So I’ve Been Saving…Now What?

17 05 2011

 Michael Carignan, CFP®, CRPC®

Have you ever wondered how to get a clear picture of all of your current financial resources and how much retirement savings you need to provide your vision of retirement, taking into account your potential health or market risks?  This is just one of many questions people ask when thinking about personal retirement planning.  If you find yourself in this boat, there are a number of solutions for you.  First, with some time, research and diligence, spreadsheets and off-the-shelf software, you can create your own retirement plan.  However, it is likely that if you are asking these questions, you probably don’t have one of those key ingredients to success, or you would already know the answer.  A more comforting solution may be to get some professional help.  WebMD can help you diagnose some medical conditions, but most people feel better having a trained medical professional give them their expert opinion and recommend a treatment if warranted.  In a similar fashion, finding the right financial professional to help you can be a key step in the right direction on your path to financial success.

Just like finding the right doctor is important, (you don’t want to go see your dermatologist if you have a cough) finding the right kind of financial professional can be equally important.  There are many financial professionals out there; selecting the right one may be the most important factor in ensuring you have a favorable planning experience.  There are some questions you need to ask when looking for a professional to help you construct a retirement plan.  The first question should be, “are they qualified to provide the answers I’m looking for?”  One good resource in this search is www.letsmakeaplan.org where you can search for a local Certified Financial Planner™.

Most people are more comfortable dealing with a doctor that has the same philosophy on treatment and they personally like.  By “same philosophy on treatment,” I mean, do they recommend a diet and exercise regimen, or do they push a diet pill to help lose weight?  If you and your doctor disagree on the basic philosophy of medical treatment, you probably will have disappointing results, since you won’t follow his or her advice.  In the same way, it is very important to look for a financial professional that has the same general philosophy that you do when it comes to investing and money management.  If you believe that it’s possible to outsmart the financial markets and pick the best performing mutual fund or stock next year, then you need to find a broker who believes that as well.  If you believe that investing involves taking some prudent risks and adhering to a long term plan with a scientifically designed portfolio, you likely should  find a different advisor.  Neither philosophy is necessarily wrong, but making sure you select a financial professional that has the same philosophy as you have is of paramount importance to a successful planning relationship.

Some additional specific questions you should ask are:

    • Do you prefer fee based or commission based compensation for your advisor?
    • Do they have experience with other clients like you?
    • Can they advise you on all aspects of your financial life or will you need several advisors to get the answers you need?
    • What is the charge for the plan?  In most cases, you get what you pay for; if it’s free there is going to be a sales agenda you might not know about right away.
    • What is included in the service they provide?
    • Will they be able to help you implement planning suggestions?  If so, is it a requirement of the planning process?  Be careful of the solutions that can only be done through them.
    • Do they make “suitable” recommendations or are they a “fiduciary”?  (For more information on the difference click here)

Finding a professional that you can understand and trust is critical when choosing to have a retirement plan constructed for you and your family.  You are unlikely to follow the advice, good or bad, if you do not trust the person providing the advice.  Once you find your ideal fit of personality and capabilities, be ready and willing to provide answers to all of their questions, since a retirement plan is only as good as the information you provide.  Don’t hesitate to ask them probing questions and provide honest answers if they ask you some difficult questions.  When dealing with the money you have worked so hard to accumulate, stumbling into retirement without a carefully crafted plan can be a dangerous prospect at best. Once your retirement plan is complete, then it becomes time to “work your plan” if you have a few more years, or “live your plan” if you are already retired.

The earlier you start planning for retirement the better, because finding yourself in retirement and unsure if you’ll be able to live it how you’d like is a scary proposition.  It has been my experience that those who are most successful in retirement have taken the time to get the advice that helps them sleep well at night, knowing they have done everything they could to create the retirement they wanted for themselves and their family.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.

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So I’ve Been Saving…Now What?

4 04 2011

 Michael Carignan, CFP®, CRPC®

Have you ever wondered how to get a clear picture of all of your current financial resources and how much retirement savings you need to provide your vision of retirement, taking into account your potential health or market risks?  This is just one of many questions people ask when thinking about personal retirement planning.  If you find your self in this boat, there are a number of solutions for you.  First, with some time, research and diligence, spreadsheets and of-the-shelf software, you can creat your own retirement plan.  However, it is likely that if you are asking these questions, you probably don’t have one of those key ingredients to success, or you would already know the answer.  A more comforting solution may be to get some professional help.  WebMD can help you diagnose some medical conditions, but most people feel better having a trained medical professional give them their expert opinion and recommend a treatment if warranted.  In a similar fashion, finding the right financial professional to help you can be a key step in the right direction on your path to financial success.

Just like finding the right doctor is important, (you don’t want to go see your dermatologist if you have a cough) finding the right kind of financial professional can be equally important.  There are many financial professionals out there; selecting the right one may be the most important factor in ensuring you have a favorable planning experience.  There are some questions you need to ask when looking for a professional to help you construct a retirement plan.  The first question should be, “are they qualified to provide the answers I’m looking for?”  One good resource in this search is www.letsmakeaplan.org where you can search for a local Certified Financial Planner™.

Most people are more comfortable dealing with a doctor that has the same philosophy on treatment and they personally like.  By “same philosophy on treatment,” I mean do they recommend a diet and exercise regimen or a or do they push a diet pill to help lose weight?  If you and your doctor disagree on the basic philosophy of medical treatment, you probably will have disappointing results, since you won’t follow his or her advice.  In the same way, it is very important to look for a financial professional that has the same general philosophy that you do when it comes to investing and money management.  If you believe that it’s possible to outsmart the financial markets and pick the best performing mutual fund or stock next year, then you need to find a broker who believes that as well.  If you believe that investing involves taking some prudent risks and adhering to a long term plan with a scientifically designed portfolio, you likely should  find a different advisor.  Neither philosophy is necessarily wrong, but making sure you select a financial professional that has the same philosophy as you have is of paramount importance to a successful planning relationship.

Some additional specific questions you should ask are:

    • Do you prefer fee based or commission based compensation for your advisor?
    • Do they have experience with other clients like you?
    • Can they advise you on all aspects of your financial life or will you need several advisors to get the answers you need?
    • What is the charge for the plan?  In most cases, you get what you pay for; if it’s free there is going to be a sales agenda you might not know about right away.
    • What is included in the service they provide?
    • Will they be able to help you implement planning suggestions?  If so, is it a requirement of the planning process?  Be careful of the solutions that can only be done through them.
    • Do they make “suitable” recommendations or are they a “fiduciary”?  (For more information on the difference click here)

Finding a professional that you can understand and trust is critical when choosing to have a retirement plan constructed for you and your family.  You are unlikely to follow the advice, good or bad, if you do not trust the person providing the advice.  Once you find your ideal fit of personality and capabilities, be ready and willing to provide answers to all of their questions, since a retirement plan is only as good as the information you provide.  Don’t hesitate to ask them probing questions and provide honest answers if they ask you some difficult questions.  When dealing with the money you have worked so hard to accumulate, stumbling into retirement without a carefully crafted plan can be a dangerous prospect at best. Once your retirement plan is complete, then it becomes time to “work your plan” if you have a few more years, or “live your plan” if you are already retired.

The earlier you start planning for retirement the better, becasue finding yourself in retirement and unsure if you’ll be able to live it how you’d like is a scary proposition.  It has been my experience that those who are most successful in retirement have taken the time to get the advice that helps them sleep well at night and knowing they have done everything they could to create the retirement they wanted for them and their family.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.





The 8%+ Solution*. Seriously??

8 03 2011

  by Michelle Ash, CFP(R), CDFA(TM)

 This past Friday evening, February 26th, I went to my local bank’s ATM to make an evening deposit.  It was about 8pm, it was dark outside, and clearly the bank itself had been closed for hours.  As I was waiting for the machine door to open to accept my envelope, a piece of paper folded up and taped to the ATM machine caught my eye.  It’s headline read,

 

“Finally, A Safe, Sensible Alternative to Money-Losing IRAs: The 8%+ Solution*”.

Being a financial advisor, and firm owner, this naturally caught my eye.  The paper was taped with one small piece of tape and was clearly meant to be taken by a curious passer-by, so I decided I’d take it.  Down below the headline, the 8 x 10 sheet continued to espouse all the almost-too-good-to-be-true features of this investment strategy, and then the contact information for the advisor who could be contacted about the investment; who is not affiliated with the bank, by the way.

You know what they say about things that seem too good to be true, right?

They usually are, and the same thing is true here as well.  Technically speaking, the author of the flyer did not make any inaccurate statements or tell absolute falsehoods.  However, as a fellow financial professional, I would tell you that he did make all sorts of misleading statements that appear to be intentially designed to cause a consumer to believe one thing – while the truth is actually another. 

Let’s look at some examples:

1. The footnote of the title, “The 8%+ Solution*” says “*8% is the highest income guarantee in the industry; actual accumulation amount could be greater.  **If you add an initial optional bonus of 8%, your first-year earnings could be at least 16%. Product is guaranteed and insured by an A rated insurance carrier. Minimum deposit is $5,000.”

Other examples:

“Want a retirement account that compounds at 8% a year guaranteed- no matter what happens in the market? (But it could be much more!)”

“Would you like a financial vehicle that will guarantee you income for the rest of your life? (And you can pass it on to your family!)”

To the left is a picture of the flyer.  I include it because it’s just got so many wonderful-sounding details.

 

 

 

 

 

Sounds fabulous, doesn’t it?  So, now let’s talk about the rest of the story.

 

 

First of all, what product is this advisor talking about?  Answer:  an equity-indexed annuity with a guaranteed income rider.  Now, that’s a mouthful of words that, unless you’re in the financial industry, probably sounds like I just spouted off in Greek instead of English.

So let’s break that down.  I’m going to try and keep this relatively simple, since this is a blog and not a white paper.  And trust me, you could write quite a lot to really give an explanation of these things.

Equity-indexed annuity: is an annuity product wherein your invested principal’s safety is guaranteed, and has a minimum guaranteed return (usually around 2%).  “Your” money is never invested directly in the stock market like it may be with a variable annuity or a mutual fund.  Instead, the insurance company invests your dollars in very safe vehicles like government treasuries, and then uses the interest from those to buy calls on a stock market index.  If the calls make money from the stock market going up, your account gets credited with a portion of the earnings.  If the calls don’t make money, your principal was never at risk so it’s still safe.

Guaranteed income rider:  There are several types of these, but this one is most likely a “GMWB” – a Guaranteed Minimum Withdrawal Benefit – an optional rider that can be purchased for an extra annual fee and “attached to” the base annuity contract.  In jest, sometimes we refer to this as “magic money”.  Think of it like this:  when you buy an annuity with this optional guaranteed income feature, your annuity actually has two values.  The first value is your account value – the one that represents your ACTUAL money in the account.  This is the money that you could actually take out if you decided to withdraw your money or cancel the contract (minus possible surrender fees, but that’s a different issue).

The second value your annuity has is the “magic money” guaranteed income bucket.   THIS value is the one that gets the “guaranteed” 8%  growth – NOT your account value.  The ONLY way to access this value is in one of two ways – either 1) by turning this “magic money” bucket into an income stream similar to a monthly pension, or 2) by taking a preset amount in the form of withdrawals over your lifetime – such as taking 5% annually off of the “magic money” bucket.

Still confused?  That’s common, so let’s do a simple example, using option number 2 (the GMWB option).

Let’s say I have $100,000 that I put in one of these contracts.  It has a guaranteed interest rate of 2%, but the opportunity to earn more if the stock market goes up.  I also buy (and pay for via internal costs) a guaranteed income rider with an 8% guarantee.

Now, let’s say that I hold the annuity contract for 10 years.  During that 10 years the stock market does really poorly, similar to the years 2000 – 2010, not even surpassing my 2% minimum guarantee.

My ACTUAL account with the 2% minimum guarantee grows to $121,899.  This is the money I could take out if I want (assuming all surrender charges are zero).

OR, instead, I can use my guaranteed income rider, which, with its 8% guarantee has grown my “magic money” to $215,892.  The amount of annual withdrawals I can make will be based on my age and published in the contract.  Let’s hypothetically say I’m age 70,  and because the insurance company has calculated my mortality, I may be able to withdraw annual amounts of 5% of my “magic money”.  If you multiply 5% by the “magic money” value of $215,892, you get an annual withdrawal of $10,794 – for life.  If I take more money out – it “blows up” the contract and my “magic money” pot will be severely penalized in some fashion, depending upon the individual company and contract.  At no time can I get the $215,892 at any one time – although, if I live for longer than 20 more years, I may get more than that amount – in annual withdrawals.

Still confused?  At this point, most people are.  Honestly – the vast majority of financial advisors and financial journalists do not understand these products – so misrepresentations tend to abound.

And so here’s the real crux of my issue with this advisor’s flyer:  these products are very, very complex.  If you take some of their different features individually in isolation and discuss them, they sound great.  You might even think that everyone should want one.  However, the real key to success is understanding how all of the features work TOGETHER.  Only then can a buyer have a true understanding of the pros and cons of the product.

At the end of the day, am I saying equity indexed annuities with guaranteed income riders are bad?  No.  Neither am I saying they are good.  They are just a tool.  Much in the same way that a carpenter probably doesn’t look in his toolbox and decide his hammer is “bad”, I am not looking at this annuity as “bad” or “good”.  Like the hammer, it’s just a tool.  A hammer may be great for pounding in nails to hang a picture, but I probably don’t want to use it to sand fine furniture.

The real problem I have with the flyer I found taped to my bank’s ATM machine is that advisors representing the financial industry are supposed to a) understand their products, b) represent them accurately, and c) only recommend them to individuals for whom they are suitable.  These are the mandates that state insurance commissioners, FINRA (the Financial Industry Regulatory Authority), and SEC (Securities Exchange Commission) oversee to try and prevent consumer abuses.

In my opinion, this advisor seriously misrepresented a product to try and make sales, and by doing so, he made our industry look bad by his misrepresentations.  I take serious issue with this.  And I bet the Florida Insurance Commissioner will too.

 

All investing involves the potential of loss – including invested principal.  Indices are general barometers of security price movement.  You cannot invest directly in an index.  Past performance is not a guarantee of future performance.  This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security or insurance product.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Imvestment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.