Are you taking unnecessary and unwanted market risks?
Here are some points to ponder:
- Would you have more money invested in the market if it were not for the market risk?
- Would you have any money invested in the market if it were not for the market risk?
If the answer to either of these questions is “Yes”, then you may want to explore some financial vehicles that are designed to fill the void between stock market investments and lower-yielding interest accounts.
For example, the nature of one style of index annuity is to employ the underlying guarantees of a fixed annuity, while linking the credited interest rate to a formula based upon the annual performance of one or more stock indexes, such as the S&P 500, the Dow Jones Industrial Average, or the NASDAQ-100. Simply put, this style of index annuity will increase in value when the corresponding annual stock market index rises up to the capped amount, if applicable, but will not decrease in value when the corresponding annual stock market index declines.
This reminds me of a story I once heard from a very successful business man who was comparing his acceptable business risk with his recent trip to Las Vegas. What he said was, “When I go to Las Vegas to play Blackjack, I have to play by the casino’s rules. If I place a $10 bet on the table and I win my hand, they give me another $10. But if I lose my hand, they snatch my $10 away from me. But in my business, I play by different rules. If I place a $10 bet on the table and I win my hand, I’m happy to collect $6 or $7, because if I lose my hand, I plan on keeping my $10 and playing again.”
The inherent value of this style of index annuity from a planning perspective is that, although the possible upside increases may not be as great as is the stock index itself, the down side decreases are completely eliminated.
It is extremely important that people truly understand the cost of a loss, and the corresponding necessary gain that is required in order to break even again and, in other words, offset that loss. For example, let’s say you have a $100,000 investment and you incur a 10% loss; your $100,000 is now worth $90,000. In order to get back to $100,000, you would now need a gain of 11.11%. In other words, a 10% loss needs more than a 10% gain in order to break even. Again, for example, let’s say you had a 20% loss. $100,000, taking off a 20% loss, would bring you to $80,000. You would now need a 25% gain in order to recoup your 20% loss to make you whole again, bringing you back to $100,000. With a 30% loss, you’d be down to $70,000 compared to $100,000, and would need a 42.86% gain in order to get back to $100,000. If we had a 40% loss on our $100,000, our new value would be at $60,000, and we would now need a 66.67% gain in order to offset the previous 40% loss. Again, with a 50% loss, our $100,000 would drop to $50,000 and we would now need a 100% gain in order to get our new $50,000 value back up to our original $100,000 scenario.
Each of the graphics will show different examples comparing indexed annuities with point-to-point calculations and caps, to indexed annuities with point-to-point calculations with participation rates. They will compare that against the S&P 500 index composite with total return, meaning that dividends are included, as well as the S&P 500 index composite without dividends. You can literally see the lines and how they move with the market itself, one line being the S&P 500, and theoretically how the hypothetical fixed index annuities may have moved, depending upon which structure and which feature those fixed index annuities had within them.
- It is extremely important to note that there are a number of important factors used in determining and calculating an indexed annuity’s policy values. These factors can drastically differ insurance carrier by insurance carrier and product by product.
- In our Hypothetical Index Annuity example we used the following assumptions:
- S&P 500 values shown include both Composite Returns that do not include dividends as well as Total Returns that do include dividends. S&P 500 values are based upon a hypothetical $100,000 investment, and are for illustrative purposes only, since investors cannot directly invest in the S&P 500. Past performance is no guarantee of future results. 2) Both indexed annuities shown are calculated using an annual point-to-point measurement. 3) Both indexed annuities shown are calculated using a 100% participation rate. 4) Both indexed annuities shown are calculated using a 0% asset fee. 5) Both indexed annuities shown are calculated using annual caps on the interest rate that is credited, one at 6% & one at 4%. Indexed annuity caps are based on a number of factors, including, but not limited to, whether or not the policy offers any bonus upon deposit(s), as well as the surrender charge percentage and/or duration of the surrender charge.
- An index annuity should be considered a long-term investment and may include, but is not limited to, asset fees, participation rates, caps and surrender charges. Credited interest is based upon a formula linked to the corresponding stock market index and may be more or less than the actual index performance. Indexed annuities also do not include dividends. Guarantees are subject to the claims paying ability of the underlying insurance carrier. Also an IRS 10% excise penalty may apply on distributions from an annuity prior to age 591/2.
In review of the graphics that I have discussed, it is extremely important for you to note that there are a number of important factors used in determining and calculating an indexed 
annuity’s policy values. These factors can drastically differ from insurance carrier to insurance carrier as well as product to product. There are many intricate features that can be involved with fixed index annuities, and you should do a full exploration with a financial professional to decide what vehicle may best suit your needs.
Along with review of the accompanying graphics and charts, please now take a moment to reflect and evaluate upon your current financial situation as it relates to the topic we have just discussed. Are you taking unnecessary and unwanted market risks?
Now, for a final reminder on this topic’s disclosure: an index annuity is a long-term investment and may include, but is not limited to, asset fees, participation rates, caps and or contingent deferred sales charges. Credited interest is based upon a formula linked to the corresponding stock market index, and may be more or less than the actual index performance. It is possible that this investment will not provide the same returns as the corresponding index. Early surrender penalties may apply, including a 10% excise penalty that may apply on distributions from an annuity prior to age 59-1/2.
So What’s the Next Step?
Your receipt of this report entitles you to a no cost or obligation one hour session to explore your situation and discuss whether or not you’re taking unnecessary market risks. Any customary hourly planning fees will be waived for this one hour session.
What should you expect at this one hour session? Below are some frequently asked questions about what we call the “59 Minute Financial Wellness Consultation.”
Q: What will this meeting consist of?
A: This meeting is simply an opportunity for you to ask any questions that you may have regarding stock market risks as well as your personal finances and retirement. Throughout the course of the meeting, we will take the time to talk with you and analyze your situation. We’ve found that everyone’s definition of a comfortable retirement is a little different, and that everyone’s situation is unique. Our objective is to learn about your personal goals as we explore how to help you retire the way you want.
Q: Why do you offer this no cost or obligation consultation?
A: Simple. It gives us an opportunity to meet folks from around the area that may have questions about financial matters. It’s no secret that we would love new clients. Gaining new clients is the way that our business grows. However, we want to provide a comfortable, non-invasive environment for exploring a new, potential professional relationship — for you and for us. By offering an hour of our time for no cost or obligation, it provides a non-threatening way for us to spend some time with you to see if it makes sense for us to continue discussions into the future.
Q: Will there be a sales presentation?
A: Not at all. In fact, we are very hesitant to talk about any potential solutions to any questions or concerns you may have during our first visit. It’s important for us to understand your goals and desires about what “retiring” or “investing for your future” means to you. We feel it would be financial malpractice to begin exploring solutions prematurely. We tend to look at the first meeting as an opportunity for you to ask some questions, and for us to get to know each other. Furthermore, we can both be more informed by the end of the meeting, which will help determine whether or not it will be advantageous for us to meet again.
Q: How long will the meeting last?
A: About 59 minutes. Most of our meetings are stacked throughout the day. Future sessions may require more time, but we’ve found that an hour, initially, provides a good basis for getting to know a little more about each other.
Q: What should I bring to the meeting?
A: We are sensitive to the fact that your personal financial information is just that — very personal. However, it is hard for us to help if we don’t, at least, have a fundamental understanding of your financial position. We ask that you bring information regarding your financial accounts, and your previous year’s tax return. However, we follow a pretty strict policy of not looking at any of this until you are comfortable with us doing so.
Q: What will happen after the meeting?
A: If we both decide that it would be beneficial to meet again, we’ll schedule another time to get together. At that meeting we would introduce to you the various areas in which our firm may be able to provide value to your situation. Again, we shy away from offering solutions at this point because we still consider it to be a discovery meeting. At that time, you should be in a better position to make an educated decision as to whether you wish to engage the services of our firm.
Q: Who should come with me?
A: We do ask that if you are married, you bring your spouse with you. If you wish to bring any children with you to the meeting, you are welcome to do so. For that matter, anybody that you may utilize in helping you with your retirement and personal finances is welcome to join.
*An index annuity is a long-term investment and may include, but is not limited to, asset fees, participation rates, caps and/or contingent deferred sales charges. Credited interest is based upon a formula linked to the corresponding stock market index and may be more or less than the actual index performance. It is possible that this investment will not provide the same returns as the corresponding index. Early surrender penalties may apply, including a 10% excise penalty may apply on distributions from an annuity prior to age 59’/2. Guarantees are subject to the claims paying abilities of the underlying insurance company.
**Please note that these examples are for illustrative and educational purposes only. Past performance is no guarantee of future results. Actual investment returns may vary.
