Here is a MYGA That Warrants a Hard Look Now
The Federal Reserve recently raised short-term interest rates again, and long-term interest rates have been on a tear for months. But, in general, annuity payout rates have yet to start rising.
There are spotty exceptions to this rule, however, and a particularly attractive, albeit short-term, opportunity has reemerged. A five-year fixed annuity from a major annuity vendor – specifically, a Multi-Year Guaranteed Annuity (MYGA) – is offering a guaranteed payout of 3.1 percent. By contrast, most five-year MYGAs today pay 2.75 percent. And this annuity allows owners to withdraw the interest they earn annually – unusual for annuities offering above-market payouts.
The insurance company behind this annuity offered the same deal late last year for roughly a couple of weeks. It will the same case this time around – we expect this vendor to maintain this offer for only one or two weeks. So those interested should act quickly.
Some people have refrained from buying MYGAs annuities and, to a lesser extent, fixed indexed annuities, which offer guaranteed lifetime income riders, because they think that interest rates will continue to rise. They believe that annuity vendors will be forced to go with the flow and broadly hike their payout rates as well. They want to purchase annuities when that occurs, not before. While this is not a bad bet, the timing is highly uncertain, and in the interim prospective annuity buyers who delay purchase will earn far less iincome.
For investors who like this five-year annuity, probably the best move would be to insert this into a ladder of three annuities to hedge their bets as to when higher-paying annuities will actually become available. They could, for example, combine this five-year MYGA paying 3.1 percent with a three-year MYGA and a seven-year MYGA. The three-year now pays 2.1 percent and the seven-year 3 percent and also offer penalty-free access to some cash along the way. (You can get a seven-year MYGA paying 3.4 percent if you’re willing to forego access to any cash prior to maturity.)
The appeal of the ladder is that it enhances the odds that the owner would be able to roll over maturing MYGAs into similar MYGAs paying higher rates – and perhaps more than once — because annuity rates likely will be higher by that time.
Here is an Annuity That Pays More in the “Go-Go” Years
Even retirement can be sexy. So it may not come as a surprise that some experts have dubbed the first phase of retirement – the period spanning roughly the early 60s to the early 70s – the “Go-Go Years.” This is when new or recent retirees are delighted not to be working and want to do what they have not done before, be it traveling the world, spoiling their grandkids or upscaling their home.
Subsequent decades have been called the “Slow-Go Years” and the “No-Go Years” – decades in which extensive travel becomes tiresome and health generally erodes – and, predictably, the rate of spending typically declines.
If you could afford it, wouldn’t it be neat to have an annuity that matched your proclivity to spend, offering higher payouts in the first phase of retirement, financed by lower payments thereafter?
A major annuity vendor has begun offering just such an annuity. It’s a fixed indexed annuity (FIA), and it pays 10 to 20 percent more than a traditional FIA for the first 10 years. The range depends on age and whether you amass annual pre-withdrawal rollups. Somebody who buys a $100,000 annuity, for example, might get $13,200 in guaranteed annual payments, compared to $11,000 from a standard FIA. Ten years later, payouts are cut in half permanently.
The minimum annuity premium is $25,000 for both qualified and non-qualified accounts. Currently, this annuity is unavailable in California, New York, Virginia, Massachusetts, Iowa, Vermont and Delaware.
The back-end payments may seem troublesome, but that need not be the case. For example, you might delay taking Social Security payments later than otherwise, boosting your eventual payout an additional 8 percent each year you postpone payouts.
This annuity is definitely not for everybody. Some people simply could not afford to trim an annuity payout by half in their later years. For those who can, there is the realistic threat that inflation will erode down-sized payments even further. And unanticipated events may eventually crop up, putting you in a financial squeeze.
The genesis of this annuity is a recent Consumer Expenditure Survey by the U.S. Bureau of Labor Statistics. It shows that average annual expenditures for somebody at ages 55 to 64 total $58,781. That drops to $49,477 at ages 65 to 74 and further still, to $38,123, for those 75 years old-plus. For most people in this age range, their only real financial priority, other than making sure they don’t outlive their assets, is healthcare expenses.
For single males aged 55 to 80, guaranteed payout rates range from 5 percent to 7.5 percent annually in the first 10 years, slightly higher than those for females, who tend to live longer. Payout rates for a couple range from 4.3 percent to 6.8 percent.
Annuity features include a home healthcare rider for those who cannot perform two out of six Activities of Daily Living (ADLs), such as eating and bathing. The roll-up rate for those who defer payments is 6.5 percent annually, for up to 10 years. The annuity comes with an 8 percent bonus in most states and allows 5 percent annual withdrawals without penalty.
This FIA offers seven index crediting options, including the S&P 500 with an annual 4.25 percent cap and the S&P 500 Low Volatility Daily Risk Control 5 Percent Index, which tracks the performance of the 100 least volatile stocks in the S&P 500 and targets a 5 percent level of volatility.
There arguably are some drawbacks. The lifetime income rider costs 1.2 percent annually, higher than many competing FIAs. And it may seem that a 50 per cent haircut on guaranteed monthly payments 10 years down the pike is a stiff price to pay for an initial 20 percent premium – assuming you receive even that much. The counterpoint is that those later payments last a lifetime. Whether that is ultimately a square deal – and whether higher up-front payments are truly enticing – is up to you.
To learn more, call Annuity FYI today at (866) 223-2121 or email us here.
A Fantastic Solution to Low Returns on Cash for Those Who Qualify
Cash has absolutely no cachet these days. Money market funds and traditional savings accounts pay virtually nothing. They still offer relative safety, but you can’t live on that.
Fortunately, there is a great alternative, which we like to call the Super Savings Account (“SSA”), which some also refer to as a Super Annuity. But it’s not actually an annuity but rather a liquid fixed indexed universal life policy with indexed annuity-like features that offer a very respectable return on cash and a highly appealing equity index feature for those who have at least $100,000 to invest and are in good health.
This is a one-of-a-kind product. It waives surrender charges. It guarantees a 3% worst case annual rate (minus fees) and offers a high ceiling — an 11.5% annual cap on the S&P 500 stock index. There are also 12 additional indexes to choose from, plus a fixed income account paying 4%. Again, the owner can exit the policy at any time, without any penalty. These policies are solely for non-qualified (non IRA and non-401(k)) money.
If this sounds too good to be true, it’s not – it’s just too good to last. You have to act fast because the insurance company will trim the minimum safety net worst case interest rate to 2.5% on February 17.
The fees for the Super Savings Account are particularly low – about 1 to 1.5% annually for a healthy person and 2% for an older, (ages 70+) less healthy person. This still puts the worst case net interest earned smack in line with what a traditional two-year bank CD pays today, and that’s the worst case. Add in 100% liquidity, a 9.5% to 10.5% best case scenario, a 5.5% to 6.5% 20 year average (on what?), and a tax-free death benefit that’s two times account value, and this product is a big winner.
The Super Savings Account compares very favorably to top fixed indexed annuities (FIAs), which are also pegged to indexes. The cap on this unique product is three to four times higher on the annual point to point for the S&P 500 – i.e., . 11.5% versus 3 to 4 percent for the average FIA. Unlike this fixed indexed life opportunity, FIAs offer a guaranteed lifetime income rider, but the FIA’s chances of earning more on the strength of the index is unappealing because many FIAs have low index participation rates and low caps. Unlike the SSA, which is always 100% liquid, FIA liquidity is usually limited to 10% per year, sometimes less.
In summary, the Super Savings Account makes great sense for anyone in good health sitting on cash, interested in earning 10-20 times more than a typical money market fund, maintaining 100% liquidity, and participating in the upside of the market without the downside risk. The product also leaves a tax-free death benefit to loved ones should the unexpected happen.
If interest rates rise, you can move to the SSA’s 4% fixed account or take the money out, penalty-free, and invest in a potentially higher yielding investment elsewhere. You can also do a 1035 tax-free exchange to another life or annuity policy… If the money is not exchanged, the owner pays ordinary income tax only on the gains.
Here is a summary of product specifics:
- $100,000 minimum ($1 million maximum) investment for non-qualified money only
- Pays a worst case guaranteed 3 percent annually, minus fees, until February 17.
- Thirteen (13) index investment options to choose from. The S&P 500 annual point to point option offers an 11.5% annual cap. Through the end of 2016, the five year average annual rate of return for the S&P 500 was 12.35% percent, excluding dividends. (Note: Indexed products do not pay dividends)
- Designed for fundamentally healthy people. A free medical exam is required and for your convenience a paramedic will come to your home or office.
- No surrender fees or other early withdrawal penalties
- The death benefit, on average, is tax-free and two to three times the premium.
To learn more, call Annuity FYI today at (866) 223-2121 or email us here.
This Annuity May Be for You if You’re an Aggressive Investor — and Truly Love Your Spouse
If you’re a married retiree, place a high priority on the welfare of your spouse and are leaning toward purchasing an aggressive annuity with a lifetime income rider in your IRA, here is something you probably want to know. There is a variable annuity available that beats all the others hands down for someone with your priorities.
Several factors set this VA apart from its competitors. Its mortality, expense and administration is lower than most others. Unlike others, it also offers contract owners the flexibility to invest in subaccounts (mutual funds) that invest solely in stock funds, or, for that matter, solely in other aggressive investments, such as REITs and commodities.
Most noteworthy, however, is the enticing way it treats death benefits – no small plus as a retiree ages.
First, here is a bit of background. When retirees turn 70 ½, they have to start taking Required Minimum Distributions (RMDs) from their IRA accounts and pay the government ordinary income taxes on this money. RMDs start at less than 4 percent of the IRA, typically less than the income rider’s annual payment stream. But RMDs climb each year and exceed 5 percent at age 79 and 6 percent at age 83, more than the income you receive from the income rider.
Most annuities with riders increase payouts at these age milestones so that aging retirees can pay their RMDs without breaking a sweat. But there is a catch: The extra payout decreases the annuity’s contract value, impacting beneficiaries. In the case of the variable annuity we’re spotlighting, there is no such penalty. You can buy a single premium VA and receive a competitive rate on the income rider (5.25 percent at age 65), and yet your spouse enjoys no dilution of beneficiary payments in the event of your death. In fact, your spouse may reap an unusually generous payment. If, for example, the stock market tanks and the value of a $100,000 investment declines to $75,000, your spouse would still receive $100,000 in the event of your death.
This annuity is not for everyone – not even for all those who fit all the aforementioned parameters. That’s because the income rider’s payout, while respectable, isn’t tops in the field, and the highest-paying rider is what many people want – period.
“Some people will not buy this annuity because they have the money they have and want maximum income for the rest of their lives,” says Scott Sadar, an executive vice president at Somerset Wealth Strategies in Portland, Ore… “This annuity doesn’t offer maximum income. So most people wouldn’t select it.”
As noted, this VA appeals to particular priorities, and the biggest is that the surviving spouse gets the best possible financial deal in the event of your death.
An important caveat regarding this annuity – and all VAs, for that matter – is that the beneficiary receives nothing if the value of the account is wiped out. The likelihood of this is extraordinarily low, however.
“I would put the odds at slim to none,” says David Smith, a Somerset Wealth Strategies financial adviser. “For this to happen, you would have suffer through really bad consecutive years in the market, and also pull out tons of money. That is highly unlikely.”
If you have questions or comments, call Annuity FYI at (866) 223-2121 or email us at www.annuityfyi.com and click on Ask Annity FYI By Email.
Annuity Rates and Terms Have Started Heading North
A major annuity vendor this week became the second insurance company to offer a top-of-the-line interest rate of 3.1 percent on a five-year fixed annuity, a huge jump from 1.8 percent and highlighting widespread — albeit more modest — increases in the rates or terms offered by fixed, fixed indexed (FIAs) and immediate annuities in recent weeks.
Interest rates and other terms are following the path set by the benchmark 10-year U.S. Treasury note, which has increased roughly 1 percentage point since it bottomed in July and has been rising more briskly since the election of Donald Trump on November 8. A growing number of annuity vendors have been increasing rates or terms each passing week…
Nobody knows if the increases will continue. Investors interested in purchasing the five-year fixed annuity – specifically, a Multi-Year Guaranteed Annuity (MYGAs) – should act quickly because it may be a limited time offer. Nonetheless, the increase mirrors the first piece of good news for prospective annuity buyers in a long time. After years of declines or at best flat rates and terms, annuity payouts have been heading north instead of south.
As an example, five-year MYGA rates generally bottomed at 2.6 to 2.7 percent this summer and are now generally 2.9 percent, said David Smith, a financial advisor at Somerset Wealth Strategies in Portland, Ore. In addition, so-called caps on FIAs – the percentage of an increase in an index that investors actually pocket – have also been rising, Smith said.
“Over the last two-and-a-half years, we have seen only red (reductions) in annuity terms,” Smith said. “In the last month, however, we are seeing green (increases) for the first time. While this doesn’t indicate that there is a massive change for the better in annuities, it does offer promise.”
Today’s MYGA rates are particularly attractive in comparison to conventional certificates of deposits, their chief competitors. Three-year CDs purchased online are paying 1.5 to just under 1.7 percent and five-year CDs are paying 1.85 to 2 percent. (CDs purchased at traditional banks pay far less.) By contrast, top three-year MYGAs are paying 1.8 to 2.1 percent while top five-year MYGAs, as mentioned, are paying 2.9 to 3.1 percent. Immediate annuities have not been left out of the improving picture. Smith said a 69-year-old female is eyeing a $100,000 single-premium immediate annuity paying $580 a month for life – an increase of $34 a month, or 6.2 percent, if she had bought the same annuity in September.
Here is an Annuity Combining Perhaps the Best of Two Worlds – Strong Upside Potential and Some Downside Protection
Many people are flocking to fixed indexed annuities (FIAs) these days because they get market exposure and suffer no losses in a down market. Sounds good, but what often gets lost in the shuffle is that upside potential is usually very limited – most FIAs today pay only about 25 percent of market upside, down from roughly 50 percent earlier in the year.
Happily, MetLife and a few other insurance companies are offering what many may view as a more palatable alternative – highly tailored annuities linked to various market indices that offer substantially more upside potential and that curb— albeit do not eliminate — downside risk. The primary selling card: While markets often rise and fall from one year to the next, they typically rise over a multi-year period.
“The desire for 100 percent downside protection is often over-emphasized,” says Scott Sadar, executive vice president of Somerset Wealth Strategies in Portland, Ore.. “In fact, markets tend to recover over time.”
Other insurance companies that offer annuities similar to this MetLife offering are Axa Equitable, Allianz and American General. In the case of MetLife — which calls its product the MetLife Shield Level Selector annuity — an investor can select among up to five indices diversified among large and small cap stocks, international stocks and commodities.
Sadar says some investors may be wise to invest in all three terms that MetLife offers – a six-year, three-year and a one-year annuity.
An investor might, for example, buy a six-year annuity invested in the small cap Russell 2000 index, which tends to grow the most over time. An investor would capture up to 87 percent of its upside. (Depending on the option the investor selects, MetLife would absorb at least 10 percent of a loss should one occur.) He or she might also invest in the three-year annuity and invest in the S&P 500 and take advantage of MetLife’s “step rate” feature – if the S&P 500 is flat or up at the three-year mark (excluding dividends), he or she receives a 15.1 percent return. If the market declines in that period, MetLife would absorb the first 10 percent of the loss.
Lastly, this investor might also buy the one-year version of the annuity, also investing in the S&P 500 with the step rate feature, and pocket 6.4 percent if the market is flat or down. Similarly, MetLife would absorb the first 10 percent of a loss should one occur.
The longer the term of the investment, the higher the percentage of market gains an investor receives. The six-year annuity, which offers the greatest range of downside risk options, offers 10 percent, 15 percent or 25 percent downside protection. The more downside protection an investor chooses, the less the upside potential.
The MetLife Shield Level Selector annuity is sold at a minimum price of $25,000. There are no income riders and hence no rider fees and, in fact, no fees of any type except relatively standard surrender fees. MetLife earns money if an investor prematurely exits the investment, and also when the market rises more than the maximum MefLife payout. In general, heirs receive the value of the contract if the investor dies.
The appeal of the MetLife product is its strong upside potential, coupled with some downside protection, plus the variety of its investment options and timeframes. “This annuity allows you to choose your own adventure,” Sadar says.
Here is a FIA that is Hard to Beat
In today’s ultralow interest rate environment, it’s increasingly difficult to find an annuity that keeps interest rates stable. Instead, insurance companies in the last couple of months have focused on trimming rates.
But here is a pleasant — and highly welcome — surprise: A fixed indexed annuity (FIA) underwritten by a major player has rolled out an unusually generous FIA – one paying a 95 percent participation rate on a respectable low-volatility index. This is more than three times what most FIAs pay today on an index tied to the often more robust — but also more volatile — S&P 500.
To be completely accurate, this FIA, as generous as it is, has actually cut its index participation rates this year. When it was introduced last spring, it offered a whopping 130 percent participation rate. After a couple of months on the market, that rate was cut to 100 percent. Recently, it was cut yet again, to today’s rate of 95 percent.
Nonetheless, this obviously remains a highly attractive deal as long as it lasts – and it’s available to interested consumers for a minimum of only $5,000 in a qualified or non-qualified account. It offers an income rider charging 1 percent a year, but investors may be better off waiving this to maximize returns.
The index to which this FIA is pegged – the BNP Multi-Asset Dynamic Index – is algorithm-based and comprised of three equity futures indices, three bond futures indices and two commodity indices. It seeks to measure the value of a hypothetical exposure to a range of asset classes and geographic regions based on momentum investing principles. Over the last 10 years, the index methodology would have produced an average annual return of 5.5 percent.
This annuity vendor is offering this FIA to gain market share for a while, as other competitors also do periodically. The low-volatility index is less expensive to hedge than an S&P 500 index because of its steadier performance. Also reducing costs is a two-year point-to-point crediting schedule. The product has a highly competitive seven-year surrender schedule (starting at 9 percent).
Interested investors are advised to act relatively quickly. Even if this FIA stays on the market an extended period of time, its participation rate is likely to be cut yet again after additional sales are generated.
Here is a Hot MYGA That Pays a Variable Bonus Annually
No question that this is a difficult time for prospective annuity buyers. Interest rates have tumbled to record lows and there is no assurance when – or even if — they will rebound.
Over the past month, for example, the average interest paid on popular five- and seven-year fixed annuities – Multi-Year Guaranteed Annuities (MYGAs) — has tumbled 25 basis points to about 2.4 percent, compared to roughly 3 percent two years ago.
A solidly rated annuity vendor appears to have come to the rescue, however, with the introduction of five- and seven-year MYGAs that offer an annual floating interest rate bonus, currently 0.82 percent. This pushes the MYGA’s contracted rate of 2 percent and 2.4 percent, respectively, to a very competitive level and provides upside potential should interest rates rise.
The minimum investment is $10,000 for both qualified and non-qualified accounts.
This MYGA is probably not a good substitute for a MYGA ladder. If rates rise, more competitive MYGAs will enter the market. Bear in mind, however, that you can lose, as well as win, with a ladder. A typical ladder would contain a three-, five- and seven-year MYGA, which overall pays less and which would mature and then open the door to higher rates only if rates, in fact, do rise. The three-year MYGA could mature in a period of even lower rates.
In any case, this MYGA essentially outperforms any other fixed interest contract on the market today. Most five-year MYGAs, for example, pay 2.5 to 2.7 percent – less than this one today with the bonus. A few other MYGAs pay more – as much as 3.1 percent – but they nickel and dime customers. Unlike our featured MYGA, they charge early withdrawal fees, don’t waive surrender fees for a nursing home confinement or terminal illness and offer a traditional death benefit only for an additional charge.
The insurance company behind this MYGA is rated a respectable B++ by A.M. Best. Some other companies have even higher ratings, but this one has $1.6 billion in surplus cash. “This is definitely enough to keep the promises this company is making,” says David Smith, a financial advisor at Somerset Wealth Strategies in Portland, OR.
The floating rate, by the way, is the three-month LIBOR, a global benchmark rate that some of the world’s leading banks charge each other for short-term loans.
The insurance company underwriting this MYGA has chosen to do so as an inexpensive move to build market share. It’s inexpensive because the company already sells MYGAs – in this case, it’s simply tweaking some features.
Prospective buyers should not wait long to take a good look at this MYGA. Smith says it is likely to be on the market three to four months but adds: “The more people talk about it, the quicker it will be gone.”
Here is a FIA That Warrants a Good Look
Most fixed indexed annuities (FIAs) essentially give with one hand and take away with the other. The crediting methods – the rules used to calculate how much of the gain in the accompanying stock index you actually receive – might be relatively generous. But the guaranteed lifetime income rider is relatively disappointing. Perhaps even more common, it’s the other way around.
But Annuity FYI has found a FIA, and one sold by one of the major players in the annuity industry, that offers the best of both worlds – a strong guaranteed income stream and generous crediting methods, and one that is likely to be around for a while even though it has already garnered $500 million in sales.
“We’re looking long-term,” says Chad Reynolds, CEO of Alpha Solutions, one of the firms marketing the annuity to broker-dealers. “We’re not going to stop selling this annuity anytime soon.”
This FIA has low investment requirements, too – only $5,000 for a qualified account and $10,000 for a non-qualified account.
The annuity offers a 10 percent bonus on the income base at purchase and a 4 percent annual rollup, compounded – plus stock index appreciation – for 20 years. Most FIAs don’t include the index appreciation in the rollup and turn off the rollup altogether well before this.
Buyers have a choice among three equity indexes or a fixed interest account paying 2 ½ percent a year. Most customers opt for the 20-year-old Deutsche Bank CROCI index, which tracks 850 global blue-chip stocks. This option offers a 100 percent participation rate, without caps or spreads.
There is icing on the cake in the annuity’s withdrawal rate as well. It pays a 4.7 percent withdrawal at age 65, which is nothing special — but this figures rises 10 basis points a year indefinitely.
One drawback is that this FIA offers no death benefit. Beneficiaries get just the residual value in the account. In the overall scheme of things, however, this is a minor negative.
Why Market Volatility is Rising and How Investors, Including Prospective Annuity Buyers, Should React
Stock market volatility — which impacts variable and fixed indexed annuities, as well as stocks, stock funds and ETFs — has been on the rise, and that’s unsettling. Several times last year, the market spiked, only to subsequently sell off. Then, in 2016, the market unceremoniously ushered in the new year with a ferocious sell-off – the worse early-year market nosedive, in fact, ever.
Yes, the market is faring well now — but who isn’t worried about the next downdraft?
As measured by the CBOE Volatility Index, volatility since the end of 2015 averaged a little over 21 ½, compared to a long-term average of just under 20. This isn’t that big of an increase, but it is enough to rattle many investors’ nerves and push more people away from investing in the market, which has always been the best way to increase wealth over time. Sales of variable annuities, for example, have been tumbling for several quarters.
Several factors are causing volatility to rise. For starters, there are the experimental and divergent monetary policies being pursued across the globe, including negative interest rates. With this comes the intuitive understanding that the longer we stay in this experimental monetary policy phase, the higher the risk of unintended consequence.
In addition, economies worldwide have been mired in secular stagnation for years, which adds to volatility by creating a growing sense of widespread helplessness and hopelessness. More succinctly, this is the Wall Street versus Main Street gap.
And making matters markedly worse, of course, is the economic downturn in China, the world’s second-biggest economy.
For more than two decades, China served as the most potent anti-poverty weapon the world has ever known. Twenty five years of breakneck expansion brought hundreds of millions of people from farmland into cities. In 1990, 61 percent of Chinese lived on less than $1.25 per day, the global poverty line. Now, only four percent of the country lives below the line. As China grew and lifted its own out of poverty, it also lifted many other countries.
Today, however, longstanding issues of Chinese oversupply and growing declines in demand are undermining employment, and cuts are likely to become much worse. China plans to reduce the number of state workers, for example, by up to six million people over the next two to three years.
There is much more to be said about the reasons behind heightened volatility, and, more important, about how investors should intelligently react. For more insight, an excellent report — “Managing Volatility” is available, in which portfolio managers and investment strategists from ClearBridge Investments, Parametric and Cammack Retirement Group discuss how investors – and their portfolios – can weather the storm.
If you have questions or comments, call Annuity FYI at (866) 223-2121 or email us at www.annuityfyi.com and click on Ask Annuity FYI By Email.
If you are considering an annuity, you need to act now.
Rates are dropping in July. Please contact an advisor today to determine which annuity is best for you. You do not need to send money now or make a commitment but you do need to submit an application to lock in the current rates.
Fixed annuity rates are about to be cut, but prospective buyers may be able to sidestep this if they act promptly.