I'm one to always share the credit where it is due, so thank you Mike Glenn for your “ah-ha moment” for this month’s rant. Mike being the pastor of Brentwood Baptist Church, he’s always talking about the really serious stuff…the kind of stuff you really need to be thinking about. Me? Well, I’m only talking about money, investments, and planning…the stuff you usually procrastinate about.
Is it a fair statement that everyone is glad that 2011 is over? I am sure glad it is. I told my friends that it was probably the most unique, yet challenging year I’ve ever had. The knee replacement and not being able to run anymore is a big part of that statement.
The incredible global volatility of the markets sure didn’t help either. You don’t realize how much you miss something till you can’t do it anymore. Running was that part of my life that erased the emotions of a bad day or the post-meal regrets of fried chicken for lunch…but not anymore…but I
digress.
OK, you’ve looked at your statements for last year…you’ve seen what certain indexes
did versus what yours did…and you might be wishing that you had put your money in whatever it was that did better than you. This is when I share my disclaimer that I cannot in anyway predict the future…and neither can anyone else on Wall Street or CNBC. If you might be thinking that
way, imagine you & me at the Kentucky Derby watching races all day long. One horse wins a big race, and for some reason we see it running in the next race. (Work with me here.) So I look at
you and say “That horse ran so well in the last race, let’s bet on him to win again!” We might want that horse to win, but the chances of that happening are just a big wish...just like looking at last year's performance numbers and betting on them to win again in 2012!
So, now that it’s 2012, are you really wanting to learn how to meet your financial goals, such as put the kids through college, or perhaps retire on your terms…or are you just wishing that it will magically happen? Do you want to have more control over your current financial affairs…or are you wishing again? Are you wanting to really learn how all of the moving parts of your insurance, investments, liabilities, and cash flow can be more efficient and work to help you &
your loved ones feel more in control…or are you just wishing that the next greatest seminar, talk show, or financial article will finally be the key to your financial success?
Two simple words…wishing and wanting...but they can be so powerful…and the crevasse between them in your world could potentially be huge. Throwing money into a 529 savings plan for college or a 401(k) for retirement without a plan of wanting it will usually result in
“should-a, would-a, could-a” and then you will wish you had done something differently…kind of like looking at last year. I can’t fix last year…but I can help you “negotiate a truce with
tomorrow”.
The standard last paragraph and call to action is now here. I can help you if you will let me. We love what we do at Peachtree, and I think we are the best at it…but I’m biased, of course. There’s a “contact Brian button” around here somewhere…click it and let’s get started.
Happy Valentines Day!
Brian
03/19/2012
Guarantee...an interesting and oftentimes overused word...death and taxes, right? However, in this, the most volatile time I've seen in my entire adulthood, people are seeking things that are "guaranteed" but rarely do they find what they are looking for...at least in my opinion. For some reason beyond my application of "applied common sense", people think that investing in stocks, mutual funds, etc. have some type of guarantee associated with them because they have an average annual return of X%. There's a reason the phrase "past performance is not indicative of future results" is stamped on every brochure, prospectus, and other relevant piece of material associated with these investments.
So, is anything "guaranteed" anymore? Webster's defines the word as: a promise or assurance, especially one in writing, that something is of specified quality, content, benefit, etc. To use this definition, in my world, yes there are things that are guaranteed...because they are in writing, and they come from major financial institutions, like life insurance companies. OK, just because I mentioned the words "life insurance" doesn't mean you should stop reading. This is about the word "guarantee". There are certain aspects about some of their products where the word "guaranteed" can work against you.
Case in point: a large majority of "Financial Entertainers" tell you to purchase only level term life insurance to protect you, your family & your business...because it's inexpensive, and "anything other than term is garbage" to quote one of them. Usually they tell you to buy a "20 year guaranteed level" product. There's that word again...whatever the annual cost will be...there are two guarantees there. The first one is that your cost is guaranteed to not change for 20 years. However, the second one is that the price in the 21st year and beyond is guaranteed to increase exponentially should you have to keep it due to health reasons & the ability to buy new insurance. There's a reason that 98% of all term insurance policies issued never pay the benefits to the chosen beneficiary: people outlive the guaranteed period and can't pay the price in the 21st year (Source: LIMRA).
My rebuttal to that: "If you know the day you are going to die, buy term insurance the day before!" In our comprehensive planning approach at Peachtree, we believe in the values that whole life insurance offer to an individual's financial plan. Why? It is loaded with guarantees that we need to stabilize and complete the overall plan. If properly structured, the death benefit of the policy is guaranteed be paid to the chosen beneficiaries, and equally as important, the cash values inside the policy will grow at a guaranteed 4% rate of return. Higher rates of return in the form of dividends paid to the policy could be greater, and historically have been, but they are determined by each company on an annual basis and are not guaranteed.
Another insurance company offered product that offers guarantees is a variable annuity. Again, another product that is scrutinized by the "financial entertainers". Why? Because they say the fees are higher than other investments...and yes, they are right...but there's a reason why, as there are underlying guarantees that are beneficial to the client. If I have a client that is 50, and they have an IRA in mutual funds worth $100,000, what will it guaranteed to be worth at age 65 and what will their guaranteed retirement income be? I used to be criticized in the 1990s for using 10% as a hypothetical rate of return. "It's too low...surely I can get more than that!" The 2000s have been a little different as in looking back at the last decade, 6% is often perceived as "too aggressive". BOTTOM LINE: Just as "There is no crying in baseball." (Thank you Tom Hanks)...there are no guarantees in mutual funds. If you can find them...let me know...please!
So...simply put, a variable annuity is a product where the investments are made up of mutual funds, mainly in models of conservative, moderate, or growth risk parameters. The funds work just like a regular portfolio of mutual funds...they go up and down with the market. However, there are underlying guarantees offered by the issuing insurance company, and they vary by company.
Same scenario, different methodology. Client, age 50, $100000 IRA in mutual funds inside a variable annuity with underlying guarantees. If I am trying to calculate guaranteed income in retirement, now I can plan with certainty. I know that the underlying guarantee in the annuity says that over a 15 year period, which gets me to age 65, for purposes of taking guaranteed withdrawal benefits (A.K.A retirement income), the account will be guaranteed to be worth 250% greater than the original amount.
In this scenario, with certainty, I can plan for a guaranteed amount at age 65 of $250,000. That's a 6.3% average annual return, by the way...which was too aggressive in the last paragraph!! In addition, I can plan for the client to receive guaranteed annual income of 5% for his life which equals $12,500/yr. I can do this with certainty, and guarantees backed by the issuing insurance company. This illustration is a simple "worst case scenario" as I have all of this in writing in the brochures and prospectus of the annuity contract.
The best case scenario is that we somehow find ourselves back into a Bull Market...whenever and if ever that might be...and the investment portfolio grows greater than the 250% guaranteed amount. The client can take that larger amount and still take a 5% guaranteed lifetime income. Regardless of either situation, I can plan with certainty and not speculation. The word "hypothetical" doesn't come into our planning whatsoever in this scenario.
There are certain terms I have used that make this article relevant, and suitable for me to share with you. Two of the most scrutinized products in the entire financial planning arena are the two that I've shared with you. My thought is that they are often times the most misrepresented and misused products offered by financial sales people. The words I want you to pay attention to in this piece are "properly structured", "comprehensive planning approach", and "hypothetical". I used the word "guaranteed" 28 times including this last one, so hopefully I'm getting my point across.
I live by the phrase "people always criticize what they don't understand", and that's why I finally wrote this piece...that, and the friend I had coffee with this morning said I should as she would enjoy reading it. As always, I'm here to serve, and to deliver what I think is the honest truth...and I welcome your comments, both pro and con.
Thanks for your continuing readership...
