Where to Put Your Money During Times of Uncertainty

Available for Interviews: Harry Abrahamsen

Harry J. Abrahamsen is Founder & CEO Abrahamsen Financial Group. His company offers customized wealth management solutions—creating plans and portfolios that protect, preserve, and grow client’s wealth. He was selected as one of the ten most dependable Wealth Managers in the Mid-Atlantic as published in Forbes magazine.

 

What Harry Abramhamsen can say in an interview:

Where to Put Your Money During Times of Uncertainty…

JUMBO MMA, CDARS vs.
MYGA & Annuities explained …

If you are wondering where to put your money during times of uncertainty you must consider your long-term and short-term liquidity objectives.  Is the purpose to find a spot short-term because you want to use this money to buy a home or send your kids to school, or it is more about putting into something that is safe and offers growth potential?

1–Jumbo money market accounts usually require a minimum of $100,000.  Is this a put and keep short-term or long-term strategy.  Remember there are FDIC limits and very low APY.

2–For the savvier investor CDARS may be a consideration.  This is where you can access multi-million-dollar FDIC insurance.  This is a service where they latter CDs and make the process easier for a family or individual.  The issue here is fee’s for convenience and inflation is gobbling up your money.

3–Another option to consider is an annuity.  There are so many types and so many opinions that the average investor can get overwhelmed.  

What is an Annuity?

The annuity contract is a legal document that provides specific benefits which are guaranteed in the annuity contract. 

Fixed annuity sales in the United States are increasing dramatically. Several factors are contributing:

      • An aging population 
      • Stock market volatility 
      • National interest 
      • More varied and competitive annuity products 
      • The search for safety and security 

Greater annuity popularity has come with increased consumer misunderstanding and confusion. No wonder given: 

      • Hundreds of insurance companies providing countless different annuity offerings. 
      • Existence of two distinct, and very different types of annuities: fixed and variable. 
      • As the Baby Boomer Generation evolves into retirement, the need for safety and security becomes vital. 

Insurance companies attempt to educate and keep the annuity policyholder informed about product and suitability issues. As highly regulated entities by your individual state Department of Insurance, they provide extensive agent training on both product and sales practices. The intent is for the insurance agent to pass on that information and ensure that the purchased annuity is suitable to meet the needs of the policyholder. 

The need for consumer awareness and education arises from the breadth and diversity of annuity types and providers, and the different terms and optional riders available. 

Not only are there two distinct types of annuities, but within those types, there are countless variations and options available. (See below if you want to learn more!)

Which is the strongest investment option? Harry Abrahamsen can break it down for your audience and give valuable advice.

 

Interview: Harry Abrahamsen

Harry J. Abrahamsen is Founder & CEO Abrahamsen Financial Group. He has been quoted in numerous national publications, such as Forbes, On Wall Street, Financial Planning, Bottom Line Personal, Smart Money and cited in the Encyclopedia Britannica. An independent research firm has selected Harry James Abrahamsen as “The 10 Most Dependable Wealth Managers in the Mid-Atlantic” published in the Forbes December 2007 issue Investment Guide. Harry Abrahamsen has five children and resides in New Jersey.

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Jo@SuccessInMedia.com

 

Going Deep into Annuities. . .

A–The Variable Annuity 

Variable annuities are sold as securities, offered by licensed security professionals. Variable annuities are always offered with a required sales prospectus which discloses options, benefits and fees. 

Simply put, the combination of high fees and exposure to market risk will often make the choice of purchasing a variable annuity an unwise decision. If an individual wants to participate in equities, a no-load mutual fund or a managed portfolio may be a better choice. 

An even safer approach is to seek out simple, guaranteed benefits combined with protection from market risk exposure. Our choice for an annuity is a no fee, Tax-Deferred Fixed Annuity. 

B–The Tax-Deferred Fixed Annuity 

There are three distinct types of fixed annuities: 

    1. Immediate Annuity (also known as a Life Annuity and Pension Annuity) 

This type of annuity is very common for those retiring from a position within a company. Immediate annuities provide income for almost any time period, either in specific years or for a lifetime. Many options exist. The system is simple, a deposit is made with the insurance company and it assumes fiduciary responsibility to provide the agreed upon income for the desired time period. 

    1. Multi-Year Guaranteed Annuity (also known as a CD Type Annuity) 

The Multi-Year Guaranteed Annuity (MYGA) is much like a bank certificate of deposit. The MYGA pays a specific interest rate for a specific time period. Much like the CD, the time period could be from a couple of years to a longer time period and many options exist. 

It is straightforward, you know what you are getting. The insurance company spells out the annuity benefits and yield in the policy (contract). You know exactly what your investment is worth at the end of the investment period. Currently, the MYGA for a fixed investment horizon (3 – 10 years) yields are higher than Bank CD products. One advantage an annuity has over a Bank deposit is taxation is deferred until the funds are accessed (tax deferral). 

Bottom line, if you are currently investing in CD’s or low interest-bearing investments, consider the MultiYear Guaranteed Annuity as an alternative with a very appealing blend of higher interest yield without sacrificing principal protection and investment safety. 

    1. Fixed Index Annuity 

The Fixed Indexed Annuity (FIA) was first created in 1995. The concept is simple: the funds in the annuity are guaranteed, and the actual yield enjoyed with this product is tied to an outside source. The insurance company does not dictate yields. One popular source is basing the yield on a stock market index such as the S&P 500 stock index or the Dow Jones Industrial Average. 

You do have a contractual minimum guarantee, yield is determined annually by movement in the chosen index (minus any connatural cap) but are not limited to a contractual maximum yield. Annually the gain is calculated and the percentage of gain allowed by your contract is then credited to your account. At no time are any of your funds invested in the stock market or exposed to market risk. The index is merely used to determine the annual yield. 

While the Multi-Year Guaranteed Annuity is very straightforward, with virtually no moving parts or benefits subject to confusion, the FIA has many moving parts, and can seem complicated. In reality they are quite simple, your funds are guaranteed, a minimal amount of interest is guaranteed and the actual yield earned by your annuity is outsourced to a 3rd party. 

A more extensive discussion of the FIA is important. Let’s look at the genesis of the FIA to gain a greater overall understanding and appreciation. 

The Fixed Indexed Annuity (FIA) was introduced in early 1995 and it was much different than the fixed annuities preceding it. It indexed the S&P 500 and the only index strategy available was an annual point-to-point (growth of index from policy anniversary to policy anniversary). 

The FIA has exploded in the market place, now being offered by agents and brokerage houses everywhere. The reason is simple: guaranteed growth and no exposure to market risk. Currently, it is the most popular annuity product in the financial industry. 

When our economy crashed with the financial meltdown of 2008, those that were in FIA’s never lost a penny. 

These products only move in one direction: up, never down. With that reality, investors demanded better products with more options, the industry obliged. 

With new-found popularity, the FIA embarked into the 2000’s. The Fixed Index Annuity has appealed to those wary of stock market risk, but who wanted yields exceeding CDs and more traditional fixed annuities. The FIA was here to stay. 

C–Performance of Multi-Year and Fixed Index Annuities 

  1. The Multi-Year Guaranteed Annuity (MYGA) As of May, 2018, the average yield available on one to five year MYGA’s is 2.0 – 3.5% APY which currently is higher than competing bank products. 

We are proponents of laddering – – – purchasing multiple bank CD’s or MYGA’s having staggered maturities. It is a meaningful way to consider the improved yield of the MYGA. 

The rates listed below are the average National CD interest rates as of May, 2018. An example ladder scenario of those CD rates would look as follows: 

Amount Investment Duration Annual Percentage Yield $25,000 One Year 2.10% $25,000 Two Year 2.22% $25,000 Three Year 2.32% $25,000 Five Year 2.61% TOTAL: $100,000 AVG TERM: 2.75 YRS AVG APY: 1.70% *rates provided by bankrate.com 

A ladder of current MYGA rates shows:

Amount Investment Duration Annual Percentage Yield $25,000 One Year NA $25,000 Three Year 2.65% $25,000 Four Year 2.85% $25,000 Five Year 3.10% TOTAL: $100,000 AVG TERM: 4 YRS AVG APY: 2.87% 

As you can see, the MYGA is a 1.27% increase in overall average yield. If you ladder bank CD’s or purchase CD’s as part of your overall portfolio, you should consider the MYGA. 

2A. The Fixed Indexed Annuity (FIA): 

It is now time to address today’s Fixed Index Annuity. To gain a historical perspective, Dr. David Babbell, professor emeritus of insurance risk and management, stated in his June 2009 Forbes magazine article, “There is no asset category that outperformed the Fixed Annuity in the 1995 – 2008 time frame. We were extremely surprised, really just amazed.” 

A 2009 study at Wharton further supported Mr. Babbell’s conclusion. In their review of Fixed Index Annuity performance, they summarized their findings as follows: 

Period S&P % FIA Avg % Return Range 1997-2002 9.39% 9.19% 7.80% – 12.16% 1998-2003 -0.42% 5.46% 3.00% – 7.97% 1999-2004 -2.77% 4.69% 3.00% – 6.63% 2000-2005 -3.08% 4.33% 0.85% – 8.66% 2001-2006 5.11% 4.36% 1.91% – 6.55% 2002-2007 13.37% 6.12% 3.00% – 8.39% 2003-2008 3.18% 6.05% 3.00% – 7.80% Average 5.74% 

Our average client with contracts anywhere from 2 – 10 year maturities going back to 1995 have had average returns in the 4% – 5% range. The best return has been just under 7% and the worst a little better than 1%. Going forward in a lower interest rate environment, yields will come down a bit, but will remain well ahead of other fixed investments. 

The intent of the FIA is not to replace equities in a portfolio, but provide a principal guaranteed alternative that bridges the APY gap between fixed investments (Treasuries, CD’s, MYGA’s, etc.), and the risk/reward of equities. Does the FIA have a place in your portfolio? 

2B. The Fixed Indexed Annuity with Income Guarantee (Income rider) 

We have already touched on the past and anticipated performance of the Fixed Index Annuity. It’s certainly better than other alternative fixed investments, but historical yields do not support equity-like returns. 

If that’s the case, how can the insurance industry tout FIA guaranteed income growth that in some cases may approach double-digits? The answer is in combining the FIA with a benefit rider that guarantees lifetime income. 

In 2004 insurance companies introduced a rider (some contracts charge a fee for the rider, other do not) that is referred to as a lifetime income rider. 

The funds that accumulate in the income rider are not available for withdrawal – – – instead, they are used to calculate a guaranteed income payout. 

In other words, there are two distinct FIA account values; the accumulation value (principal plus interest earned) that’s available for withdrawal, and an income base that’s strictly used to calculate income entitlement. 

Think of the accumulation value as your investment, and the income base as a number that converts to a future income. 

What we’ve just described has become extremely popular, a guaranteed market risk free growth with a separate account that can guarantee income, income for life. When FIA interest yield is coupled with a lifetime of guaranteed income, you have a financial product that bears further examination. 

While the calculation of guaranteed lifetime income is different across companies, all FIA share the following characteristics: 

▪ It is a rider on a FIA 

▪ The rider service fee is fully disclosed (or provided free) 

▪ Future income increases at a guaranteed contractual rate or formula until distribution election 

▪ Annuity accumulation value increases, less the withdrawal of rider fee and income (if any) 

▪ Income is guaranteed for life regardless of the annuity accumulation value 

Insurance companies use three strategies to grow the income base: 

▪ Guaranteed roll-up rate 

▪ Index performance rate 

▪ Combination of roll-up and index performance rates 

Currently, the highest guaranteed roll-up rates we are aware of provide 6% compounded interest. In the case of a 6% compounded roll-up, a starting income base value of $100,000 would be $106,000 beginning year two, $114,490 beginning year three, etc. If the annuity owner were to take income after 10 years at age 70 (for example), the base would be: $196,715. As we stated earlier that $196,715 is not your investment value but is used in the calculation of your income payout. The other component in this calculation is a multiplier that is adjusted for the income election age. The older you are at election, the greater the multiplier. Let’s say that the multiplier at age 70 is 7%. If you multiply $196,715 times 6% you arrive at a guaranteed lifetime payout of $11,802 per year. 

The advantage of using an income rider is obvious: income you (and your spouse) can never outlive. It is a wonderful way to outsource retirement income responsibility to a risk taker, the risk taker is the insurance company. Fully guaranteed. 

Suitability 

Insurance companies have become extremely diligent in verifying annuity suitability. They want to know an applicant’s investment portfolio, liquidity, financial experience, income needs, investment horizon, and more. Whether you select a Multi-Year Guaranteed or Fixed Index Annuity (with or without lifetime income), the purchase must meet your financial needs and lifestyle requirements.

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