Know when to use them.know when to lose them

Know when to use them.know when to lose them Or, why an income rider is rarely appropriate.. Before I get started please let me state something clearly: there is nothing wrong with buying an income rider on an index annuity. It does the job it s intended to do. The question is, is this a job you need done???? *** Almost everyone who comes to Annuity Straight Talk has some exposure annuities with monthly income components. Indeed, most people think that is the ONLY thing annuities do. But in reality, there are many simpler and more efficient annuity contracts offers safety, flexibility, and income options, all without fees and unnecessary costs. The purpose of this paper is to show you that many of the alluring benefits touted with index annuities with lifetime income riders, or hybrid lifetime income plans, are really just sales hype. Many of the components of an income rider ultimately do not offer as competitive a benefit as available through other channels. This is only clear once you deconstruct each feature- then you can look objectively at the true overall benefit. And quite honestly, for many people, once you strip out the sales pitch and fanfare, the safety and flexibility are what s appealing about an Index Annuity. All the rest are just extras you are better off not buying. *** So in this brief report, we will first show you how the add on benefits of income rider contracts are not worth your money. Secondly, we will show you a different approach that will allow you to choose objectively which strategy is best for you. In the end it s all up to you and I believe you ll find it more beneficial to compare strategies first, rather than get lost in the details of hundreds of contracts. One of my favorite quotes is applicable in this situation The real voyage of discovery consists not in seeking new landscapes, but in having new eyes. Marcel Proust 1

First: Why Buy Guaranteed Income? Guaranteed income is only a necessary purchase if you are looking to cover basic expenses in retirement. These are the essential expenses like housing, food, medical care, etc. In other papers and documents, we ve detailed all the reasons why this income is essential, and we ve also detailed how index annuities work, and how income account riders work with these contracts. How the contracts work is outside the scope of this paper- I m assuming you already have a good level of understanding. By all means, start with that essential information first. Undoubtedly, an income rider on an index annuity is one way to generate guaranteed income. But it s not the only way. Rather, the purpose of this paper is to give you the unvarnished truth about index annuities with income riders, and to give you a glimpse into some of the alternate ways of thinking that we use with clients that often accomplishes a lot more, for a lot less money. Guaranteed Income Riders: A Big Bundle Of Benefits: Now, the problems most advisors are trying to solve with income riders are legitimate. As I said at the start, income is essential and income riders may be appropriate. No one wants to run out of money, so a guarantee of some sort is critical. Income contracts accomplish this, but too often they are paired with many additional benefits, riders, and features that simply muddy the waters, and add cost and complexity. For example, in addition to needing income, other reasonable concerns that people have are market volatility and avoiding market losses in retirement, fear of long term health care costs, fear of inflation, the desire for growth, and wanting to leave something to the next generation. Most income rider focused index annuities offer watered down benefits addressing all these points. Undoubtedly, these added benefits give the products a wider appeal and create more sales opportunities. But where things go awry is when buyers lock into a contract with everything under the sun, and which will most certainly be a lifetime commitment, yet come to find out that the wide range of benefits perform in merely a mediocre manner. Index annuities with income riders may be quick and convenient for consumer and advisor alike, but the sale may be shortsighted, and leave the buyer disappointed at how the added benefits perform. 2

Additional Problems with Income Rider Sales Techniques Income riders over-bundle excess benefits into bloated contracts. And furthermore, annuity sales techniques frequently focus on fear, and are used to get a commitment from buyers. But it seems to me that fear-based selling puts a potential client in a defensive mindset. Instead, my goal has always been to put people in a position of strength when making strategic decisions. This always creates more confidence for the individual, and empowers them. Which would you rather have? There Is A Better Way: So, rather than emphasize just the income rider, and then scare or force-fit the client into that bloated set of benefits, I always try to discern the client s essential income needs first, and then find the most efficient way to secure that income. Frequently, the most prudent use of a clients assets is to simply position them so they can not lose. Often that creates a great source of stable assets from which to draw income, and does not require the use of an income rider. And usually, this costs a lot less than income focused annuities. I ll go into detail on this more logical annuity strategy in just a moment, but first, let s dig into the truth and the downsides of various benefits contained in an income rider. 3

The Straight Talk Truth: 1. All income contract payouts are based on today s rates a. All terms are locked when the contract is issued i. Once income is triggered, payments will not change- whether they are level or increasing- and are known from day one. ii. There is no possible way this strategy will do anything to help with inflation. b. Income rider payouts are essentially based on the 30 year Treasury and yield similar results. And with the rider locked in, you are locking in today s rates, forever. c. Conclusion: Would you buy a 30 year Treasury at 3% to fund retirement? Probably not 2. Long term care riders will rarely payoff a. Most pay for only 3-5 years b. Most stop paying when account balance reaches zero which happens when you are at the greatest risk of needing it c. Additional cost in relation to greater payments is not much of a yield d. Benefit is not tax free like a true LTC policy is e. Conclusion: Private LTC insurance is better, period. 3. Death benefits don t last long a. The death benefit has a proportionate decrease when taking income or free withdrawals b. If you buy the contract for the right reason then there will be no additional death benefit left when you are most likely to cash in c. Conclusion: Death benefit Rider is usually a Gimmick. Buy life insurance instead. 4. Growth potential is very limited a. This is not the purpose of an income contract but many times it is sold as a great benefit b. In fact, growth projections are low and the rider fee inhibits whatever potential the contract has. c. Conclusion: Assume little or no growth in a contract loaded with other benefits. 4

Summary: Income-Rider Focused Index Annuities are the Jack of All Trades Annuity Income rider focused index annuity contracts are the jack of all trades annuity. But, as you well know, the jack of all trades is the master of none. When a contract comes with everything under the sun, the weight of such large promises usually casts a dark shadow on each component. In simple terms, a contract that does everything never does any one thing really well. Within each annuity contract, an insurance company has an underlying cost associated with each benefit. The more benefits a contract has, the more expensive it is for the insurance company to maintain the guarantees associated with the annuity. As a result, each benefit gets pared back to a level manageable to the insurance company. It s not wrong, it s just the way business works. We all know that nothing in life is free. In reality it s easy to see that there is no such thing as a contract that has the highest income, with the best Long Term Care rider, the lowest fees, best growth potential and a great death benefit to top it off. No such contracts exists! So what s the Solution? Focusing on what is most important leads us to use Index Annuities for their core value. Safe Growth. So leaving the bells and whistles of income riders behind, lets take the best attributes of these innovative financial products and leave out the fluff. 5

Solutions: Portfolio Enhancement Using Annuities Use Annuities For What They Are Designed To Do Best Now as I mentioned earlier, there are better ways to use index annuities that other advisors probably aren t telling you about. There are quite a few reasons why others are not talking about these strategies, but only one reason really matters. Most simply don t have a deep enough level of understanding of these contracts and have no idea what kind of analysis is required to use index annuities the right way. So selling an income rider is just easier. But it s critical that you understand these alternative options and make an informed decision, because annuities are fantastic safe money strategies. And it s a beautiful thing to put a purpose-built annuity to work when it is the best tool for the job. Focus On The Big Benefits If you are like most of our clients, you most likely already have some form of guaranteed income and have taken care to protect your assets. You may already have more than enough income, or perhaps you need to make just a few adjustments or enhancements to your already well-laid plans and savings. But chances are also good that there s something about an annuity that appeals to you. Focus on the aspects of a contract that appeals most and accomplishes your most basic goals. The right annuity will maximize that attribute to create the most benefit for you in retirement. Let s look at the key components that are most appealing, and that can be isolated and maximized. Safety: Annuities are safe money strategies that in many situations offer superior qualities to most other safe money asset classes like bonds. Growth: Index annuities were made to capture growth in good times and protect from losses in down times. Annuities are not subject to volatility. Income: If you want maximum income then focus on a contract that is specifically designed for income alone. The Ideal Solution: Growth Oriented Index Annuities By far the best feature of an index annuity is its ability to guarantee against loss and provide moderate growth when markets perform well. It simply evens out the effects of gains and losses so your account rises steadily over time. This is why the contracts were created in the first place. Also, a growth focused Index Annuity is a contract geared specifically for maximum growth without additional riders or fees, and without the extra costs those bloated benefits bring. 6

Using Growth Oriented Index Annuities In Portfolios Here are two ways to use a Growth Index Annuity 1) Use As A Bond Alternative a. Safety- This safe money holding is not interest rate sensitive, unlike bonds b. Higher yield potential- Bond yields are low and any rate increase means price declines. c. More flexibility- Partial surrender of annuity contract releases your money without penalty, whereas bond sales may realize losses 2) Use Free Withdrawals for Supplemental Income a. Using free withdrawals, you can safely protect assets and allow other investments time to mature, and allow for time to avoid systematic withdrawals in down markets. b. If your assets comfortably exceed income needs (appx 20X assets/ annual income needs ratio) then you can afford this strategy. c. Use an annuity to fill an income gap for a short period of time before another source of income can be accessed. For instance, it is perfect for someone who wants to retire at age 62-65 but is waiting until age 70 to maximize social security payments. The major benefits of a growth focused index annuity are as follows: Lower Cost- using a growth contract with liquidity when done correctly will lead to a savings of 25% or more compared to the cost of adding an income rider. Quite simply, you get more of the benefits, for less money. More Output- it takes less than 2% yield in a growth contract to keep pace with an income rider over life expectancy. And almost every growth contract should do much better than that. o Said differently, with the income rider focused annuities, on average it takes 20 years to receive aggregate income payments equal to the initial premium. If that puts you near the age of 80 then you haven t made any money, yet are nearing your actuarial life expectancy. o Is it a good deal to have zero growth for 20 years? Probably not. Greater Flexibility- With a good growth contract, you will only be locked in through the surrender term which is a maximum of ten years as compared to lifetime commitment with an income rider. Guaranteed income is always for sale and you should wait for that until the age when you receive maximum benefit. Hint, it s usually sometime in your 70s. 7

Here s why it works in a portfolio management scenario For all the reasons above, a shift of some portion of your current safe allocations to a growth oriented index annuity may be a smart move. Here s why: 1) You will be drawing from all assets in the portfolio to cover retirement expenses, and not concentrating drawdown risk on one bucket or asset class 2) When markets do well, you draw income from selling securities at a point of high value 3) When markets are not doing well, draw income from the annuity 4) The ability to draw from the annuity lets you avoid selling securities at low value and offers a balancing effect to the entire portfolio which will give you far better long term performance. Using this strategy, you avoid the risk of reverse dollar cost averaging, and increase your overall safety by giving you a solid base of assets to take money out of if you need to that allows your other assets plenty of time to recover. A quick case study Larry is 58 years old, has an investment portfolio of $750,000 and plans to retire in four years when he is able to collect Social Security. If he waits to age 70 he expects monthly payments of $2,000. Along with his pension, that will give him more than enough to cover all necessary and discretionary expenses. But, what does he do to cover the eight year gap? Like many other people Larry started doing some research online and found someone in Arizona selling annuities. This agent was heavily advertising an annuity contract that seemed to be sent straight from financial heaven big bonuses, great growth, flexibility with assets and very high levels of guaranteed lifetime income. Since Larry is a little smarter than the average person, he also talked with a local advisor who seemed to be saying about the same thing as the online agent in Arizona. He was starting to believe that all he needed to do was put $400,000 into an index annuity with a guaranteed income rider and he would receive the $2000 per month that he needs starting in four years. What s the problem with this? First, Larry doesn t need lifetime income. he just needs income for eight years. Second, that is way too much money to throw at the problem. 8

The AST Solution All Larry needs to do is call AST and we ll solve the problem with a flexible solution for less money with more overall benefit than the contract with the income rider. Here s what Larry should do purchase a growth oriented index annuity so the money he needs for eight years is guaranteed to be there. This will eliminate any chance of the markets not being in good shape when he needs the money. It will take a maximum of $300,000 in a growth oriented index annuity to make sure he always has what he needs which will leave him $450,000 to invest elsewhere for long term growth. Currently the best contract on the market has a surrender schedule of only seven years. After that his funds will be liquid and he can rebalance the portfolio so he can finish covering the eight year gap. An annuity of exactly that size will ensure that, in a worst case scenario, the 10% free withdrawal allowance will give him enough to cover expenses through the surrender period. If that actually happens then Larry will be very happy with the annuity purchase because his other investments would likely be performing poorly and will need time to recover value. In a moderate growth scenario Larry will hardly touch the principal and maybe not at all. If repeated, he will get to age 70 with his entire asset balance intact or greater than when he started. What would Larry accomplish by taking this route? Guarantee a base of assets that cover his income gap to maximum social security age Balance out his entire portfolio with the best safe money asset available Add the flexibility to reposition annuity assets in the future rather than locking into a lifetime contract 9

So, How Do You Get Started With Us? Working with Annuity Straight Talk, you will get clear and concise advice specific to your situation. As this paper shows, there are ways to use annuities that are smart, and that cost you less, and that give you more. More flexibility, more options, more overall output. We can find that solution in your situation too. If this paper makes sense to you, it may be that you don t need an income rider, but would benefit by some of the safe money features of a high quality index annuity. Going this route it may also be that we save you a lot of money by doing things a bit differently, and with no less safety. The end result? More flexibility More growth More to spend More control More for emergencies More for your heirs Less cost and commitment Now, this strategy is not for everyone but it just might be for you. Chances are good that you found us because you were researching annuities and have seen contract pitches with income riders. Income riders are not the only way to go, so give us a call and we ll not only shoot it straight but we ll deliver a solution that is a much easier commitment to make. Ready to get started? Book an Appointment Online Now All the best, Nathaniel M. Pulsifer and Bryan J Anderson Annuity Straight Talk, 800 438 5121 10