These days, though, the annuity landscape is markedly different. The majority of people shopping for an annuity overwhelming have just one question: How can I get a half-way decent rate of return?

“Today, a majority of prospective customers tell me that their bank CD is coming due, while new CDs are paying next to nothing, and ask me what they can do about it.”

Why Investors Prefer Annuities over CDs

In today’s highly unusual financial world – one in which interest rates are rock-bottom and highly likely to stay that way for at least a couple more years – the answer for most folks is very simple: Buy a plain vanilla fixed annuity (specifically, a Multi-Year Guaranteed Annuity, or MYGA). It’s very similar to a bank CD but issued by insurance companies, not banks, and pays markedly more.

To a lesser extent, fixed indexed annuities (FIAs) are also attracting attention because they offer stock market exposure and protect against losses. (Annuity FYI will also address them.) But MYGAs, by far, are where the action is today. They have much shorter maturities, pay interest annually, and are super simple to understand.

Banks Can’t Touch MYGA Rates

Most important, MYGAs pay markedly more than bank CDs. A three-year MYGA is paying up to 2.4% and a five-year MYGA up to 3.10%. By contrast, most bank CDs are paying only about 0.75% and five-year CDs only about 1%. The most generous CD on the market – a five-year product – pays only 1.35%.

When you look at interest rates, it’s best to compare them with the inflation rate. This tells you if you’re coming out ahead after taking rising prices into account. To do so, the interest rate has to be higher than the inflation rate. This isn’t the case with most CDs. According to the U.S. Department of Labor, the annual inflation rate in the U.S. was 1.2% for the 12 months ending in October.

If you invest, say, $100,000 in a three-year MYGA today and take no withdrawals along the way, you walk away with more than $107,000. If you invest that money instead in a five-year MYGA, you walk away with more than $116,000. Most annuity buyers prefer the three-year MYGA because they don’t want to tie up their money any longer than necessary.

FIAs Require Patience – But It’s Worth It

FIAs with the most growth potential are sold without a guaranteed lifetime income rider, which costs roughly 1% a year and so detracts from potential market returns. As mentioned, FIA owners are protected from market losses. In return, they receive only a portion of the increase in the underlying stock market index in a positive year, and these portions have been decreasing. Most prospective FIA buyers still have no problem with the trade-off. What is frequently an issue, however, is that most FIAS have 10-year maturities. Many people don’t want to lock up their money that long.

The Most Attractive Annuity Route of All: Laddering

What is probably best for most investors, assuming they have the funds to do so, is to hedge their income prospects through so-called laddering. This means they invest in different annuities with different maturities, recognizing that it’s impossible to know what interest rates will do as this decade proceeds and so it’s best to buy annuities that mature at different points in time. At these points, you’re likely to buy new annuities that hopefully pay higher rates than available today.

FIAs belong in an annuity ladder, most annuity pros say, notwithstanding their long maturities. For one thing, FIAs with shorter maturities, typically five or seven years, are available. Most important, FIAs without income riders typically invest in low-volatility indexes with high index participation rates and typically return an average annual return of 3.5% to 6% over time – more than MYGAs.

If all or most of this seems attractive, here are a few MYGAs and FIAs that stand out. All allow 10% penalty-free withdrawals starting at least by the second year. All FIAS cited are growth (no guaranteed income) FIAs.

A Look at Top MYGAs

• American Equity Guarantee Shield 3. This three-year MYGA pays 2.40% annually, the highest rate we could find for a three-year product. The next highest three-year MYGA pays 2.15% annually. American Equity, which is 25 years old, has an A.M. Best rating of A-. The minimum investment is $10,000.
• Western United Life Navigator Ultra. This five-year MYGA pays 3.10%. Western United has a B+ rating from AM Best. You cannot make any withdrawals for the 5-year period. Zero withdrawals. Max issue age is 75 years old. The minimum investment is $10,000.

A Look at Top FIAs

• Athene Protector 5. This five-year FIA – as short a duration as you can get – typically invests in two indexes: BNP Paribas MAD 5, a low volatility index (one that invests in bonds and commodities, as well as stocks), and the AIPEX index, an artificial intelligence-powered index that invests in 250 companies and rebalances monthly.The participation rate is 80% on the BNP index and 75% on the AIPEX index.In the highly unlikely event that the annuity earns no money over five years, investors still receive 7.5% on their principal. For an annual rate of 0.4%, you get penalty-free access to all of your principal. The minimum investment is $25,000.
• Midland National RetireVantage 10. This tracks the MARC 5 low-volatility index with a generous 110% participation rate. The participation rate among most competitors is 80% to 95%. RetireVantage has a top-notch A+ rating with A.M. Best.To get the 110% participation rate, investors have to pay a 1 percent annual fee. Otherwise, the participation rate is 70%. Investors are highly likely to come out ahead if they pay the fee because the 110% participation rate is so much higher.The minimum investment is $20,000.
• Security Benefit Strategic Growth Annuity. This offers a 70% participation rate on the Morningstar Wide Moat Barclays VC Index, a low-volatility index rebalanced monthly. (Those willing to credit earnings every other year, instead of annually, will receive a 90% participation rate.)The minimum investment is $25,000.One point of interest in this FIA is that its index invests in the most undervalued U.S. stocks. For a number of years, this has been a losing proposition. But it appears to be a winner now because value stocks have recently begun rising more than growth stocks, and may continue to do so. Given the likelihood of an economic resurgence next year, they are increasingly deemed to be undervalued.Also noteworthy is that the Morningstar index has produced a positive return every year since 2004, with the exception of 2015. This means, of course, that it sidestepped the 2008 recession-sparked bear market. Most indexes are more volatile.

Summary

All of these annuities are highly attractive not only because they typically beat the competition but because they are an entire level higher than bank CDs. They are also considered relatively safe. Unlike CDs, they are not guaranteed by the Federal Deposit Insurance Corporation.

Over a long span of time, insurance companies have been safer than banks. In particular, they strutted their stuff during the Great Depression, when far more banks than insurance companies failed. Conservative investors want safety, as well as a competitive return, and good annuities provide both.

For the latest rates and more information about the products mentioned in this article, please call 1-866-223-2121 to speak with a licensed agent or send an email to support@annuityfyi.com. 

Written by Steve Kaufman

The post Hands Down, Select Annuities Today Are Better Than CDs first appeared on Annuity FYI.

We’re in the thick of the holiday season, and this should be as joyous a time as possible for seniors and others. But, as we move into the very end of the year, it’s also time to start thinking about the income taxes we’ll have to pay to Uncle Sam in just a few months.

This isn’t fun, and it typically requires more effort among seniors than younger folks because far fewer of them have jobs that automatically deduct their payroll taxes all year on their chief source of income. 

Nonetheless, let’s get into the spirit of the season and make the best of things. With this in mind, here are some tips to make your 2019 tax tab as palatable as possible.

• If you turn 70 this year, or are already in your 70s, 80s or 90s, don’t forget that you have pay RMDs (required minimum distributions) from your retirement accounts by December 31. If you miss the deadline, you could be hit with a 50% penalty on the shortfall. In traditional IRAs, you can easily calculate the RMD for each account you own and then take the total RMD from one or any combination of these IRAs.

• If your single or spouse income is not particularly high, consider taking some profits from stocks, in particular, if you qualify for the 0% long-term capitals gains tax rate. A married couple filing jointly qualifies with income up to $78,750. So, for example, if they have $65,000 of income in 2019, the couple could sell investments for a profit of $13,750 and pay no tax. (Singles with income up to $39,375 qualify for the 0% rate.)

• Remember to harvest your losses in taxable accounts if you have them, especially if you own stocks in what has been the best year for the market since 2013. You may have some stocks, possibly even mutual funds, fitting the bill. If so, sell them and use the losses to offset your profits in other investments. Make sure you line up your short-term losses, if any, with short-term gains and do the same with long-term losses and gains. 

• See if it’s possible to bunch deductions to save on taxes. With a huge increase in the standard deductions in comparison to past years, it’s admittedly harder to make itemizing expenses worthwhile. But if you are close – say, for instance, that you or your spouse had high, not fully insured medical expenses – you could combine them with, say, a sizable charitable gift this year and increase your itemized tax deductions for 2019 over the standard deduction threshold. (Unreimbursed medical expenses can be deducted if they exceed 10% of your adjusted gross income.). 

If instead you waited until 2020 to make the charitable gift and had no major medical expenses next year, you might wind up taking the standard deduction anyway.

• If you’re still working part-time and are in your early to mid-60s and don’t have a retirement plan at work, it may be smart for you and/or your spouse to contribute up to $7,000 in an IRA and deduct it. Single taxpayers covered by a workplace retirement plan can also deduct traditional IRA contributions if their income is between $64,000 and $74,000. For a married couple filing jointly, the income phase out is $103,000 to $123,000 if the spouse making the IRA contribution is covered by a workforce retirement plan.

• If you’re self-employed, as many seniors still are, you can also contribute up to $62,000 to a solo 401(k) plan — available to anyone with self-employment or freelance income. (Your contributions can’t exceed your self-employment or freelance income.)

• If you’re the parent or grandparent of a college student, you might be able to lower your 2019 tax bill by prepaying the tuition bill due for the next term.  And, courtesy of the American Opportunity Tax Credit, you don’t need to itemize to claim this tax break. This is available if the student in question is in his or her first four years of undergraduate education. The credit is worth up to $2,500 for each qualifying student.

• For seniors whose tax returns are not at all complicated, Uncle Sam is also now offering a psychological, if not financial, lift. The IRS recently released the second draft of federal form 1040-SR, U.S. Tax Return for seniors. The form has larger print and less fussy boxes and is intended to make life easier for some of the roughly 15 million senior households expected to file tax returns in 2020. The new form, roughly similar to the Form 1040EZ, is available for seniors 65 or older.

If possible, seniors would be well advised to capitalize on any tips above, except the last one, which is simply a matter of convenience.

The changes in federal income tax law two years ago – changes that set the stage for higher standard deductions and diminished opportunities to capitalize on itemized deductions – are almost certainly here to stay until the last day of 2025. This is true even though the federal deficit is ballooning again. Even if Democrats take over the White House next year, altering tax legislation with complex provisions mid-stream is a rare and highly onerous task. 

So, clearly, seniors who want to maximize tax savings must be proactive.

The post There is Still Time to Trim Your 2019 Tax Tab — But You Have to Act Soon first appeared on Annuity FYI.

Variable annuities are the most popular annuities because they offer by far the best shot at capital appreciation. But it’s a safe bet that they haven’t been popular much of this calendar quarter, VA sales typically track the ups and downs of the stock market, and the stock market got off to an abysmal start in 2016.

 
Happily, the backdrop has markedly improved. Stocks have rebounded nicely and appear to be stabilizing, and so folks who put plans to buy a VA on the back burner no doubt have started shopping again.

 
This is probably a smart move at this time, and certainly less unsettling. But potential buyers should make sure they’re covering the bases required to buy a VA that is truly best for them.

 
Here are five tips:

 
* Be cognizant of the share class you buy. Different share classes have different fee structures. Flagship Shares usually have the lowest fees, offsetting the arguably negative fact that they have among the longest surrender fee schedules – six to eight years. At the opposite end of the spectrum are L Shares, whose fees are about 50 basis points higher. There are also Bonus Shares, which pay a bonus but have higher fees, and the Fully Liquid Option.

 
* Don’t automatically sidestep Bonus Shares because of their higher fees.
They may be best if the bonus is sufficiently generous to offset those fees for a long time. To determine this, divide the amount of the bonus by the additional annual cost of the VA and see how long it takes to come out even. If you’re still ahead after 10 years, it’s probably a good deal.

 
* If you buy a living benefit rider, make sure you buy an annuity from a highly rated insurance company. You’re in this for the long-term and want to make sure the annuity underwriter is rock-solid. The A.M. Best rating should not be lower than B+, even though a B rating is still investment grade.

 
* In buying a living benefit, make sure you select the premium that best fits your long-term goals. The options are a single premium and a joint premium. Some brokers don’t even mention the joint premium to couples because it pays less (since it covers two lives, not one). But you’ll be sorry if your spouse was the single annuitant and dies because the annuity payments will cease.

 
* Make sure you select a VA whose sub-accounts (stock mutual funds) mesh with your investment preferences. If you’re an aggressive investor, make sure you have at least a small handful of aggressive growth sub-accounts from which to choose. If you’re conservative, make sure the selection offered doesn’t force you to invest in a sub-account riskier than you prefer.

 
Written by Steve Kaufman

The post It’s a Good Time to Take Another Look at VAs first appeared on Annuity FYI.

Baby Boomers spend nearly a quarter trillion dollars annually on annuities and in so doing mitigate the fear of running out of money in retirement. But many are not careful buyers and sellers, unfortunately, often don’t properly weigh their particular needs. Too often, this means buyers are making poor choices in purchasing what is often one of the biggest investments of their lives.

                Here are five tips that potential annuity buyers should bear in mind before consummating a purchase:

·         Know why you’re buying an annuity. It is meant to supplement, not replace, a traditional portfolio, which has much greater liquidity. Because annuities commonly offer guaranteed lifetime income, they are meant to be an additional supplemental safety net.

·         Make sure the benefits of your prospective annuity fit your needs. If you are married, for example, you’ll typically want a joint annuity, not a single annuity, even though the former pays less. With a joint annuity, if one spouse dies, the other still receives lifetime income.

·         Shop for annuities with at least three financial planning firms and make sure at least one is independent. Independents are not “captive” to an insurance company or wire house and generally offer more products. Whichever annuity you ultimately choose, make sure the credit rating of the insurance company selling it is solid.

·         Verify that a financial adviser is indeed an independent. If he sells securities – specifically, mutual funds and variable annuities – he is associated with a broker/dealer or a registered investment adviser and is. In fact, independent.

·         Compare the major types of annuities. These are variable annuities, fixed indexed annuities, fixed annuities, deferred annuities and immediate annuities. Once you decide which one you want, compare three to four choices in each category.

Written by Steve Kaufman

The post 5 Annuity Shopping Tips first appeared on Annuity FYI.

If you’re a meat-and-potatoes person who likes to keep things simple and began taking full Social Security benefits from your own account at age 66 — even though you’re married and could instead have tapped your spouse’s Social Security benefits and ultimately collected more — life is good enough and uncomplicated.

It’s also status quo.

But if you’re more creative and would have liked to take advantage of relatively complex Social Security strategies described with nomenclature such as “file-and-suspend” and “a restricted application for spousal benefits” – the different approach to filing you were looking forward to is ending and things are not good. That’s because Congress is phasing out these two filing strategies, which ultimately will cost select couples and divorced people thousands of dollars in retirement income.

Families already using these strategies will be grandfathered. There is also a six-month window in which couples at least 66 years old and divorced spouses who act can still take advantage of these tactics. In addition, there is a partial reprieve for others. If you’re 66-plus and creative and have considered using these complex strategies or would like to explore whether they could benefit you before disappearing, review this with a trusted financial advisor.

But that’s it. Younger folks will have fewer options and those with a creative bent will ultimately lose retirement money. The legislation just became law.

The strategies being phased out have allowed a husband or wife at least 66 to delay claiming benefits on their own earnings record while one pockets a “spousal benefit” based on the earnings of the other spouse.

This is possible because one individual can file for benefits and suspend them. The other files a restricted application to collect only a spousal benefit. Both individuals hence take advantage of delayed retirement credits, increasing their earnings benefits by 6 to 8 percent each year in which they defer claiming between the ages of 66 and 70. Meanwhile, one individual could still get some income from Social Security.

The post New Social Security Rules Undermining Younger, More Exotic Filers first appeared on Annuity FYI.