One extraordinary Plan – Everything you need to know:

As you may have just learned from “Part One” of the homework assignment, in its most basic format, an indexed annuity operates very much like a savings account at an insurance company; albeit one with a very innovative interest crediting mechanism. This uniqueness along with terminology not seen in more familiar mutual fund and bank accounts, tend to make indexed annuities look more complicated than is actually the case.

So let’s review the pros and cons of our most popular indexed annuity as to how it stacks up with the basic criteria used to evaluate any new savings or investment idea, those being safety, fees, performance and accessibility.

Safety:

Insurance companies are legal reserve financial institutions and arguably the safest financial institutions on the planet. Plus, you may have heard on the tele-seminar that there is another layer of protection in the unlikely event an insurance company fails.

The company we are reviewing here is Athene Life Insurance Company located in Iowa. The company is highly rated and a major player in the indexed annuity field. Cementing their indexed annuity reputation is their recent partnership with Annexus, the premier designer of the most consumer oriented indexed annuities ever created. With their flawless reputation on the line, Annexus only partners with the strongest of companies that agree to put the consumer first in every aspect of the plan. Case in point: The “Elevate” Fixed Indexed Annuity.

Click here for the Athene “Elevate” brochure

Fees:

What sounds like a reasonable fee can really add up over time and become a significant drag on long term performance. TSP is known for low fees, but if used properly indexed annuities have no fees.

These plans have a design structure that allows for the insurance company to make their profits on the back end, without directly charging fee or commission. Banks don’t charge a fee for your savings account, yet we know they profit by having our savings kept at their institutions. It is similar in the case of indexed annuities.

If we allow the insurance company to hold onto the funds long enough, they can make a profit for themselves and have some left over to pay for the linking mechanism that ties your interest rate to a stock market index without actually placing any money in the stock market.

This design is the key that allows for no market risk and no fees, as long as you don’t spend your money too rapidly. Athene defines “too rapidly” as taking out more than 10% per year or cancelling before 10-12 years, depending on what state you live in. So if your goal with these monies is to supplement other income sources by withdrawing less than 10% of your balance each year, you will never pay any fee or “surrender charge”.

Performance:

The safety and accessibility features have not changed much in the past 20 years, most of the innovation has been in the performance and accessibility areas. Until recently, most plans linked or “indexed” their interest calculations to the S&P 500.

As you learned in homework assignment part one,  positive market years were typically capped and negative years in the market were simply replaced with zeros.

Today we have access to uncapped links and managed indices. This allows for volatility to be reduced and a chance at interest earnings even if the S&P 500 goes down. These third party money management specialists include trusted names like Merrill Lynch and Barclays.

Just like TSP has allocation choices like the “C” or “G” funds, the Athene “Elevate” indexed annuity has allocation choices as well.

Click here to see all the allocation choices and performance

Some of the choices are managed and some are not, some have a fee and some do not. Here are a couple that stand out…

Click here for the Merrill Lynch RPM allocation brochure

This index is not 100% correlated to the S&P because it contains additional asset classes like bonds, gold and real estate. The brochure goes into more detail including performance.

The Barclays alternative is more U.S stock focused.  It is based on the extraordinarily successful “CAPE” investment models that won Yale economics Professor Robert Shiller a Nobel Prize for his efforts.

Click here for the Barclays Shiller allocation brochure

The CAPE formula assures being in value priced market sectors including real estate. Be sure and note the impressive performance outlined on page six of the brochure…over a third higher than the S&P 500!

Accessibility:

The opening sentence on this page indicated how easy this is…take what you want, when you want, how you want, but, for the next 10-12 years depending on what state you live in, don’t take more than 10% per year. Remember, this is the structure that provides the opportunity to avoid the usual administrative, management and sales fees.

But now lets explore a value added feature by virtue of the fact that this is not a one dimensional savings account at a bank. These are insurance company plans and insurance companies understand life expectancy and manage it in ways that allow us to remove another major retirement risk from our retirement – Longevity risk.

Surveys indicate the number one fear of retirees is outliving their assets. One long standing solution has been to take an investment account and convert it into a lifelong income stream. These plans are referred to as immediate annuities and require you to give up all access to your account balance and leave you with no money to grow or pass along to survivors. There is no longer a need for this!

Guaranteed Lifetime Income

This is the other big innovation in the indexed annuity field. Instead of giving up control of your asset, a simple addendum or “rider” is added to your indexed annuity allowing for the best of both worlds. You have full access and growth on your underlying balance, the ability to pass the entire remaining balance on to your heirs and have a never ending monthly income guaranteed for your lifetime.

Full details are discussed on page six of the “Elevate” brochure. Using this lifetime income feature is voluntary and free. It simply adds another dimension to the account. Because this additional component is used only for calculating lifetime income, the insurance company can add bonus credits on your behalf. This is explained in the brochure and is very powerful.

In fact, if your focus is on lifetime income, additional features can be added for a nominal fee. One popular option guarantees 5% annual interest on top of regular market credits up until the time you turn on the lifetime income feature.

Additionally, some states allow Athene to double your monthly income for up to five years if you find yourself in a nursing home or other long term care type facility.

Regardless of which income option you choose, you have the ability to have your monthly checks increase along with the market linked interest giving you an ever increasing income throughout retirement and a chance at outpacing inflation.

Let’s Review a Personalized Illustration Together

As I indicated at the outset, plans vary slightly depending on the state where you reside. We also need to mold our advice based on your age and how you intend to use the account. I will provide more accurate and personalized detail during our next session.

To this point, we have discussed concepts and you have read about the basics, but for some, it is the numbers that will put all this into better focus. All of these allocation options and lifetime income amounts can be projected with our software based on your individual situation. Please be sure and ask for this projection so that I can have it ready for our next conversation.