Using a Multi-Year Guaranteed Annuity

Multi Year Guaranteed Annuities

The markets have been turbulent lately. ?

Yesterday’s market was OK, it came roaring back, and today just we’re down 1000 points – we’ve gave back everything we gained yesterday and more.?

I have been approached by a couple of clients that are getting to retirement age and are concerned. ?

We have talked for a while now about having strategies to defend against rising interest rates. ?So you have that, coupled with inflation, you’re going to create now what’s sort of a byproduct. ?

As much as I would like to say “hey, it’ll be fine, and there’s clear skies ahead,” I'm of the opinion that there’s choppy water ahead.

To what degree? I don't know.

Now the other side of that is I am not a doom and gloom type of advisor.?I’m pragmatic. And although I do understand turbulence, I also know that we can smooth that ride to a degree.??

One way to do that is to incorporate a MYGA (Multi-Year Guaranteed Annuity) into your overall strategy.?But first you have to understand what they are and how they can work. ?

I’d like to start with the Reader’s Digest definition of “annuity.” ?An annuity is really a promise that an insurance company will pay regardless of how long you live. ?And we’ll get deeper detail a bit later in this post but, the thing I wanted to outline here is longevity credits in annuities through a little story.

LONGEVITY CREDITS

Suppose five 90-year-old woman take a vacation together every year. ?The five women each place one hundred dollars in a box.?Take that $100 and multiply it by five, and you have $500.?

Now because they’re 90, unfortunately one of them passes away. So, the next year they leave for vacation but now there's only four ladies left so they split the $500 they put in the year before and each woman now has $125.?That’s a 25% rate of return.

The question is how much was invested in the market and what interest rate did it earn?

Nothing.?Because they weren’t in the market.?

Instead of using the money for vacation, the friends decide to let it ride. The next year, one more lady passes away. And now the 3 ladies return for vacation and split the $500 three ways, so they each get $167.?That is a 67% return.?

All of this is based on longevity credits or sometimes what is referred to as mortality credits. They weren’t in the market, the $500 didn’t increase, but they are each getting a return on their money since they’re splitting it among less friends.

In annuities, longevity credits are created when people die sooner than expected and don't receive as many income payments as they would have if they had lived their full life expectancy. That money goes into a pool that will then pay lifetime income to those people who live longer than their life expectancy.

?If you find yourself at the dinner table trying to explain this to somebody, life insurance pays if you die (so everybody pools their money together to pay a death benefit), annuities pay if you live (you're still pooling your money together).?If you end up being one of those people that make it to 100, 110, 120… the insurance company is on the hook to pay you as long as you’re alive. ?

GUARANTEED PAYMENTS FOR LIFE

With that being said, there are only three tools that can guarantee payments for life.?

One of them, what I call a unicorn, is a pension.

The second one (a lot of people are in fear of going away) is Social Security. This is a promise from the federal government that they will pay you an income stream based on how much you contributed while working.?A lot of people are fearful saying, “It's not going to be there, it’s going to be bankrupt,” for most of us reading this, I don't think we have any issues.?For some of the younger generation, maybe the millennials, it will change, the rules will be different, but the money will be there.?

Now the third option is an annuity and it’s important to note that there are several different types of annuities so it’s important to differentiate them.?But we've all heard that commercial, “I hate annuities and you should too!” Well, there’s aspects that maybe aren’t attractive. ?BUT not every annuity has to be used in the same way.?Not every tool is going to be utilized to do the same job. ?

I want to share a picture that can help you understand the different types of annuities.

IMMEDIATE ANNUITIES

The left side of the equation is what we call an immediate annuity.?This is where you give up all control. ?You are trading an asset with the insurance company.??You're saying, “here's my cash” and you can never get it back once you receive a payment option. This works just like a pension, so if you have ever seen pension statement where they say if you take X amount, you get 100% of Y, but if you want to make sure that you get at least a payment for 10 years (that’s the period certain) you'll get a little bit lesser amount. Or if you want to make sure your spouse gets something (survivorship) then there's even a lesser amount.?Or you can get a combination of both.?

Usually when you have a corporation that has a pension, or you have a municipality, or the federal government, or even a state government offering these types of products, they're really just annuities with these terms. It’s based on actuarial data. This is NOT what we’re talking about today.?

Here’s the main reason people don't like immediate annuities: let's say that you had $100,000. ?You go to the insurance company, and you say, “here's $100,000, give me $80 a month for the rest of my life.” $80 being just an arbitrary number to keep the math simple.?

You turn around and cash that first check for $80.?

Would you agree that the insurance company still has the other $99,920??They have the balance of your money.?It hasn't gained interest. You only got paid one month.?

Well, what happens when you have a bad day – you get hit by a bus??

The insurance company gets to keep your money.

This is why there's a lot of negative press because nobody wants to exercise that risk. We don't know how long we're going to live.?

Now some people may suggest that you can just take that money, invest it in the market, you can do better than what an annuity could do for you. ?The problem is, none of us know when we are going to die.?That's the trade-off.?

I'm not here to sway your opinion one way or the other, I just want you understand how an immediate annuity works.?When you start those payments, that’s called annuitization. That word means that you had given up control.?It is an irrevocable agreement. You hand over your money and say to the insurance company, “here is my money, pay me, whether I live a day, I cash a check, or I live a month, or I live till I’m 120, you must pay me or my spouse for the rest of my life.

DEFERRED ANNUITIES

But we’re not focusing on immediate annuities today.??We’re focused on deferred annuities. And there are different types of these as well.

The first is variable deferred annuities. If you know me, I don’t like an abundance of risk. This is what that commercial, “I hate annuities and you should too” is talking about.

You're basically saying to an insurance company, “Here’s some money, I'm going to take all the investment risk (so you can lose money inside of it), and they're expensive.?

The type of annuity we utilize mostly is a fixed annuity. ?There are two different versions. Indexed Annuities (ie. Allianz 222 that I’ve talked about in the past that currently is offering a 35% bonus) or a Multi-Year Guaranteed Annuity.??MYGAs are really the insurance company’s version of a bank’s CD.?It’s for a (usually short) period of time.?It’s guaranteed by the credit worthiness of the financial institution, which in my example to follow, happens to be Oceanview.

OCEANVIEW AND AM BEST RATINGS

Oceanview is rated A- (Excellent) by AM Best. ?Me and my advisers across the country are typically never going to use anything less than a A-.??That’s just because that increases risk if an insurance company goes insolvent.?

I get that question often. Just keep in mind that every insurance company is regulated by the state in which they do business.?So, in New Jersey, it's no picnic.?In order for an insurance company to do business here in New Jersey, they must contribute to something called a Guaranty Fund.?But not only are they putting in money just for themselves, but they also have to contribute for any other insurance company that does business in the state. They have each other's backs. If you look at banks over the years compared to insurance companies, banks have defaulted at a much higher rate than insurance companies in the last 30 years. ?I’m much more comfortable with financial reserves required of insurance company to do business in the state versus what a bank is required to have.?

But with that being said, the AM Best ratings are just benchmarks that we typically like to use. I don't like to use B+ companies but depending on product options and needs of a client, once or twice I have deviated from my mainstream. ?But for purposes of this blog, I’m very comfortable with Oceanview’s financials.?

Oceanview just had rate increases (See attached chart).?And here's their offer. ?

VOLATILE MARKETS

If you’re close to retirement and you’ve looked at the market today, you will you see that is down over thousand points and you may go, “Oh my God, I can't take this anymore.”

Sidetracking a bit here, but when you see the market, and the markets down a thousand points, you must ask, which index is it? So maybe it’s the S&P maybe it's the NASDAQ - tech sector’s been getting crushed. Are your holdings in that area??If you're not matched up or mirrored identically, you’re likely not down equally in comparison to the market.?Unless you're in the S&P index. If you’re in the S&P index and the S&P lost 100 points, then yes, in fact, you should have lost pretty close to that. ?But if you’re looking at the DOW in the DOW is down 1000, well that’s only thirty stocks. So, you just have to put that in perspective.

Remember what I talked about before…the news networks like noise, and they need information to be able to spew, whether positive or negative, so they can generate emotional swings.?That’s what gets ratings and people tuning in. Our job is to manage expectations, to help manage emotions and take a step back and to have a strategic plan.?

So my thinking is, typically bonds are not an area that is going to do well on a go forward basis, in this rising interest-rate environment. I think everybody that is listening to the news will see that interest rates are going up.?The fed just raised interest rates a half a point yesterday, the market liked it for a little while, and then went and slept on it and then didn't like it today. That’s the equities market. Bond markets didn’t like it either.

So you turn around and go, “wow, my 60/40 portfolio lost money.” It’s going to be hard area of our portfolio to recover.?I also don't believe that we can time the market.?You can't sit here and go “get in, get out.” That has been proven. I don’t care who you, or how savvy you are, it cannot be done with any degree of predictability.??However, you can take your winnings, or you can put in stop losses, or you can add a tactical component to your overall investment philosophy and that's what I'm suggesting here.

UTILIZING A MYGA

If you're feeling like you’ve had enough with the current volatility, utilizing a MYGA might be a solution for you. ?To use this strategy, you would have to have a 401(k) or IRA.?If you own an IRA, you can do this.?BUT if you own 401k, you need to check if they allow an in-service distribution or you’re over age 59 1/2 – either one of those things, you can this strategy. ?

Moving money from your retirement account to a MYGA means that you have a guarantee from insurance company that they are going to take your money, trustee to trustee (retirement plan to insurance company) put it in the tax environment of an IRA, and credit the funds a percentage based on the amount of money you contribute to the annuity.?With this Oceanview product, you’ll see the minimum amount is $20,000 (between 20k to 80k) and they’ll give you 2.7% on a 2-year annuity.?It's not too bad. It beats a ten percent loss, 20% loss.??Or on what MYGA companies refer to as a “high band” ($80,000+) it’s 2.85% for two years. ?

They have longer-terms, four years, five years, seven years… I didn't get into all that because I think it's a short-term solution to consider. A strategy to help give you peace of mind. I think a recession is still on the horizon …not tomorrow, not next month, not three months from now…but I do believe the next 12 to 24 months we will see that.

But if your money is locked up, and in 2-3 years you come out from underneath that, you can then take the money that you had in the MYGA plus the interest and put it back in the market.?At that point the market should have settled down and we will probably be in a lower environment. That’s the thought process.?If it’s something that you’d like to look at, send me an email or call the office and I will be in touch.??

Investment Advisory Services offered through Retirement Wealth Advisors, LLC (RWA), a Registered Investment Advisor. Professional Planning Services and RWA are not affiliated. Insurance products and services are not offered through RWA but are offered and sold through individually licensed and appointed agents.?

Annuity guarantees rely on the strength and claims-paying ability of the issuing insurer. Any references to protection benefits or lifetime income generally refer to fixed insurance products. They do not refer in any way to securities or investment advisory products or services. Fixed insurance and annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by RWA.

Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.?