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Annuities: The Wonder Drug for Your Retirement?

January 17, 2022 by 12 Comments
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Annuities: The Wonder Drug for Your Retirement?

Annuities are often touted as the “cure” for all that ails your retirement.  Baby Boomers and retirees are the prime target market for the annuity sales types. You’ve undoubtedly heard many of these pitches in person or as advertisements. The pitches frequently pander to the fears that many investors still feel after the last stock market decline. After all, what’s not to like about guaranteed income?

What is an annuity?

I’ll let the Securities and Exchange Commission (SEC) explain this in a quote from their website:

“An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

There are generally three types of annuities — fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In an indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.

In a variable annuity, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.

Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC. You can learn more about variable annuities by reading our publication, Variable Annuities: What You Should Know.”

What’s good about annuities?

In an uncertain world, an annuity can offer a degree of certainty to retirees in terms of receiving a fixed stream of payments over their lifetime or some other specified period of time. Once you annuitize there’s no guesswork about how much you will be receiving, assuming that the insurance company behind the product stays healthy.

Watch out for high and/or hidden fees 

The biggest beef about annuities are the fees, which are often hidden or least difficult to find. Many annuity products carry fees that are pretty darn high, others are much more reasonable. In general, the lack of transparency regarding the fees associated with many annuity contracts is appalling.

There are typically several layers of fees in an annuity:

Fees connected with the underlying investments.  In a variable annuity there are fees connected with the underlying sub-account (accounts that resemble mutual funds) similar to the expense ratio of a mutual fund. In a fixed annuity the underlying fees are typically the difference between the net interest rate you will receive vs. the gross interest rate earned.  In the case of an indexed annuity product the fees are just plain murky.

Mortality and expense charges are fees charged by the insurance company to cover their costs for guaranteeing a stream of income to you. While I get this and understand it, the wide variance in these and other fees across the universe of annuity contracts and the insurance companies that provide them makes me shake my head.

Surrender charges are fees that are designed to keep you from withdrawing your funds for a period of time.  From my point of view these charges are heinous whether in an annuity, a mutual fund, or anyplace else. If you are considering an annuity and the product has a surrender charge, avoid it. I’m not advocating withdrawing money early from an annuity, but surrender charges also restrict you from exchanging a high cost annuity into one with a lower fee structure. Essentially these fees serve to ensure that the agent or rep who sold you the high fee annuity (and the insurance company) continue to benefit by placing handcuffs on you in terms of sticking with the policy.

Who’s really guaranteeing your annuity? 

When you purchase an annuity, your stream of payments is guaranteed by the “full faith and credit” of the underlying insurance company.  This differs from a pension that is annuitized and backed by the PBGC, a governmental entity, up to certain limits.

Outside of the most notable failure, Executive Life in the early 1990s, there have not been a high number of insurance company failures. In the case of Executive Life, thousands of annuity recipients were impacted in the form of greatly reduced annuity payments which in many cases permanently impacted the quality of their retirement.

Insurance companies are regulated at the state level; state insurance departments are generally the backstop in the event of an insurance company failure. In most cases you will receive some portion of the payment amount that you expected, but there is often a delay in receiving these payments.

The point is not to scare anyone from buying an annuity but rather to remind you to perform your own due diligence on the underlying insurance company.

Should you buy an annuity? 

Annuities are not a bad product as long as you understand what they can and cannot do for you. Like anything else you need to shop for the right annuity. For example, an insurance agent or registered rep is not going to show you a product from a low cost provider who offers a product with ultra-low fees and no surrender charges because they receive no commissions.

An annuity can offer diversification in your retirement income stream. Perhaps you have investments in taxable and tax-deferred accounts from which you will withdraw money to fund your retirement. Adding Social Security to the mix provides a government-funded stream of payments. A commercial annuity can also be of value as part of your retirement income stream, again as long as you shop for the appropriate product.

Annuities are generally sold rather than bought by Baby Boomers and others. Be a smart consumer and understand what you are buying, why a particular annuity product (and the insurance company) are right for you, and the benefits that you expect to receive from the annuity. Properly used, an annuity can be a valuable component of your retirement planning efforts. Be sure to read ALL of the fine print and understand ALL of the expenses, terms, conditions and restrictions before writing a check.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Annuity Sellers Love Stock Market Turmoil

March 11, 2020 by 4 Comments
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Update 3/11/2020 – We are in the midst of the worst stock market turmoil since the financial crisis in 2008, due to the coronavirus and related disruptions in the economy. It’s times like these that can fuel fear-based selling tactics by many who sell annuities. I have absolutely nothing against annuities, but I feel that no financial product should be purchased based on fear. It will be interesting if the pattern of these fear-based tactics that we’ve seen in the past materializes in this volatile stock market environment.

Just like clockwork if we see a prolonged period of volatility you can count on a new wave of ads touting various types of annuity products as the answer for investors worried about the stock market. Annuity sellers love stock market turmoil. Those of you who follow my blog know that I have a special level of contempt for those who sell financial products by invoking fear.

Stan Haithcock wrote Annuity sharks smell blood with market volatility recently at Market Watch. This was one of those articles that after reading it led me to wish I’d written it.  Stan’s opening paragraph provides a great overview.

“Any time the stock market has a bad week or experiences extreme volatility, the annuity sharks start smelling blood in the investment waters and will be on the attack to lock your money into their “perfect product.” Current indexed- and variable-annuity sales pitches can sound enticing and almost too good to be true, so it’s important to keep your head and understand the contractual realities and proper uses for annuities in a portfolio.” 

Mike Ditka and Indexed Annuities

My dislike of fear-mongering annuity ads started a few years ago when the local news radio station was full of ads touting indexed annuities as the cure for the risky stock market. The group enlisted former Bears coach Mike Ditka as their pitchman. Ditka can probably sell anything to the win-starved fans of the Chicago Bears.

I personally think using any celebrity spokesperson to sell financial products is reprehensible and takes something as serious as someone’s financial well-being and equates it to the decision of which snack food to buy.

Indexed Annuities 

Though I’ve tried to keep an open mind about these products, I’ve reviewed many contracts over the years and have never found one that seemed to have much redeeming value for the contract holder. By this I mean I’m not sure what the product does for them that a properly diversified investment strategy with a well-conceived retirement income plan couldn’t do just as well or better for a whole lot less money.

Indexed annuities, sometimes called equity-indexed annuities, offer limited upside participation in a stock market index such as the S&P 500. The reason they are sold as an alternative to the risky stock market is they offer either a guaranteed minimum return each year or a limit on how much of a loss the contract holder can incur each year. The sales pitches will vary and they are often also touted as an alternative to CDs.

A few things to be leery of if you are being sold one of these products:

  • Long surrender periods. I’ve seen policies where the surrender charges last for 10 years or more.
  • High fees and commissions. The fees internal to the contract serve to provide nice compensation to those selling them. Why do you think agents and registered reps are so eager to sell you an indexed annuity?
  • Hard to understand formulas to determine your return. The premise is typically that you will participate in a portion of any gains on an underlying market benchmark such as the S&P 500 and that there is some minimum amount of return that you will make no matter how the index performs.  Make sure you understand the underlying formulas that determine your return and any factors that might cause a change in the formula.  Check out FINRA’s Investor Alert on Indexed Annuities as well.
  • Limited upside participation in the underlying index.

Additionally the sales pitches can be confusing. Make sure you understand what you would be buying, all of the underlying expenses and most important why this is the BEST solution for you.

Variable annuities and riders 

Variable annuities generally have underlying investment choices called sub-accounts that function like mutual funds. They also have internal fees called mortality and expense charges that cover the insurance aspect of the contract. These fees can vary all over the board. Many contracts also carry surrender charges for a number of years from the issue date as well.

While the value of the VA will vary based upon the investment results, several riders or add-ons can create certain product guarantees. These riders come at a cost and that cost will impact how long it takes for the contract holder to come out ahead.

Two popular living benefit riders are guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum income benefits (GMIB).

A GMWB rider guarantees the return of the premium paid into the contract, regardless of the performance of the underlying investments via a series of periodic withdrawals.

A GMIB rider guarantees the right to annuitize the contract with a specified minimum level of income regardless of the underlying investment performance.

Both types of riders entail added costs and require varying time frames to be eligible for exercise and/or to recover the cost of the rider.

A variable annuity with or without one of these riders may be the right choice for you. You are far better off shopping around for the best product versus allowing yourself to be sold via a slick sales pitch.

The Bottom Line 

Renewed market turmoil means a new wave of annuity sales pitches reminding prospects how risky stocks can be. Financial planning should always trump the sale of any financial product so investors who are worried about the volatility in the stock market will generally be better served by having an overall financial plan in place from which the appropriate products for implementation will flow.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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6 Investment Expenses You Need to Understand

October 1, 2018 by 5 Comments
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Investment expenses reduce your investment returns. While nobody should expect investment managers, financial advisors or other service providers to offer their services for free, investors should understand all costs and fees involved and work to reduce their investment expenses to the greatest extent possible.

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Here are 6 investment expenses you need to understand in order to maximize your returns.

Mutual fund and ETF expense ratios

All mutual fund and ETFs have expense ratios. These fees cover such things as trading costs, compensation for fund managers and support staff and the fund firm’s profit. Expense ratios matter and investors shouldn’t pay more than they need to.

Vanguard’s site, as you might expect, deals with this topic at length. In one example, it shows the impact of differing levels of fees on a hypothetical $100,000 initial account balance over 30 years with a yearly return of 6%. After 30 years the balance in the account would be:

$574,349 with no investment cost

$532,899 with an investment cost of 25 basis points

$438,976 with an investment cost of 90 basis points

These numbers clearly illustrate the impact of fund fees on an investor’s returns and their ability to accumulate assets for financial goals like retirement and funding their children’s college educations.

Mutual fund expense ratios are an example of where paying more doesn’t get you more. Case in point, Vanguard Value Index Adm (VVIAX) has an expense ratio of 0.05%. The Morningstar category average for the large cap value asset class is 1.03%. For the three years ending September 30, 2018 the fund ranked in the top 10% of all funds in the category; for the trailing five years it placed in the top 6% and for the trailing ten years it placed in the top 24% in terms of investment performance.

Sales loads and 12b-1 fees

Front-end sales loads are an upfront payment to a financial advisor or registered rep. Front-end sales loads reduce the amount of your initial investment that actually goes to work for you. For example, if a rep suggests investing in a mutual fund like the American Funds EuroPacific Growth A (AEPGX) for every $10,000 the investor wants to invest, $575 or 5.75% will be deducted from their initial investment balance to cover the sales load. Over time this will reduce the investor’s return versus another version of the same fund with a similar expense ratio that doesn’t charge a sales load.

Some will argue that this load is a one-time payment to the advisor and their firm for their advice. This strikes me as dubious at best, but investors need to decide for themselves whether the advice received in exchange for paying a sales load warrants this drain on their initial and subsequent investments. This share class has an expense ratio of 0.82% which includes a 12b-1 fee of 0.24% (see more on 12b-1 fees below).

Level loads are associated with C shares. The American Funds EuroPacific Growth C (AEPCX) fund has a level load of 1% in the form of a 12b-1 fee and an overall expense ratio of 1.60%. Brokers and registered reps love these as the level load stays in place for ten years until the funds convert to a no-load share class of the fund. There is a 1% surrender charge if the fund is redeemed within the first year of ownership.

12b-1 fees are a part of the mutual fund’s expense ratio and were originally designated to be marketing costs. They are now used as trialing compensation for financial advisors and reps who earn compensation from selling investment products. They can also be used to provide revenue-sharing in a 401(k) plan. While 12b-1 fees don’t increase expenses as they are part of the fund’s expense ratio, typically funds with a 12b-1 fee will have a higher expense ratio than those that don’t in my experience.

401(k) expenses

For many of us our 401(k) plan is our primary retirement savings vehicle. Beyond the expense ratios of the mutual funds or other investments offered, there are costs for an outside investment advisor (or perhaps a registered rep or broker who sold the plan) plus recordkeeping and administration among other things. If your employer has these costs paid by the plan they are coming out of your account and reducing the return on your investment.

Be sure to review the annual fee disclosures provided by your employer for your company’s plan for information on the plan’s expenses.

Financial advice fees

Fees for financial advice will vary depending upon the type of financial advisor you work with.

Fee-only financial advisors will charge fees for their advice only and not tied to any financial products they recommend. Fees might be charged on an hourly basis, on a project basis for a specific task like a financial plan, based on assets under management or a flat retainer fee. The latter two options would generally pertain to an ongoing relationship with the financial advisor.

Fee-based or fee and commission financial advisors will typically charge a fee for and initial financial plan and then sell you financial products from which they earn some sort of commission if you choose to implement their recommendations. Another version of this model might have the advisor charging a fee for investment management services, perhaps via a brokerage wrap account, and receiving commissions for selling any insurance or annuity products. They also would likely receive any trailing 12b-1 fees from the mutual funds used in the wrap account or from the sale of loaded mutual funds.

Commissions arise from the sale of financial and insurance products including mutual funds, annuities, life insurance policies and others. The financial advisor is compensated from the sale of the product and in one way or another you pay for this in the form of higher expenses and/or a lower net return on your investment.

Investors need to understand these fees and what they are getting in return. In fact, a great question to ask any prospective financial advisor is to have them disclose all sources of compensation that they will receive from their relationship with you.

Surrender charges

Surrender charges are common with annuities and some mutual funds. There will be a period of time where if the investor tries to sell the contract or the fund they will be hit with a surrender charge. I’ve seen surrender periods on some annuities that range out to ten years or more. If you decide the annuity is not for you or you find a better annuity, the penalty to leave is onerous and costly.

Taxes 

Taxes are a fact of life and come into play with your investments. Investments held in taxable accounts will be taxed as either long or short-term when capital gains are realized. You may also be subject to taxes from distributions from mutual funds and ETFs for dividends and capital gains as well.

Investments held in a tax-deferred account such as a 401(k) or an IRA will not be taxed while held in the account but will be subject to taxes when distributions are taken.

Tax planning to minimize the impact of taxes on your investment returns can help, but investment decisions should not be made solely for tax reasons.

Fees and expenses can take a big bite out of your investment returns.

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The Bottom Line

Fees and expenses can take a big bite out of your investment returns and your ability to accumulate an amount sufficient to achieve your financial goals. Investors need to understand all costs and expenses associated with their investments and take steps to minimize these costs.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Investing Seminars – Should You Attend?

March 12, 2017 by Leave a Comment
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It must be the season for investing and retirement dinner seminars. I’ve received a number of these invitations in the mail recently.

Typical was one from a local investment firm “___ Cordially Invites You to Attend an EXCLUSIVE Dinner Gathering!” Wow, me invited to anything that was exclusive?  The only brokerage sponsored investment “seminar” that I have ever attended featured legendary market guru Joseph Granville who among other things played the piano in his boxer shorts. It was in a movie theater in Milwaukee back in grad school, no food was involved.

Opening the invitation, it was from a well-known brokerage firm. The topic of the seminar is “Strategies for helping build a stronger portfolio.” The areas to be covered include:

  • Outlook for Domestic/International Stock & Bond Markets
  • Focus on distributions:  strategies for managing your retirement income
  • Developing a systematic process to help GET and STAY on the right financial track
  • Strategies to help take advantage of upside market potential while planning for a possible downside

So far this all sounds great. Reading on I noticed that while the session is sponsored by two brokers from the firm, the featured speakers were from a mutual fund company that offers funds that are often sold by commissioned reps while the other speaker was from an insurance company who is big in the world of annuities.

Should you attend? 

Clearly the objective is to sell financial products to the attendees, this is reinforced by the choice of speakers. That said there might be some good information available, the topics are certainly timely especially for Baby Boomers and retirees.

Consider attending one of these seminars only if you feel that you can resist a sales pitch. In the case of this session, the restaurant is a pretty good one that is close to my home. I am often tempted to check out one of these seminars out of professional curiosity, a free meal at a good restaurant would be an added bonus.

What are you hoping to gain from attending? The brokers are likely spending a fair amount of money on this session and expect a return on their investment. There will be a good deal of sales pressure at the very least to schedule a follow-up session with them.

Think about your real objective 

If you want a good meal and perhaps a little bit of knowledge, go ahead and attend.

If you are serious about finding a financial advisor to guide you to and through retirement, perhaps you should forego the meal and try to find someone who is a good fit for you. I strongly urge that you seek a fee-only advisor who sells only their knowledge and advice. NAPFA (a professional organization for fee-only advisors) has published this excellent guide to finding a financial advisor.

A free meal is great, but in the end as they say, there are no free lunches.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Should You Accept a Pension Buyout Offer?

December 4, 2016 by 4 Comments
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Corporate pension buyout offers have been in the news in recent years with companies like Hartford Financial Services offering lump-sum payment options to vested former employees and with Boeing offering a choice of lump-sum or annuity payments to a similar group. Note these offers are not available to retirees who have already taken their pension benefit.

The answer to the question of whether you should accept a pension buyout offer versus taking your pension as a lifetime stream of monthly payments is that it depends upon your situation. Here are a few things to consider.

Are they sweetening the deal? 

Perhaps the lump-sum is a bit larger, and in the case of the Boeing offer the annuity payments were a bit better as well. Or perhaps there normally wouldn’t be a lump-sum option available from the pension plan so this in and of itself is an incentive.

Remember the incentive for the companies offering these deals is to get rid of these future pension liabilities. The potential cost savings and impact on their future profitability is huge. 

Can you manage the lump-sum? 

The decision to take your pension as a lump-sum vs. a stream of payments is always a tough decision. A key question to ask yourself is whether you are equipped to manage a lump-sum payment. Ideally you would be rolling this lump-sum into an IRA account and investing it for your retirement. Are you comfortable managing this money?  If not are you working with a trusted financial advisor who can help you?

There has been much written about financial advisors who troll large organizations (both governmental and corporate) looking for large numbers of folks with lump-sums to rollover. In some cases, these advisors have moved this rollover money into investments that are wholly inappropriate for these investors. As always be smart with your money and with your trust.  Be informed and ask lots of questions.

Do you have concerns about the company’s financial health? 

Do you have doubts about the future solvency of the organization offering the pension? This pertains to both a public entity (can you say Detroit?) and to for-profit organizations like Hartford Financial and Boeing. In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC. If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.

While I am not familiar with the financial state of either Hartford Financial or Boeing I’m guessing their financial health is not a major issue. If you receive a buyout offer you might consider taking it if you have concerns that your current or former employer may run into financial difficulties down the road.

Who guarantees the annuity payments? 

If the buyout offer includes an option to receive annuity payments make sure that you understand who is guaranteeing these payments. Generally, if a company is making this type of offer they are looking to reduce their future pension liability and they will transfer your pension obligation to an insurance company. They will be the one’s making the annuity payments and ultimately guaranteeing these payments.

This is not necessarily a bad thing but you need to understand that your current or former employer is not behind these payments nor is the PBCG. Typically, if an insurance company defaults on its obligations your recourse is via the appropriate state insurance department. The rules as to how much of an annuity payment is covered will vary.

The impact of inflation

An additional consideration in evaluating a buy-out option that includes annuity payments of this type is the fact that most of these annuities will not include cost of living increases. This means that the buying power of these payments will decrease over time due to inflation. 

What other retirement resources do you have? 

If you will be eligible for Social Security and/or have other pension plans it quite possibly will make sense to take a buyout offer that includes a lump-sum. Review all of your retirement accounts and those of your spouse if you are married.  This includes 401(k) plans, 403(b) accounts, IRAs, etc. This is a good time to take stock of your retirement readiness and perhaps even to do a financial plan if don’t have a current one in place.

The Bottom Line

I’m generally a fan of pension buyout offers, especially if there is a lump-sum option. As with any financial decision it is wise to look at your entire retirement and financial situation and to have a plan in place to manage this money.  Where an annuity is also available you need to understand who will be behind the annuity and to analyze whether this is a good deal for you. Be prepared to deal with an offer if you receive one.

Were you offered a buyout or early retirement package? Do you need some help evaluating it? Do you need an independent opinion on your investments and where you stand in terms of retirement? Check out my Financial Review/Second Opinion for Individuals service. 

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Discover the Secret to Living Tax-Free in Retirement

October 3, 2015 by 4 Comments
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On those rare occasions that I develop writer’s block in terms of what to write about here the financial services industry seems to bail me out. Case in point the invitation to a “Private Taxation Workshop” (versus just a plain old seminar) I recently received in the mail. The title of the seminar on the invitation was title I used for this article.

Think about the words “secret to living tax-free in retirement” and while doing so make sure you know where your wallet is.

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Look I’m not saying the accounting firm who is conducting the session in conjunction with a financial services firm is anything but above-board but when I hear words like living tax-free in retirement my first thought is that there will be someone telling you that purchasing the cash value life insurance policy or annuity product being peddled is the answer to your retirement anxiety.

To top this off the seminar is being held at a park district facility, not at a restaurant. In other words they aren’t even providing dinner. Those of you who are regular readers of The Chicago Financial Planner know that I do not hold the sponsors of these sessions in high regard. (Please read Investing Seminars – Should You Attend? and Should You Accept That Estate Planning Seminar Invitation? )

How to legally be in the 0% tax-bracket for any income level

This is one of the bullet points listed under the items they will be discussing at the session. Come on, really? If it were that easy wouldn’t everyone be doing it?

Again I’m guessing that there is some sort of life insurance or annuity product that will be promoted. Note nothing will be sold at the session (it says so right on the invitation) but you can be sure that if you schedule a follow-up session the hard-sell with be there right after the hand-shake. In fact you can count on being given the hard-sell to schedule a follow-up session.

The most overlooked strategy for creating tax-free income from your taxable investments

Another bullet point on topics that will be covered. This sounds great! Wow!

OK back to reality. Remember the adage if it sounds too good to be true it probably is? Well this sounds like it fits.

Again I have no idea what they will be saying but if this was some super-secret sophisticated tax strategy would they be sharing it with a group of non-screened attendees in a park district building for free?

The Bottom Line

I am not saying anyone is doing anything fraudulent, illegal or untoward. What I am saying is that this appears to be nothing but a thinly veiled sales pitch by an accounting firm and a financial services firm to pique your interest and to ultimately sell you some sort of life insurance policy, annuity or some other financial product with hefty commissions attached. I’m guessing the accounting firm has some arrangement to realize a portion of the product sales arising from session attendees.

I’m not against learning and improving your financial knowledge. In fact that’s why I started this blog and why I write for Investopedia, Go Banking Rates and elsewhere. If you go to one of these seminars go with a very skeptical attitude, listen hard and be non-committal about your interest when they urge you to schedule a follow-up meeting. Go home afterwards and at least research the ideas they are touting and the firms involved. Be a smart consumer of financial products and advice. That is the best way to protect yourself from financial fraud and from buying expensive financial products that serve someone else’s needs better than they serve yours.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

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7 Retirement Savings Tips to Help Avoid Regret

November 23, 2014 by 16 Comments
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According to TIAA-CREF’s Ready to Retire Survey “…more than half of people approaching retirement (52 percent) say they wish they had started saving for the future sooner.”    Some key findings from the survey include:

  • “Many respondents say they wish they had made smarter financial decisions earlier in their career, including saving more of their paycheck (47 percent) and investing their savings more aggressively (34 percent).
  • Forty-five percent of participants age 55-64 say financial readiness is the most important factor in determining when they will retire, but only 35 percent say they saved in an IRA or met with a financial advisor.
  • By not making the most of these options, many Americans now feel uncertain about their financial futures, with 68 percent of those approaching retirement saying they are not prepared for what’s to come
  • These retirement savings challenges are causing Americans to reconsider their vision of retirement. Forty-two percent of survey respondents age 55-64 say they plan on working in a part-time job, and 39 percent say they’ll be more conservative about how much they spend on entertainment and other luxuries.” 

Here are 7 retirement savings tips to help you avoid regret as you approach retirement. 

Start early 

If you are just starting out in the workplace, enroll in your employer’s 401(k), 403(b), or whatever type of retirement plan they offer.  Contribute as much as you can.  If there is a match try to contribute at least enough to earn the full matching contribution from your employer, this is free money.  There is no greater ally for retirement savers than time and the magic of compounding.  As tough as it may be to save early in your career put away as much as you can reasonably afford as early as you can afford it.

Increase your contributions 

The maximum 401(k) contribution limits for 2015 are $18,000 and $24,000 for those 50 or over at any point in the year.  No matter what you are currently contributing to your plan try to increase it a bit each year.  If you are currently deferring 3% of your salary bump that to 4% or even 5% next year.  Increase a bit more the following year.  You won’t miss the money and every bit can help fund a comfortable retirement.

Start a self-employed retirement plan 

If during the course of your career you become self-employed it is still important that you save for retirement.  Starting a plan such as a SEP or Solo 401(k) can be a great way for you to put away money for retirement.  You work hard at your own business and you deserve a comfortable retirement.

Contribute to an IRA 

Anyone can contribute to an IRA.  Traditional IRAs are subject to income limits as far as the ability to make pre-tax contributions, but anyone can contribute on an after-tax basis with no income limits.  All investment gains grow tax-deferred you do need to keep track of any post-tax contributions however.  Roth IRAs can also be a good alternative; again there are income ceilings that can limit your ability to contribute.

Don’t ignore old retirement accounts 

Today it isn’t uncommon for people to have worked for five or more employers during their career.  It is important that you make an affirmative decision as to what you with your old 401(k) or other retirement account when you leave your employer.  Leave it where it is, roll it to an IRA, or to your new employer’s plan (if allowed) but don’t ignore this money.  Even smaller balances can add up especially if you have several such accounts scattered about.

By the same token make sure that you stay on top of any pensions that you might be eligible for from old employers.  Make sure these companies can find you and be sure to carefully evaluate any pension buyout offers you might receive from old employers.  These can often be a good deal for you.

Beware of toxic rollovers 

Recently I have read a number of accounts about brokers and registered reps looking for employees of large organizations and convincing them to roll their retirement accounts into questionable investments with their brokerage firms.  Certainly rolling your 401(k) into an IRA via a trusted financial advisor is a valid strategy but like anything else you need to vet the person suggesting the rollover and the investment strategy they are suggesting.

Avoid high cost financial products

Many financial advisors who make all or part of their income from the sale of financial products will often suggest high cost financial products to implement their financial recommendations.  These might include annuities, certain mutual funds, non-traded REITs, and others.  Be leery and ask about the costs and fees associated with these products.  There is nothing wrong with annuities, but many of them that are pushed by registered reps carry excessive fees and have onerous surrender charges.

In the case of mutual funds, index funds are not the end all be all.  But you should certainly ask the advisor why the large cap actively managed fund with an expense ratio of 1.25% or more that they are suggesting is a better idea than an index fund with an expense ratio of 0.15% or less.

52% of people approaching retirement wish they had started saving for the future sooner.

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At the end of the day starting early, investing wisely and consistently, and being careful with your retirement savings are excellent ways to avoid the regrets expressed by many of those surveyed by TIAA-CREF.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Indexed Annuities – Pros and Cons

June 13, 2014 by 33 Comments
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A recent article by Investment News’ outstanding insurance and retirement products reporter Darla Marcado discussed the increased popularity of indexed annuity products (link may require free registration) among registered reps.  The zealousness with which these products are often sold sadly invokes images of the annual Canadian baby seal hunts in which the animals are often clubbed to death so as not to damage their valuable hides, with the remains then left to rot once the hides are removed.

Indexed Annuities – Pros and Cons

As with any financial product it is a good idea to look at the pros and cons of Indexed Annuities.

Indexed Annuities – Pros

For the life of me I cannot come up with a single reason why I would ever recommend an Indexed Annuity to anyone.  To be sure I wasn’t missing something I posed this question to my fee-only advisor study group recently and they agreed.

Indexed Annuities – Cons 

Unreasonably long surrender periods.  I’ve reviewed a number of these contracts over the past couple of years and they all seem to have surrender periods of ten years or longer.  I can’t see giving your money to anyone who won’t let you have access to it for a decade.  You can of course annuitize and most contracts allow for the withdrawal of a portion (usually 10%) each year, but you’re prohibited from doing a 1035 exchange to another annuity contract if you find a better deal.

High fees and commissions.  These fees serve to reduce your returns and are often hard if not impossible to determine.  They can run in the 5% – 10% range and provide a great incentive for financial sales types to really push these products.  Make sure you demand that your rep disclose ALL commissions and fees that she might earn should you buy a contract.

They can be hard to understand.  With any financial product you should never even consider writing a check until you fully understand how it works and why it’s beneficial to you.  The premise is typically that you will participate in a portion of any gains on an underlying market benchmark such as the S&P 500 and that there is some minimum amount of return that you will make no matter how the index performs.  Make sure you understand the underlying formulas that determine your return and any factors that might cause a change in the formula.  Check out FINRA’s Investor Alert on Indexed Annuities as well.

Limited upside potential.  It is important for you to understand that this is not an equity investment.  Most contracts limit your participation in the underlying index.  For example in 2013 the S&P 500 gained over 32% so if your participation was limited to say 8% you would have missed out on a lot of the gain.

Confusing sales pitches. While technically not a feature of the product, it seems like the sales pitches for Indexed Annuities change to fit the times.  In the wake of the financial crises the fear mongering sales pitch was along the lines of avoiding the risk of the stock market while still participating in the upside.  These days it seems to be about the minimum returns as an alternative low-yielding CDs and other bank depository products.  Sorry there is no “wonder drug” financial product that I’m aware of.

Look this blog is not meant to provide readers with specific financial advice for their unique situation so please at the very least if someone is pitching you an Indexed Annuity (or any other financial product for that matter) ask them and yourself a few basic questions:

  • What’s in this for the financial sales person?  Is this recommendation based upon my best interests or based upon them earning a hefty commission?
  • Does this product make sense for me based upon my situation, my goals?
  • Do I understand how this product works including the upside potential and the downside risks?
  • What are the underlying expenses?  Is there a lower cost alternative that I’m not being made aware of?
  • Is this the best version of this type of product or just the version the sales person has available to sell to me? 

As with any financial product make sure you are buying an Indexed Annuity because it is right for you and not because you succumbed to a convincing sales pitch.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

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Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Financial Advice and Mini Bottles of Liquor

June 9, 2014 by 4 Comments
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Regular readers here know that the inspiration for some of my blog posts comes from non-financial sources such as youth soccer fields and the Rolling Stones.  In that spirit the idea for this post popped into my head while waiting in line to pay for an item at a local gas station.

Financial Advice and Small Bottles of Liquor

I noticed the clerk behind the counter restocking the very prominent display case with mini bottles of liquor of the type you would buy on an airplane.  When I asked if they sell a lot of these she indicated that I would be surprised and I was.  This is the last place that I would think of buying mini bottles of liquor.  My hope is that the contents are not being consumed en route from the gas station.

I liken this to some of the places that people seek financial advice.  Are you getting financial advice from someone best positioned to advise you or simply from where it is convenient to obtain it?  Here are a few thoughts on some of the alternative sources available to you when seeking financial advice.

Insurance companies and agents

We have had our auto, homeowner’s, and person umbrella policies with an agent affiliated with a major insurance company for years.  Our agent is great and has provided outstanding service.  His company made a big push into providing personal financial planning largely to tap into their vast customer base to try to sell various financial products to these customers.  When I asked my agent if he was now going to become a financial planner he just kind of grumbled as he wanted no part of this.

My experience is that insurance companies are looking to sell annuities and other insurance-based products as their answer to your financial and retirement planning needs.  Many of these companies also offer their own proprietary families of mutual funds and other investment vehicles.  As with anything you need to understand the motivations and capabilities of the person trying to sell these products to you.  Is this agent qualified to provide you with unbiased financial advice or do all questions lead to a solution that involves the sale of a variable annuity or a related product?

Banks offering financial advice

Many banks offer investment and financial advice across a number of formats.  It’s not uncommon to have a registered rep at the branch selling various financial products.  The bank may even have their own line of mutual funds and their own brokerage operation.

Other banks have in-house or affiliated investment advisory operations which offer investment and perhaps wealth management services for a fee as opposed to the commission-based services mentioned above.

Again banks view this as a way to expand their service offerings and broaden their revenue streams by tapping into their depositor base.  As with any financial services provider you need to understand what your bank offers, how they offer it, any potential conflicts of interest, and most of all if this type of arrangement is right for you. 

CPAs offering financial advice

CPAs have rightly earned a reputation as a trusted advisor, especially for business owners.  The good ones offer a range of tax and financial advice that is invaluable.  Many CPAs have ventured into the business of offering investment and financial advice as well.  They realize that this is an excellent revenue stream, often a better one than they can generate via their core business.

As with other providers of financial advice you want to understand that if your CPA is qualified to provide financial planning and investment advice as this is a different knowledge base than his or her normal world.  A few other considerations:

  • Does the CPA have specific knowledge or training here?  A designation such as the CFP® or the PFS (the CPA equivalent) can be good evidence of training and commitment to this area.
  • What happens during tax season?  Are they available to answer your questions and monitor your situation?
  • Is the advice offered as an RIA (Registered Investment Advisor) or via a Broker-Dealer type arrangement?  In the latter case the CPA is likely engaging in advice via the sale of commissioned financial and insurance products.   

Financial Planners 

The term financial planner can be used by anyone so you will want to understand a few things about how any financial planner operates before determining if this is the right advisor for you.

  • What are the financial planner’s credentials and training?  Does he/she hold a CFP® or some similar designation?
  • How is the financial planner compensated?  Fee-only?  Commissions?  A combination of fees and commissions?  It is important for you to understand if there will be any conflicts of interest involved in the delivery of financial advice.
  • What type of financial advice does the financial planner offer?  Hourly as needed?  Comprehensive financial planning? Investment advice and wealth management?  More importantly is this the type of advice that you need?
  • Who are the financial planner’s typical clients?  If you are 60 and nearing retirement an advisor who specializes in clients in their 20s and 30s is probably not the right advisor for you.
  • Check out NAPFA’s guide to finding an advisor for some tips on choosing the right financial advisor for you.  

I’m often puzzled by the process used by many folks in choosing a financial advisor, but I guess it is no stranger than buying mini bottles of liquor at a gas station.  Choosing the right financial advisor can be very rewarding, choosing the wrong advisor can have a devastating impact on your financial life.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

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