Why an Annuity is just part of your pursuit for Financial Happiness
A
neighbor suggested that our family should get a Chrysler Town and
Country because his family loves theirs. "Besides," he says, "they get
great gas mileage, seat 7 comfortably with zoned climate control, and
have DVD players equipped with headphones to occupy our kids". Hey, he
must be on to something... right?
Recently, I had several
attendees at our financial workshop come up after the session and ask,
"My friend told me I should buy an Indexed Annuity, what do you think?"
or they haphazardly quip, "I would never put my money into a Fixed Rate
Annuity, even though my CPA suggested I look into one." Or my favorite,
"all of my co-workers are getting into this Annuity, where can I get me
one of those?" as he's pointing to a pamphlet of the 10 best reasons to
buy an annuity.
Now if you query on the internet, "Should I buy a
Fixed Annuity?" or "What is an Indexed Annuity?" or "Is an annuity right
for me?" you will be inundated with articles from all over the globe
telling you the virtues and pitfalls of owning or 'investing' in such a
product. No doubt, the pro-annuity articles will extol the benefits of
safety, growth and tax savings while the anti-annuity articles will
highlight the exorbitant fees, usurious surrender charges and the
undefinable complexities of these products. So, who is right? We believe
your guidance actually rests in the questions rather than the answers
themselves, thus the better the questions (from both sides of the table)
the easier to identify the proper course of action.
Now, we know
that most of our friends mean well, but how do they know what I need for
my family? How do I know that they asked all of the right questions
when it came down to their well-being? Do their values and principles
match ours? Or maybe they didn't ask enough of the right questions. Our
neighbor recommended a minivan and at first glance, it sounded like a
logical choice. His assertion for this type of vehicle may be good
enough to serve our family's needs, but I don't want any buyer's
remorse. For our approach we needed to first establish the following:
1. To ask a lot of questions... from both sides of the table!
2. Discuss, in detail, the ideal outcome... this becomes 'the vision'
3. Determine if the guidance is a 'fit'... Is the advisor capable of being objective?
4.
Determine if the guidance is 'competent'... Does the advisor possess
unique knowledge, skillset or experience to solve our challenges?
Are
you considering if an Annuity is right for you? Utilizing a sequence of
four meetings with your financial advisor to identify your immediate
and long term needs and objectives, you will prioritize what is going
well and what needs to change. With the help of an impartial financial
advisor, you will be able to stress test your current allocation of
resources compared to other recommended options producing a sound
blended strategy that should deliver your expected return on investment.
But, if you skip over this decision making process and only consider
the features of an up-front bonus or a fantastic interest rate or the
fact you just can't lose your money while capturing the up side of the
market, you could be doing yourself a disservice. By asking the right
questions, you will be able to uncover how the four pillars of money;
time, opportunity, risk and appreciation fits into your goals and
objectives. Bottom line is, if you don't take the time to ask the hard,
deep questions you may be setting yourself up for unforeseen financial
stress.
Just a few short years ago, a friend of mine built a
gorgeous lakefront home for his family. He spent years in the planning
and development phase, finding the right lot in the right area with a
panoramic view of his favorite lake. He had plans drawn up by a local
architect and then interviewed several builders until he was satisfied
with going forward. The house was built without a hitch and it turned
out magnificent. He and his family were truly happy until he gradually
started to notice that there was a slight shift to the house. It wasn't
noticeable at first but over time it only got worse. In fact, it was to
the point where he could place a bowling ball at one corner of a room
and then watch it roll to the other.
Upon investigation, he found
out that the geological survey done before they poured the foundation
only went 18' deep (per township code). Now when they had another survey
done, they dug a little deeper to find out had they used that
measurement, the lot would have been tagged as unsuitable for building.
My friend was so unhappy. After all of the questions he thought he
should ask, there was one that simply slipped away. If only there was a
way to have stress tested the area before this catastrophic mistake! His
story has left such an impression on our family that when it comes to
making 'big' decisions, we have incorporated a formal system used to
clearly understand our needs and expectations. We will use this process
to identify what we like or don't like about our current situation,
explore alternatives and then test those options using our current
strategy as a benchmark.
"Didn't think to ask", got my friend into
trouble when building his home. Can't really blame him, he spent an
enormous amount of time researching and doing his homework but when it
comes down to it, sometimes it is just better to find an impartial
advisor who has been there, done that, for several thousand other
families trying to build a foundation and legacy.
In solidifying a
plan to buy a new car, my wife and I decided that it would take no less
than 4 meetings with our salesman to discover if it was in our best
interest to replace our current vehicle with something else and if so,
what would be the most appropriate choice understanding that even with
all of this due diligence, this decision has the possibility of not
meeting our expectations. Within this sequence of meetings to uncover
the needs, expectations and transparency for you and your advisor, you
will get to know how each other will act and re-act when the strategy
goes as planned or below expectations. They may seem obvious, but it is
crucial to take the time to come to an agreement with an advisor who
understands how, when and why these precious assets need to perform in a
particular manner. How much money can I make? Is it Safe? It sounds too
good to be true, what am I missing? How much is this going to cost me?
These are all valuable questions to ask when thinking about investing
into an annuity. Other good questions when deciding on a source to make
recommendations to help you put a plan in place; how long have you been
in business? Any lawsuits or disgruntled clients? Do you have all of the
necessary accreditations, licenses and certificates to guide our family
legally and ethically? Maybe a better question to ask when interviewing
a financial advisor, "If our plan is performing below our agreed upon
expectations, what is our strategy then and how will you communicate it
to us?"
As far as my neighbor, politely letting me know I should
buy a minivan, what he didn't know is that my wife and I already started
the process of looking for a new car. We began with prioritizing a list
of dissatisfactions over our current vehicle and what we wanted to
change to see if it even warranted a new one. So, are you that
dissatisfied with your current holdings that warrants a change in your
asset allocation? Have your expectations changed? If so, is it your
circumstances that have changed or maybe you see a change in the
marketplace? These are important questions to understand your purpose,
objectives and goals.
Considering buying a new car, my wife and I
met with our trusted salesman to see what options that could satisfy our
requirements, both immediate and long term. A key element to our
successful meeting is we came prepared knowing our needs, expectations,
but most importantly, anticipating changes in our family dynamics over
the time period we would have this vehicle. Our mindset going into the
meeting is 'the better the questions, the more obvious the answers'.
Sure, tangible features and suitable benefits are important but it's far
more important to stick to a decision making strategy for entering and
exiting an agreement. You would be doing you and your family a great
service if you came equally prepared when meeting with your financial
planner to discuss if an annuity is right for you.
During our
initial meeting, our expectations are simply to be pointed in the right
direction. Identify what we clearly are dissatisfied with in our current
vehicle and what is needed to enhance our situation. We would be
looking to discover what is working, if it can be improved and what are
the best and worst case scenarios. To answer our first question in
putting together our entrance and exit strategy, how do we measure if it
is working to our needs but most importantly how will you help us
understand what is an acceptable range above and below our expectations?
What do we do if our implemented plan underperforms that range? A key
element in any plan is projecting future income. The same decision
making process is implemented in your financial advisory relationship,
or at least, it should be.
During the second meeting, where the
"Rubber Hits the Road," we will stress test our current plan through a
sophisticated computer program specifically built for this type of
forecasting to show the probability of desired or ideal outcome. This
will also improve our consistency of results by closing the gap between
our average test results and the best case scenarios. There should be a
comparison of your financial plan by adding or removing 'guaranteed
lifetime income' provisions to determine the optimal allocation. Then
review to understand all costs and fees associated with every plan
version including the current portfolio. We will have a little fun by
adding other ideas and options to formally see how things could work out
for us in the immediate, near and long term future. This eye-opening
meeting with your financial advisor will prove invaluable when
constructing a financial plan that will be able to weather all sorts of
storms.
A fully guaranteed approach will be the platform for our
third meeting where we can identify aspects of each option while
minimizing risk. We will weigh the advantages and disadvantages of all
the plans to choose the one plan that fits best. What we have found
helpful when there are so many options is to eliminate ideas from the
obvious down to the negligible that just don't fit into our overall
objectives. When highlighting what is guaranteed and what is not in
putting together your comprehensive financial plan will be the
foundation of your risk tolerance and total portfolio performance
expectations. One of the choices my wife and I needed to discard was a
large SUV, only because we have children that will be learning to drive
in the next couple of years and we believed it would be too cumbersome
for a new driver to maneuver around town.
Time, method and risk
are paramount in the decision making process. Of course, the higher the
perceived risk, the longer the time and the more formal the method
followed to make a decision. A decision usually follows the same
protocol, it starts with the decision that there needs to be a change,
then what is the best solution for that change and finally when that
change needs to happen. So, the fourth and final meeting is the
implementation meeting where the "What" and "When" are agreed upon. You
will also be agreeing with your financial advisor on how often you need
to meet to review real time performance measured against expectations as
well as the current range of worst and best case scenarios.
One
of the basic concerns in deliberating over an annuity, is the insurance
company. Who are they? What rating do they have? How do I know when the
time comes they will be able to provide me with lifetime income? These
are all legitimate questions that need to be answered for your
consideration. We also know insurance companies are not philanthropic
organizations so maybe a better question to ask is, "How do they
realistically profit from issuing these products?" By understanding
where the other side is coming from, aka 'What's In It for Them', the
more comfortable we can be buying their product and services. It is a
credence we call, "Know Where Their Heart Is." That is probably why you
will want to spend a little more time with your financial advisor...
plenty of them look good on paper, but do you know where their heart is?
When
understanding if any Annuity would be the right choice for your
objectives, it is our belief that you sit down with an impartial
financial advisor who will take the time to understand your needs for
both the immediate and long term future and take you through a formal
process so you will make a well-informed, empowered decision. By
prioritizing your needs, asking the right questions, especially the
questions no one thought to ask, you will eliminate most of your options
so you can concentrate and test the products that will perform exactly
as expected. Remember, a goals without a plan is just a dream!
So,
here's a question for you. Regarding a 'big' decision you have made in
the past where the outcome was less than favorable, could you have
averted disaster by asking better questions during the decision making
process? Or maybe you didn't know just how great you had it providing
you didn't know all of the facts because you didn't ask enough
questions? If you want to assure yourself success, take the necessary
time to write out your questions ahead of time for your ideal outcome,
your current plan, and if there are any gaps. In case you were
wondering, we ended up buying the Town and Country, but not because our
neighbor told us to. You see, my wife runs a business where she has to
sometimes make deliveries and having the capacity to stow the seats when
needed and still have the ability to transport our entire family at any
given time was the need that was best filled now and in the future. An
annuity may be the right choice after all, but since this is a long term
investment, doesn't it deserve the right approach?
We are a Financial and Tax Planning Firm since 1996. We educate
and empower our clients to invest wisely, protect their assets and pay
the minimal amount in taxes and the only way to accomplish all of those
objectives is with a measurable, accountable plan. It pays to take the
time to identify the best adviser who thinks out of the box with
creativity to find new solutions and opportunities. We spend an
incredible amount of time and energy making sure we have the knowledge
and resources to design a specific customized plan.
