Do “zero-risk” investments exist?
With the equity markets in turmoil, where can I hide and focus solely on fixed returns, and what money is best placed in those types of investments? Hello again! I’m Dave Duley with Georgia Advisor Group, a full-service wealth planning firm located in Alpharetta, Georgia.
Do us a favor. If you enjoy these videos, click “subscribe” and ring the bell below. This lets us know we’re providing valuable information to you, so let’s dive right in. Because of the severe market volatility, we continue to get calls and questions related to protecting the downside risk while participating in the markets. One question is: what alternatives are out there? What guardrails can I put in place today? I’m going to focus on equity-indexed annuities because that’s the question that we receive on a regular basis. Equity-indexed annuities are set-rate fixed annuities where the rate of interest that you earn is linked to the returns on a specific market index that you choose.
This is typically said annually by the insurance company issuing and guaranteeing the contract. In 2007, Federal Reserve Chairman Ben Bernanke disclosed that his largest financial assets were in annuities, while the benefit of lifetime income remains a significant benefit of annuities. They have evolved dramatically in recent years to meet increasingly complex needs of investors preparing for retirement, though at the time, from 2007 through 2009, we were heading into one of the most tumultuous markets in U.S. history, and all the banking leaders in the FED were trying to assure the average investor not to panic and stay the course in the markets.
We discovered that the FED’s chairman had the majority of his personal assets in securities that protected market losses, and once his blind trust was revealed, I found that pretty interesting. Limra, a research consulting firm and non-profit trade association, reported that in the second quarter of 2022, over 77 billion dollars were poured into annuities, setting a new record not seen since 2008. This is the largest number ever recorded from limber since 1995, when they began to track annuities. The majority of those dollars are put into what are called “indexed annuities” or “equity indexed annuities.” With the continued conditions of the markets today, they are projecting that the record will be broken once again in the third quarter of 2022. and you’re going to see those numbers relatively soon. So why is this taking place? First and foremost is the protection of your principal.
Most annuities do not protect against any loss to your principal. This brings a lot of comfort to many investors; they call it the “Sleep Factor.” Second, in the indexed annuities, you can still participate in market gains with certain limitations. Let me make that crystal clear. And at some point in the future, you will begin to draw a lifetime income for not only you but your spouse. These vehicles are suited for all investors, and should they be part of everybody’s asset allocation? The answer is no. There are many moving parts, from caps to margins to spreads to participation rates, and of course surrender fees are at the top of that list. But if you’re looking for market returns tied to overall market indexes with protection of the principal, then you may be headed in the right direction or at least beginning to ask the right questions. What is best suited for you? In 1995, Keyport Life introduced the first index annuity. It had a 100% participation rate in the market returns and a 150 basis point spread. What that meant for you was that if the SP index, for example, increased by 20% and you had $100,000 invested, you would receive that year a fee of less than 1% or $8,200. If the SP fell by 20%, you would not lose a penny and your account value would still be $100,000. If the index fell by 20% in year two, after you received the $8,200, your account value would be $100,000.
The answer is Yes, because they had a 10-year surrender period. If you needed to access your money above the 10 free withdrawals per year, you could be penalised significantly. For example, if your balancing year three was 130,000 and you needed more than the 13 thousand for emergencies, it could cost you a lot to access those additional funds. Another caveat is the fact that these were commissionable products like life insurance or b-share mutual funds, and because of that, many people were sold these products not because they were in the best interest of the client, but rather to profit the seller. Over the years, the SEC along with the state insurance departments have cracked down and set rigid guidelines for disclosure to clients so they can make informed decisions before purchasing. In addition, the insurance carriers have made it possible for registered fiduciaries to receive fee-only payouts instead of commissions where their interests line up with the clients by focusing on growing the assets and not just selling a product to line their own pocket.
I can attest that, having been licenced for over 39 years in this field and serving on the Advisory Board for one of the largest privately held insurance carriers in the United States, we spent countless hours not only designing these products for the best interests of clients, but also ensuring that they were sold properly and ethically from a disclosure standpoint. Greater detail I’ve always been an advocate for using IRA money to fund these types of products. Why several reasons: an IRA or tax benefits The deferred account is a long-term vehicle, meaning I won’t touch it until at least 59 and a half at the earliest, and then I will only make yearly withdrawals, so surrender fees have no impact. How long will I have an IRA or a 401k? You’ll have it for the rest of your life or until you deplete the amount, but an annuity, unlike my traditional IRA, guarantees me that I cannot outlive my income even if my account goes to zero; I still get a check as long as I live, and if I die, my spouse continues to receive an income on my IRA for the rest of her life; if we both pass and there’s no money left in Returns on these types of investments over 30 years range anywhere from 4 to 8% on average, and most limber studies agree with what I’m telling you.
I’ve seen returns as high as 18 and, of course, zero based on the indexes being down from the previous year. Zero is your worst outcome, but I would argue that returns are not the major factor. Point The guarantee of principal lifetime income for both spouses and having peace of mind that, of course, the miles of assets will outlive me is the focus for clarification. I’m providing this information for you to get familiar with other options for a successful retirement, but it’s your responsibility and ability to dive deep into any investments that you decide to go with and ask all the right questions. My job is to make sure you’re asking the right questions again.
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