It’s essential not to make emotional decisions during a time of economic volatility. The key to a successful retirement is sticking to a tested plan that includes tactical management strategies. This week on the Active Wealth Show, Ford breaks down how to fight inflation and volatile markets. If you are interested in getting a complimentary portfolio review, you can reach The Active Wealth Team and Ford at ActiveWealth.com or by calling Ford at 770-685-1777.
Request your free copy of Annuity 360: www.Annuity360.net
Schedule a conversation with Ford now: ActiveWealth.com
Watch more episodes: www.ActiveWealthShow.com/podcast
AWS #130 Transcript: Audio automatically transcribed by Sonix
AWS #130 Transcript: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Producer:
Are you concerned about US tax rates being raised by the Biden administration and how that will affect your retirement? Tune in to the Active Wealth show with Ford Stokes, your chief financial advisor, to learn how you can reduce the taxes you pay before and during retirement. The Active Wealth Show Saturdays at noon and Sundays at 11 a.m..
Executive Producer Sam Davis:
Registered Investment Advisors and Investment Advisor representatives act as fiduciaries for all of our investment management clients. We have an obligation to act in the best interest of our clients and to make full disclosure of any conflicts of interest. If any exist, please refer to our firm brochure, the ADV to a page four for additional information.
Producer:
Welcome to the Active Wealth Show with your host. Ford Stokes Forde is a fiduciary and licensed financial advisor who places your needs first. He’ll help you protect and grow your wealth. The Active Wealth Show has grown because activators like you want to activate their retirement planning with sound tax efficient investing. And now your host Ford Stokes.
Ford Stokes:
And welcome the Active Wealth Show activators. I’m Ford Stokes Chief Financial Advisor. I’m joined by Sam Davis, our executive producer. And we’ve got kind of an action packed and timely show. In case anybody’s wondering. We’ve had a little bit of market volatility. We know, and we’re going to cover a lot of that today. On today’s show, we’re going to talk about the reasons for inflation. We’re also going to have a vignette, a news article from Matt McClure, our retirement radio reporter on cryptocurrency. I think you’re going to find that really interesting. We’ll do that right after this introduction. And we’re going to also talk about what some people are doing with self-directed IRAs and why there are some concerns about people doing some of that stuff. And then also just specifically diving into. You know, inflation, what’s causing it, but also what does inflation mean when what does it mean when inflation takes care of inflation? And and also some solutions on what to do about this market volatility and things you can actually start doing right now. So, Sam, go ahead and play the vignette from the news article from Matt McClure with retirement ready that he was covering cryptocurrency.
Executive Producer Sam Davis:
I’m Matt McClure with the Retirement Radio Network Powered by a Life. If amusement parks are your kind of thing, roller coasters can be fun. But when it comes to investing for retirement, not so much. One of the most volatile investments around is cryptocurrency. That means, sure, there’s some potential upside, but is it worth taking a ride on the crypto coaster? First. What is crypto anyway? The website Investopedia defines it this way. A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities. Bitcoin was the first such currency out there, so it’s been the most talked about and faced the most scrutiny. Like anything in life, crypto has its advantages and disadvantages, while it offers a faster and cheaper way to transfer money. Its value is highly volatile. The technology has gotten some blowback from both sides of the political aisle. One of the most vocal critics has been Democratic Senator Elizabeth Warren of Massachusetts.
Ford Stokes:
Unlike, say, the stock market, the crypto world currently has no consumer protection.
Executive Producer Sam Davis:
None. Republican Senator Pat Toomey, ranking member of the Banking Committee who generally supports the industry, also acknowledges there are issues with crypto.
Ford Stokes:
Now, it’s important to note that many people have raised legitimate issues about cryptocurrencies. These include their use in illicit activity and the possible effects on monetary policy and our existing financial infrastructure.
Executive Producer Sam Davis:
But what do big time investors have to say about cryptocurrency? Here’s Warren Buffett speaking at a recent Berkshire Hathaway shareholder meeting. Now, if you told me you own.
Producer:
All of the Bitcoin in the world. And you offered it to me for $25. I wouldn’t take it because what would I do with it?
Executive Producer Sam Davis:
Still, cryptocurrency has legions of fans who swear by it and enjoy riding the daily roller coaster. So are you willing to risk your hard earned and hard saved money in a volatile cryptocurrency market? That’s a key question to consider as you invest in your future with the Retirement Radio Network Powered by Omaha Life. I’m Matt McClure.
Ford Stokes:
I think that’s a great piece. Talking about the crypto coaster, the crypto rollercoaster that many folks, especially the younger folks, want to be on. Also, if you’re a retiree or a retiree and you’ve got kids and grandkids that are all about cryptocurrency and trying to convince you to put some of your hard earned money into cryptocurrency, please don’t please keep that money into invested into the markets or into equities or bonds or. Fixed index annuities or commodities or a structured oat ladder or things like that, please, just or even bank CDs or even leaving it in your checking account. I also go back to what Warren Buffett’s partner, Charlie Munger, says. He just says he believes that Bitcoin and other cryptocurrencies are immoral because you’re you’re really trying to prey on the next person that’s going to buy it. And and he prefers to go long strategy and own real companies that generate real net revenue and profit and EBITDA and and they employ employees and do all kinds of things. And so those are the things that we like to invest in. So it is helpful because I get this question quite a bit about cryptocurrency and should we include that also, we’ve seen some self-directed IRAs in the cryptocurrency market crop up, and we’ve even seen one of those go completely. Bluey That’s a technical term for basically the the net asset value that was invested, the principal is invested in that was actually evaporated.
Ford Stokes:
And for some clients in Florida that, you know, I’ve been privy to some other financial advisors in Florida were telling me about it. And so be very careful about any type of self-directed IRA. I would encourage you to work with a financial advisor like us to help you protect and grow your wealth. Folks that are held a fiduciary standard that need to put your interest ahead of their own. And one of those examples is a real estate self-directed IRA. Let’s say you like to hunt or you like to camp or whatever, and you want to take part of your 41k or IRA and and put it into a self-directed IRA and pay cash or whatever that that property is. And then that stays within your IRA. And then when you go to when you turn 72 years old, you’re going to have to either sell that asset and and start taking distributions from it, which will be problematic as well. But also those assets could go down over time. And we’re probably going to address this with some real horror stories out there with real estate based, self-directed IRAs, especially when, you know, rents have decreased since the onset of COVID, with a lot of people not wanting to go back to work.
Ford Stokes:
We see significant vacancies and in commercial buildings. I mean, there’s even vacancies in our in our the King Queen building where our office is that we’ve had to lobby tenants that have been those offices have been emptied for empty for two years. And they just now filled one of those two offices and leased that out. But you’re talking two years of 80% of our floor not being rented. And so that deeply affects the performance of a read or a performance of real estate holdings that are connected to self-directed IRA. So be careful about some of that stuff too. So. One of the things that people are talking about, obviously, is inflation. And one of the things I keep hearing is, you know, inflation takes care of inflation. And really, what does that mean? So as a result of inflation, the purchasing power or value of the money decreases over time. This is the definition of inflation. Inflation affects the prices of everything around us. Generally speaking, inflation can be caused by a number of factors. We’ll talk about those factors that are affecting us right now when we come back right after the break. But key takeaways. Governments can use wage and price controls to tighten inflation, but that can cause recession and job losses. Governments can also employ a contractionary monetary policy to fight inflation by reducing the money supply within an economy via decreased bond prices and increased interest rates.
Ford Stokes:
So really, what’s the solution here? One is you want to stay invested because you need your money to grow at the pace that the that the market grows. And that inflation grows. Because if you don’t if you bury in the backyard and a bunch of different coffee cans, you get out the metal detector to go find some some of the metal coffee cans when you want to make a withdrawal and pay for some stuff and buy a new lawnmower or something or buy some groceries. You’re that money’s not going to grow. It’s you know, it’s not going to grow in your backyard. If you if you pour water on it, it’s just not going to grow. And so you need the money to grow at the pace at least of what inflation is growing. Social Security Administration in October came out with a 5.9% cost of living adjustment. Your money’s got to grow, at least at that level of last year. And most folks did did well, and obviously our clients did as well. You’ve got to stay invested. The other solution is consider some sort of bond replacement. And we’re going to play a chapter of bond replacement here in segment four from my book Annuity 360.
Ford Stokes:
And you get that book at Annuity 360 net, that’s annuity 360 net. Put your name, email, phone, mailing address, email address in there and we’ll get the book right out there to you. But one of the other solutions, which is invest in a fixed indexed annuity and or a structured note ladder. And on next week’s show, we’ll talk about a structured note ladder. We’re not going to talk about it today, today on this show, but we’ll talk about it next week. But today, we’re going to talk about fixed index annuities as a bond replacement option because, you know, bonds right now are down ten plus percent for the year because of rising interest rates. So if you held bonds in December of of last year, that bond is worth less because new bond prices are higher and your your bond is less attractive to purchasers of bonds. So when we come back from the break, we’re going to talk more about this fixed indexed annuity stuff and how that could replace some of the bonds and also replace some of the market volatility you’re seeing and also delete some of your advisory fees and portfolio fees. We’re so glad you’re with us. Thanks for listening. And we’ll be right back. You’re listening, Active Wealth Show, right here on AM 920. The answer.
Producer:
Listen to the number one show on the weekends on AM 920. The Answer to Protect and Grow Your Hard Earned Money. The Act of Wealth Show with Ford Stokes your Chief Financial Advisor, Saturdays at 12 noon and Sundays at 11 a.m..
Executive Producer Sam Davis:
Fixed annuities, including multiyear guaranteed rate annuities, are not designed for short term investments and may be subject to restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.
Ford Stokes:
All right. Welcome back to the Active Wealth Show Activators on Ford Stokes, your chief financial advisor. And I’ve got Sam here with me. So let’s talk about real quick on inflation. What’s pressuring the markets, what’s driving up inflation to, you know, obviously we’ve got the crisis in Ukraine. That’s what’s pressuring the markets. You’ve got Russia invading Ukraine. You’ve also got central bank tightening and they’re going up 50 basis points with every meeting. You’ve also got lockdowns in China that are affecting production, actual production of goods, and then you’ve got recession worries in Europe. And by the way, Europe, when they’re going great, there’s 2% growth. When they’re going bad, it’s negative growth. And then US midterm elections coming up. That’s a concern. Supply chain disruption. We’ve seen a lot of that. If anybody’s got kids or grandkids, they’ve got young babies in the family. You know, there’s a huge shortage of baby formula. You’ve also got weakness in the Japanese. Yen is also pressuring markets. You’ve got a multi decade. High inflation. So it’s literally the highest inflation rates we’ve seen in multiple decades. And you’ve got high energy and food prices, which obviously when you’ve got high gas prices, that doesn’t help. And unfortunately, the current administration is not doing anything about the energy crisis because they want everybody to go out and buy a Tesla, as Pete Buttigieg said. You know, thank you very much. One, I don’t think every family can afford a 72 $90,000 car.
Ford Stokes:
And next is, are you aware that there’s a whole lot of coal fired electrical plants that actually are the number one type of plan out there. And it’s the carbon footprint on those is crazy compared to. Other options. And then you’ve got, you know, food prices are just runaway freight train. I mean, chicken keeps going up because chicken is usually extremely inexpensive and the price of chicken is skyrocketing. And that’s what a lot of people eat. And that’s the protein of choice for a lot of people. The price of beef has gone up, the price of fish has gone up because also the price of shipping, all that stuff has gone up. So those are the things that are pressuring the markets. So. What can we do about it? Well, one is we want to generate income and also get market like gains without market risk. And I want you to listen to this chapter on how you can generate your own personal income, because I think it’s really important because a lot of people don’t realize that they can generate their own personal income, less than 16% of all Fortune 500 companies. Actually provide a pension. And so what I would encourage you to do is consider generating your own personal pension. Also, if you are about to take your own personal pension, you’re trying to figure out whether you’re going to take a lump sum or not. We have fixed indexed annuity products that offer 10% bonus and immediate bonus on those on the money you invest.
Ford Stokes:
And so. Let me ask you, is it a good idea to just make an immediate 10% bonus on your your pension lump sum and then start income? I think so. I think it’s something to consider. So. Go ahead and check out Chapter nine from Annuity 360. And again, you can get my book Annuity 360. We’ll send you a hard copy, free hard copy of the book at Annuity360.net. Just put your information in and we’ll send you a hard copy of the book. Thanks so much, so much for listening to us on the Active Wealth Show and thanks for being supporters of the Active Wealth Show and my book Annuity 360, Chapter nine. You can create your own personal pension. Big idea. Using an annuity to create a personal pension helps you create a lifetime income stream, but it also helps you leave a legacy for your beneficiaries. All annuities can create annuity income to supplement the income you need before or during retirement. Those who are approaching retirement are afraid that they will run out of money. But an annuity can help make sure you have an income you can never outlive. An annuity can be a great investment for your portfolio, but encourage you to be careful that you don’t overpay for your annuity. When you put your money into an annuity, the annuity company will pay you your money back at a date.
Ford Stokes:
You specify you don’t want an annuity company to charge you too much to simply pay your money back to you. I’m confident that leaving a remarkable family legacy is important to you. You likely want to have money left over when you pass away to leave your beneficiaries. The goal of a personal pension is to generate lifetime income with no risk that grows your money and allows penalty free withdrawals. An annuity can create a lifetime income with market like gains and no market risk, while also allowing you to build enough wealth to leave for your beneficiaries when you pass away. Don’t give the annuity company fees for doing nothing. We prefer fixed indexed annuities for our clients that do not have an income rider fee. But you can still create a personal pension without an income rider on your annuity. If you get an annuity with an income rider but don’t utilize the features of that income rider, then you are not getting what you paid for. You are literally just paying the annuity company 1 to 2% each year. You defer annuities in your annuity without receiving a single benefit for that annual fee. This income rider fee will also draw down your account value or principle, depending on how that index is performing. The growth on your entire account value could be significantly and negatively impacted. Some accumulation focused annuities are built to deliver increasing payments without an income rider.
Ford Stokes:
You should consider the features your income rider is providing you before deciding to purchase it as an add on. Make sure you utilize the features you are paying for more ways to get the most out of your annuity. The longer you wait to turn on the annuity, the more you’ll receive in annual payments. This is because your annuity will spend a longer time in the accumulation phase, meaning it will spend more time building up your account value. Your annual payments will grow as your account value grows. Believe it or not, you can generate your own personal pension by distributing no more than 5% a year with penalty free withdrawals. From your accumulation based annuity policy, many accumulation annuities are set up to be RMD friendly, so you won’t suffer a penalty when you have to take your RMD. It would be silly for you to be penalized for something you are required to do. Annuity companies take this into account by creating products that make taking your RMDs easier. Inspect what you expect with any annuity. Don’t just go with what the annuity agent or advisor tells you. Read it for yourself. Specifically, you should read the annuity illustration guaranteed and non guaranteed tables included within the annuity illustration. Also, please remember that annuity policy is a contract between you and the annuity company, so caveat emptor or buyer beware applies here. Be aware of the annuity you are buying and choose an annuity that works best for you.
Ford Stokes:
They will help you build a successful retirement and they’ll offer you peace of mind. Whether you choose to generate income through penalty free withdrawals or invest annually in an income rider, know the consequences of both. This is a decision you will make at the beginning of the investment process. One poor decision here can cost you 1 to 1 and one half percent of annual growth over a 30 year retirement. This could come out to be a significant loss. Educate yourself on your options and the specifics of each option you are considering. Making the right decision up front will save you a lot of frustration in the long run. Also, please remember that if you withdraw too much annually, say 10%, you will run out of money in 10 to 12 years. Make sure that you’re working with an advisor who can help you choose the appropriate withdrawal amount so that your money lasts for your entire lifetime. As discussed above, we recommend no more than 5% be withdrawn each year from your account. Likely you didn’t realize that you could actually generate your own personal income, your own personal pension during your retirement years that you can never outlive. And you can do that with the right type of fixed indexed annuity also if you’re looking to take pension income. Want you to know the product behind that is called a single premium immediate annuity.
Ford Stokes:
Those products are really good at giving you your money back, paying you your money back. They’re not very good at growing your money because they’re also not linked to market indices and you need market like growth over time so your growth can outpace your withdrawals so that 20 years later, after you started taking income from your annuity, which what they call annuity, using your annuity, that just means you start. You turn on the income. That we don’t want that account value to go to zero. So your heirs have nothing to to get it. They have nothing to inherit. So we try we like to invest in accumulation based annuities. That do not carry an income rider fee. We also like to delete the advisory fee in the portfolio fees with a fixed indexed annuity, at least that portion of it. And we recommend investing in 20 to 40% of your portfolio into a fixed indexed annuity to diversify. Your risk and take the income that you really need during retirement. Take market risk off the table for that portion of your portfolio. And enjoy the income from it. And granted, that money grows tax deferred. When you take out withdrawals from that fixed indexed annuity, you do need to pay ordinary income tax on the money you withdraw. But at the same time, your money is growing, tax deferred and it’s building up account value. The longer you defer to the payment, you don’t take out actual withdrawals or you don’t turn on income.
Ford Stokes:
So that’s something to definitely consider. We just felt like it was important to share because so many people don’t know about it and they’re looking for places of safe harbor, if you will, during this volatile market time. I mean, even the skilled captains of small vessels seek safe harbor during a storm. And we’ve seen a lot of market volatility, especially in the last week. We’ve seen a market downturn this year. This is one of the worst starts of any market year. In history. And it’s and it’s it’s been like that. At least it’s one of the worst market years since 2011, the start of over a decade. This this this four or five month start here. So something to consider is trying to figure out other alternatives to what you’re doing with your bonds when bonds are down as well. And we come back for the break. We’re going to play chapter one for my book in 8360. We want to we want to share with you the type of annuity that might just be just right for you. It’s got a lot of really good support materials as well in there. And I think you’re going to like that chapter a lot, right? We come back to the break in segment three. You’re listening Active Wealth Show right here on AM 920, the answer.
Ford Stokes:
Chapter one Why you should consider investing some of your hard earned wealth into a fixed indexed annuity. Big idea. Protect your hard earned wealth with annual point to point protection periods that lock in your gains each year. A fixed indexed annuity can help you do the following with your wealth. Number one, protect your money from market loss. Fixed indexed annuities offered by highly rated annuity carriers did not lose a dime in account value in 2000, eight or 2009. During the worldwide recession caused by the mortgage loan crisis that resulted in the S&P 500 losing 50.1% of its value from March one, 2008, to March 31, 2009. Number two Grow your money with market like gains. Typical annual growth of 5 to 7%. Number three, generate a lifetime income. Your retirement will likely last 30 plus years. It might be a good idea to place some of your assets into a fixed indexed annuity, to set a safety net around a portion of the retirement income that you wish to generate. Number four, eliminate market risk associated with bonds by replacing the fixed income bonds in your portfolio with a fixed indexed annuity. Number five, eliminate the advisory fees you’re currently paying to generate fixed income with bonds in your portfolio by replacing them with fixed index annuities. The annuity companies pay the advisor you don’t. This is called a bond replacement. If the above fixed indexed annuity benefits sound appealing to you, then I invite you to listen to the rest of this book and ultimately invest a portion of your hard earned wealth into a fixed indexed annuity to build a successful retirement.
Ford Stokes:
For more important information on annuities beyond this book. I also invite you to visit our website. Annuity 360 net. Let’s consider a $100,000 investment in the S&P 500 versus a 100,000 investment in a fixed index annuity with a 50% participation rate in the S&P 500 from 2000 to 2013. Here’s a hint, folks. The annuity wins from January one, 2000 to December 31st, 2012. The S&P 500 experienced -2.943% growth over those 13 total years. People who retired prior to 2000 experienced zero growth, over 43% of their estimated 30 year retirement. Question. Do you want to live your life during retirement without any growth over 43% of your retirement years? I didn’t think so. Conversely, if you had invested into a fixed indexed annuity with a 50% participation rate in the S&P 500 in January 2000, you would have seen a growth of 65.53%. That’s a significant total account growth difference of 68.473%. Do I have your attention now? This chart shows the power of one year protection periods called annual point to point features. The gains from each year were locked in on each anniversary of the annuity policy effective date when the S&P had negative years. The S&P Spider 500 spy experienced losses in those same years. The fixed index annuity experienced zero losses. This proves that you don’t need double or triple digit gains if you don’t experience losses. In this author’s opinion, every sound portfolio with a smart financial plan includes fixed indexed annuity investments with tactically managed portfolios in hopes to minimize market risk, reduce advisory fees and deliver a reasonable rate of return.
Ford Stokes:
The annuity can also deliver consistent income with or without the added feature of an income rider that also charges fees within the policy. I recommend avoiding income riders. I strongly recommend investing a portion of your hard earned wealth into a fee efficient, accumulation based, fixed indexed annuity with no more than 5% annual penalty free withdrawals to allow your money to grow and to generate important income during retirement. Refer to your audiobook companion PDF that comes free with the purchase of this audiobook. See Chart 1.1 for annuity account growth examples. Green Line, a $100,000 investment into a fixed index annuity showing the net growth of the annuity with a 50% participation rate with zero withdrawals from January one, 2000 to December 31st, 2013. The resulting account value is $190,038 by the end of December 31st, 2013. Redline 100,000 investment into the S&P 500 spider. Ticker symbol SPI. This investment carried 100% market risk with 100% opportunity for market gains. On the performance of the SBE from January one, 2000 to December 31, 2013. The resulting balance of the account is $125,786. Your human capital versus your wealth capital. Human capital is an intangible asset or quality not listed on a company’s balance sheet. You can think of this as an economic value of your work. Your human capital will decrease over the course of your career. Your peak amount of human capital is at the start of your earning years. Whether that be right out of college at 22 years old or at age 30 after completing your advanced degrees.
Ford Stokes:
This is the time where your productivity levels are high and you are contributing to your company’s wealth. You have all of your earning years ahead of you. During this time, you have to protect your hard earned wealth capital. This is not something you can recoup. You can’t go back and relive your prime earning years or the years where your human capital was the highest. There are many barriers to going back to work at retirement age. Unfortunately, age bias is a real issue, especially in certain industries. Those who might have been an engineer during their younger years might be forced to take a retail job to make some extra cash because companies in their field won’t invest in older employees. Many employers focus on what you can’t do when you’re older. Instead of thinking about the experience and the expertize you could bring to a project. You’ll most likely have to rely on your wealth capital during retirement. The idea of losing capital as you go farther in your career sounds a little scary, but you can rest easy knowing that this new form of capital will kick in as your human capital dwindles. As you earn and invest throughout your career, your wealth, capital will grow exponentially. You’ll need this wealth capital for your retirement. So it is important to choose investments that will protect and grow your wealth. Annuities, specifically fixed index annuities can offer you market like gains without the market risk.
Ford Stokes:
Your money never goes below zero. By investing in a fixed indexed annuity, you are taking money out of the Wall Street casino, and we think that’s a good thing. Annuity guarantees like guaranteed lifetime income and the guaranteed growth of your principal are based on the claims paying ability of the issuing annuity company. It’s a good idea to buy annuities from highly rated annuity carriers that are rated by Standard Poor’s and am best. We consider a highly rated annuity carrier to be rated at least a triple B rating by S&P or with a B plus rating by and best. The impact of loss on your portfolio specifically, it can be devastating to your retirement. When we look at market volatility risks, the risk of loss and the potential impact on your retirement income is an important thing to understand. This chart shows the impact of losses on your retirement accounts. If we take a look at an example, let’s say you have an account that is at risk. If you start with 100,000 and lose 20%, you lose $20,000 and you are left with 80,000. If you gain back the same 20%, are you back to even? As you can see in the graphic below. The answer is no. In order to get back to your original 100,000 investment, you would have to gain back 25%. If we add an additional 5% for RMDs, we would now have to gain back 33.3% to get back to even. Understanding this concept is one of the keys to a successful retirement income distribution plan because you no longer have time on your side.
Ford Stokes:
The last thing we want to do is run out of money when we are 90 or 100 years old. How much do you have to gain to make up for a market loss? See Chart 1.2. After reviewing the above chart, I’m reminded of Warren Buffett’s two rules of investing. Number one, never lose money. Number two, never forget. Rule number one, we invest in a fixed indexed annuity with a highly rated annuity carrier that has a high financial solvency ratio. Then it is likely that you will be able to follow Warren Buffett’s two rules of investing. Exactly. You will likely not lose any money with the amount you invest in a fixed indexed annuity offered by a highly rated annuity carrier with a high solvency ratio. A good financial solvency ratio is any solvency ratio over 104%. The solvency ratio expresses financial soundness and a company’s ability to meet policy obligations as they come due. Assets divided by each $100 in liabilities result in a financial solvency ratio expressed in a dollar figure. Assets are bond stocks, cash and short term investments. Liabilities exclude separate accounts. The higher the amount, the stronger the company’s position to cover unforeseen emergency cash requirements. So I hope you enjoy that chapter from my book and 8360. And again, you can get my book absolutely at no cost to you just by putting your information in an annuity. 360 net, that’s annuity360.net with your name, email, phone and mailing address and we’ll will mail you a copy.
Ford Stokes:
There’s also a little bit of a executive summary document that you’ll get as an immediate download. I think you’ll you’ll like that. The one thing I want to say about this chapter is really that last section, the impact of loss on your portfolio is. Enormous and it can be devastating. And listen from the folks who retired in the year 2000 all the way to 2013. They had zero growth. The S&P 500 made $0 zero growth from. In January 2000, all the way till December of 2013. And that is significant. That’s 43% of a 35 plus year retirement. Please, please, please consider getting some market like growth with investing in fixed index news. Also, if you want us to do an annuity x ray report, we’ll do that for you. If you’ve got a variable annuity, we’re happy to help you and analyze the variable annuity. And we might be able to do a 1035 exchange over into a fixed indexed annuity. We come back to the break. We’re going to talk about bond replacement and specifically two strategies that you can start implementing right now to try to combat some of this market volatility and all this stuff we’re seeing in the market with fixed indexed annuity investment or a structured note ladder investment, we’re not going to talk about structure note ladders in earnest today in detail. We’ll talk more about fixed indexed annuity investment, for sure. And we’re so glad you’re with us here on the Active Wealth show on AM 921 on the Answer. We’ll be right back.
Ford Stokes:
Chapter 15 Bond Replacement With Fixed Indexed Annuities. Big idea. Historically, bonds have seen volatility when the market is volatile. Fixed indexed annuities are not subject to the same volatility, which makes them a much safer investment. You might have heard a financial advisor talk about replacing your bonds with annuities to protect your wealth and grow your retirement funds. And my firm Active Wealth Management. We believe this is a smart way to protect your future. Many people have learned that bonds are a safe way to invest your money, but there are some downsides to bonds that should make you think twice. We’ll talk about some reasons why you should consider replacing your bonds with annuities first. Here’s some information on the history of bonds in the United States. Historical bond volatility. The 1900s saw two secular bear and bull markets in US fixed income. Inflation peaked at the end of World War One and World War Two due to increased government spending. The first bull market started after World War One and lasted through World War Two. The US government kept bond yields artificially low until 1951. The long term bond yields were at 1.9% in 1951. They climbed to nearly 15% in 1981. In the 1970s, globalization had a huge impact on bond markets. New asset classes such as inflation protected securities, asset backed securities, mortgage backed securities, high yield securities and catastrophe bonds were created. Early investors in these new asset classes were compensated for taking on the challenge. The bond market was coming off its greatest bull market coming into the 21st century. The bull market in bonds showed continued strength in the early 21st century, but there is no guarantee with our current market volatility that this will hold.
Ford Stokes:
See Chart 15.1 to see the incredible difference of investing in a fixed index annuity versus investing in bonds. Why you should consider replacing your bonds with annuities. The first question you should ask yourself is this Why would you take market risk with your bonds when your bonds can lose their value? If you just look at the history of loan, you can see how uncertain the future of bonds is. Inflation and fluctuating interest rates play a big role in bond yields. Interest rate risk of bonds. Bonds and interest rates have an inverse relationship. When interest rates fall, bond prices rise. Due to the COVID 19 pandemic, investors have moved their money to bonds because they believe it is a safer investment option. However, this has caused bond yields to fall to all time lows. As of May 24, 2020, the ten year Treasury note was yielding 0.64%, and the 30 year Treasury bond was at 1.27%. Reinvestment Risk of Bonds. This is the likelihood that an investment’s cash flows will earn less in a new security. For example, an investor buys a ten year $100,000 Treasury note with an interest rate of 6%. They expect it to earn $6,000 a year. At the end of the term, interest rates are 4%. If the investor buys another ten year note, they will earn 4000 instead of 6000 annually. Consider the possibility that interest rates change over time when deciding to invest in bonds.
Ford Stokes:
Systematic Market Risk. This refers to the risk that is inherent to the market as a whole. It will affect the overall market, not just a particular stock or industry. This can be unpredictable and it is impossible to avoid. Diversification cannot fix this issue, but the correct asset allocation strategy can make a big difference. Unsystematic Market Risk. This type of risk is unique to a specific company or industry. Similar to systematic market risk, it is impossible to know when unsystematic risk will occur. For example, if someone is investing in health care stocks, they may be aware of some major changes coming to the industry. However, there is no way they can know how those changes will affect the market. There are two factors that contribute to company specific risk. Business risk. There are two types of risk internal and external. Internal refers to operational efficiency. An external would be similar to the FDA banning a specific drug that the company sells. Financial risk. This relates to the capital structure of a company. A weak capital structure can lead to inconsistent earnings and cash flow that can prevent a company from trading. Reduced advisory fees. Investors who trade individual stocks may know how much commission they are paying their broker, but individuals who buy bonds often have no idea what type of commission they are paying. Bond dealers collect commission on bonds. They sell called markups, but they bundle them into the price that is quoted to the investors. This means you are unaware of how much commission you are actually paying. Standard and Poor’s estimates of bond markups.
Ford Stokes:
Is 0.85% of the value for corporate bonds and 1.21% for municipal bonds. However, markups can be as high as 5%, up to $50 per bond. Bonds have finite durations. Bonds only provide income for a finite amount of time, unlike an annuity which provides income for life. You must reinvest your money if you want to continue generating interest with bonds. However, reinvesting with a bond can sometimes come at a loss. As we discussed above, annuities will provide you with an income you can never outlive. So that chapter on bond replacement really details out kind of the metric power of it. But I want to be specific that the the graphic that we didn’t talk about in the audio book and by that, you can get my audio book if you want to hear the full audio book, you can just go to Amazon or Audible and download that and listen to it. Bond replacement is really powerful, especially when you’re seeing that bonds have in general decreased ten 11% this year so far. And we’re just in May. What happens when that safe leg of the stool of the portfolio, of the 6040 portfolio, which is all part of modern portfolio theory that Harry Markowitz founded in 1952, which is now a 70 year old strategy, I think there’s an opportunity to do an improved revised version of modern portfolio theory, and in my opinion, it would be 60% stocks, 20% fixed indexed annuities, and 20% into a structured debt ladder to get you greater rates of return. Obviously, structured notes are securities and do involve risk and we’re not going to detail those today.
Ford Stokes:
We’ll talk about that next week. But fixed indexed annuities allow you to get market like gains without market risk. Your money is not invested in the market. It actually is invested into the ten year Treasury bond. And at the end of year one, that ten year Treasury bond interest is invested into options into indices like the S&P 500 or the NASDAQ 100 or the Credit Suisse Raven Pack or the Credit Suisse Momentum or, you know, the JPMorgan Morgan Cycle Index, etc.. And also, I want you to learn something about something called a participation rate. That’s basically the amount of percentage participation in the growth of the indexes that you’re tied to or the index that you are tied to. Sometimes you’ll, you know, advisors will make it, makes it up and have you have two or three indices that are allocated with 20, 40% or something to the amount of principal that you’ve invested in for that growth. But let’s just say you’re 100% allocated to the S&P 500. Make sure that with your participation rate that you’re participating in a majority of the growth of that S&P 500 index. Like there’s a lot of products out there that are selling only 32% participation rate and S&P 500 on the growth of that for the each year and they lock in the gains at the end of each year. The problem is, is that 32% and the company gets 68%. That doesn’t seem fair to me because it’s my money. It’s the final.
Producer:
Down, down. So let’s recap what you may have missed. It’s the final countdown.
Ford Stokes:
On today’s show, we talked about cryptos and why that is a seriously perilous journey. We talked about being careful about investing in self-directed, real estate based IRAs. We gave you the definition of inflation. We also gave you all the different factors that are contributing to pressure on the markets and and also additional inflation pressures. And we walk through fixed indexed annuities, how to generate your own personal pension and the type of fixed indexed annuity that is likely could be just right for your retirement, which would be an accumulation based annuity that doesn’t carry with it income rider fees. Also, the annuity to avoid is let’s please avoid variable annuities because they come with 3 to 6% in total fees and 2 to 4% in something called mortality and expense fees. We hope you really enjoy this week’s show. Next week, we’re going to talk about the other strategy on how to implement a few things with a structured note ladder that’ll help us replace bonds as well. We’ve talked about fixed indexed annuities as a potential bond replacement this week. Next week, we’re going to talk about a structured note ladder as a potential bond replacement. We’re so glad you’ve been with us here on the Active Wealth Show. And also talk more about how to implement a truly smart financial plan. Have a great week, everybody. Remember, when you’re investing, make sure if you’re going to be a bear, be a grizzly, seek as much information and knowledge as possible. And we hope you all can invest and retire successfully. All the best. Have a great weekend, everybody.
Producer:
Thanks for listening to the Active Wealth Show. You deserve to work with a private wealth management firm that will strategically work to protect your hard earned assets. To schedule your free consultation, call your Chief Financial Advisor Ford Stokes at (770) 685-1777 or visit Active Wealth Investment Advisory Services offered through Brookstone Capital Management LLC. Become a registered investment advisor BCM An active wealth management are independent of each other. Insurance products and services are not offered through BC but are offered and sold through individually licensed and appointed agents. Investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results.
Executive Producer Sam Davis:
Any examples used are for illustrative purposes only, and do not take into account your particular investment objectives, financial situation or needs, and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
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