Annuity IQ

There is legislation that is being introduced called The Retirement Security for Life Act of 2007. Basically, the proposal would allow for a portion of income, up to $20,000 a year derived from an annuity that offers a lifetime income guarantee, to be excluded from taxation. This could give the average person in a 25% tax bracket annual tax savings of up to $5,000 on that income generated from an Annuity.

It is no secret that Baby Boomers and Americans in general need more incentive to save for retirement. We all know the numbers behind Social Security, and they are not pretty. We need to do something and I see this legislation as an excellent step to get people to save more money for retirement.

For two decades we have seen politicians posturing and talking about fixing Social Security, but no action has been taken. It is time for our politicians to come up with a plan that will actually help the looming crisis. Certainly there is a lot that can be done to increase personal savings and this legislation is a great step in providing an incentive for people to save.

This legislation will not fix Social Security though, but it will help build piece of mind for millions of Americans. Do not misunderstand me here, we need to fix Social Security and we need to fix it soon. I do not have the solution to the Social Security problem, but I do know that personal savings accounts probably will not work.

Unfortunately, I think the only real solution to fix Social Security and Medicare is to raise payroll taxes, not a very popular solution I know, but a realistic one. I am only talking about a 1% raise split between your employer and you. Then again, what do I know?

That is my two cents on politics, but what would this new legislation mean to investors and the annuity market? It would be huge, an unprecedented opportunity for the middle class to find a way to save more money than ever before. This proposal would be a boom for insurance carriers and agents unlike anything we have ever seen in the past.

It is unclear if variable annuities that provide living benefits would be included, but it would make sense that they would be. These contracts loosely fit the description laid out by the legislation, but it does look like much of the proposal is geared towards income annuities. If it does include Variable annuities that would be a boom for investors who could reap the rewards of guarantees and stock market growth, which could lead to higher income in the future.

I see this as an opportunity for insurers and agents, but it will help millions of people at the same time. It is a total win-win situation for everyone involved, I cannot think of a better situation. This proposal should be examined closely, passed and signed into law!

This is the headline that a certain, previously mentioned, financial writer wrote back in 1997. I would just like to point out that he was, and still is, wrong. NAVA just released their fourth quarter variable annuity sales data yesterday and sales were up.

annuity sales were just not up a little bit, but they were up a lot. We are talking about an 18.2% increase in year over year sales. That may not sound like much, but when you are talking about 133 billion dollar a year business (that was 2005 sales) an 18% increase is very substantial. I have to say that these new numbers are impressive to say the least.

Total sales for 2006 were 157.3 billion dollars driving total assets in variable annuity contracts to about 1.36 trillion dollars. You know what some of these people are going to be writing about variable annuities over the next week or so. Let’s take a look at some of the potential headlines.

“variable annuity Swindling Continues at Record Pace!”

“The annuity Rip-Off”

You get the point, they will pick apart the numbers and say annuity agents are ripping people off, which is not true. The fact of the matter is that investors want some type of guarantee on their money, which historical investments cannot provide.

What the anti-annuity crowd will come out and say is that net flows are much lower than the gross number mentioned above. This is true for various reasons, but mostly because you have money coming out of contracts. Net flows in 2006 were up 45% to 29.8 billion dollars.

Also, what I find amazing is that the drive by financial writers will not point out that over 60% of all variable annuity assets are in equities and a little over 10% is invested in bonds or money market accounts. They will also not tell you that almost 20% of these assets are invested in fixed accounts, these are numbers from across the board.

Why would I bring this up? Simple, they, the media, always say that brokers/agents invest money to aggressive in variable annuity contracts. These numbers illustrate that is not the case at all, it shows wide diversification and that brokers are following asset allocation plans within variable annuities.

Anyhow, these new numbers prove that variable annuities are not dead, but thriving during adverse conditions. Maybe the Ivory Tower writers should start to actually understand these products better instead of pretending that they know what they are talking about.

When shopping or looking for annuity information you will find many websites that are offering free information. These websites are more than happy to help you make an Annuity decision, simply give them your name, contact information and the amount you want to invest. I am sure they or whoever they sell your info to will get right back to you.

Some of these sites are OK and others are a bit more dubious and it is ultimately your responsibility to know who you are dealing with. I know most of the players out there, either personally or by my own research, and can tell you there are, other than Annuity IQ, only a few sites I actually trust.

The fact of the matter is, there is nothing for free in this world. Either they are trying to gain your business by selling you an annuity or they are going to sell your contact information for $20 to $50 a lead to other brokers. Some of these sites, you know who you are, copy other websites, this one included, and make claims that are false.

Annuity IQ is not free because we do not try to sell you an annuity. We do not sell your information, ever! We have no hidden agenda, as a matter of fact Annuity IQ is one of the few sites that actually tells you who runs the site, ME! Many other sites do not tell you who they are and simply tell you to contact them, with your information, to find out who they are…I wonder why that is?

I am writing this because I am about to launch a new web page that will go over the internet, annuities and you. These sites are not my competition, as a matter of fact I am friends with a person who works for one of these websites, but we do not have any business relationship with each other. I want to keep my work pure and consumer and broker based so you get good information without the fear of a sales call.

Some of my free information does require you to provide your name and email address. I do this so I can track who is requesting information, their location and I can identify who my viewing base is, consumers or brokers. In other words I take this information for marketing purposes only and rarely, if ever send out mass emails and I never sell the information, as laid out in my privacy policy.

So, here are some signs that you are on a website designed to sell you an annuity or some pie in the sky information:

All the ‘Contact Us’ forms involve you giving your contact information such as your name telephone number, address, state, etc.

You are getting a sales kit for ‘free’, providing you give the information requested as listed above.

They tell you that they are licensed, but do not give you their names or the firm they work with on the website.

They ask how much money and when you want to invest in an annuity product.

The website has no more than one page and it is a mile long. This is known as a ‘squeeze’ page and is designed to sell you information or get you to sign up for a free newsletter. Also, the claims they make are all emotional and the product usually sells for $47, $67 or $97 dollars.

They provide you with ‘ratings’ on variable annuity contracts. Annuity IQ is the only ratings website on the internet that actively reviews and rates variable annuities. Others use it as a gimmick.

They claim to have never had a customer complaint against them. I just found a new website that makes that claim and the person who runs the site has two settlements against him and the owner of their broker/dealer, a family operation, has 12 complaints against him.

10 years investment experience does not mean 10 years experience as a financial advisor. The same firm mentioned above has two people with over 10 years experience, the rest only have a couple years experience. I am sorry but an UGMA account or a savings account that you have had for 10 years does not count as investment experience.

They have a top annuity that ‘stands out’ over the rest of the variable annuity contracts they ‘track’. Under no circumstances does one contract issued by a single company meet everyone’s needs. Also, there could be a financial reason that that contract is ‘the best’, the commission is high or they are getting marketing dollars for supporting that product. This is not always the case, but you would be surprised how often it happens.

If they have a 1-800 number and are showing you variable annuities, they are brokers trying to sell products to you.

Like I said before, there is no such thing as a free lunch and real information is rarely free, especially for annuities. You can find free mutual fund information, but we pay for the Morningstar report. We pay for that report because we know Morningstar does not care about the mutual fund firm and are unbiased. We pay for that information because it can be trusted. This is why Annuity IQ information is not free, we do the same thing, just with variable annuities.

There are certainly a lot of anti-annuity financial writers around, but there is one who is totally anti-Annuity. That would be Mr. Burns who writes for a newspaper in Texas. Now, I do not disagree with everything Mr. Burns writes about, but I do disagree with a fair amount of his advice.

Yesterday, Mr. Burns compared management fees to paying taxes in qualified plans. The problem is he is comparing apples to oranges and management fees should never be compared with taxes. A management fee is paying for the fund management and in the case of annuities the guarantees that the annuity provides. While taxes go to the government and funds the nation’s Federal Budget.

In a nut shell Mr. Burns says that paying taxes is not as bad as high expenses, but he used qualified retirement plans as his example. I do not understand why he used qualified plans for his example, but I am not a rocket scientist and he is. In my opinion he should have used taxable accounts to make his comparison, but that would not have made his story or numbers work.

He uses figures that show total amounts paid to the money manager over years and compares them to the current tax rates. He basically extrapolates out money managers and annuity fees over a period of years to make his case, I guess he does not realize that taxes have to be paid annually not every few years, clearly this is not a level headed example.

Mr. Burns then uses 403 (b) and 401 (k) with broker sold mutual fund management fees as an example of higher fees. These qualified investments are not taxed until money comes out so I am still lost as to why he is comparing management fees of these investments to paying taxes. I am also aware that cheaper 401 (k) plans are a must in today’s society and that is fine, but that is no reason to not do a fair comparison.

So, let us reexamine his comparison using realistic accounts, taxable accounts. According to Mr. Burns mutual funds are far superior to variable annuities because of the long term capital gains tax is at 15%. If all we paid was capital gains tax on mutual funds I would have to agree, but we pay much more than 15%. You will receive 4 distributions from mutual funds every year.

1. Short term capital gains – the bulk of your distribution will be short term distributions and they are taxed at your ordinary income tax rate.

2. Long term capital gains distributions – these are taxed at 15% and generally make up a smaller portion of your annual distributions.

3. Dividends – these are paid out quarterly, usually but sometimes monthly or annually, and are taxable, but they make up the smallest portion of your distributions.

4. Capital gains tax, part two- when you sell your mutual fund you will have to pay taxes on the appreciation of the shares of the mutual fund. This would be added on to of the distributions that you have already paid taxes on. If you bought your mutual fund shares at $10 per share and sold them 20 years later at $20 per share you would owe taxes on the difference.

Now, according to two studies, mentioned here before, the average investor looses between 2.5% and 5% of their total return due to paying taxes on these distributions. When we add in another 1% for management fees you may be loosing between 3.5% and 6% of your total return due to taxes and fees.

Compare that to a variable annuity where you will pay 2.5%, including fund expenses, and you tell me which is more. I am not a rocket scientist unlike Mr. Burns who is one, but 2.5% is less than 3.5% and is definitely less than 6%. You should also know that the 2.5% variable annuity charge also guarantees you a stream of lifetime income that can go up over time.

For Mr. Burns to use qualified accounts as an example is bogus and absurd to say the least. He also uses compounded numbers over time and reduces the management fee to a percentage of your total return making it sound like they are robbing you blind. Look behind his numbers and you will see them for what they are, a sham.

Especially considering he shows the management fees compounded over a 40 year period of time and then says; ‘This is far more than the 35% federal tax rate’ what a joke. Mr. Burns TAXES ARE PAID ANNUALLY, not every 40 years! How can you compare a number compounded over 40 years to annual taxes is beyond me, but I digress.

Every time Mr. Burns does his rant and rave about annuities he forgets to mention the living benefits they offer or, on the rare occasion he does mention them, he misrepresents the living benefits offered. Every time he does this he shows his ignorance on how these products work. Instead he is reduced to showing this type of example, a qualified account and comparing management fees to paying taxes? Come on give me a break.

On the brighter side of things he did blow a hole in the anti-annuity crowds argument that variable annuities can cause increase your tax rate to 35% when you take withdrawals. In his first couple of paragraphs he tells you that the marginal tax rate of 35% means you needed income of $349,700 in a given year. Most Annuity owners will not retire with $349,700 in income so it is unlikely they will ever pay 35% on their annuity withdrawals. Sorry for sounding so angry, but a person can only take so much.