Category Archives for "Annuities"

The 401(k): Robbing Americans for 40 Years Now


Why the 40th birthday of the 401(k) is nothing to celebrate

This article from Robert Kiyosaki, author of Rich Dad, Poor Dad (sold over 30 million copies) clearly explains what the majority of Americans know about their 401(k) plans. 

Written by Robert Kiyosaki | Tuesday, November 6, 2018

Read time: 6 min
This week, the 401(k) will turn 40 years old. For a lot of working Americans, this investment vehicle is all they know about retirement planning. Since they were very young, they’ve been told to sock money away into a 401(k) and when they are ready to retire, they will magically have enough money to live on.

Of course, retirement wasn’t always this way. My dad and many other people of his generation enjoyed a pension plan. Work your entire life as a good employee for a company and they’ll take care of you when you retire.

As “Time” points out, the 401(k) wasn’t built to replace this system of pensions:

  • To be fair to section 401(k)’s framers, the provision was never intended to be a broad-based saving incentive that would serve as a foundation for financial stability in retirement. Instead, it marked a truce between the IRS and firms that wanted to let employees plow their year-end bonuses into pension plans. The IRS sought to tax employees immediately on those amounts, on the theory that the pension plan contributions were equivalent to cash. Congress struck a compromise, which it tucked away in a provision of the 1978 Revenue Act that garnered little notice at the time: employees could delay taxes until they withdrew cash from the plans, as long as the plans satisfied certain statutory criteria (including a requirement that the plans not discriminate in favor of the firm’s highly compensated employees).

Yet, fast-forward 40 years later, and pensions are rare and 401(k)s are everywhere…at least for wealthier workers. Poor workers, well, they have nothing. Turns out that corporations are really good at using “tucked away” provisions to their advantage, and the financial industry is great at selling financial vehicles to people who know little about money.

The 401(k) is a horrible retirement plan

At Rich Dad, we’ve talked for years about how horrible 401(k)s are. My advisor, Andy Tanner, is especially good at sharing the reasons why. You should check out his book, “401(k)aos”.

For starters, you have no control over your money in a 401(k). You literally hand it over to a manager and hope that it will grow. Want to access your money? You can’t, at least not without a hefty fine. And if the market crashes? You’re out of luck because there’s no insurance for a 401(k).

You also are capped on the amount you can invest. So, if you want to invest more than $18,500 a year, you’re out of luck and need to find another investment vehicle. The problem is that most people who invest in 401(k)s don’t know a lot about money or investments, so they’re happy to give away their money, even if they could be putting it to much better use in other investments. Extra money around? They save it, which is potentially even worse.

Another horrible thing about 401(k)s is that the fees from the managers cut significantly into your earnings. As my wife Kim wrote:

  • The first thing you should know is that your 401(k) is sprinkled with hidden fees that are buried in pages of legal paperwork. Legal fees, transaction fees, bookkeeping fees, and more. Plus, the mutual funds in the 401(k) often take 2% off the top.
  • These fees may not seem like a lot when you sign on the dotted line, but over-time, compounding cuts down your returns substantially. Jack Bogle, the Founder of Vanguard, puts it like this: "Do you really want to invest in a system where you put up 100 percent of the capital, you take 100 percent of the risk, and you get 30 percent of the return?"

Finally, there are significant tax disadvantages to investing in 401(k)s. Rather than taxed at the lower capital gains rate of around 15%, they are taxed at earned income rates, which can be twice as much.

The one “good” thing?

With all these things stacked against a 401(k), why in the world would anyone want one and why are they still around?

To answer the latter part, no one has come up with a better idea and implemented it yet. And big corporations and a whole financial services industry would revolt if they were taken away.

To answer the question of why anyone would want one, people don’t know a lot about money and investing, are often ready to believe whatever they are taught about money and investing, and also buy into the lie that they get free money when their employer matches their investment.

The problem is, there’s no such thing as free money. Here’s a story to show what I mean.

Years ago, I had a conversation with a young man about 401(k)s. “I have a question for you,” he said. “I’ve read that you say 401(k)s are the worst investments, but I don’t understand why you say that.”

“What is it that you don’t understand?” I asked.

“Well,” said the young man. “Most employers match your contribution. For instance, my employer matches up to four percent of my salary. Isn’t that a hundred percent return? Why is that a bad investment?”

“It’s a bad investment,” I said, “because it’s your money to begin with.”

He looked puzzled and perplexed.

“Listen,” I said, “if it weren’t for 401(k)s, your employer would have to pay you that money as part of your salary. As it is, they still pay it, but only if you give up four percent of your existing salary in to a retirement account where you have no control. And if you don’t, well the employer comes out ahead. It’s your money, but they’re in control.”

Thinking like an employee

The young man still didn’t look convinced, but I could tell he was thinking hard about it. The reason this young man and many others don’t understand my reasoning is that they only think like employees. As an employer, I know that if it weren’t for 401(k)s, I’d have to pay that money to employees in their salary in order to be competitive.

For me, as an employer, a 401(k) is an advantage because I don’t have to pay the money unless an employee opts in, and if they leave my company too early, I don’t have to pay because they aren’t vested.

A 401(k) steals your money

A study confirms what I’m saying and should help those of you who still find this logic confusing or not convincing. According to Steven Gandel, a study issued by the Center for Retirement Research indicates that, “All else being equal…workers at companies that contributed to their employees’ 401(k) accounts tended to have lower salaries than those at companies that gave no retirement contribution…In fact, for many employees, the salary dip was roughly equal to the size of their employer’s potential contribution.”

Translation, companies that don’t offer 401(k)s must pay a higher salary to compete with companies that do. Those company’s employees simply get their money as part of their salary rather than having to match it and save it in a tax-deferred retirement plan where they have no control and have high fees.

No financial intelligence? Stick with the 401(k)

Control is an important aspect of investing. As I mentioned, with a 401(k), you have no control over your investments as you generally invest in funds and indexes controlled by brokers, who are controlled by bankers, who invest in companies that are controlled by boards—all of which you have no control over.

If you want to be rich, you must have a financial education and control over your money and your investments. This is why I like to invest in my own business, purchase real estate, and create products. I have a lot of control over those investments. Generally, a good matrix is the more control you have, the higher your potential return. The less control you have, the lower your potential return.

Of course, it takes high financial intelligence to invest in things where you have control because you have to make a lot of important decisions. This is why being forced into a 401(k) probably isn’t a bad thing for most people. This is because most people have little-to-no financial education and wouldn’t know what to do with the extra money other than save it or spend it.

But I expect the average Rich Dad reader to be head and shoulders above the average person in terms of financial intelligence. The reality is that if you’re investing in a 401(k), you’re not making a return on your employer’s match. You’re simply getting what is owed you by your employer.

So, why don’t we celebrate the 40th birthday of the 401(k) but kicking it to the curb? I think that you can find a better way to put your money to work.1

Source: http://www.richdad.com/Resources/Rich-Dad-Financial-Education-Blog/November-2018/The-401k-Robbing-Americans-for-40-Years-Now.aspx?fbclid=IwAR2fz92zsFItre6WXICPeVYGhOVtRN9uUUu0o2YIjZi0qI07Az39iBq7zcY#.W-JY-bovwB8.facebook

How to Stay North When the Market Goes South

Today I spoke with several clients and friends and most of them lost money in the market...again. So how do you stay north when the market goes south? You’ve heard the expression your whole life, but what does it mean when it applies to your finances? Well to begin with, it’s not good.

Here’s the definition from Dictionary.com​:1

go south

verb phrase
to fall or slide down; to decline; to fall in value

Examples
His golf game is going south.

Usage Note
slang; goes south, going south, went south, gone south

The recent stock market downward corrections in 2018 have millions of active and passive investors nervous… again.


Many experts agree that the nine-year bull market is feeling the giant paws of the bear market clawing into their financial breadbasket.

I concur and believe this is only the beginning.  To take you back a bit (6 months), here are a few headlines to consider taken directly from Google on Saturday March 24, 2018.2
"What was once considered an anomaly now seems to be a trend".

My personal favorite is the last one stating Losses are part of the game when investing in the stock market”. Maybe it’s just me, but I've always thought keeping my money is always better than losing it.

Dow closes at 2018 low as trade worries rise - MarketWatch
https://www.marketwatch.com › Markets › U.S. & Canada › Market Snapshot

1 day ago - The benchmark index lost 6% over the week and is down 3.2% year to date. The Nasdaq Composite Index COMP, -2.43% declined 174.01 points, or 2.4%, to 6,992.67 and posted a 6.5% loss over the week. Weekly losses for all three benchmarks were the steepest since January 2016, when markets were ...

Dow drops more than 400 points into correction, posts worst week ...
https://www.cnbc.com/2018/.../us-stock-markets-set-for-a-sharp-fall-at-the-open-amid...

2 days ago - The major averages posted their biggest weekly loss since January 2016. The Dow and S&P 500 dropped 5.7 percent and 5.9 percent this week, respectively, while the Nasdaq pulled back 6.5 percent. "The market has been priced for perfection ... and that leaves the market vulnerable to surprises. In this ...

MARKET SNAPSHOT: Dow Closes At 2018 Low As Trade Worries Rise
news.morningstar.com/...markets/2018032310549/market-snapshot-dow-closes-at-20...

2 days ago - The major averages posted their biggest weekly loss since January 2016. The Dow and S&P 500 dropped 5.7 percent and 5.9 percent this week, respectively, while the Nasdaq pulled back 6.5 percent. "The market has been priced for perfection ... and that leaves the market vulnerable to surprises. In this ...

Dow Jones and S.&P. Slide Again, Dropping by More Than 4% - The ...

https://www.nytimes.com/2018/02/05/business/stocks-equities-dow-markets.html

Feb 5, 2018 - The rule book is now changing, a shift that is sending tremors through the financial markets. The Standard & Poor's 500-stock index fell by more than 4 percent on Monday, deepening its losses from the previous week and erasing its gains for the year. The Dow Jones industrial average sank by 4.6 percent.

Stocks close down, making February the worst month in two years for ...

www.latimes.com/business/la-fi-financial-markets-20180228-story.html

Feb 28, 2018 - Some of Wednesday's drop was due to a slide in the price of oil, which sent energy stocks to the market's sharpest losses. The S&P 500 ... He told Congress that he's more optimistic about the economy, which led some investors to anticipate four rate increases for 2018, up from three last year. Among the ...

This Year's Stock Market Losses Are Normal

awealthofcommonsense.com/2018/03/this-years-stock-market-losses-are-normal/

This Year's Stock Market Losses Are Normal. Posted March 20, 2018 by Ben Carlson. The recent market correction was unusual in how swift it occurred but the magnitude of the losses shouldn't be unexpected for investors. Losses are part of the game when investing in the stock market. This piece I wrote for Bloomberg in ...

SCREEN SHARE

Here’s a picture I took on my iPhone, October 26, 2018. This graph clearly illustrates the current market conditions.

So how does one stay north when the market goes south?

One solution I can share.
The clients that I have helped with this dilemma have not been concerned from this down turn because they made decisions and acted to protect themselves from market losses. How? Because they re-allocated only what was needed to cover the income gap for projected essential expenses (after focused discussions and strategy sessions) into…

You guessed it, the annuity. That awful, beat up, misunderstood and bullied financial instrument that falls into the monetary hierarchy between savings accounts / Cd’s and the stock market.

Let me first say, annuities are not for everyone and I do not consider annuities to be an investment in a portfolio. After all it is an insurance product and should not be considered anything else. However, when they are positioned to provide stability, protection against loss of principle and reduction of risk in a financial plan, they are unmatched by any other financial instrument.  

Robert Ibbotson, a renowned financial expert agrees. Ibbotson is a 10-time recipient of Graham & Dodd Awards for financial research excellence and a professor emeritus at the Yale School of Management. Today, Ibbotson's latest research validates that uncapped FIAs (Fixed Indexed Annuities) help control equity market risk, mitigate longevity risk, and have the strong potential to outperform bonds in the very near future.

Suze Orman, an internationally acclaimed personal finance expert has been recommending indexed annuities to shield your retirement nest egg from market volatility for some time. In her NY Times best selling book, “The Road to Wealth,” Suze Orman tells readers that “if you don’t want to take risk but still want to play the stock market, a good index annuity might be right for you.”

True, the circumstances of an individual’s life, goals and retirement needs to be identified, discussed and put in order first before even considering an annuity. Before making a judgement call on whether an annuity should be included in your planning process, I always recommend a little education first. To learn more about annuity basics, read this article on my website: What is an Annuity?

This article is not intended to give you all the details, stats, pros and cons of annuities. Its purpose is simply to illustrate a way to help you keep the money you’ve earned and serve as an alternative to gambling away any portion of your nest egg benchmarked for your essential spending.  Depending on your needs, availability of assets and financial goals, annuities if utilized and set up correctly, can provide a guaranteed solution for predictable income that you can’t outlive.

Most people like receiving social security checks and funds received from pensions but rarely think about or acknowledge the fact that they are annuities.

A final note: As with any bull run, your investments are at an all-time high in gross value (minus the recent decline of market value) which translates into higher purchasing power. If in December 2017 you re-allocated of a portion of your IRA, 401k, 403b and or brokerage account into a tax-deferred annuity, it would have would have bought you more then it will today. 

How much longer will you wait to consider these benefits? When you lose another 4%, 6%, 10%? Something to ponder.

Now you know there is a way… to stay north when the market heads south.

As always, plan wisely my friends...

Finding a reputable and trusted partner to assist you with your financial & insurance needs is of vital importance.  I will work hard to find the best programs, coverage and rates that fits your budget and your needs. Contact me at 949-216-8459 or ccolley@coliday.com


Other articles about Annuities:
What Are Annuities?
Alternatives to Low Paying Bank CD’s

Information and materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. The above information is not intended to provide, and should not be relied on for, tax, legal, accounting or investment advice.
Coliday / Craig Colley is not giving any financial advice, is not a financial advisor and is not affiliated, employed or endorsed by the SSA, Medicare.gov. or any other government agency.

1)  http://www.dictionary.com/browse/go-south 2)https://www.google.com/searchq=how+to+stay+north+when+the+market+goes+south&oq=how+to+stay+north+when+the+market+goes+south&aqs=chrome..69i57.47458j0j7&sourceid=chrome&ie=UTF-8 3)graph https://www.nytimes.com/2018/02/05/business/stocks-equities-dow-markets.html

What Are Annuities?

Annuities can be a paramount way of saving for retirement. They are designed to assist in reaching long term financial goals such as the ability to create an income stream, put aside money for the future or to provide guaranteed lifetime income. Annuities also offer deferred tax status so you do not pay taxes until there is a withdrawal which helps your savings grow faster. Different annuities have advantages and disadvantages that should be carefully considered in choosing the right option.

Fixed Deferred Annuities
Fixed deferred annuities offer tax-deferral advantages with a set interest rate and can provide steady growth in value over time for long term retirement goals as they are not exposed to stock market fluctuations. Taxes are deferred until withdrawals are taken.

Features and Benefits:

  • Guaranteed Fixed Interest Rates
  • Protection from Market Volatility
  • Income Options
  • Tax Deferral

Guaranteed Fixed Interest Rates1
Fixed deferred annuities lock in a specified interest rate during the contract accumulation period (the period before annuity payments begin) allowing the money within your contract to grow slowly and steadily over time.

Protection from Volatility
You’ll be protected against the effects of market fluctuations when you choose a fixed deferred annuity. Provided you don’t make withdrawals, your principal is protected and will grow in value.

Income Options
Fixed Deferred Annuities offer income options that can provide guaranteed short term and/or long term income for life depending on individual needs.2

Deferral
Fixed Deferred Annuities offer a fixed rate of interest which allows the money value in the annuity to increase as the principal earns interest and as the interest on that principal compounds. Fixed annuities are free from current income taxes which allows your money to grow. Taxes are paid on the money in the event of a withdrawal.

Income Annuities
A type of annuity that provides guaranteed income for life with limited or no liquidity or for a period of time of your choice — either immediately or at a future date. As an additional source of income outside of Social Security or a pension, Income Annuities are designed to help convert a portion of your retirement savings into a predictable stream of guaranteed income for a specific amount of time or that you can't outlive.

Features and Benefits:

  • Guaranteed Income
  • Tax Efficiency
  • Income Options

Guaranteed Income
An Income Annuity gives you the confidence of knowing you will have the money you need for everyday expenses when the paycheck ends.

Tax Efficiency1
If you have already paid taxes on money used to purchase an income annuity, part will be taxable earnings and part of each annuity payment will be considered a return of the amount you paid for the annuity (your purchase payment).

Income Options
Income Annuity options offer the flexibility of the policy holder to decide when to and how often the income will be received (within contract limits). With the fluctuations in the financial markets, you can have peace of mind knowing Income Annuities can provide guaranteed income.3

1 Guarantees are based on the claims-paying ability of the issuing company.2 Taxable withdrawals are subject to ordinary income tax and, if made prior to age 59½, may be subject to a 10% federal income tax.The information provided is not written or intended as specific tax or legal advice. Our representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Taxable withdrawals are subject to ordinary income tax and, if made prior to age 59½, may be subject to a 10% federal income tax


Alternatives to Low Paying Bank CD’s

Guaranteed-income-Graph-1-400pxIn a time when many financial experts are predicting another major correction in the stock market, there is a safe alternative to seriously consider; Fixed-Indexed Annuities. Now before you make a snap judgement (as many do when they see the word annuity) take a moment and find out just how much this program can provide in retirement. If you are like most retiree’s, you probably share the number one fear which is running out of money. So let’s look at what a fixed-indexed annuity is and how it can benefit you.  

What is a fixed-index annuity?

A relatively new financial option offered by insurance companies, the fixed-index annuity was created in 1994 as an alternative financial product to CD’s, mutual funds, and stocks. Participating in a fixed-index annuity offers tax deferred growth and a guarantee against loss of principal and options for gains when the market does well.

Safe Money

Many life insurance companies that only offered variable annuities are now offering fixed-index annuities as a very attractive and safer option to their clients. Unlike variable annuities that invest in different mutual funds, the performance of fixed-index annuities are tied and mirror the performance of a single index such as the S&P 500.

CD alternative

A safe investment, but with today’s all time low interest rates certificates of deposit are paying less than half the amount of a percent 10-year Treasury Bills which is less than 3 percent. With a fixed-index annuity, there is usually a guaranteed minimum rate of return. You can also earn a substantially higher return if the index does well.

Mutual fund alternative

Diversifying through mutual funds does not protect you when the market declines. Mutual funds may be less risky than individual stocks but you can still lose money in a bear market as 401K plans dropped by more than 30% in 2008.

Stock market alternative

Older individuals do not have time on their side in a volatile stock market to recover from losses and are hesitant to put their hard earned retirement savings into the market. The bear market that existed from the end of 2007 and into early 2009 may have also affected those who are younger to think about other options.

Preserve capital

The goal is to preserve capital and a fixed-index annuity is an alternative to a risky stock market or mutual funds for anyone who cannot afford to lose money. Upon the purchase of this type of annuity the contractual agreement will guarantee that you will not lose any of your principal (and potential interest credits) and will usually have a minimum interest rate earned for every year while you hold the investment.

Looking for extra money you want and need?

An excellent feature of a fixed-index annuity (if you are tied to the S&P 500) is if the stock market and/or index should fall you do not lose any money in that year. Similar to a CD in a retirement account, a fixed-index annuity will not only earn you a base interest rate but also allows you to participate in the positive index returns.

Typically, you only receive approximately 75% of an increase on an annual basis, starting from the purchase date of the annuity, but a substantial difference in earnings can still be made in that year. Based on the performance of the index, there may be a cap on the maximum amount of extra interest earned.

Guaranteed income for life

Another great option of some fixed-indexed annuities are the Guaranteed Income for Life riders. For those individuals looking for income for life (similar to how social security benefits work), many programs offer a separate income growth option that is different from the cash value of the annuity, which can have a guaranteed interest rate of 7 to 10% on your initial premium or principle payment for up to 10 years. You then draw a guaranteed amount from that income growth (based on your age and if you have an individual or joint account) based on the percentage determined in your policy.

Market performance is always unknown

A fixed-interest annuity makes sense for people who want to participate at a lower level of risk in the stock market without  investing directly in the market.  You will not earn as much as an index fund outside of an annuity in good markets but your money will be safe if the markets turn bad or bearish.

In conclusion fixed-indexed annuities might be the best fit for anyone who is looking for financial gains from the upside of the market and cannot afford to lose a dime if the market has another major down turn (which many experts predict will happen). Life time income benefits are also very attractive in providing peace of mind in retirement.

Finding a reputable and trusted partner to assist you with your financial & insurance needs is of vital importance.  I will work hard to find the best programs, coverage and rates that fits your budget and your needs. Contact me at 949-495-2016 or ccolley@coliday.com