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Indexed Annuities

Annuity Rates Are Heating Up

The thermometer is reading 112 degrees as I write this email here in sunny Gilbert, Arizona! Walking outside feels like opening your oven as the hot blast peppers your skin. “Yeah but it’s a dry heat,” we tell ourselves. Not to be over dramatic, but as hot as it is, it’s nothing compared to what we are seeing with annuity rates right now.

Let me give you a few examples:

Fixed Deferred Annuities

Fixed annuity rates are the highest we've seen in years. Five - year deferred annuities, also known as Multi Year Guaranteed Annuities (MYGA), which pay no tax until you take withdrawals, are paying as high as 3.65% per year, guaranteed for the full five-year term. Assuming a 28% tax bracket, that’s a 5.11%tax equivalent effective yield.

Indexed Annuities

We are now in the biggest increase and longest bull market for the Dow Jones post –WWII. There's a chance this bull wave will continue several more years; however, there is a mountain of evidence to suggest a downturn is coming and coming soon.

If you want protection from a potential downturn, yet still ride the wave as this bull cycle continues, you should consider Indexed Annuities. You can hedge your bet and get the safety of a fixed annuity’s guaranteed no-loss-of-principal while still participating in the upside of your chosen market Index.

Indexed Annuity participation rates are hotter than my steering wheel at 3:00 pm in the afternoon. One index participation rate is as high as 170% of the Index with no upside earnings cap. If you are unfamiliar with participation rates, that means how much of the movement of the Index you will be exposed to and credited interest.

Short Term Indexed Annuity rates are the highest they've been in over a decade. We have one five-year Indexed Annuity that is giving 100% Index Participation on the S&P 500 5% Low Volatility Index, which was up over 14% last year. Another innovative Indexed Annuity offers terrific hedging potential and includes an Inverse Index to the S&P 500. If the Index is negative at all for the year you would be credited over 8% interest. If its up, you get 0% for that portion of your funds invested.

Remember, with Indexed Annuities, your principal is protected, and your interest, once credited is locked in and banked with each crediting term. So if this bull market continues and has a final run up like in 1999 and early 2000, you will continue to participate in the growth. If and when the correction occurs, you will sit safely on the sidelines. Heads you win, tails you don’t lose.

Long Term Care Annuities

If you have been investigating long term care, you probably have learned that traditional long term care is going the way of the dinosaur. That doesn’t mean you still don’t need long term care insurance. In fact if you are a woman age 65 or older you have an 80% chance of experiencing a long term care event at some point in your life.

Recent innovations in hybrid long term care annuity combos can make great long term care solutions. There are several LTC/Annuity combos that will immediately leverage your annuity value three times for your long term care benefits. In other words, $100,000 deposited will generate up to $300,000 in potential care benefits, and they can be used jointly.

If you have an old annuity, you can exchange it by making a 1035 tax-deferred exchange into a new hybrid LTC Annuity. Thanks to provisions in the 2006 Pension Protection Act, any withdrawals taken for long term care purposes can be withdrawn tax-free.

Hybrid long term care annuity rates are heating up as well. One Fixed LTC Annuity is paying 3.4% interest and can be transferred with IRA/qualified funds. Hybrid annuity availability can vary greatly from state to state as well the source of funds you can use. Call us to find out if hybrid LTC annuities make sense in your situation. Sometimes hybrid life insurance with long term care can be an even better care solution. You can learn more by requesting our special report “Leveraged Care Solutions” which describes the various hybrid long term care solutions. Please call 888-892-1102 or CLICK HERE to request our free report.

There's no telling how long we can go before the next big correction. The Fed wants to continue to raise rates, but as Dr. Mark Skousen says, every time the Fed has continued to raise rates, an ensuing downturn was sure to follow. Now might be a great time to bank some of your recent earnings and move your funds into the safe harbors of a guaranteed annuity.

Please call us at 888-892-1102 or reply to this email and we can discuss which annuity or combination of annuities is the right strategy for you.

Todd and David Phillips

Could Ramsey Be Wrong?

Last night we decided to take our oldest three girls to see Miss Peregrines's Home for Peculiar Children. The plan was to meet up with the rest of the family at the theatre and attend the 7:45 pm showing. I arrived a few minutes early and was listening to our popular local news channel, 92.3 KTAR. Most of the time KTAR plays news and discusses politics, but this hour from 7:00 - 8:00 pm was dedicated to the Dave Ramsey Show. In case you are unfamiliar, Ramsey's show is broadcasted nationally, and he is one of the most well known financial advisors in America.

I've found myself listening to Dave with awe as he astutely walks his callers through debt elimination and investment advice. My in-laws and mother all have Ramsey's books. In fact, his latest book is the center piece on my Mother-in-Law's coffee table. In their house, Dave has replaced the old EF Hutton motto, "When Dave Ramsey speaks, people listen."

The first caller told Dave she had inherited $1.6 million. She told him about how her mother suggested she meet with their financial advisor, who told her to invest half of the money into an annuity. I have heard Dave preach numerous times about the virtue of buying Term Insurance and investing the difference in mutual funds versus buying Whole or Universal Life, but I had never heard his take on annuities.

Right off the bat, Dave said "What a shame that he put you into an annuity. Those things are awful, full of fees, you can't take the money out and they don't pay squat!"

The caller told Dave she had $800,000 in the annuity and it was paying $38,000 per year for the rest of her life.

Dave then responded with:

"Now you could have put that money into a good mutual fund and I could get you $60,000 to $80,000 no problem and not touch your principal. That's the key you don't want to touch the principal. You don't want to kill the golden goose and we can do that. Keep it simple in large cap growth and value funds with a good history, maybe a splash of some international. Get you $60,000 to $80,000 and we won't have to kill the goose."

Then he proceeded to tell her to not listen to other peoples' advice, fire the advisor who recommended the annuity and "shame on him."

I should also add that the caller was on disability and that this money along with disability was her sole source of income. She needs the income that the $800,000 was producing.

Dave finished the call by telling her to take the remaining $800,000 and pay off her mortgage and then put the rest in large cap mutual funds as well.

Working with numbers all day, I quickly computed that $60,000 on $800,000 is 7.5%. Dave told her she should be able to take 7.5% from some good mutual funds and not have to worry about touching the principal. I read at least a half dozen financial newsletters a week, and it's pretty common knowledge that these days, taking 4% income is pushing the envelope, and that's assuming you are drawing down the principal.

The caller's annuity was paying $38,000 guaranteed for life from the $800,000 which is 4.75%. That's actually a fair rate in today's environment, but of course nothing near Ramsey's 7.5%.

Have I been wrong all this time?

I laid awake last night and this morning questioning myself and my career these past 20 years, making hundreds of recommendations to invest in annuities.

In 2000, with my shiny Series 7 license in hand, I put my family and close friends into the best mutual funds available at that time. All gung ho with the 1990's in my rearview, I was eagerly optimistic with the potential wealth I would be making for my clients.

And then, as you know, the tech wreck hit with a vengeance. Family members' $500,000 tanked to $300,000 seemingly overnight...on my watch!

Fortunately, I had been putting most of our clients' safe money into Indexed Annuities. Dad was on the board of directors to help in the creation of one of the very first Indexed Annuities back in 1995. We were lucky to have latched onto the idea. All of our clients who put money into the Indexed Annuities didn't lose a single penny from 2000 - 2003.

But then there's Ramsey, my financial planning hero, the guru, telling America that Annuities are a sucker's bet and full of fees. You can't touch them and are nothing but a means to fill the pocket book of some crooked, self serving advisor.

I know I'm not crooked, and I've always recommended investments that I truly felt were in my client's best interest, but have I unwittingly been wrong all this time?

So far, in my twenty year career I haven't had one complaint on my Indexed Annuity recommendations. I know in some years we have made over 20%. In the tough recession years, our clients were grateful not to experience any losses. But maybe Ramsey is right. How could I question this nationally syndicated authority whose book my Mother-in-Law has marked up more than her scriptures?

Do the Math

If you've listened to Ramsey at any length you'll hear him tell the callers to "Do the Math."

So this morning I did just that and started firing up Microsoft Excel, my GoFigureNow historical data software, Morningstar and Yahoo. Finance data feeds.

Rather than focus on one particular mutual fund I chose the S&P 500 Index itself, which I think is an excellent representative of historical returns to Dave's Large Cap Mutual Funds. To prove it, here is chart from Morningstar comparing one of the country's top Growth Funds - American Funds Growth Fund of America.

As you can see, they are almost identically correlated. I used the S&P 500 Index in green to represent Dave Ramsey's Mutual Fund recommendation.

For my Indexed Annuity representative, I chose our most popular annuity issued at the inception of this analysis which began January 1, 2000.

This Annuity gave 100% Index Participation on the S&P 500 Index, which means when the Index was up 10%, the investor earned 10%. It also had a spread, which is similar to a fee, but is only charged when there are gains. The spread was 1.5% on average. Some years the spread was 0%, some were as high as 3%. I concluded that 1.5% was the fairest estimate of the average.

The Indexed Annuity had the Annual Reset feature, which meant each year the calculations reset and started a new calculating period. This effectually wiped the slate clean on the contract anniversary starting a new term until the next anniversary. The worst performance the annuitant could experience in any given year was 0%. We used to say, "Zero is your Hero" and as you can imagine, it sure was from 2000 - 2003 and 2008.

The final qualifier was that our Indexed Annuity used the "Daily Averaging Calculating Method." This meant the company added up all of the ending values of every trading day throughout the year and then divided that from the number of trading days to get the average ending value. Using averaging smoothes out choppy markets but can limit returns in up-trending years. This particular annuity had No Maximum Earnings Cap.

I pay for software that allows me to input the various Indexing stipulations and calculating qualifiers such as Caps, Participation Rates, Spreads and Averaging.

First, I compared the Indexed Annuity assuming no withdrawals were taken from January 1, 2000 to January 2016. Here's how they stacked up:

As you can see, the end result was quite similar. Neither were that terrific; certainly nowhere near the 7.5% Dave Ramsey was advising.

What Happens When We Take Withdrawals?

Remember, the caller needed the income to live off of. The annuity was guaranteed to pay $38,000 for the rest of her life. Dave told her the mutual funds could pay her $60,000 and not touch the principal.

Let's give Dave the benefit of the doubt and assume we have $1,000,000 to work with instead of $800,000 and take out his recommended $60,000 out per year. Here's how it would look:

The difference is absolutely astonishing when you include withdrawals!

I encourage you to run through this exercise on your own. Take $1,000,000 and start pulling withdrawals to simulate retirement income. Go to or Morningstar or Fidelity online. Pull the data from your mutual fund or an index and start taking withdrawals. Try to match Dave's 7.5% and see how long it lasts. It'll work fantastically if you start in 1990. But look out if you started in 2000!

Now I'm sure after calling Dave, the caller phoned her advisor the next day and fired him. She's probably now sitting in some nice Large Cap Equity Funds telling her friends how now she's getting $60,000 per year and won't even have to touch her principal.

Perhaps Dave simply thinks we are living in the 1990's with a GDP growth rate of 4% and not 1%. Or maybe he knows about some new industry that's going to push the Dow to 40,000 by in 10 years (which is what it would need to be to keep her $60,000).

All I know is that if his caller had put $1,000,000 into a Large Cap Mutual Fund that performed like the S&P 500 and took her $60,000, she would have run out of money in 13 years. Hopefully her siblings were wiser and she can move in with them.

Whereas, our Indexed Annuity, thanks to not having to take any losses, still had $419,492 in 2012 and $305,303 at the end of 2015.

Why the Difference?

The secret is in the Sequence of Returns. In our comparison with no withdrawals taken there was little difference, but when we added withdrawals to the equation, the Indexed Annuity was far superior.

As a Financial Planner, I get to run thousands of assumptive returns to test how a portfolio will hold up. The key in retirement is not to take big losses in the beginning. If we switched the returns in order and had the 2000 - 2003 at the end, the S&P 500 would have held up fine. Start retirement in 1995 and you're in tall cotton. Start in 2000, and you better start being nice to your kids and hope they have a guest room!

OK, maybe I cherry picked a great time to compare the Annuity. It's absolutely true that not having to take any losses in the downturn gave me and my clients a huge advantage, especially when we analyze a choppy whipsawing market like the last 16 years. Had I picked the start of the 90's, my annuities likely would have been left in the dust.

What do we do now?

But that's all in the past. I have to write a disclaimer that past performance is not indicative of future results. So what do we do now?

We have absolutely no idea what the next 16 year chart will look like. What affect on the market will Trump or Hillary make? What if Deutsche Bank collapses, will it trigger another Lehman Brother's Fall of 2007 debacle? What if experts like Peter Schiff are correct, and that the Dow Jones Industrial Average will soon be the same value as one ounce of Gold? On the other hand, will all the free money stimulus finally ignite a powder keg of inflation sending equity values into the stratosphere?

Look at this chart of the S&P 500 over the last 20 years from October 1996 to today.

My daughter, Juliette, is learning about patterns in preschool. I had her guess and draw where she thought the line would go next. Where do you think she continued? I can promise it wasn't straight up.

It's dangerous and uneducated to broad stroke an entire group of anything as being all good or all bad. Not all Whole Life Insurance is bad for everyone. Not all Mutual Funds are good, all the time, and neither are all Annuities.

Consider using the Annuity piece of your financial puzzle as a safe money substitute for your other investments such as bonds or CD's. With overall interest rates near record lows, what will happen to the value of your bonds and bond funds when interest rates finally start to rise? Then again, what will happen to your equities if and when the market finally corrects?

During this time of incredible uncertainty, I believe the prudent move is to take some chips off the table. Cash them in to the safe harbor of guaranteed investment that will both crash proof the downside of your portfolio, and maintain the upside exposure to keep pace with inflation.

Please call me at 1-888-892-1102 so we determine whether or not an annuity makes sense for a portion of your portfolio.

Here's to a Safe Secure and Prosperous Retirement!

Best Regards,

D. Todd Phillips

Indexed Annuities

What if you could combine part of the stock market’s upside with absolutely zero downside risk? Better yet, what if after each year 100% of your gains were automatically locked in – guaranteed never to disappear? Well now you can do all of this and more by moving your funds into the safety of an Indexed Annuity.

With an Indexed Annuity you can:

  • Permanently Crash Proof your portfolio
  • Generate unlimited upside with zero market risk
  • Lock in profits against market downturns
  • Create your own personal pension and guaranteed income for life
  • Accumulate tax-deferred wealth
  • Enjoy market linked returns with 100% guaranteed minimum interest
  • Reduce provisional income to avoid tax on social security
  • Avoid probate fees on your assets without a trust
  • Kick start your savings with a double digit bonus

An Indexed Annuity is a deferred annuity that combines the downside protection of a traditional fixed annuity with the upside linked to the performance of a stock market index such as the S&P 500, NASDAQ 100, or Dow Jones Industrial Average. Indexed Annuities provide guaranteed minimum interest rates similar to fixed annuities, CD's and Bonds. But unlike these "safe money" investments, your interest earnings participate in the growth of the stock market with 100% downside protection.

With interest rates still near all-time lows, investors seeking traditional "safe investments" like CD's, money markets and bonds, run the risk of losing their purchasing power. Current rates of returns earned on most CD's and money markets’ after tax returns are actually lower than current inflation rates. On the other hand, you run an even greater risk investing directly in the stock market, thanks to its prevailing uncertainty. Indexed Annuities offer the best of both worlds; downside protection like CD's, and upside potential from the stock market.

Today there are more than 50 companies offering indexed annuities with over 300 products, each with numerous methods of crediting returns based on the stock market indices’ performance. Click the link below or call us at 888-892-1102 and we will send you an information packet on today's top paying Indexed Annuities. We'll also include a free Indexed Annuity Guide which will unravel the mystery behind Indexed Annuity crediting as well as teach you which ones work best for various market conditions.

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