Will My Annuity Income Really Increase?

piecing-retirement-puzzle-pathJim Lorenzen, CFP®, AIF®

Annuities can play a valuable role in a retirement portfolio; but, often they’re somewhat oversold.

Should equity-indexed annuities serve as a substitute for stocks?

Short answer: No.  And, when making historical performance comparisons, you’d be better off comparing them to CDs and traditional fixed annuities.  An equity-indexed annuity is nothing more than an interest-bearing IOU from an insurance company paying an unpredictable interest rate each year… anywhere from 0% up to the “cap”, which these days can be around 4-5%.   So, do the math:  if you get the maximum cap in two out of three years – let’s assume 5% – and zero in every third year, you’re averaging 3.33%.  It’s up to you to decide whether that’s a good return.  It is tax-deferred until withdrawn, but you also have a liquidity issue.

As I said, in some cases, they can make sense for a portion of a bond portfolio because of downside guarantees from the insurance company; but, you should also see if another alternative might make more sense.

 “My annuity Living Benefit is guaranteed to return 5-10% each year!”

Not likely (translation: No).  Too often, people look at the ‘income benefit base’ in the paperwork and assume (because they see a dollar sign in front of the number) they’re looking at real money.  Not so.

Think of the income benefit base as “sky miles” – it’s a number that’s used to calculate the amount of income that will be generated and has nothing – zero – to do with the return on the policy itself.

Technically, many, if not most, annuity offerings state that if the account value ever exceeds the income benefit base, the purchaser will receive a ‘step-up’ in income.  Realistically, however, it’s not likely (translate: won’t happen) these days, considering the spreads and cap rates the insurance companies are using.  As long as living benefit income is calculated on the income base vs. the account value, you shouldn’t expect anything beyond what’s guaranteed on the first day of the policy.

If you’re considering purchasing an annuity, there are seven things you should consider ahead of time.  You might find this short report worthwhile.



Economy Maybe Not So Strong After All

Fotila Images

Fotila Images

Jim Lorenzen, CFP®, AIF®

The new jobs report shows 178,000 jobs were created last month – and much of the media has reported that number; however, there’s a number missing:  All but 9,000 were part-time.

While unemployment has dropped from 5% to 4.6% over the past year, the participation rate has remained constant and those eligible workers not in the labor force has actually gone up, as you can see.

All of this, of course, seems to be forming a pattern occurring in an environment of increasing national debt.   If you want to give the politicians your own feedback on this, there are resources you can use.

If you’re one of those trying to navigate retirement planning in the midst of all the media `white noise’ and financial uncertainty, it might help to have a roadmap.  Maybe I can help.  You can begin here.




Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.