How to Analyze a Variable Annuity(2)

How to Analyze a Variable Annuity

Ever had a variable annuity pitched to you?  Maybe you own one.  They’re a popular way for many people to mix guaranteed retirement income with the growth potential of equities.

But I’m guessing even if you hold a variable annuity, you’re not 100% sure how it works.

“What are the annual fees again?”

“How does that bonus period work?”

These were a few of the questions a client asked me recently when he was considering a variable annuity.

**Full disclosure – I do not sell variable annuities** 

This client just wanted a second opinion. He’d recently met with an advisor who pitched him a variable annuity, and wanted input from an objective source.

My client was in a tough position.  He’d just lost his father, and was about to receive a sizable inheritance.  He wanted to use this inheritance to produce income throughout retirement, since he was about to turn 60.

He was skeptical about investing in the markets, fearing that another financial crisis would destroy his nest egg.  At the same time, he struggled with the idea of buying an annuity.  He was attached emotionally to the money since it was coming from his father’s estate, and he didn’t want to fork it over to an insurance company.  On top of that, the annuity he was considering was complicated and confusing, and he was feeling a little lost.

After walking through everything together, my client decided to use some of his inheritance to purchase an annuity – but not the one he was being pitched.  He opted for a fixed rather than a variable annuity, which he bought with a small portion of the money from his father.  He decided to invest the majority of the money in a diversified portfolio geared to produce income.

My client isn’t alone, and I get a lot of questions about variable annuities.  Since they have so many moving parts, I wanted to share exactly how I analyze variable annuities using my client’s contract as an example.

There’s a lot of nonsense floating around the internet when it comes to annuities.  Hopefully this framework is useful to you if you’re considering buying one.

 

American Legacy Annuity Analysis

In this video, I’ll analyze the American Legacy variable annuity offered by Lincoln Financial Group, which my client was considering.  This specific contract is the American Legacy Shareholder’s Advantage annuity, with the i4LIFE Advantage Guaranteed Income Benefit.  I’ll also assume that the Enhanced Guaranteed Minimum Death Benefit (EGMDB) is chosen.

Framework: How a Variable Annuity Works

Before we discuss how to analyze a variable annuity, let’s take a step back and review how they work & where they came from.

Variable annuities have become very popular in the retirement planning industry over the last 25 years.  Essentially, they’re a contract between you and an insurance company that guarantee you a series of payments at some point in the future.

There are two phases in a variable annuity: the accumulation phase and the payout phase.  What’s unique about a variable annuity is that you invest your contributions during accumulation phase – hence the term “variable.”  These investments are known as sub accounts and behave a lot like mutual funds.  They are professionally managed and will follow a specific investment strategy described in a prospectus.

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6 401k Trends for 2016

6 401k Trends for 2016

Now that we’ve turned over the calendar to 2016, I thought it might be helpful to take a look at current 401(k) and 403(b) trends across the country.  The marketplace is continuously changing, and 401(k) and 403(b) sponsors can maintain competitive and low cost plans by keeping current.

Six 401k Trends for 2016:

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5 Ways to Get Lower Rates on Unsecured Business Loans

5 Ways to Get Lower Rates On Unsecured Business Loans

Borrowing money is a way of life for most entrepreneurs and business owners.  I recently read that 80% of businesses rely credit to finance their ongoing operations.

Entrepreneurs often don’t have many options when it comes to procuring credit.  And any time you don’t have collateral to put up against a loan, you’re venturing into the unsecured business loan market.

Many small business experts advise against taking out an unsecured business loan.  The rates are high and the terms can be kryptonite to your bottom line.

But for many of us, unsecured business loans are our only option.  If you ever find yourself in this situation, this post will cover 5 ways to improve your rate on unsecured business loans.

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What No One is Telling You

What No One Is Telling You About Long Term Disability

When someone mentions the word insurance, most of us think of one of three things:

  1. Aaron Rodgers doing a discount double check
  2. The GEICO Gecko using his British accent
  3. The coverage we carry on our cars, our home, our health, or our life

What most of us don’t think of is our long term disability coverage.

Since tangible assets like our cars and homes are easy to visualize, they’re often top of mind when it comes to insurance protection.

But what about the risk that we get sick or injured, and can’t work?

Long term disability insurance is meant to replace our income if this happens.  And coincidentally, our ability to earn a living is probably our biggest and most overlooked asset.

 

Earnings Capacity

Let’s take a moment to think about your ability to earn a living.  Just imagine for a moment what your lifetime earnings will look like.

Your lifetime earnings includes every single paycheck you earn throughout your entire career.  It counts every single raise, every single promotion, and every single bonus.

When you add them all together you’ll get a massive number.  It will be far bigger than the value of your home, your car, and probably your retirement nest egg.

Your ability to go out into the work force and earn this money is your earnings capacity.

 

Now Imagine It’s Gone

Many people consider the possibility that they die, and the impact that would have on their family.  But what if you were hurt or sick and unable to work?

Your family would be left with monthly expenses like a mortgage, utilities, and grocery bills.   They’d also be left without your steady paychecks to afford them.

Plus there’s a chance you might need additional help from a caretaker if you’re permanently disabled.  The end result?  Higher expenses, lower income.

 

It’s More Likely Than You Think

If you’re thinking “that’ll never happen to me,” the statistics would disagree with you.

The social security administration says that 1 in 4 of today’s 20 year-old’s will become disabled for some period of time before they retire.

And if you’re under 45, the chances that you become disabled are far, far greater than the chances that you die.

 

Let’s Think About This

  1. Our earnings capacity is our biggest and most important asset
  2. Becoming disabled is far more likely than we realize
  3. Losing our earnings capacity could cause our family severe hardship

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Small Business and Tax Policy

For small businesses, two topics are consistently near and dear to our hearts in presidential elections: taxes and health care costs. 

There’s been heated debate on the issues during this election (and most for that matter).  And while I’m no political expert, I’m confident our new president will push for changes that affect the small business community – both good and bad.

To help sort through negative ads, debate & media circuses, and smear campaigns, I’ve compiled the remaining candidates’ positions on taxes and health care.

 

The Candidates

I’ve sorted them by where each falls on the political spectrum with regard to their tax policies.  We’ll start with most conservative, and work our way toward the most liberal.

 

Ted Cruz

ted-cruz-poster_1

Personal Taxes

Ted Cruz has notably emerged as a proponent for a flat tax.  Cruz wants to tax all personal income and wages at 10%, and eliminate the estate tax and alternative minimum tax entirely.

Corporate Taxes

On the theme of a flat tax, Cruz wants to replace the payroll and corporate income taxes with a 16% flat business tax.  He also wants to eliminate tax on business profits earned abroad.

Cruz’s position is the most radical of the republican candidates, but the camp still claims that social security and medicare would remain fully funded after implementing his measures.

Interestingly the Tax Foundation, which is a group that supports lower tax rates, claims that Cruz’s plan would increase the federal deficit by up to $3.6 trillion over the next 10 years.  With potential economic growth, that number decreases to $768 billion.

Cruz has also been outspoken against the IRS, and wants to relegate tax collection and enforcement to another arm of the treasury.  He’s been critical of the IRS since their targeting scandal, and believes they should be made irrelevant through his tax plan.

Healthcare

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