Monthly Income

Q. Dear Jeff Thanks for taking my question. I was forced to retire due to an accident. I made a cash settlement and need to invest in a monthly income. I can purchase a fixed annuity from Fidelity for 75,000.00 that will pay a monthly payment of 364.19. I would also like to invest in a growth fund of some sort that also pays a monthly income. what would be a good option for me to pursue? A. Thanks for asking your question...and I'm sorry about your accident. Can you tell me a little more? What is the total amount of your investable assets and if any are already invested, how? What monthly income do you need? How old are you? This will help me narrow down a recommendation. Q.The total amt of investable assets is 150,000.00. I am 60 years of age and my wife is 55. I need an income of five to six hundred dollars monthly to compliment my social security. I have no investments other than our home which is debt free. A. Now that I understand your situation a little better, let's look at your investment options. You mentioned the Fidelity annuity and referred to it as a fixed annuity. Are you referring to an immediate annuity? A fixed annuity pays you a set rate of interest for a set period of time and then you get all of your principal back. An immediate annuity is like a home mortgage in reverse. Each month you get a payment that consists of interest and a return of some of your principal. Immediate annuities guarantee the set payment amount for 10years certain, life, joint life, etc.. There is a big difference between the two. If you can get $364/month and it be a fixed annuity, then that's a great deal---over 5.5%. That is considerably above market rates, so I expect you are referring to an immediate annuity. If so, that return is being made up by them giving you back your money and some interest. The interest rate used in that calculation is probably less than 4%. Was it an immediate, and what were the terms--10 year certain, life or joint life? Let me know and I will be able to provide some different alternatives. Also, you mentioned wanting to invest some in a good growth fund--is that money that you wouldn't expect to touch for several years? Do you anticipate investing the full $150k or will you need some of it to pay off expenses, cash reserve, etc? Obviously, it is very important that you invest this money wisely because you will be depending on it. I'll help you make the right choice. Q. I think your correct that it is an immediate income annuity. Here is what it says on the quote. income amt. $364.19 monthly for 20 years guaranteed and as long thereafter as either or both measuring lives shall live.income amts commence on 4/25/2005. taxable portion 172.63 non taxable portion 191.56 I will invest the full 150,000.00 amt. I have set aside funds to have a cash on hand situation after spending 15,000.00 on home repairs paying off a vehicle and buying a used 3,500.00 bass boat. Im sure that will leave enough cash to get by for a year. I must say that I dont know beans about investing and not to say this as an insult to you. I feel like a housecat in a room full of bulldogs. Thats why I got in touch with you. Your credentials speak for themselves and you are highly respected in the investment area. A. I've been doing some calculations and you should be able to withdraw $600 per month ($7200 per year) without any problem. Here are some of the numbers. If we only earn an average of 3%, your money will last 34 years. If we earn an average of 4% you money will last 46 years. If we earn an average of 5% you will not ever run out of money and will be able to increase your income slightly each year. Assuming 5% and withdrawals of $7200 per year (without any increase) your money would still be worth about $170,000 after 30 years. Realistically, based on the fact that you were considering putting 50% in a growth fund, I believe you could average 6-7% per year if I managed your money using conservative methods that will limit any potential losses to 2-3%. To put that in perspective, the potential losses using a growth fund like you mentioned in the first email could be 20-30-40%. In fact, in 2002 the better growth funds lost over 20%. I've developed a proprietary money management system that allows you to participate in the growth of the market while rigorously controlling losses. It is designed for those who are more concerned about keeping what they got instead of growing it with a lot of risk. There aren't any commissions (I get paid by fees), no set-up charges, no surrender penalties and no time committments. If you like, send me your name/address info and I can send you some additional info. I will be happy to help you in any way I can.

Your Questions Answered – Equity-Indexed Annuities

Q. Jeff, I've been approached by someone touting the benefits of equity indexed annuity with “Company-X”. They say my money will be safe, there’s a minimum return and a cap with a participation rate of 100%. They also said I’d probably average between 6%-7% without any risk to the money I put in. I'm confused by all this. Any help you can give would be greatly appreciated! A. I’d be happy to help. It’s completely false when they say you should earn 6-7% per year without any risk. The only 'guarantee' on any equity-indexed annuity is the guaranteed minimum rate. On Company-X’s equity-indexed annuities, their guarantee is 3% on 75% of premium. As you can tell, they aren’t interested in making equity-indexed annuities easy to understand. 3% on 75% of premium means that you are only 'guaranteed' a minimum of 2.25% on the full amount you invest. If you put in $100,000, they’ll pay you 3% on $75,000, or $2250 in interest. Why don't they just say they'll pay you 2.25%?The rest of the 6-7% return they say you should safely earn is entirely based on the stock market. More correctly, you are guaranteed of earning 2.25% if you leave all of your money in the equity-indexed annuity for 10 years. Any additional earnings are subject to the performance of the stock market. They aren't even straight with the market-based returns. You either have the option of "yield spread deducted from average monthly positive gains or cap with no spread". The Spread Option: Your contract is broken into monthly periods and the return for each period calculated. That gives you 12 one month returns. Those are added together and divided by 12. Lastly, the 'spread' is deducted from that average. I don't know what their spread is (and they can change it anyway), but if it were 3%, they’d then subtract 3% from the average I just mentioned. Let's say your average was 7%. 7%-3%=4%. So they’d credit you 4% for that contract year. The 100% option: You get 100%, but only up to the cap, say 9%. So if the index goes up 9% you get 9%. If it goes up 23% like in 2003 you still only get 9%. And they can change the cap. The bottom line is that you’re locked into an equity-indexed annuity and they control everything. They can change how your return is calculated from year to year and you have no recourse. Q. You stated they can’t guarantee 6-7% as my return, but that the return would be based on the average of the S&P 500. What was the average for the last ten or so years? And wouldn’t that be my return? Company-X has a 100% participation rate and that sounds good, but they said there is a 7% cap on the interest rate. That sounds pretty decent in comparison to what I can get on a fixed annuity. What do you think? A. As of 2/18/2005, the 10 year average annual return of the S&P 500 was 11.5%. You participate 100% but only up to the cap--7%. For instance, in 2003 the S&P 500 earned 23%, but this EIA would have only earned 7%. Last year, the S&P 500 earned over 10% with dividends reinvested. This EIA would have only earned 7%. That’s a huge difference. $100,000 earning 7% for ten years will be worth $196,715. The same investment at 11.5% will be worth $217,852. That is $21,137 more. Put differently, you will earn 21% more over ten years at 11.5% then at 7%. You shouldn't compare an equity-indexed annuity to a fixed annuity. A better comparison would be to a variable annuity because none of the returns of a fixed annuity are subject to the stock market. I don’t have any financial incentive in the advice I’m offering you. On the other hand, the person recommending the equity-indexed annuity will probably make a 10% commission and will provide little or no service after you sign you up. Did they mention that? I love to answer reader’s questions. I f you’d like free, unbiased advice send your questions to jeff@guardingyourwealth.com. Read answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner®, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. You can reach him toll-free at 1-877-827-1463 or by email at jeff@guardingyourwealth.com

Sneaky Suspicions About Your Advisor?

Today’s investors are more savvy and sophisticated than ever. Unfortunately, as your expertise and expectation levels have increased, the traditional advisor/client relationship has changed very little. Many of you haven’t felt comfortable with your advisor relationship for some time. If you’ve got a sneaky suspicion that your advisor isn’t delivering all he or she should be, then this article is for you. Foremost among the complaints I hear from investors is that they’re tired of being sold. You can smell a sales pitch a mile away. You know when you sit down with an advisor that you’re getting a well-practiced spiel given countless times before. You know this advisor is getting paid on commission, but how much is this influencing their recommendations? When you are being pitched an insurance product like an equity-indexed annuity or a variable annuity, remember most advisors are paid on commission, they have to sell a large number of investments every month or they no longer have a job. And if they have the choice of offering a mutual fund with a 2% commission or an equity-indexed annuity with 10% commission, which will they recommend? This brings us to a second investor complaint. Besides knowing they’re just being sold, investors are also beginning to realize they’re all being sold the same thing! Each advisor promises to meet your unique needs, but you have this uneasy feeling that this advisor has cookie-cutter solutions for all his or her clients. You feel like a square peg being forced into a round hole. Once again, your suspicions are true. The traditional advisor/client relationship is built on trying to deliver pre-packaged products designed to appeal to the masses. You soon recognize that regardless of what the advisor says and in spite of your unique needs, you are being sold the same ‘solution’ as everyone else. Many investors confuse the attention they receive during the selling process with the attention they’ll receive afterward. In most cases, the two are entirely different. Before the sale, you’re treated as special. After the sale, you’re just another face in the crowd. You soon realize that the advisor isn’t monitoring or managing your money the way you expected. All that warm fuzzy attention has been replaced with indifference. What happened? Once you pass the ‘courtship’ phase of the advisor relationship and you become a client, your advisor moves on to repeat the procedure with the next prospect. Starting with a monthly paycheck of zero tends to do that with people. Besides, they aren’t getting paid to service your account. They’re getting paid to sell you. Once you’re ‘tapped-out’, it’s time to find another ‘cherry’. If you’ve been a serious investor over the last decade, you probably discovered something else about your commission-based advisor. When times got tough, as they did back in 2000, you expected your advisor to manage your money and take steps to prevent losses. Remember their sage advice? “Just hang in there. The market will come back.” And they sat on their hands and did nothing while your nest egg dropped 10%, 20%, or 30% in value. What kind of advice is that? Many of you still haven’t recovered those losses several years later. You probably would have done better on your own! You’ve also discovered that most commission-based advisors aren’t the financial experts they market themselves to be. Most of the training they receive revolves around how to be better salespeople, not how to manage their clients’ money. They cling to the buy and hold strategy because it doesn’t require much effort on their part. So what should you do? First, find an advisor whose financial incentives are aligned with your success. You should only have to pay them for the period they manage your money. Remember that you aren’t going to know if an advisor is the right one for you until after you’ve worked with them for several months, so don’t pay up-front commissions or allow yourself to be locked-in by surrender penalties. Do your homework. Make sure your advisor is acting in your best interest, not just their own. Want my take on your situation? For free, clear, unbiased advice call or send your questions to jeff@guardingyourwealth.com. I will respond to them personally. Also, see answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com

Don’t Put Your IRA in A Variable Annuity – Part 2

Last week I shared with you the real reason advisors push IRA accounts into variable annuities: the commission. If you’re getting ready to retire with a large IRA rollover, or your current IRA account is nearing the end of any surrender penalties, chances are you’ll be pitched this product. So this week I’m going to reveal more secrets about the truth behind the variable annuity sales pitch. One of the biggest draws advisors use to get you to take the plunge is the promise of the big bonus. They’ll pay you 6%, 8% or even 10% extra, right up front, just for putting your money into their variable annuity. Sounds great, doesn’t it? Who wouldn’t want such a big boost to their nest egg, especially with the stock market returns of late? But remember, there’s no such thing as a free lunch. In return for this lovely bonus, you end up paying higher recurring annual fees, usually .15% higher (or more) than regular variable annuities. These fees are charged on all of the money in the annuity and are a continued drag on performance. Surrender penalties are higher and longer, too. The truth is that when you take into account the increased fees and the extra years you have to stay in the annuity, you really aren’t getting a ‘bonus’ at all! These bonuses aren’t just used to entice you to invest your original IRA rollover when you retire. They’re also used to encourage you to transfer out of an annuity you already own that’s still in the penalty period. Advisors will tell you that the bonus on this ‘new-and-improved’ annuity will ‘pay you back’ for the penalty you’ll pay to get out of your old commission-based investment. The truth is, by getting you to switch to the ‘bonus’ annuity, they earn a fat fee up-front. You end up with pretty much the same thing you had but now are locked into it for much longer. What kind of a ‘deal’ is that? The promise of multiple investment choices is another feature of the variable annuity sales pitch that doesn’t live up to its claim. It’s true that many variable annuities offer a multitude of mutual fund choices in various sub-accounts, including funds investing in bonds, small companies, large companies, international stocks and more. Surely out of all of these choices, anyone could create a balanced well-performing portfolio, right? Not necessarily. It’s sort of like fishing. Who wants to fish in a pond full of minnows? Wouldn’t you rather drop your line where you have a greater chance of catching the big one? The mutual fund universe is full of thousands of choices. But only a small group of them are consistent top performers. Unfortunately, few variable annuities offer these big fish. Some variable annuities feature a well-known fund already offered to the general public. But beware. This same fund will have much higher management fees within the annuity than it does outside of it, hampering its performance. I believe insurance companies make special deals with mutual fund companies to gain access to their management and then charge higher fees. When you invest your money into a variable annuity, you’ll no longer have control over the choices at your disposal. The insurance company can change the investment choices whenever they want to and you have no recourse. Since your money is locked in for years, it will be very costly to change course a few years down the road should you be dissatisfied. What kind of choice is that? So here’s the bottom line: variable annuities make big promises but don’t really deliver. Every feature they offer -- be it a big bonus, a multitude of investment choices, death benefit, or a guaranteed income stream -- comes at a very high price. High management fees and long, costly surrender penalties hinder your performance and rob you of your flexibility and control. The ones making the most money off of variable annuities are the advisors and the insurance companies. It turns out that variable annuities are a great investment—for them. If you’d like free, clear, unbiased advice send your questions to jeff@guardingyourwealth.com. Also, see answers to questions other readers have asked onthe Q&A page at www.guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com

Don’t Put Your IRA in A Variable Annuity

If you’ve talked to a broker or agent about rolling over your retirement account, there’s a good chance the advisor recommended you invest in a Variable Annuity. Don’t do it! I believe the only reason a variable annuity is recommended for an IRA is so the advisor can earn more money. Let me explain. There’s a high probability that if an advisor doesn’t recommend an Equity-Indexed Annuity for your IRA rollover, a Variable Annuity will be recommended instead. ‘There are so many advantages to a variable annuity versus a mutual fund’, you’re told. I disagree. It’s advantageous for the advisor, not the investor. In this article, I’ll debunk the two main arguments used in selling variable annuities. First, that you don’t pay a commission and secondly, the importance of the death benefit guarantee. I’ll explain how you pay dearly for both. One of the main sales ‘hooks’ used in selling a variable annuity is that you don’t have to pay a commission. That can be very compelling when compared to a mutual fund in which you pay the all the commission up-front. Many advisors will even say that they get compensated by the insurance company, not you. Do you really believe that? Insurance companies are not charitable organizations. If they are paying the broker, they’ll recoup those costs from you—the costs are just hidden so you don’t think you’re paying a commission. The second main argument for using a variable annuity for an IRA is the death benefit (not offered with a mutual fund). “That way you’ll never have to worry about your beneficiary getting less than you invested”, the thoughtful advisor says. This feature may seem nice, but you end up paying through the nose for it. With all variable annuities there is a Mortality and Risk Expense (M&E) charge. Most variable annuities sold through commission-based advisors have an M&E charge of 1.45%. This is an annual fee that is charged against the entire value of the account, not the original investment. On a $500,000 investment that amounts to $7,250 the first year. If your account doubles in 10 years, you’d pay $14,500 that year. Note that the M&E charge is in addition to the underlying money management fees charged by the people actually making the investment decisions. Their fees can range from .70% to 1.5%. All told, the fees associated with most variable annuities range from 2-3% per year. That’s a 2-3% hole you start in each year. That’s $10,000-$15,000 each year on a $500,000 investment—and that expense increases as the value of the account increases. Do you really think it costs $10,000-$15,000 a year to cover the cost of the insurance associated with the death benefit? Of course not. The full $500,000 in our example isn’t really being insured, either. They’re only insuring the amount of loss. So if the investment loses 10%, the actual amount of ‘insurance’ is $50,000. Even when the investment is worth more than you paid you continue to be charge M&E. So the death benefit associated with a variable annuity is either the most expensive insurance you’ll ever buy, or it pays for more than insurance. The M&E is where the insurance company makes their money. More importantly, the M&E is where the insurance company gets paid back the money it paid your advisor in commission. Here’s proof. The M&E on variable annuities offered by Vanguard (in which no one earns a commission) is about .60%. That’s over three quarters of a percent less than the 1.45% being paid to the commission-based advisor. The real reason that you are recommended a variable annuity for your IRA isn’t that it’s better for you. It’s because it’s better for the advisor. If you invest $500,000 in a commission-based mutual fund, the advisor’s gross commission will only be about $10,000. The same investment in a variable annuity would yield gross commission to the advisor of $30,000-$35,000 or more! If an advisor can earn 3 times more by getting you to invest in a variable annuity instead of a mutual fund, which do you think will be recommended? Don’t fall for the ‘put your IRA in a VA’ trap. You are smarter than that. Get free, clear, and unbiased advice by sending your questions to jeff@guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463.