Ways to Grow and Protect Our Money: The CD Alternative

Anyone who has been following me or listening to me knows I love helping people create protected gains that can be accessed as tax-free income using Indexed Universal Life insurance. Sometimes my clients do not qualify for these plans however. For me the next best thing is to grow your money tax-deferred in a protected vehicle, then deal with the taxes later. Unlike CDs today these financial instruments actually give you growth AND offer liquidity options.

Below is an excerpt from The Retirement Miracle by Patrick Kelly explaining the three types of annuities. As usually my pick is the indexed annuity. This is the product that thrived and continued to produce during the crash of 2008. It is worth your time to understand the concept.

If you have any assets at risk or cash that is sitting in the bank making nothing, reach out to me to discuss your situation. There are some strong rates out there currently in 3 year and 5 year annuities. There is also a completely NO FEE option for 7, 10 and 14 year deposits.

The Retirement Miracle by Patrick Kelly excerpt. Emphasis mine.

I’d like to give you the real story on annuities – the good and the bad, what they are, and what they are not, and then I want you to decide whether it is a good fit for your specific financial situation. The first thing you need to know is that there are three different kinds of annuities.

1. Fixed Annuities – which are interest rate based 2. Variable Annuities – which are equity based 3. Indexed Annuities – a hybrid that shares some characteristics of the previous two

Even though the purpose of this chapter is to highlight the unique benefits of Indexed Annuities, I want to give a brief explanation of the other two so you have a cursory understanding of how each works. (read to the end to learn about Indexed Annuities)

?Fixed Annuity: (the good the bad the ugly)

A Fixed Annuity is much like a Certificate of Deposit (CD) offered by a bank. It pays a fixed rate of interest, thus the name. And just like a CD, the return on a Fixed Annuity is very safe. However, because it is safe, it offers a low interest rate and, thus, a low potential for growth.

While CDs generally charge penalties for any withdrawal prior to the end of the chosen term, Fixed Annuities commonly allow an individual to withdraw up to 10 percent of the account value each year without penalty. This makes Fixed Annuities more liquid (accessible) than most Certificates of Deposit, which is a very significant feature.

Also, unlike CDs, whose gain is taxed every year, Fixed Annuities grow tax-deferred, meaning taxes are not due on the gain until the money is actually withdrawn. The benefit of delaying taxes is that an individual earns interest on three things instead of just two:

1. The original principal 2. The interest (growth) 3. The future taxes retained within the annuity

This third feature, earning interest on Uncle Sam’s future taxes, is unique to products offering taxdeferral, which allows a Fixed Annuity to grow faster than a CD paying the same rate of interest.

Another valuable feature of a Fixed Annuity is that it is an insurance product, which allows the owner the ability to name a specific beneficiary (a person or organization) who will receive this money upon his or her death. The advantage of the beneficiary designation is that the annuity proceeds get paid directly to the chosen beneficiary, avoiding all of the expense, hassle, and delay of probate. It bypasses court completely, enabling heirs to receive the money in days instead of months. This is a huge benefit that cannot be overstated.

The last benefit I’d like to highlight is the Guaranteed Income feature that Fixed Annuities offer. Most of the time an annuity is simply a bucket of money, just like any other financial account. However, annuities also allow individuals to choose an additional benefit that other types of financial instruments generally don’t provide – the benefit of receiving a guaranteed stream of income for life. An income the owner cannot outlive.

Now before you get too excited about this feature, it does have its?own set of drawbacks. To turn this money into a stream of lifetime income, the individual must surrender the entire bucket of money over to the insurance company, which then turns it into a series of guaranteed, periodic payments for either a set period of years, or for the life of the annuity owner.

So what’s bad about that? A couple of things. First, once the money is turned into a series of periodic payments, the owner no longer has access to, or control of, the entire account value. He trades the bucket of money for the certainty of a lifetime income. This can be seen as good or bad, depending on the needs and desires of the client.

However, I do think this feature, called annuitization, is where a lot of the annuity’s misunderstanding occurs. Many individuals, even some in the financial profession, think that clients must turn their entire account value into this ongoing stream of income, giving up the access to and control of their entire pot of money. This is simply not the case. A client is never forced to choose this option. It is simply that – an option. It’s an option that would only be chosen if the client felt this stream of income would be of greater benefit to him than keeping control of the entire bucket of money. But the fact remains, it’s always the client’s prerogative, and it’s nice to have options.

?Variable Annuity?

I’m going to keep this description relatively brief, since Variable Annuities share many of the same features as Fixed Annuities:

1. They generally allow a withdrawal up to 10 percent of the account value per year without penalty. 2. They provide tax-deferred growth, meaning taxes are not paid until money is withdrawn. 3. The benefit pays directly to the beneficiaries, bypassing probate completely. 4. And they also allow the owner the ability to choose a lifetime stream of guaranteed income, one that cannot be outlived.

But there are also some key differences. The most significant difference between the two is risk.?While a Fixed Annuity can be thought of much like a CD, a Variable Annuity can be thought of much like a mutual fund. To be clear, it is not a mutual fund, but the engine for growth is much the same, based largely (if not solely) on equities. While this can be of benefit to the owner in a rising market, it can be disastrous in a declining market. Variable Annuities can lose money, sometimes a lot of money. In a Variable Annuity, the client generally bears 100 percent of the market risk upon his or her shoulders.

?So why would someone take this increased risk? Purely for the hope of a higher return. A return that might possibly combat the wiles of that dreaded villain, Mr. Inflation.

However, for those currently retired, taking that risk can have disastrous results. Just look at 2008.

The second area in which a Variable Annuity differs from a Fixed Annuity is the cost incurred by the owner. Since Variable Annuities are equity based, they usually incur management fees and charges that Fixed Annuities do not. While these fees can be outweighed by years of solid market growth, they can feel like a sucker-punch to the midsection in years of market decline. (As a side note, though, this is really no different than any other equity-based product. They all have fees and expenses that are charged regardless of whether the market is up or down.)

(Enter the) Indexed Annuity

Writing this chapter feels a little bit like the story of Goldilocks and the Three Bears. Remember the story? One porridge was too hot. One porridge was too cold. But one porridge was just right. Such is the case in the annuity world. One annuity is safe but offers weak growth. One annuity offers growth potential, but is too risky for the retiree. But one annuity is just right. The Indexed Annuity. It provides both safety and an opportunity for solid growth.?The Indexed Annuity takes positive features from both of its predecessors and blends them into a new and powerful product.

?Just like Fixed and Variable Annuities, the Indexed Annuity offers the same four features discussed under the Variable Annuity: penalty-free withdrawal, tax-deferred growth, bypass of probate, and the option for a guaranteed lifetime income. Where it differs is that it provides:

? 100-percent safety against stock market declines and ? Solid growth potential

Think about that for a moment. This is not a rhetorical question. Seriously, pause for a moment and ask yourself, Where can I get the potential for an inflation-beating return and have 100-percent safety against market risk of not only my principal, but also of all my previous years of gains?

?If you can name another product that offers both of those things, then you are incredibly intelligent and industrious, because I can’t find anything like it, and trust me, I’ve tried. It’s unique.

I am convinced that many of the clients who purchased Indexed Annuities prior to 2008 didn’t completely believe their agent when he or she told them that they would never lose money due to a stock market decline. Why do I think this? It’s human nature. I’m sure most of the clients trusted them on one level, but on another level they were thinking,?“Yeah, I’ve heard that before. I’ll believe it when I see it.”?

Well, 2008 gave them the perfect opportunity for a white-knuckled test-drive. And guess what? It passed with flying colors. Indexed Annuities did just as the agent had promised.?Even when the S&P 500 was down nearly 52 percent, the owners of Indexed Annuities didn’t lose a penny.?Not one. And not only did they not lose any money, but all their previous years of gains were protected as well. They kept it all. And once the market began to climb again, these Indexed Annuities began growing from their currently locked-in highs, making new gains, while other accounts were clawing back losses, scrambling to simply get back to even. That really is a retirement miracle!

So if you are currently retired, or have already accumulated most of your retirement dollars inside a tax-qualified account, you may be asking yourself, “What should I do?” As you would imagine, it is impossible to address every specific situation in the context of this chapter, but I will give you the same advice I proffered earlier in this book – it’s critical that you meet with an honest and qualified financial professional who can evaluate your specific and individual needs and who can recommend the right solution for you.

Along that same line, it is also important for you to know that purchasing an annuity from a financial professional will generally not cost you more. Sure, the financial professional will receive compensation for selling you this product, but an annuity’s commission does not get paid from the owner’s deposit, but, rather, it is paid to the agent directly from the issuing life insurance company.

As a matter of fact, unlike other investment options, it is common for many annuities to actually pay a deposit bonus when they are purchased. Yes, a bonus. For instance, if an annuity paid a hypothetical 4-percent bonus, then the purchaser of this annuity would make $4,000 immediately for every $100,000 put into the annuity, giving his account a positive growth from day one.

So, if you are a retiree who has money in any tax deferred plan, and you like the prospect of growing your account with zero market risk, then look no further. You’ve found your new home, and the sign hanging just inside the door reads, “Annuity sweet annuity."

To learn more about tax advantaged strategies to grow your wealth let's talk:?https://calendly.com/teresaschoendorf/30min