Everything You Need to Know About


Screen Shot 2018-05-09 at 2.26.36 PM.png

In the 20 year history that I have been working in this industry, if there was one product that caused confusion or that a client misunderstood, it was always in the annuity realm. When you break them down and begin to understand the nuts and bolts, they're not all that difficult. 

Our goal is for you to leave knowing more than you did previously, and whether an annuity should be considered, or not, depending on  your individual needs and desires.

In today's discussion, we will go over the conservative versus risk options in the investment world. We break it down in this way, because when you go to invest, you have different products, some are for more conservative minded investors and some for more risk minded investors, and we need to know where annuities fall on this spectrum to know if they are right for you.

Screen Shot 2018-05-09 at 2.27.19 PM.png

Screen Shot 2018-05-09 at 2.27.44 PM.png


Conservative investments are someone that prefers to not see too much change in their account value, and can't or don't want to lose any money in their investments. My grandparents were like this. They went through the Depression, and they didn't trust the stock market. So, my grandparents invested in things like CD's and Money Market. When they retired in the early 70's they had an advantage that we don't. They retired at a time that interest rates were much higher. Money Markets today pay around 1% nowadays. CD's are around 2-3% now.

Considering taxes and inflation, these numbers are pretty low for most people. That is why people will look into Fixed and Index annuities, because like a CD you are putting your money aside for a set period of time, but instead of investing it at the bank, you are investing it in the insurance company. For most Fixed Annuities right now, the rates are around 3%.

Index Annuities were created to provide some exposure to the market gains, while still protecting you from losses. They have a cap, a maximum that they can earn in a year, so they do not match the market, but rather loosely correlate to the direction of the market, at a lower rate of return. For many investors that are looking for ways to have exposure and growth from the markets, but can't risk dropping below their principal investments, Index Annuities may be an option for them.


Risk Assets

Risk and reward is a common saying, and you could apply this statement to the markets. There is typically a higher potential reward when you are willing to take more risk. For investors that need returns that are greater than which you can find in the "conservative" investments, then they may need to start exploring their other options, and potentially riskier assets. I have organized these from what I feel are lower risk to higher risk. 

The "conservative" asset of bonds is becoming a riskier asset. In an environment where interest rates start to rise, these can cause a lot of havoc in your portfolio, which is why I have placed them on the right side of the chart.

Real Estate is pretty straight forward, and I am sure most of you are familiar with that, so we won't spend much time on that subject. We will be diving deeper into the details of Variable Annuities a little further along in the presentation.

Mutual funds, stocks, bonds, ETFs all experience market volatility. Commodities and options are basically only for very experienced investors. Investors should exercise caution when considering investing in these last investments, and always talk to your advisor to see if an investment is suitable for you.

Screen Shot 2018-05-09 at 2.27.56 PM.png

Annuities have Tax Deferral. We call it the 8th Wonder of the World, because tax deferral allows your money to grow at a faster pace. It helps compound an account faster. Most retirement accounts are tax-deferral focused.

The whole purpose of annuities are to help you like a pension would, to set up an income you won't outlive. Some annuities provide a death benefit, which is there for your beneficiary to ensure an efficient transfer to your heirs upon your passing.

Annuities are often used by people in retirement, or planning on retiring. 

Screen Shot 2018-05-09 at 2.28.04 PM.png

This chart is of the S&P 500 from 1999 to 2013. I chose this timeframe, because if you retired and entered the market anytime in this red box, you spent most of your time in the markets in recovery mode.

Most people don't retire when we are in a slump, when 401ks and house values are at extreme lows. Many times, if people aren't forced into retirement, they will keep working until they feel comfortable enough with their savings to step away from work. So, the idea with annuities is that if you happen to go into the distribution phase of life near a market top, maybe it can help you offset some of the potential risks involved with market cycles.

Screen Shot 2018-05-09 at 2.28.14 PM.png

Variable Annuities are growth oriented accounts. A variable annuity gives you the ability to diversify your money between different market sectors or different mutual funds.

Think of it like a 401k, where you would have 20-30 different investment options, a variable annuity works pretty much the same way that you can invest the money you have in it in these different investment options.

They provide tax-deferral, and often times provide an optional death benefit for your heirs or spouse. They also have income benefits that help people plan for future retirement income. 

Screen Shot 2018-05-09 at 2.28.50 PM.png

Think of it like an M&M. A variable annuity is similar to an M&M. What's an M&M? A hard candy coating around chocolate- so that it melts in your mouth, not in your hand. The candy outside part of the variable annuity is the insurance benefits. These are usually in the form of a death benefit, and the optional income benefit.

Inside the M&M, the chocolate part of the variable annuity, is Mutual Funds. Some variable annuities have more Mutual Funds than others, so that is where you do your shopping around to see what product you prefer. The limits to what you can invest in within these variable annuities is set by the annuity company.

You have to remember that there are certain advisors like myself that are able to work with many different companies, and help you choose the best product for your needs, and other times there are annuity salesmen that are married to one company, and are unable to give recommendations outside of their one brand.

Screen Shot 2018-05-09 at 2.29.40 PM.png

Here is a real life scenario. 

Tom was a client that I started talking to in 1998. In 1998-2000, the NASDAQ was doing really good.  Tom worked at a company called Qualcomm, that was doing very well from a stock prospective. He was looking at his 401k, and he realized he had 1.6 million dollars. He looked at his 401k, and his house value, and he thought to himself

Screen Shot 2018-05-09 at 2.30.23 PM.png

Screen Shot 2018-05-09 at 2.30.40 PM.png

Screen Shot 2018-05-09 at 2.30.56 PM.png

Screen Shot 2018-05-09 at 2.31.09 PM.png

Screen Shot 2018-05-09 at 2.31.18 PM.png

Screen Shot 2018-05-09 at 2.32.56 PM.png

Screen Shot 2018-05-09 at 2.33.55 PM.png