The Ultimate Annuity Buyer's Guide

 

   

 

7 Sure-fire Tips To Generating More Income, Growth, And Preservation Of Principal

       

 

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7  Key  Tips  For  Purchasing  Annuities  In  Today’s  Market    

TIP #1 – Company Ratings Matter! In  light  of  the  current  economic  condition  both  globally  and  domestically,  it  is   more  important  than  ever  to  select  insurance  companies  that  have  strong   histories  and  track  records.   A  lot  of  sales  pitches  are  being  used  these  days  that   talk  about  legal  reserve  systems  and  other  factors  that  supposedly  make  the     strength  rating  not  as  important.    This  is  a  sales  gimmick  to  be  extremely  wary  of.       Strength  ratings  are  there  for  a  reason.    Use  them!    Don’t  let  an  agent  talk  you  into     a  B-­‐-­‐-­‐rated  company  when  A  or  A+  rated  options  are  available!     Two  of  the  more  helpful  rating  systems  are  A.M.  Best,  and  the  Comdex  Score   system.   These  can  be  found  at  www.AMbest.com  and/or  by  doing  an  internet   search  on  whatever  the  name  of  the  insurance  company  is  that  you  are   researching  followed  by  “Comdex  Score.”   Example:  “ABC  Insurance  Company   Comdex  Score.”      

TIP #2 – Suitability Part One: % of Assets Annuities,  for  the  most  part,  represent  long-­‐-­‐-­‐term  commitment  vehicles  that  can   carry  some  substantial  surrender  penalties  for  early  termination  of  the  contract.     Because  of  this,  it  is  very  important  that  proper  thought  and  determination  goes   in  to  deciding  how  much  of  your  overall  net  worth  should  be  placed  inside  of  an   annuity.         While  annuities  can  provide  valuable  features  for  your  retirement,  such  as  safety   of  principal  and  a  lifetime  income  stream  you  can  never  outlive,  they  can  also   create  significant  problems  if  too  much  money  is  tied  up  inside  of  an  annuity   without  leaving  sufficient  liquid  assets  outside  of  the  contract  to  be  used  for   emergencies  or  other  investment  opportunities.   Be  extremely  careful  of  any   agent  who  recommends  that  you  put  any  more  than  around  60%  of  your  total   assets  into  an  annuity.         This  is  a  potential  major  red  flag  that  could  indicate  an  effort  on  the  agent’s  part   to  simply  maximize  his  or  her  own  commissions  instead  of  providing  a  truly   beneficial  solution  to  your  needs.   Very  seldom  is  it  ever  appropriate  for  more   than  60%  of  your  total  investable  portfolio  to  go  into  annuities.    

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TIP #3 – Suitability Part Two: When Income Begins One  of  the  most  popular  forms  of  annuities  being  marketed  today  is  an  income   rider  annuity.    Also  referred  to  as  hybrid  annuities,  deferred  income  annuities,  or   lifetime  income  annuities.   Typically  these  annuities  come  with  an  attractive   “bonus”  interest  rate  up  front  for  signing  up,  then  a  “guaranteed”  growth  rate  or   “roll-­‐-­‐-­‐up”  rate  while  the  product  is  being  held  in  deferral,  and  lastly  a  guaranteed   payout  rate  based  on  your  age  or  you  and  your  spouses  age  depending  on   whether  you  select  a  single  life  or  joint  lifetime  payout  option.   While  these  products  can  provide  wonderful  lifetime  income  benefits,  be  cautious   of  these  products  if  you  are  in  need  of  income  right  away  or  within  just  a  year  or   two  of  deferred  growth.   Typically,  it  takes  a  minimum  of  5-­‐-­‐-­‐7  years  worth  of   deferred  growth,  BEFORE  income  is  turned  on,  for  it  to  really  provide  a  truly   beneficial  mathematical  result.    Otherwise,  if  you  turn  on  the  income  within  the   first  1-­‐-­‐-­‐4  years,  you  haven’t  given  the  product  enough  time  to  accumulate  at  good   enough  returns  to  avoid  being  stuck  with  a  lifetime  internal  rate  of  return  of   usually  around  1%  -­‐-­‐-­‐   1.5%,  which  of  course  is  very  low.   So  just  remember,  if  you  are  55  years  old  and  want  to  grow  money  in  an  income   rider  annuity  until  age  65,  this  could  be  an  excellent  option.   But  if  you  are  64  and   need  income  to  begin  at  65,  you  might  want  to  consider  either  an  immediate   annuity  or  a  different  retirement  income  option  all  together!  

TIP #4 – Always Ask About Agent Commissions This  tip  is  a  great  way  to  separate  the  ethical  agents  from  the  rest.    An  ethical   agent  will  never  have  a  problem  or  hesitate  in  answering  your  questions  about   what  the  commission  rate  is  of  the  product  that  he  or  she  is  recommending.   Most  fixed,  indexed,  and  income  rider  annuity  companies  pay  the  agent  directly   out  of  their  own  pocket  based  on  a  percentage  of  the  assets  you  invest.   Many  of   the  more  heavily  marketed  annuity  products  out  there  these  days  pay   commissions  anywhere  from  5-­‐-­‐-­‐9%.    This  means  if  you  invest  $300,000  in  an   annuity  paying  an  8%  commission,  the  agent  stands  to  receive  a  $24,000  lump   sum  commission  from  that  sale.   While  this  may  not  necessarily  in  and  of  itself  be  a  red  flag,  it  is  always  important   to  ask  the  agent  what  the  commission  rate  is,  and  to  judge  their  response   accordingly.   What  you  are  looking  for,  of  course,  is  a  scenario  where  an  agent   might  be  recommending  a  B  rated  company  with  a  9%  commission,  instead  of  an   A+  rated  company  with  maybe  only  a  6%  commission.     There  is  nothing  wrong   with  an  agent  getting  paid,  but  your  best  interest  has  to  come  first!!  

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TIP #5 – Work With A Fiduciary Not A Broker When  choosing  a  financial  representative  to  work  with,  it  is  so  important  to  work   with  an  individual  who  is  held  to  a  fiduciary  standard  and  not  just  a  suitability   standard.   What  is  the  difference?   Well,  a  fiduciary  is  legally  bound  to  act  in  the   client’s  best  interest  at  all  times.      This  means  that  they  are  never  allowed  to  let   their  own  compensation  influence  their  recommendations,  and  are  required  to   give  advice  and  make  recommendations  that  are  truly  aligned  with  a  client’s   needs  and  objectives.   Under  a  suitability  standard,  while  an  agent  or  broker  is  required  to  follow   certain  broad  guidelines,  they  are  still  allowed  a  tremendous  amount  of  flexibility   when  it  comes  to  using  products  that  provide  higher  compensation  for   themselves,  even  if  they  are  not  in  the  best  interest  of  the  client.   Therefore,  when   selecting  an  advisor,  it  is  very  helpful  to  look  for  investment  advisors  or  Certified   Financial  Planners  that  are  bound  to  a  fiduciary  standard  and  not  merely  a   suitability  standard.     For  a  more  in  depth  description  of  this,  you  can  research   “fiduciary  vs.  suitability”  on  the  internet.  

TIP #6 – Annuity Portfolios Vs. Annuity Products With  so  many  products  available  today  that  contain  a  plethora  of  “living  benefits”,   and  with  so  many  agents  giving  pitches  about  how  they  have  the  one  “perfect”   annuity  for  all  your  needs,  it  is  no  wonder  that  many  consumers  begin  to  buy  into   the  idea  that  they  might  actually  be  able  to  achieve  all  the  things  they  want  in   retirement  within  one  specific  annuity  product  purchase.   The  truth  is,  ALL  annuities  have  good  parts  and  they  ALL  have  bad  parts  at  the   same  time.   There  is  not  one  single  annuity  on  the  market  today  that  is   contractually  designed  in  such  a  way  that  it  can  provide  growth,  and  income,  and   preservation  of  principal,  and  safety,  and  liquidity  ALL  AT  THE  SAME  TIME.   However,  if  you  were  to  combine  or  blend  several  different  types  of  annuities   together  in  a  portfolio-­‐-­‐-­‐type  format,  you  can  significantly  increase  your  ability  to   achieve  multiple  retirement  objectives  at  the  same  time,  without  many  of  the   frustrating  trade-­‐-­‐-­‐offs  that  come  with  locking  in  to  just  a  single,  stand-­‐-­‐-­‐alone   annuity  product.   While  this  concept  can  be  extremely  simple  and  effective  it  is  important  to   understand  than  not  all  annuity  agents  are  skilled  in  (or  even  familiar  with)  the   concept  of  an  annuity  portfolio,  and  therefore  you  must  take  care  in  making  sure   that  you  are  working  with  an  agent  that  is  competent  in  this  kind  of  a  strategy.  

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TIP #7 – A Better Annuity Strategy (The Power of Laddering)

 

So  you  want  income?   You  want  growth?   You  want  preservation  of  principal?   You  want  inflation  adjustments  and  flexibility?   You  want  all  of  those  things  at  the   same  time?   What  kind  of  an  annuity  can  give  you  all  those  desirable  results  at  the   same  time?   None  of  them!!   That  is  no  SINGLE  annuity  product  can  do  all  that  for   you.    BUT,  a  laddered  annuity  portfolio  is  capable  of  doing  all  those  things!  

 

How  does  it  work?   Simple!   You  spread  your  money  into  several  different   lifetime  income  annuities  that  are  each  designed  to  turn  on  income  at  different   intervals.   You  can  play  with  the  numbers  to  determine  how  much  money  needs   to  go  into  each  annuity.    But  ultimately  the  idea  is  that  one  main  annuity  kicks  in   at  65,  then  another  one  at  70,  75,  80,  etc.   This  way,  every  few  years  of  your   retirement  you  can  produce  an  additional  stream  of  income  that  layers  down  on   top  of  your  initial  annuity  income  streams,  thereby  providing  an  automatic   inflation  adjustment  to  your  lifetime  cash  flow  needs.   You  can  even  place  a  final   growth  annuity  at  the  very  end  of  the  ladder  that  is  designed  to  regrow  some  or   all  of  your  original  retirement  principal  by  the  time  you  end  up  there,  thereby   giving  you  a  recovery/preservation  of  principal  element  that  can  greatly  solve   the  fear  of  running  our  of  money.  

 

Again,  it  is  important  to  note  that  many  annuity  agents  and  advisors  are  not   intimately  familiar  with  or  experienced  in  constructing  and  implementing   laddered  annuity  plans,  so  it  is  important  to  research  and  interview  and  advisor   that  has  a  track  record  of  success  in  managing  laddered  annuity  portfolios.  

 

We  hope  you’ve  enjoyed  this  brief  guide  and  that  it  will  help  you  make  educated  and  confident   decisions  about  annuities  and  your  retirement.     If  you  have  any  additional  questions,  or  would  like  to  learn  more  about  some  of  the  concepts   highlighted  in  this  course,  please  feel  free  to  contact  us:  

Three Oaks Capital Management 5200 Meadows Road, Suite 150 Lake Oswego, OR 97035 www.3oakscapital.com [email protected]  

 

       

 

 

5 Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Annuity riders may be available for an additional annual premium that can provide additional benefits and incomeguarantees. By contacting us you may speak with an insurance licensed agent in your state, and you may be offered insurance products for sale.