliss known as the “three-legged stool.” The 21st Century has rendered this strategy useless, however.

Less than 15% of Americans have or will receive pensions (defined contribution plans) when they retire. That’s because employers wanting to shift the burdens and costs of retirement from the company to the employees, eagerly embraced “qualified plans” like 401ks and IRAs.

Making fee-laden, choice-restricted plans work to their advantage is entirely up to the employee. To date, the results of this experiment in the transfer of responsibility have been less than spectacular.

A 2019 survey by Gobankingrates.com revealed that almost 65% of Americans will not have enough money when they are ready to retire. This includes those with 401k and IRA money.

To sum it up, times are changing, perhaps even faster than most of us are willing to admit. It makes sense to filter the advice we use to create better financial outcomes through an entirely new set of lenses. It also makes sense to build a team of trustworthy, competent advisors who have the training, tools, and skillsets to help you discover the truth about money.

Coronavirus Has Exposed Retirement Financial Land Mines

If you’re like most people, you are somewhat, if not entirely, burned out on the whole coronavirus situation.
It’s understandable given the tsunami of confusing information directed at us over the past few weeks.

However, I advise you not to allow burnout to keep you from taking a closer look at how your finances fared during the pandemic. You need to look for weaknesses in your current money strategy and discover ways to eliminate those weak links. If you’re like most people, isolation, self-quarantine, and time off work gave you time to think about what matters most to you. You may have discovered how important it is to have contingency plans in place when disasters and economic downturns arrive.

You probably also concluded that having reliable streams of income is essential, whether it’s to keep you afloat during a pandemic or to ensure that you have a retirement that is less stressful and more enjoyable. While we don’t know precisely what the world after COVID-19 will look like, most experts agree that it will be radically different in several key ways. If you want to survive financially, with your retirement blueprint intact, then you need to know what experts are saying about the new normal.

Researchers recently surveyed a cross-section of working Americans to discover how the pandemic has altered their financial situations and shifted their areas of concern.

According to the survey, the use of savings as a backstop against the economic hardships created by job loss was a common occurrence. 63% of respondents surveyed worried about having to dip into this pot of cash and eventually running out of money later. Directly related to that loss of savings is, of course, the real fear of not having enough money in retirement. 30% of respondents also indicated that their stimulus checks, designed to help reboot the economy, are either being saved or used for necessary living expenses such as food. Few people are using them to buy consumer goods beyond those required for survival.

This means that the $1,200 stimulus checks received by most Americans will have a negligible impact on the economy as a whole. It seems as if we won’t be able to cure the effects of the coming recession by throwing money at it as we have done during past financial crises. That will make for a long road to full recovery.

So, what HAS the coronavirus taught us as far financial lessons are concerned?

Well, for one thing, it has hammered home the need to be prepared for health issues that will arise now and in the future. Coronavirus shone a spotlight on our fragmented and weak medical system and the high costs associated with long term illnesses. More people than ever have started asking questions about how they can protect their retirement cash and assets against the economic devastation of chronic or life-threatening diseases, accidents, or injuries.

Another thing, as I mentioned previously, is that many people have begun to understand how vital income planning is. People who plan to retire or downsize their lives within the next five years MUST have streams of income in place.

Often, the advisor who helped a person during the accumulation phase of their financial life is not qualified to set up this kind of income plan. The reason for this is that a typical financial advisor doesn’t have enough specialized knowledge about safe money products. Such knowledge is necessary for helping clients make the right choices to create lifetime income. When you are putting together an income plan, be sure to seek the advice of a qualified safe money expert who understands the right way to use products such as annuities, life insurance, and other risk-averse products.

Finally, coronavirus has revealed the debt monster.

People who have been laid off or have lost their businesses are learning some painful lessons about how much despair and anxiety debt can create. Many of us now question our decisions to purchase new cars, homes, and high-ticket items. We may wonder if the loan taken out for Jr’s college was worth the problems we are now experiencing.

I predict that in the future, people will be a lot more careful about how they spend their money and will better understand the concepts of compounding, inflation, and lost opportunity costs. While it may take some time and will undoubtedly be painful at first, I believe that our nation will be able to move past the pandemic and achieve some measure of economic recovery. It could take years, though, so we need to prepare mentally, financially, and physically for what lies ahead.

We will want to look at our finances in an entirely different way, realizing how much thoughtful, data-driven planning can help us overcome setbacks. We will also need to reformulate our current income and retirement plans to include new realities brought about by the pandemic.
It will not be impossible to accumulate wealth or retire after coronavirus.

Still, it will require us to take a fresh approach to how we view finances and to partner with advisors who have our best interests in mind.

Has The Pandemic Made You Long For Safety?

Has the pandemic made you long for safety? Why annuities are a perfect choice during and after COVID-19.

“Most investors consider the consistent rise in share price as a proxy for safety. Often not true!” ― A K Asnani

Writing this in a pandemic-impacted world, I realize that many of us are at a loss as to what is happening right now in the markets. If you’re like most people, you’ve probably looked at your statements and wondered if there is any good way to protect what remains of your wealth. After experiencing the recent wild mood swings on Wall Street, you want and need to build a fortress around your savings.

Perhaps in the past, you felt compelled to chase after returns in order to create a lifetime income because interest rates were so low. You felt pressured to catch up and didn’t want to run out of money in retirement or have to work longer than you expected.
However, the price for getting those higher returns was seeing your life savings beaten and battered by the market. Once the dust settled and you did the math, it’s likely you didn’t come out ahead at all.

Looking forward to life after COVID-19, you may be seeking something that can give you some growth without loss of your principle, especially if you’re over 50. That’s when a fixed index annuity can become the cornerstone of your plan to create a more secure and worry-free retirement.

Annuities offer some solace to those worried about market volatility. They are expressly designed with the idea of providing better returns than other safe-money vehicles such as CDs and savings accounts.

It’s likely that your financial advisor, colleague, or family member tried to talk you out of annuities, saying they were too conservative and that you’d lose out when Wall Street rallied. Maybe that was somewhat true back in your 20’s and 30’s. But as you near retirement age, it’s critical to avoid losing even a penny of the money it took you years to accumulate. Annuities are the only products available that offer guarantees that you won’t lose your principle.

Simply defined, an annuity is a contract between you and an insurance company that typically blends elements of both investing and insurance. You can either contribute a lump sum, such as a roll-over from a qualified plan, inheritance, or windfall, or you can make payments over time. Your earnings grow tax-deferred.

Here are a few reasons why I believe that if you are 50 or older, you should consider having an annuity as part of your overall retirement strategy.

1. Annuities are NOT difficult to understand and manage. Many financial planners counsel against annuities because they claim they are too complex for people to understand. However, with the help of an expert who is well-versed in the many features of modern annuity products, you will be able to find the annuity that best suits your goals. Your annuity specialist will help you discover exactly what to expect from your annuity and how to get the most out of it. He or she will sit down with you, explain the features of your contract, and show you how it fits in with the rest of your retirement blueprint. Annuities are, in my opinion, far easier to understand than the majority of other financial vehicles in the marketplace.

2. You DO have access to your money. Many people mistakenly believe than having an annuity is like putting your money in a safe and then putting that safe into a locked storage shed and throwing the whole thing into the deepest part of the ocean. In other words, they’ve been misled into thinking that buying an annuity means your money is locked up tight and you can never touch it. It’s a myth that many advisors who don’t specialize in safe money continue to parrot. What most people don’t realize is that nearly every annuity available allows you to withdraw a portion (usually up to 10%) of the amount you put in or earnings, whichever is greatest, during the first few years of the contract, or “surrender period.” While there may be some tax implications for doing so, there is no penalty. Your advisor will counsel you on the tax implications should you ever need access to those funds in case of an emergency. While it is wise to avoid taking out money from your annuity if, at all possible, it is comforting to know that you have that option. Some annuities also provide for access if you or a loved one needs long-term care or is terminally ill. Ask your annuity expert about those options.

3. Annuities allow you to have protected lifetime income. Many people combine an annuity with other types of protected lifetime income, such as a pension and Social Security. This trifecta of guaranteed income sources means you’ll have payments for as long as you live, even when the account balance is exhausted. If you have a 401(k) plan, an annuity can complement and augment that plan, allowing you to generate income. In fact, Congress recognized the potential relationship between 401(k)’s and annuities and passed the SECURE Act. This legislation now makes it easier for employers to offer annuities in their 401(k) plans.

Annuities in the 21st Century are robust, multi-faceted products that offer distinct advantages, like guarantees, that others don’t provide. A properly structured annuity will provide you with protected lifetime income that you can’t outlive.

If you are thinking about adding an annuity to your retirement blueprint, talk with a professional who specializes in this unique product.