Fred Orentlich- Fixed Versus Variable: Could Your Portfolio Benefit From An Annuity?
I hear a lot of questions and concerns about annuities when meeting with my clients. Many of them are worried if an annuity can help them meet their retirement goals and needs, while others ask about the volatility of the financial markets and the potential of market loss.
As people have looked over the years for alternatives to help protect from market loss, certain annuities have become increasingly popular among those with retirement in mind. An annuity is a financial product available through insurance companies. There are many types and uses for annuities; today, we’ll look at annuities in two categories: variable and fixed.
A variable annuity, which is categorized as a security, generally produces gains based on underlying investments, such as mutual funds. Many variable annuities may also offer fixed accounts where an investor can allocate funds; instead of participating in the underlying mutual funds, these funds may even receive a fixed rate of growth for a certain period of time. The rate at which the fixed account grows varies by product and can often be similar to certain market rates.
A concern some people express is that variable annuities not only grow based on the underlying investment choices but can also be reduced when the underlying investments suffer a loss. Market gains or losses can, of course, vary by investment and time, but if someone is looking for added market risk protection to preserve those funds, variable annuities should be considered.
Variable annuities can also often carry substantial fees and charges, which can lower the product’s yield and are usually charged even if the annuity experiences a loss. Some of the fees associated with variable annuities are for riders for certain benefits, such as death benefits and income riders.
Fixed Annuities
There are several types of fixed annuity products. Some offer different riders and benefits, but they all have protection from market loss in common.
Some fixed annuities offer a guaranteed rate of growth for an agreed period of time. This type of fixed annuity is known as a multiyear guaranteed annuity (MYGA). These annuities have a time frame when the rate can be guaranteed, similar to a CD. Unlike many CDs, however, numerous MYGAs will often allow client access to some of the funds during the guarantee return period; this is known as a “free withdrawal.”
Although free withdrawal amounts vary by product, a 10% annual free withdrawal is fairly common; check your contract for any restrictions and limitations. If a client were to withdraw more than the allowed amount, they would be subject to an early surrender charge on the excess funds withdrawn. For example, if someone has a 10% annual free withdrawal and withdraws 12% that year, generally only 2% over the free allowed amount would be subject to a surrender charge.
Commonly, the early surrender charge amount decreases over time until it is no longer applicable, at which time all funds are available. Both variable and fixed annuities often offer annual free withdrawals.
Another type of fixed annuity is known as a single premium deferred annuity (SPIA) and is usually purchased to convert that asset into an income stream. This annuity will often have a choice of income payout periods available at the time of purchase, which allow for an income for either a specified period of time or the lifetime of the client and the client’s spouse. If a lifetime income is selected, the product may offer a provision that payments are made to the named beneficiaries if the owner were to pass before all the funds were paid out to them.
Although the guarantee of a lifetime income that you cannot outlive certainly has appeal and fits in some cases, several of my clients raise a concern that a SPIA doesn’t accumulate growth in the traditional sense. Another concern raised is that, once this type of annuity is purchased, the client doesn’t have access to the asset if they change their mind and want to withdraw a lump sum.
The next type of fixed annuity is known as a fixed index annuity (FIA). Lately, this type of annuity has become a popular option, as it offers some unique advantages.
This product offers clients gains based on indexes, many of which are market-based. The indexes vary and can be based on the S&P 500, NASDAQ, Dow Jones, bonds, commodities, or real estate. Certain products offer volatility control indexes, which may combine the growth potential of a combination of the above. A volatility control index will often regularly shift its allocation based on the movement and volatility level of varying underlying assets. This method is traditionally designed to produce a more consistent, less volatile growth potential.
The client generally has a choice of indexes and can change at the end of each index period, which can last one or two years. In addition to being able to change indexes, clients can also allocate to a combination of multiple indexes to use simultaneously.
Depending on a client’s needs and goals, the appropriate type of annuity can benefit their portfolio. Whether the goal is added protection from market loss, a consistent growth rate, or creating a guaranteed income that cannot be outlived, the right annuity can be an integral part of a diversified portfolio and deserves careful consideration. Working with a financial professional can help you decide which indexes to focus on and when to make any changes.
This content was brought to you by Impact Partners Voice. Annuity guarantees, including optional riders, are backed by the financial strength and claims-paying ability of the issuing insurance company. Insurance and annuities offered through Frederick M. Orentlich, MA Insurance License #1720917. DT5454-1019
Frederick M. Orentlich || What place do annuities have in a modern portfolio?
In today’s discussion about annuities and their place in one’s portfolio I would first like to focus on the typical concerns and priorities my clients express to me regarding their financial positioning in relationship to their retirement and other financial needs and goals.
First, in framing this discussion, it is important to note that my typical client is of a more mature nature and is either planning for retirement or already in retirement, thus their priorities tend to be more conservative than their younger counterparts. More specifically, my clients are usually over the age of 55 and have been savings toward their retirement for at least 15 to 20 years. A good number of clients express the need to re-allocate their portfolio in a more conservative direction to protect some of the assets from market loss and feel it crucial to lock in some of their gain to help insure a successful retirement.
When many of my clients began their working careers, company pensions were far more prevalent, thus the mindset regarding retirement savings was very different. During their careers many of my clients saw a gradual yet substantial paradigm changes toward providing for one’s own retirement needs, due to the preponderance of employers that discontinued retirement and pension plans, combined with the advent and expansion of IRA’s and 401ks. For many people this change toward increased self-sufficiency put them at a substantial disadvantage as to the amount of precious time they have or had to prepare for retirement when compared to many of their younger counterparts whom more recently entered the workforce. Today most people beginning their careers have the advantage of knowing early on, that they must prepare for their own retirement and are acting accordingly. Additionally, as our population is enjoying an increasing lifespan the amount of assets needed to sustain a longer retirement can be daunting. In addition, this longevity may also increase one’s need to have some financial resources earmarked for health care expenses associated with the varying needs of the elderly. Consequently, the need to accumulate sufficient assets might cause some to people to take on more risk, than might be prudent.
A particular concern that many of my clients express about their retirement savings is the volatility of the financial markets, and of course the potential of market loss.
Many of them sustained substantial market loss during past market corrections, especially during the 2000 and 2008 corrections. Some expressed losses of up to 50% and more, during certain time frames. When considering market loss, I believe it is wise to consider the real-world mathematical challenge in recovering from that loss. If a person sustains a substantial loss of 50%, it can take them more time to recover (break-even) than some people consider. As an example, using the simple amount of 100,000.00, if the market corrects by 50% the 100,000.00 could be reduced to 50,000.00, then if the market rebounds by the same 50% (over a number of years) a person could end up with 75,000.00, not their original 100,000.00. Thus, to recover from a 50% loss, one would need a 100% gain just to break even! This truth once understood can cause people to be more concerned about averting substantial market loss, especially if that person is older and has less time to recover from such a loss. Based on the reasons stated above many people approaching retirement or already in retirement are looking for a way to earn a good return, but critically, without the risk of market loss. The most common “safe” options of CD’s and Money Market accounts may not produce sufficient gains to both grow one’s retirement assets sufficiently, and to compensate for inflation. Although we have recently been experiencing below average rates of inflation, many are concerned that this may change in the future.
Over the past decade certain types of annuities have become increasingly popular amongst retirement conscious people, and I would like to address the different types of annuities and discuss whether they might be an appropriate part of one’s portfolio. An annuity is a financial product available through insurance companies. There are many types and uses for annuities, and they vary in purpose, features, safety and return. Instead of taking many pages to illustrate the various types and aspects of annuities, I will discuss them in basic categorical terms. My explanation will be focused on how different annuities address the growth and distribution of the funds deposited, in relationship to the need of safety, growth and longevity that many people have.
First, I will separate annuities into two separate categories. The former category is variable annuities and the latter Is fixed annuities.
A variable annuity which is categorized as a security, generally produces gains based on underlying investments such as mutual funds. Many variable annuities also offer fixed accounts whereby an investor can allocate funds which instead of participating in the underlying mutual funds, will often receive a fixed rate of growth for a certain period of time. The rate at which the fixed account grows varies by product and will often be similar to current money market rates. A concern that some people express is that variable annuities not only grow based on the underlying investment choices but can be reduced when the underlying investments produce losses. Market gains or loss can of course vary by investment and time frame, but if a person is looking for protection from market loss in order to preserve those funds, this aspect needs to be considered. Another consideration is that variable annuities often carry substantial fees and charges. The fees can lower the products yield and are usually charged even if the annuity produces a loss. Some of the fees associated with variable annuities are for riders that can provide certain benefits. Some of these include a death benefit and income rider, which we will discuss.
The other category of annuities is the fixed annuity. There are several types of fixed annuities, but what they all have in common is protection from market loss.
Some fixed annuities offer a guaranteed rate of growth for one year or several years. The type of fixed annuity that offers a guarantee rate of return for multiple years is known as a MYGA (Multi Year Guaranteed Annuity). These annuities have a “time frame” during which the rate can be guaranteed, similar to a CD. Unlike many CD’s a MYGA, will often allow a client access to some of the funds during the guarantee return period, this is known as a “Free Withdrawal”. Although free withdrawal amounts vary by product, a 10% annual free withdrawal is fairly common. If a client were to withdraw more than the allowed free withdrawal, they would be subject to an Early Surrender Charge on the excess funds withdrawn, that exceeded the free withdrawal amount.
As a simple example, if one is allowed a 10% annual free withdrawal and withdraws 12% during the year, just the 2% over the free allowed amount would be subject to a surrender charge.
Commonly, the Early Surrender Charge percentage decreases over time until it is no longer applicable at which time all funds may be available without any penalty.
Both Variable and Fixed annuities often offer annual free withdrawals.
Another type of fixed annuity is known as a SPIA, which is an abbreviation for Single Premium Deferred Annuity. This type of annuity is usually purchased to convert that asset into an income. The annuity will often have a choice of income payout periods which allows a for an income for a specified period of time or for the lifetime of the client and the clients spouse. If a lifetime income is selected the product may offer a provision that payments are made to the named beneficiaries if the client, or client and spouse were to pass before all of the funds are paid out to them.
Although the guarantee of a lifetime income that you cannot outlive certainly has appeal and fits in some cases, several of my clients raise a concern that the asset is not accumulating growth in the traditional sense when this type of SPIA annuity is purchased. Another concern raised is that once this type of annuity is purchased, the client does not have access to the asset if they changed their mind in the future and wanted to withdraw a lump sum.
The next type of fixed annuity is known as the FIA, or Fixed Index Annuity. This type of annuity has become very popular as it offers some unique advantages.
First, the product offers clients gain based on indexes, many which are market based. The indexes vary and be based on the S&P 500, NASDAQ, Dow Jones, bonds, commodities, and real estate. Certain products offer Volatility Control Indexes, which may combine the growth of a combination of the above. A Volatility Control Index will often shift its allocation daily or monthly based on the movement and volatility level of varying underlying assets. This method can often produce a more consistent and less volatile growth pattern. The client generally has a choice of indexes and can change indexes in the future at the end of each index period. The index periods are most commonly one or two years. In addition to being able to change indexes over the years, clients can also allocate to a combination of indexes, thus using more than one index simultaneously. The financial professional that recommended the product would generally also recommend which indexes to choose and help the client with changes, if any, over the years.
There are three advantages regarding how FIA’s lock in gain and protect you from market loss. To summarize the first two points, when the index produces gain at the end of each index period, that gain is locked In and cannot be lost. As an example, if the person deposited 100,000.00 into an FIA, and the index produced a 10% gain during the index period the account value would be 110,000.00. If during the next index period the index sustained a market loss whether it was 1% or 50%, the client would not sustain any market loss at all! Not only would the original 100,000.00 have been protected but the full 110,000.00 would have been protected, as the gain is locked in once credited, and that higher amount becomes the new floor and cannot be subsequently reduced based on market loss.
The third and very important advantage is the Index Reset Feature. This can become quite beneficial during the times that an index sustains a loss. As an example if a client’s index does sustain a market loss at the end of any index period, the client again is not subject to that market loss and still keeps any past gains, but very importantly, if the index started at 2,800 and decreased to 1,400 by the end of that index period, the client could benefit as they get to start the next index period at out at 1,400. Thus, the client could participate in the subsequent gains (rebound gains) that are typical after market losses, but without ever having participated in the market loss in the first place!
The amount of gain an index produces can be adjusted by any participation rates, caps and spreads that the insurance company is offering in conjunction with that index.
When searching for the best products for my clients, I start with hundreds of products available thru many different insurance companies. Along with the national FMO’s I am associated with, I do research and comparisons of many product choices. I start my search by looking for products that are offered by highly rated carriers. Next, I look for products that offer low fees or no fees so more of the gain remains with my clients. Then I look for the best index choices which often point me to Uncapped Indexes, thus the amount of gain is not capped, and the clients could experience more upside, sometimes far more.
Based on the client’s needs I consider available riders which can produce benefits in the area of providing a guaranteed lifetime income, enhanced death benefits and other benefits.
There are some FIA’s that offer Income Riders that can be of benefit. Some products charge a fee for the income rider while others do not. The Income Riders may offer a level income for the rest of the persons life (and spouse) or an increasing income. The increase in income can be based on a certain annual percentage or can be based on index gains.
When comparing a Fixed Index Annuity (FIA) with an Income Rider, to the typical Single Premium Immediate Annuity (SPIA) there are some obvious differences. First, in most cases when a SPIA is chosen it is a lifelong commitment in that the client (and spouse) can receive a lifetime income, but they cannot change their mind down the road and access their funds, whereby with an FIA which includes an Income Rider the client can change their mind even if they have begun receiving the guarantee income stream and access the remaining funds, subject to any remaining surrender charges.
Next, the (FIA) with an Income Rider has the opportunity to grow based on the gains produced compared to most SPIA’s which do not offer that sort of traditional growth. When looking at a traditional SPIA, the return if any would often be based on the length of time the client and spouse live.
If a person needs or desires an Income Rider, some of my top choices are income riders allow for the guaranteed income to continue to increase with market gains. These products have the potential of providing an increasing lifetime income that can be very substantial when compared to other products. As an example, if a person’s annual income was at $2,000.00 per month and there was 10% gain at the end of the index term, the income would increase to $2,200.00 and stay at $2,200.00 until further gain is locked in. If during the next index period, the index sustained a loss (because the stock market had a downward correction) and at the end of that next index period the index was down any percentage, just like in the previous discussion of market loss, your income will not decrease at all. The reset feature also applies to your income in that, when the market goes down and your income stays the same for that period, when it’s time for the next period, your starting point is reset to the actual current level. Thus, if the index is down at the end of the period (no matter how much) you actually restart at that “down point” and get to take advantage of the gains that ensue. It has been typical that after the market has a correction as in 2000 or 2008, we have strong years of growth (sometimes called rebound growth). So, if you don’t sustain a loss of income during the drop, and then we have several years of possibly better than average growth in the indexes, your income would keep growing at the end of each index period as the index increases. As an example, you start at $2,000.00 per month, and the index produces a 10% gain and you are at $2,200.00 per month, then the market declines for a couple years by 50% you would still be at the $2,200.00 per month income, then whenever the index produces gains you will go up by that percent from the $2,200.00. So, if the index produced gains of 20% your next income level would go to $2,200.00 x 1.2 = $2,640.00, then if it did the same thing by end of the next index period, you would be at $3,168.00 per month as the gain percentage is calculated by the last (highest) income level. In this example because of the Reset Feature, it is possible that the client’s income has grown from $2,200.00 to $3,168.00 per month and the market still has not even gained back what it lost.
In conclusion, depending on a client’s needs and goals, the appropriate type of annuity can be an important part of their portfolio. Whether the goal is to protect some of their funds from market loss, grow their funds at a consistent rate, participate in market gains without the risk of market loss, create a guaranteed income that cannot be outlived, provide a hedge against inflation, or a combination of these attributes, the right annuity can be an integral part of one’s portfolio, and certainly deserves careful consideration.
Fred Orentlich | Fred M. Orentlich
Frederick Orentlich also famous as Fred Orentlich is a one of the best finance professional. Contact him for any kind of finance relates service like health insurance; invest in best life insurance plan to get tax free profit.
Bio:
I am currently licensed in over 10 states as an Independent Broker to transact, market, and consult on various products including Annuities, encompassing Fixed Annuities, Equity Indexed Annuities and Multi Year Guarantee Annuities, as well as Life Insurance, Modified Endowment Contracts, Long Term Care Insurance, Disability Insurance and Medicare Supplements.
I have trained and advised over 100 other financial professionals in the above areas.
I am the president and founder of Senior Financial Services Inc. and a member of the Asset Protectors and Advisors group.
I have received multiple awards over the years from several Insurance and Financial Services companies as well as the State of Massachusetts presented by the Governor of Massachusetts.
My area of focus is on senior financial matters, including, asset growth and protection.
I have personally serviced over one thousand clients and my independent brokerage has serviced well over ten thousand clients procured thru the financial professionals that work or have worked with or for my agency.
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