Monday Morning Quarter-Buck 03-13-2017



Monday Morning Quarter-Buck


Amy’s Blog



“These things I warmly wish for you - Someone to love, some work to do, A bit o’ sun, A bit o’ cheer, And a guardian angel always near.” – Irish Blessing


O’ the fun holiday of St. Patrick’s day will fall upon us at the end of the week.  This is a holiday where all of us find some Irish roots (or make them up for a day) and join in the festivities of all things green and the good luck of the Irish.  

This past week my luck ran out and I was “blessed” with a significant head and chest cold; as I sought to find pharmaceutical relief, I was overwhelmed with the line up of medications and each product's promise of relief.  Why are there so many products for the same thing?  How do I know which one is best for me?  Why are some so much more expensive than others? Why do I need to go to the licensed professional to get some of the medications, and others I can buy right off the shelf?  It struck me, you may be asking these same questions about the financial services world too.

Although we don’t necessarily have aisles of products for clients to select from, there are certainly are a number of products that market themselves to be the “best” answer for your situation.  Last month, I described a few of those products (stocks, bonds, mutual funds, and ETF’s), and that generated some questions from some of you on annuities, for good reason, as annuities can be complex products.

I was a little (geekishly) excited when I did the research on the history of annuities because I took 5-years of latin in high school and often wondered why; believe it or not, annuities actually date back to the days of the Roman Empire.  The root name of annuity is “annuus,” which means annually.  In 225, a Roman judge developed the very first mortality table for “annua” - lifetime stipends in lieu of a lump sum.  

In the United States, it was in 1776 that the first annuity program was developed.  Back then it was more in line with what we would today consider a pension program, or even our social security program, were the masses funded a program.  110 years later, in 1986, Congress passed tax reform that allowed unlimited amounts (of post-tax money) to be invested in a deferred annuity with the benefit of tax deferral on the earnings.

This history of annuities helps explain the various types of annuities that now exist in today’s world. Annuities are insurance products, they have to follow and are overseen by State Regulators (except variable annuities, which also have investment regulations).  The four primary types of annuities are: immediate, deferred fixed, deferred fixed-index, and deferred variable.

  • I often call the immediate annuity a personal pension; you purchase the contract with a lump sum in exchange for an income stream.  The contract can be based on your single life, a joint life, a minimum number of years or a maximum number of years. Payments begin usually within 30 days of purchasing the contract.  

  • A deferred fixed annuity allows you to put in one lump sum, or multiple contributions; the earnings grow tax-deferred, then at some time in the future, you can take distributions in a lump sum or in a series of payments.  You usually get a fixed guaranteed minimum rate of return on this product (i.e. 2% - 3%); there is also usually a minimum period of time you need to hold your deposits in this product to avoid surrender charges.

  • A deferred fixed-index annuity (also called an equity-indexed) is a combination of a fixed and a variable annuity.  It also allows you to put in either a lump sum, or multiple contributions.  There is usually a guaranteed minimum return (like a fixed annuity), but it has a variable piece to it in that the return is also tied to a benchmark index (like the S&P 500).  A note on the upside performance, often there is a cap on the return of benchmark that the annuity holder will get; for example, if the S&P 500 earns 15% in a given year, you may only receive 12% based on the cap limits.   In my experience, these policies often have a 10-year holding period to avoid any surrender charges.  In addition to being insurance regulated, these products are also security regulated.  The growth remains tax-deferred and is taxed at ordinary income tax rates when withdrawn.

  • A deferred variable annuity allows you to put in one lump sum, or multiple contributions and it allows you to choose from a selection of mutual fund type investments (called sub-accounts)  within the policy; these sub-accounts are subject to market risk, and therefore your annuity value may grow or decline in value.  These policies often have a required holding period, similar to other types of annuities, in order to avoid penalties.  Any growth remains tax-deferred until you begin withdrawals and is taxed at ordinary income tax rates.  According to a report published by CNN Money, ongoing management fees and insurance charges can run as high as 2% to 3% a year.   Many of these products also have additional benefit features that can be purchased, for more information on those features I would recommend that you read, “Living and Death Benefit Riders: How do they Work?” (

Note, annuities have a 10% penalty if you take a withdrawal under age 59½.  If the funds used to purchase the contract are after-tax, and the funds are not used for a lifetime income stream, then earnings come out first and are taxable, followed by the original after-tax investments (called LIFO or Last-In-First-Out).

I hope you enjoyed this week's blog, wishing you a wonderful week!  

Additional Education Opportunities

For those of you that are interested in additional education on the Psychology of Money, a colleague of mine recently released the following webinar that might make you think about your relationship with money a bit - it’s a great one to share with your family (in my opinion) - click here to watch now.

I also want to mention a great class that is being presented on March 28th called Demolish Debt, presented by Fiscal Fitness Clubs of America.  This class may not be for you, but you may know someone who is feeling weighed down by debt.  This is a free class at 7 pm, so even working folks can register to attend: click here to find out more details about the class (scroll down to Demolish Debt).