Annuities Celebration Fixed Index Annuities Retirement Income Planning

Retirement Income Visions Celebrates 3-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its three-year anniversary. Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post on August 16, 2009, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Just ask anyone who retired just prior to, or during, this period that didn’t have a retirement income plan in place when he/she retired.

With increasing life expectancies, record-low interest rates, traditional pension plans going by the wayside, soaring health and long-term care costs, and the potential for inflation, retirement income planning is no longer an option. It has become a necessity for anyone who wants to ensure that he/she will have sufficient income to meet his/her expenses for the duration of retirement. Recognizing this fact, The American College launched its Retirement Income Certified Professional™ (RICP™) program earlier this year in which I was one of the first enrollees.

Since its inception, Retirement Income Visions™ has used a themed approach, with several weeks of posts focusing on a relevant retirement income planning strategy. This year was no exception. The weekly posts, together with the customized Glossary of Terms, which currently includes definitions of 137 terms to assist in the understanding of technical subject matter, has contributed to a growing body of knowledge in the relatively new retirement income planning profession.

While the first two years of Retirement Income Visions™ presented a variety of retirement income planning strategies, fixed index annuities, or “FIA’s,” have been the sole focus of virtually every weekly post for the past 13 months. Continuing a theme that began on July 11, 2011 during the second year of publication with Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, the inner workings of FIA’s, including their unique benefits as a retirement income planning solution, has been discussed in detail. As a result, Retirement Income Visions™ has become an authoritative source of information on this important and timely topic.

Although FIA’s has been the theme of almost every post for over a year, the posts have been organized by a number of sub-themes. Following the July 11, 2011 post, the introduction to the FIA strategy continued with the next five posts, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities (July 18, 2011), Limit Your Losses to Zero (July 25, 2011), Do You Want to Limit Your Potential Gains? (August 1, 2011), When is the Best Time to Invest in Indexed Annuities? (August 8, 2011), and How Does Your Fixed Index Annuity Grow? (August 22, 2011).

The next twelve posts, beginning with the August 29, 2011 post, Indexing Strategies – The Key to Fixed Index Annuity Growth, through the November 14, 2011 post, How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines, presented a thorough discussion of the various traditional fixed index annuity indexing strategies. This included an introduction to, and comparison of, the following indexing methods: annual point-to-point, monthly point-to-point, monthly average, trigger indexing, inverse performance trigger indexing, as well as the fixed account that’s included as one of the strategy choices by virtually every FIA.

Moving beyond the base product, the subject of the next nine posts was an introduction to the income rider that’s offered by many FIA’s. The income, or guaranteed minimum withdrawal benefit (“GMWB”), rider is the mechanism for providing guaranteed (subject to the claims-paying ability of individual life insurance companies) lifetime income with a flexible start date that is essential to so many retirement income plans. This kicked off with the enlightening December 5, 2011 and December 12, 2011 posts, No Pension? Create Your Own and Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck. The introduction to income rider series also included two two-part series, Your Fixed Index Annuity Income Rider – What You Don’t Receive (December 19, 2011 and December 26, 2011) and 5 Things You Receive From a Fixed Index Annuity Income Rider (January 9, 2012 and January 16, 2012).

Following two posts introducing fixed index annuity income calculation variables on January 23, 2012 and January 30, 2012 (10 Fixed Index Annuity Income Calculation Variables and Contractual vs. Situation Fixed Index Annuity Income Calculation Variables), a five-part series ensued revolving around a topic often misunderstood by the general public — premium bonuses. The posts in this series included 8 Questions to Ask Yourself When Analyzing Premium Bonuses (February 6, 2012), What’s a Reasonable Premium Bonus Percentage? (February 13, 2012), How Will a Premium Bonus Affect a Fixed Index Annuity’s Value? (February 20, 2012), How Will Withdrawals Affect Your Premium Bonus? (February 27, 2012), and How Will a Premium Bonus Affect Your Fixed Index Annuity Income Distribution? (March 5, 2012).

The next five posts delved into the inner workings behind the variables and interaction of variables behind the calculation of income withdrawal amounts from FIA income riders. This included the following posts: Income Account Value vs. Accumulation Value – What’s the Difference? (March 19, 2012), How is Your Fixed Index Annuity’s Income Account Value Calculated? (April 2, 2012), How Much Income Will You Receive From Your Fixed Index Annuity? (April 9, 2012), and a two-part series, Don’t Be Fooled by Interest Rates – It’s a Package Deal (April 16, 2012 and April 23, 2012).

When Should You Begin Your Lifetime Retirement Payout? was the subject of a two-part series (May 7, 2012 and May 14, 2012) followed by another timing question, When Should You Begin Investing in Income Rider Fixed Index Annuities? (May 21, 2012).

The May 28, 2012 through June 18, 2012 four-part series, Fixed Index Annuity Income Rider Similarities to Social Security, was a well-received and timely topic. This was followed by a second five-part comparison series beginning on June 25, 2012 and continuing through July 23, 2012, FIA’s With Income Riders vs. DIA’s: Which is Right for You?

The last two weeks’ posts have addressed the topic of valuation of a FIA’s income rider stream. This included the July 30, 2012 post, What is the Real Value of Your Fixed Index Annuity, and the August 6, 2012 post, Why Isn’t the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement?.

As I did in my August 9, 2010 and August 15, 2011 “anniversary” posts, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback and inspiration. Last, but not least, thank you to Nira, my incredible wife, for her enduring support of my blog writing and other professional activities.

Annuities Fixed Index Annuities

How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines

Last week’s post, Don’t Neglect Your Fixed Index Annuity Fixed Account, made the point that you’re not guaranteed to receive interest crediting with the majority of fixed index annuity indexing methods due to the fact that interest is only credited when the result of the calculation is positive. Per the post, one way to obtain interest crediting in the event of negative performance of your chosen index or indeces, is to allocate a portion, or perhaps all, of your fixed index annuity to the fixed account.

Per last week’s post, to the extent that you choose the fixed account, you will receive three benefits unavailable from traditional indexing methods: (1) guaranteed return, (2) pre-determined return, and (3) opportunity to offset a portion or all of an income rider charge in the event of a negative indexing method return. While the predetermined annual return is generally very favorable to that of a one-year CD, it is nonetheless modest, typically in the range of 1% to 2% these days.

Recognizing the fact that (a) the performance of traditional indexing methods, e.g., annual point-to-point cap, monthly point-to-point cap, and monthly average cap, can be negative and result in no interest crediting and (b) fixed account returns, while positive, are currently low, two life insurance companies have introduced an indexing method that favors negative stock market index performance. The method is called the inverse performance trigger.

Currently available through the Midland National Life MNL Endeavor and North American Performance Choice fixed index annuity series, with six and four different products, respectively, interest crediting of pre-determined specified percentages will occur when the performance of the stock market index associated with the inverse performance trigger indexing method is zero or negative. North American’s Performance Choice series inverse performance trigger uses the S&P 500 annual point-to-point cap method to measure performance. Current annual interest crediting for its four products, which ranges between 2.5% and 4.6%, is almost identical to its traditional annual point-to-point interest crediting amounts.

To demonstrate the inverse performance trigger indexing method, let’s suppose that you purchased a fixed index annuity on October 1, 2010 that offers the inverse performance trigger tied to the S&P 500 annual point-to-point cap method as one of its indexing method choices. Let’s further assume that you allocated 100% of your contract to this selection. In order to determine whether you would receive the predetermined interest crediting on your contract anniversary on September 30, 2011, you need to compare the S&P 500 price on September 30, 2011 to October 1, 2010. If the price on September 30, 2011 is less than or equal to the price on October 1, 2010, you will receive the specified interest crediting.

In our example, the price of the S&P 500 on September 30, 2011 was 1,131.42 and on October 1, 2010 it was 1,146.24. Since the September 30, 2011 price was less than the October 1, 2010 price, interest would be credited. It makes no difference that the price on September 30, 2011 was only 14.82 points, or 1.3%, less than the price on October 1, 2010. The full amount of interest would be credited to your fixed index annuity contract.

Given the fact that (a) traditional indexing methods can result in no interest crediting in a particular year and (b) fixed account returns are currently low, I would expect to see more fixed index annuity products offer the inverse performance trigger as one of their indexing method choices.

Annuities Fixed Index Annuities

Monthly Average vs. Monthly Point-to-Point Fixed Index Annuity Indexing Method

We continue our miniseries about fixed index annuity indexing methods that began on September 12th with a discussion of the monthly average indexing method. The previous two posts, What’s the Point-to-Point? and Monthly vs. Annual Point-to-point Fixed Index Annuity Indexing Method introduced the annual and monthly point-to-point methods, respectively.

In order to help you understand the monthly average indexing method, we will compare it to the monthly point-to-point, or monthly sum crediting method as it is otherwise known. Per last week’s post, there are three steps associated with the latter method that are performed each contract year:

  1. Calculate twelve monthly percentage changes in selected stock market index.
  2. Apply the product’s cap rate to each of the twelve monthly percentage changes.
  3. Add the twelve monthly capped percentage changes together to determine the annual interest amount to be credited.

As with all indexing methods, if the result of step #3 is 0 or negative, no interest is credited during that contract year.

There are four steps used with the monthly average indexing method as follows, with the first step identical to the monthly point-to-point method:

  1. Calculate twelve monthly percentage changes in selected stock market index.
  2. Add the twelve monthly percentage changes together.
  3. Divide the total of step #2 by twelve.
  4. Apply the product’s cap rate to the result obtained in step #3.

The best way to illustrate the monthly average indexing method is with an example. Exhibit 1 shows the monthly prices for the 16th of each month beginning September 16, 2010 through and including September 16, 2011. This is the exact time period that was used to produce Exhibit 1 in last week’s post. Using the monthly prices, the dollar and percentage changes are calculated and shown in the next two columns, respectively.

Unlike the monthly point-to-point cap method that applies a cap rate to each of the twelve monthly percentage changes, the changes are simply added together to arrive at total monthly percentage changes. The total is then divided by twelve to arrive at an average percentage change. In this example, total monthly percentage changes of 9.2% is divided by twelve to arrive at an average percentage change of 0.8%. Since 0.8% is less than the assumed cap rate of 4%, the amount of interest credited for the contract year is 0.8%. Once again, if the result was 0 or negative, no interest would be credited.

Per Exhibit 1, even though nine out of twelve months experienced positive changes, with 3% or greater changes for six of the nine months, the sizeable negative changes (5.9%, 4.7%, and 9.4%) for the three negative months offset a large amount of the positive changes to result in a relatively small average monthly change of 0.8%. Although not a significant amount, it’s nonetheless greater than the interest of 0% that would have been credited using the monthly point-to-point cap method for the identical time period per Exhibit 1 of last week’s post. Assuming an accumulation value of $150,000, the amount of interest that would be credited using the monthly average indexing method would be $1,200 ($150,000 x 0.8%).

Of the three methods presented in this post and the previous two posts, the annual point-to-point method would have resulted in the highest interest crediting for the contract year beginning September 16, 2010 through and including September 16, 2011. Per the example in the September 26, 2011 post, What’s the Point-to-Point?, the assumed cap rate of 4% would have been the amount of interest credited using the annual point-to-point method. Assuming an accumulation value of $150,000 the amount of interest that would be credited using this method would be $6,000 ($150,000 x 4%).

As stated at the conclusion of last week’s post, it’s important to keep in mind that no indexing method is always going to be superior to another. Each method will result in different interest crediting depending upon market performance during a particular contract year as well as the cap rates associated with each product.