Date posted: January 31, 2011
The third entry in our series of Real World Scenarios follows.
I have been researching variable annuities and one of the things that attracts me to them is the fact that many will allow me to switch between the different sub-accounts without taxes or penalties. How do you feel about switching between the different sub-accounts, and specifically, “market-timing” in annuities?
I truly appreciate the fact that most variable annuities allow you a minimum of 12 switches per year and some even offer unlimited switching between the different sub-accounts without taxes or penalties. That said, we do not condone market-timing within variable annuities. We believe in good solid old fashion research based on company fundamentals, and those fundamentals do not tend to change dramatically over short periods of time. We believe that well-chosen, long-term investments produce the best returns for most investors, not timing the market.
A recent Dalbar Study regarding market timing, examines real investor returns from equity funds during the Jan. 1984 through Dec. 2000 time period. The average investor held their fund 2.6 years and realized an annualized return of 5.32%, compared to 16.29% for the S&P 500 Index. WOW!!! Timing decisions, driven by emotions, doom the average investor.
For more information on variable annuities, see our variable annuities page.
Date posted: January 30, 2011
A recent article in U.S. News & World Report discusses the anticipated changes that will occur this year regarding retirement benefits. In “9 Retirement Benefit Changes Coming in 2011,” Emily Brandon says that around 70% of employers surveyed said they were looking to make some type of changes to their retirement benefits. Adding 401k annuities to retirement plans has become more popular in the past few years and the popularity is expected to increase this year. Approximately 19% of employers currently have a 401k annuity to offer their employees. This lifetime income stream is very valuable for paying living expenses in retirement. Thirteen percent of employers said they were looking to add 401k annuities to their plans this year. Additionally, 13% of employers help their employees with an annuity purchase separate from their retirement plan.
There are 8 other trends that the article suggests are likely to happen with retirement plans this year as well. There will be more automatic features when it comes to 401k planning including enrollment, increases, and rebalancing. With 1/3 of employers currently offering a Roth 401k, expect close to 40% more companies to start offering one this year. Although many companies already offer target-date funds as an investment option for 401ks, even more companies will begin to offer them in 2011.
Employees can expect more options for their investments as employers look for fund options with lower costs and turn to managed accounts more often. Many companies took away all or part of their 401k matching with the economic downturn, but employees can expect to see 401k matching gradually returning this year. Employees will have less input into their 401k plans because employers are less interested in what employees think than what competitors offer. Traditional pensions will continue their decline as they are offered less and less. Medical benefits for retirees are probably going to become more expensive as well. Employees will be happy with some changes and may dislike others, but 401k changes are abundant in 2011.
Date posted: January 27, 2011
Equity linked CDs are fairly new to the marketplace and very popular right now. While the investments might not be for everyone, risk averse investors like these CDs because they allow for the possibility of market growth without the worry of losing your principal in a falling market. Go Banking Rates offers some equity linked CD information in “A Guide to Market-Linked CDs.” Equity linked CDs are also known as market linked CDs, market indexed CDs, and index CDs. They are considered structured investments since they are meant to meet specific investor goals. By offering the potential for long-term growth and the security of traditional CDs, equity linked CDs can be a great investment for many people.
Investors purchase equity linked CDs to diversify their portfolios without taking on a lot of risk. If the market increases, your return increases based on the particular index linked to your investment. Compare equity linked CDs and you’ll find out that some guarantee a base return regardless of what the markets do. With all equity linked CDs though, you will not earn a return if the market performs poorly. The most common ways to calculate the return on equity linked CDs are point-to-point and average. Point-to-point, the simplest method, takes the value of the index at purchase time and the value at maturity and uses that percentage to determine your return. With the average method, many different observation points are used to find an average return over your investment period. There are pros and cons for each investor to research when looking into equity linked CDs.
Date posted: January 26, 2011
Following is the latest blog entry in our series of real world scenarios.
How do I evaluate all of the different variable annuities available on the market? Is there a rating system? It’s very confusing and there are so many options to choose from.
To date, there is no official rating system to evaluate the 700+ variable annuities on the market. That said, there are a multitude of criteria to look at when evaluating variable annuity contracts. At Annuity FYI we have narrowed the field to what we believe to be the best 265 companies (this number varies from time to time) that meet the many needs and goals of the investing public. Our goal at Annuity FYI is to assist you in determining which annuity or annuities best fit your specific situation, and then help you to allocate among the different funds and review them with you on a period basis.
For more information on variable annuities, see the Variable Annuities Resource Center.
Date posted: January 24, 2011
According to Insurance & Financial Advisor’s Jaime L. Brockway, life insurance and annuity business is improving even though there are still some challenges ahead. In the article “U.S. life, annuity sectors improve, but face obstacles,” Brockway says that A.M. Best improved the ratings outlook for the life and annuity industry to stable from negative. The ratings were not increased to the level from before the financial crisis because the overall economy in the U.S. has been slow to recover, unemployment is high, and the housing market is still weak. But the improvement to stable was based on a number of positive factors. Credit spreads, equity market performance, asset impairments, and balance sheets all saw improvements leading to the increased rating. The overall risk management and access to capital also saw positive gains.
Fixed annuity sales are stable, while variable annuity sales are increasing as equity markets show improvement. While traditional deferred annuities are declining in sales, the large increase in sales of income and fixed indexed annuities counteract that decline. The rising interest rates at the end of last year will help annuity portfolios and could eventually lead to increasing annuity rates. Life insurers will likely be affected by delinquent mortgage loans and subprime loans. While there are some obstacles for the life and annuity market to overcome in 2011, the industries have seen enough progress to be deemed stable by A.M. Best.