When financial markets turn volatile, some investors show their frustration by fleeing the markets in search of alternatives that are designed to offer stability.
For example, in August 2015, investors pulled $79 billion from U.S. stock funds based on uncertain economic indicators and speculation about a potential increase in interest rates.1
For those looking for a way off Wall Street’s roller-coaster ride, annuities may offer an attractive alternative.
Annuities are contracts with insurance companies. The contracts, which can be funded with either a lump sum or through regular payments, are designed as financial vehicles for retirement purposes. In exchange for premiums, the insurance company agrees to make regular payments — either immediately or at some date in the future.
Meanwhile, the money used to fund the contract grows tax deferred. Unlike other tax advantaged retirement programs, there are no contribution limits on annuities. And annuities can be used in very creative and effective ways.
One strategy combines two different annuities to generate income and rebuild principal. Here’s how it works:
An investor simultaneously purchases a fixed–period immediate annuity and a single premium tax-deferred annuity, dividing capital between the two annuities in such a way that the combination is expected to produce tax-advantaged income for a set period of time and restore the original principal at the end of that time period.
Keep in mind that any withdrawals from the deferred annuity would be taxed as ordinary income. When the immediate annuity contract ends, the process can be repeated using the funds from the deferred annuity (see example). Remember, the guarantees of an annuity contract depend on the issuing company’s claims–paying ability.
Diane divides $300,000 between two annuities: a deferred annuity with a 10-year term and a hypothetical 5% return, and an immediate annuity with a 10-year term and a hypothetical 3% return. She places $182,148 in the deferred annuity and the remaining $117,852 in the immediate annuity. Over the next 10 years, the immediate annuity is expected to generate $1,138 per month in income. During the same period, the deferred annuity is projected to grow to $300,000 — effectively replacing her principal.
Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions and may be worth more or less than the original amount invested if the annuity is surrendered.
1. CNBC.com, August 14, 2015
The question I am asked every four years: “Dave, how do you think that the upcoming presidential election is going to affect my portfolio?”
It’s a fair question, and I wish I had the proverbial crystal ball to provide an answer. But this year the crystal ball is a little cloudy. In the absence of the gift of foresight, there are indicators based on everything from past performance to old-fashioned prognostication.
The answer? Like it or not based on your political leanings, my research indicates that the markets fare better in a Democratic administration. The market is performing fairly well—and at least part of that can be attributed to the market’s presumption that Hillary Clinton will be our next president.
Despite her claims that she is not tied in to Wall Street, for the most part, the markets know what to expect from her. Like her or not, the markets definitely do not like uncertainty, so Wall Street is proceeding on the assumption that the Democrats will prevail in November.
Signs and portents of election results abound, and the stock market seems to have successfully predicted the next U.S. president in the past. In her February 2016 Kiplinger.com article “How the Presidential Election Will Affect the Stock Market,” Anne Kates Smith presents some interesting statistics to support this notion. She notes, “If the stock market is up in the three months leading up to the election, put your money on the incumbent party. Losses over those three months tend to usher in a new party.”
And old-fashioned prognostication seems to be an accurate predictor of election results when people back up their opinions with their hard-earned money. While I’m not advocating their use, prediction market websites abound, where people bet on the outcomes of a plethora of topics, from Oscar nominations to presidential elections. The outcomes of the predictions are thought to be more accurate than polls because people are backing up their opinions with their wallets. Reporter John Stossel and Fox News Producer Maxim Lott host one of the popular sites, www.electionbettingodds.com, which indicated on June 12, 2016 that Hillary Clinton had a 71.2% chance of winning the presidency, while Donald Trump had a 24.1% probability of winning.
The ascendency of Donald Trump as the Republican party’s candidate for president has created some churn for voters and political and economic forecasters. Not being a traditional presidential candidate — a politician with a strong political party affiliation, voting record and policy history — how Trump would form policy positions on the influencers on the stock market and corporate earnings, such as taxes, trade, healthcare, foreign affairs, is a matter for conjecture. And everyone is guessing.
Trump has not yet revealed enough hard evidence of his agenda to alleviate the enigma, but we know that his priorities cluster around social issues, tax reform, foreign trade, and healthcare reform. A repeal of the Affordable Healthcare Act and enacting competitive interstate health insurance sales would certainly be a game-changer in the healthcare industry and affect earnings and stock prices in that sector. Getting tough with our trade policies with China and lowering the corporate tax rate to create a more fertile domestic environment for U.S. companies would affect foreign trade and corporate earnings — and potentially strengthen some segments of the market and weaken others.
Back to the answer to your question about the affects of the presidential election on your portfolio: You and your portfolio are together for the long haul. History has proven that staying the course and making portfolio decisions for the right reasons (decisions based on fear and uncertainty are not sound decisions) are the bedrock of a strong portfolio. As individual investors, we have no control over the politics, climate, economy, and domestic and foreign events that affect the markets and corporate earnings. However, we can control oversight of our portfolios and accept the inevitability of change.
If you think now is a good time for a portfolio check-up, I’ll be happy to meet with you and discuss all of the topics that may affect your current and future situation.
David Urovsky is registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer, Member (SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. It is not our position to offer legal or tax advice. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Corp. CRN-1526180-061516
The views expressed are those of the author and not necessarily that of Lincoln Financial Advisors Corp. Opinions presented may include forward-looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied.
Individuals hold more than $2.0 trillion in annuity contracts; a tidy sum considering an estimated $7.4 trillion is held in all types of IRAs.1
Annuity contracts are purchased from an insurance company. The insurance company will then make regular payments — either immediately or at some date in the future. These payments can be made monthly, quarterly, annually, or as a single lump-sum. Annuity contract holders can opt to receive payments for the rest of their lives or for a set number of years.
The money invested in an annuity grows tax-deferred. When the money is withdrawn, the amount contributed to the annuity will not be taxed, but earnings will be taxed as regular income. There is no contribution limit for an annuity.
There are two main types of annuities.
- Fixed annuities offer a guaranteed payout, usually a set dollar amount or a set percentage of the assets in the annuity.
- Variable annuities offer the possibility to allocate premiums between various subaccounts. This gives annuity owners the ability to participate in the potentially higher returns these subaccounts have to offer. It also means that the annuity account may fluctuate in value.
Indexed annuities are specialized variable annuities. During the accumulation period, the rate of return is based on an index.
Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency.
Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions, and may be worth more or less than the original amount invested when the annuity expires.
FAST FACT: Fine Print.
Since variable annuities
give you the option to allocate your premium
between various subaccounts, it’s important
to read the prospectus before you invest.
Case Study: Robert’s Fixed Annuity
Robert is a 52-year-old business owner. He uses $100,000 to purchase a deferred fixed annuity contract with a 4% guaranteed return.
Over the next 15 years, the contract will accumulate tax deferred. By the time Robert is ready to retire, the contract should be worth just over $180,000.
At that point the contract will begin making annual payments of $13,250. Only $7,358 of each payment will be taxable; the rest will be considered a return of principal.
These payments will last the rest of Robert’s life. Assuming he lives to age 85, he’ll eventually receive over $265,000 in payments.
Robert’s annuity may have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. His annuity also may have surrender fees that would be highest if Robert takes out the money in the initial years of the annuity contact. Robert’s withdrawals and income payments are taxed as ordinary income. If he makes a withdrawal prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).
TIP: Still Selling Strong.
In 2014, investors purchased $235.8 billion
in annuity contracts.
Most of this capital—$140.1 billion—
went into variable annuities.
Source: LIMRA, 2015
Deferred annuity contracts go through two distinct phases: accumulation and payout. During the accumulation phase, the account grows tax deferred. When it reaches the payout phase, it begins making regular payments to the contract owner — in this case annually.
Annuities work well in certain situations. If you would like to see if an annuity would be an appropriate investment vehicle for you, please call me and I’ll be glad to to discuss your options with you.
Insured Retirement Institute, 2015; Investment Company Institute, 2015
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2015 FMG Suite.
By David Urovsky
Helping people achieve their financial goals starts with realistic and manageable planning.
In order to develop a sound financial plan, the financial advisor must determine not only the amount of wealth required to achieve your desired lifestyle but also study your entire financial situation. This includes an examination of the present or potential need for such financial tools as budgeting, tax reduction strategies, retirement planning, insurance, estate planning to avoid long-term tax issues and more. It is important to account for every aspect of your financial well-being.
A great way to start the planning process is with an 8-Point Financial Fitness Checkup, through which you and your financial advisor will come up with answers to the following key questions:
• Do you have a written, detailed and realistic monthly budget?
• How are you funding your emergency fund? How long will these funds last if you needed them to cover monthly expenses?
• How are you planning to guard against income losses from illness, disability or death?
• What tax saving strategies did you employ during the last year?
• How are you funding your retirement plan and when do you plan to retire?
• What are your goals for retirement (i.e., travel, major purchases, lifestyle changes, and so on).
• When did you last review the beneficiaries on your retirement accounts and insurance policies?
• When did you last update your will?
Following these conversations, your advisor can develop a customized plan that responds to your individual goals and gets you strategically positioned for financial health. Quarterly or semi-annual reviews in person and phone calls throughout the year will allow your advisor to respond to changes occurring in your life as well as changing market conditions.
It’s never too late to improve your financial fitness, so why not get started on your checkup today?
Coming next: How children of baby boomers are playing an increasingly important role in financial planning for their aging parents.
David Urovsky is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Group. CRN-2279009-101518
Previous entries may have listed strategies and techniques that may be obsolete in current tax and investment environments. These entries were presented within the context of the time, and may not reflect current investment, tax or legal conditions.