2017: 12 Things to Do Before the Ball Drops

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Split Annuity Strategy

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.

The Split

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

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.Diane Divides

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 contract. 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). Annuities are not guaranteed by the FDIC or any other government agency. With variable annuities, the investment return and principal value of the investment option are not guaranteed. Variable annuity subaccounts will fluctuate with the market. Keep in mind that the return and principal will fluctuate as market conditions change. The principal may be worth more or less than its original cost when the annuity is surrendered.

 

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 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 Suite 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 2016 FMG Suite.

THE PRESIDENTIAL ELECTION SEEN THROUGH A CLOUDY CRYSTAL BALL

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.

What Is an Annuity?

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.

fastFact-blackFAST 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).

tips-blackTIP:  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

Two Phases

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.

Graphic-001-1.jpg

Your Takeaway:

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.

  1. 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.

Negative Interest Rates: The Positives and the Negatives

By David Urovosky

You may have recently seen or read news stories about the trend overseas toward central banks attempting to stimulate their countries’ economies by reducing loan interest rates to below zero percent. The European Central Bank (ECB) has already embraced negative yields, and the Bank of Japan is the most recent entrant into this controversial phenomena.

In layman’s terms, here is what you need to know about this trend and how it may affect your financial investments in the future:

 What is a negative interest rate?

Negative interest rates are interest rates that are actually below zero. A depositor would actually have to pay money to the bank for keeping it there. In effect, the depositor is paying the bank to save their money.

This is how it theoretically works:  If you deposited $10,000 in your bank you may only receive $9,990 after a year—with no interest paid in between. That means savers won’t get all of their money back. You may ask “Why would I do that?” As long as the rates were not too low or not too negative, you may keep it there and “pay the fee” for safety or convenience.

It seems counterintuitive that people would pay a bank or financial institution to save money.  What is happening in the economy and financial markets in Europe and Japan that would make this option attractive to depositors?

This is not an attractive option for depositors. The Central Banks in Europe, Denmark, Sweden, Switzerland, and Japan are now charging commercial banks for their excess reserves. According to Bloombergview.com (January 29, 2016), negative interest rates actually punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. They have not started charging retail customers (yet) for fear of losing deposits. By the end of 2015, about a third of debt issued by euro zone governments had negative yields. That means investors holding bonds to maturity won’t get all of their money back.

There are several potential explanations for the emergence of negative yields, particularly those on the short end of the yield curve. These include very low inflation, the persistence of the international savings glut and “flight to safety” toward low-risk, fixed-income assets.

In consequence, sovereign bonds of certain countries in Europe that are deemed low-risk have been in heavy demand. In addition, The ECB has exacerbated the demand for these bonds by implementing the Extended Asset Purchase Program (their version of quantitative easing — stimulating the economy by increasing funds in the monetary system).  The ECB is purchasing $60 billion of these bonds every month until at least September of 2016 for a total of $1.6 trillion euros. This and other factors have caused a shortage of these bonds, which has driven up the price and knocked down the yields into negative territory.

What is the likelihood that American banks and other financial institutions could start charging depositors to hold their money?

Most banks have not passed on this cost to their retail customers for fear of losing deposits. However, this policy does cost the banks money and hurts profits. The banks have tried to cover some of this cost by implementing various fees. Some commercial banks, such as Julius Baer and JP Morgan, have started to charge their largest corporate customers who carry tens of millions of dollars with the banks. In effect, they are telling these larger customers to take their money elsewhere!

For the average individual investor, what are the plusses and minuses of negative interest rates?

The big plus is that is that interest rates for loans of all types—mortgages, car loans etc.,— will be lower for a longer period of time. It will be a great time for borrowers. The same holds true for our government. With $19 trillion in debt, interest rates will remain low and our deficit will not increase at blinding speed. Businesses will be able to borrow at lower rates and expand. Companies will be able to borrow cheaply and either expand or buy back their stock (such as Apple and many other companies).

The minuses of negative interest rates are two-fold. It is bad for savers and that affects a lot of retired people. It may have a cost to keep money in the bank. The second is behavioral. If interest rates were only slightly negative, it may not change behavior very much. Depositors would still leave money in the bank for safety and convenience. But negative rates crossing that threshold (some analysts say at 0.5% negative) could change behavior. How?

  • People may start to make excessive tax payments to the government and earn a zero return until a refund is received from the government, thus avoiding negative rates.
  • People may start to pay their electrical bills or cable bills months or even a year in advance.
  • People may also start to hoard cash and leave it under their mattress.

None of these tactics are good for the economy. The economy is based on confidence and we need money in the system to be “out there” changing hands, and making purchases. In his February 13, 2016 article “Negative 0.5% Interest Rate: Why People are Paying to Save” in the New York Times, financial reporter Neil Irwin muses, “Might new businesses sprout up that allow people to securely store thousands of bundles of $100 bills, or could people buy physical objects as stores of value that banks can’t charge a negative interest rate on?” In Japan, where rates have been very low to non- existent and now negative for a long time, many people buy safes to keep in the house. Maybe we should start looking for companies that manufacture safes as an investment?

What are the spinoff implications of negative interest rates for other financial market sectors?

For countries that have implemented negative rates, it may help boost their exports by encouraging currency depreciation and may support lending and domestic demand by further easing credit conditions. At the same time, they could also have some adverse consequences for financial stability through an erosion of bank profitability and through excessive risk taking by investors seeking a higher yield (as mentioned in my last quarterly report).

Potential implications for developing countries include a search for yield supporting capital inflows (for example, U.S. treasury bonds would become a very attractive investment compared to the bonds in sovereign debt of Europe because the treasuries are high yielding and the dollar would increase in value as compared to the euro), which could help offset the impact of an approaching liftoff in U.S. policy interest rates.

As far as currency goes, if our interest rates are higher than Europe and Japan (which they are now), investors searching for yield will buy these bonds. They are attractive. They are priced in U.S. dollars, so theoretically the dollar will go up in value as compared to the euro and the yen. This will make U.S. products more expensive around the world and will hurt sales and earnings of the large U.S. companies that have a lot of international sales. That is one reason the stock market took a big hit when Janet Yellen announced the first interest rate hike in almost 10 years in December 2015. Much of the rest of the world is lowering rates as we have started to hike rates. That hurts our multinational companies earnings and profits and share prices.

Your key takeaways:

I don’t think we will have negative rates in the United States this year; however, negative interest policy is spreading in the rest of the world. David Kotok, the Chairman and Chief Investment Officer of Cumberland Advisors said, “Five currencies and 23 countries are now practicing some form of negative interest rate policy (NIRP). In all cases the likely outlook is for NIRP to go lower in rate and for its usage to broaden. For perspective, 24% of the world’s real output is housed in those 23 countries ranging in size from Malta (the world’s smallest economy) to Japan (the world’s third-largest economy).”

I expect interest rates in the U.S. to remain low for a long time, perhaps 3 to 5 years. Investors will continue to search for yield and, with a lack of other choices, I think money (in fits and starts) will find its way to the stock market and other risk assets and drive prices of credit-sensitive bonds and stocks higher during the next few years.

Questions or comments? Send us an email at David.Urovsky@lfg.com.

The information in this blog post has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of David A. Urovsky, President of Wealth Advisors Group, and are not necessarily those of Lincoln Financial Advisors.  Expressions of opinion are as of this date and are subject to change without notice.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.   Investments mentioned may not be suitable for all investors. Investing involves risk, and investors may incur a profit or loss.

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-1468262-041116

 

 

How Is Your Financial Fitness? Find Out With This 8-Point Checkup

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.

Hallmarks of a Client-Centric Investment Approach

Hallmarks of a Client-Centric Investment Approach

By David Urovsky


Knowing the client. That is what a client-centric investment approach is all about.

An investment advisor’s work process must begin with the client. The advisor must take the time to really get to know the client as an individual. In the first meeting, the advisor should ask about the client’s current financial circumstances. Factors to review include annual income, job security and satisfaction, and financial assets set aside for retirement or other financial objectives. Then the advisor and client should discuss anticipated financial goals and the time horizon the client has in mind.

Based on a careful study of this information, the advisor is then able to develop a customized financial plan that offers several approaches to investment – all of which are clearly defined, manageable and responsive to the criteria the client has provided. After the client selects the approach that seems most appropriate, the advisor finalizes and exacts the plan, choosing carefully from the vast array of financial products available in the marketplace.

Day-to-day, the client-centric investment approach is demonstrated through attentive service that includes returning phone calls and e-mails promptly (on the same business day). And sometimes, the advisor goes above and beyond.

For example, a couple of weeks ago, I went with a client to help her buy a car because she wasn’t familiar with all of the financial terms and jargon. Next week, I’m going to sit with a client and her attorney to discuss alimony disagreements with her ex-spouse.

Client-centric portfolio management also means being proactive with regular and frequent client communication by phone, e-mail, mail and, if appropriate, in-person meetings.

Consistent portfolio review is another hallmark. Depending on the client’s preference, portfolio reviews could be quarterly, semi-annual or annual.  Whatever the frequency, these reviews must be done consistently. They can be done in-person or by phone, depending on the client’s preference. Either way, consistent portfolio reviews make it possible for the advisor to respond more effectively to changes in the client’s life or market conditions.

Perhaps the most important hallmark of the client-centric investment approach is that all investment solutions are customized and personalized.  This means strict avoidance of cookie cutter solutions or pre-packaged investment models.

In the long run, client-centric investment depends on the quality of personal relationships. As an advisor, I’m not just a stranger who manages money. I make it my business to be accessible to my clients. In that spirit, I have been known to make house calls.

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-2400901-012919