Category: Annuities

Know Your Investment Lingo! 5 More Terms Every Soon-to-be Retiree Should Know

Know Your Investment Lingo! 5 More Terms Every Soon-to-be Retiree Should Know


It’s easy to get confused when someone is talking over your head. And when it comes to the world of investing, it is easy for the jargon to fly a mile high. In fact, even after years of investing experience, I still find myself baffled by some of it! That is why I am determined to translate some of the most commonly misunderstood (but often most important) concepts into terms soon-to-be retirees like you can understand.


Here are 5 important terms to get you started:


1. Fee-only vs. Fee-based Managers

Fee-only money managers are paid by you only. You give them a flat fee or a percentage of your portfolio every year, and that is it.


On the other hand, fee-based managers may charge fees as well, but they also receive commissions on the products they sell. In other words, the companies they represent also pay them via higher fees—not just you.


Here’s why this term is important to understand: although there are conflict of interests with any transaction, a fee-only manager is more likely to act in your best interest.


2.  Average Annual Return

Market fluctuations cause returns to vary. You’ll have some good years, and others in which your investments fail to stay in the black. But the Average Annual Return examines how an investment performs over a block of time—usually over three, five, or ten years—rather than the fluctuations from year to year, giving you a well-rounded evaluation of the investment’s performance.


This number is calculated by taking the beginning value and determining how much it had to increase consistently (or, God forbid, decrease) each year to reach the ending value. Pretty simple, right?


3.  Fiduciary

Fiduciary has to do with trust, coming from the Latin word “Fidere,” which actually means, “trust.” More specifically, in the investing world, a fiduciary is a person who has the ethical and legal obligation to act in your best interest when managing your assets.


Of course, not every fiduciary lives up to this definition. But, when you choose a fiduciary, there’s a better chance he’s making decisions that are the best for you, not for his bank account.


4.  Mutual Funds and ETFs (Exchange-Traded Funds)

Mutual funds and ETFs are very similar in a lot of ways. They are both investment options in which others choose the stocks or bonds for you. However, they differ in a couple ways that are important to note:

  1. When investing in a Mutual fund, the transaction occurs between you and the Mutual Fund Company. With an ETF, you trade directly with other investors.
  2. Mutual funds are sometimes actively managed, while ETFs always track an index (such as the S&P 500).

These differences cause many ETFs to be more cost-effective and easy to use. However, they are the new kids on the block so many people still stick with the old, trusty Mutual Fund.


5.  Required Minimum Distribution (RMD)

Because the government wants you to save, they allow you to invest tax-free in any one of many qualified retirement accounts: IRAs, 401(k)s, 403(b)s just to name a few.


However, because the government still wants to collect tax, they also require you to take out a certain amount each year after you turn 70 and ½. The amount you must take out is also known as your required minimum distribution.


Well, there you have it. Making retirement investment decisions is often overwhelming and scary, but taking this step to understanding your options will help you immensely. If you have come across a term that was not on this list, check out our other blog (See our blog on Five Investment Terms You Should Know) that complements this list or leave a comment. We love to hear from you!


Want a Certified Financial Planner to analyze your portfolio at no cost to you? Looking for someone to walk you through your retirement transition? Call Seniormark at 937-492-8800 for a free consultation.



Know Your Investment Lingo! 5 Terms Every Soon-to-be Retiree Should Know

Know Your Investment Lingo! 5 Terms Every Soon-to-be Retiree Should Know

Smile and nod…smile and nod, you think as some financial advisor spews jargon about diversification or risk tolerance or ETFs. You begin to realize he’s saying more words that you don’t know than words that you do, and pretty soon his voice starts to sound like Charlie Brown’s teacher. You know he’s offering priceless advice about your portfolio as you transition into retirement, but those little nuggets of gold are buried beneath layers of acronyms and complicated concepts.


There are many soon-to-be retirees just like you. This is why I am here, to translate the foreign language of finance and investments into something a lot easier to understand. Here’s a compiled list of the top 5 terms you are likely to come across on your journey to a secure retirement investment strategy.


1.  Annuity

An annuity is an investment option that puts an insurance company between you and the ups and downs of the market. This insurance company guarantees you an income throughout your lifetime. Or it may guarantee that you will always be able to cash out the amount you place in their care.


However, here’s the catch: you often have to pay higher fees and can rarely take out your money in a lump sum without paying a stiff penalty. That is the trade off. It is not always the best choice (see our blog “Why Annuities aren’t worth it”), but an annuity is an increasingly popular choice for retirees desiring a guarantee.


2.  Diversification

This is best explained by the adage “don’t put all your eggs in one basket.” When investing, it is rule number one. Or maybe rule number two, if you include “buy low and sell high.” The idea is to decrease risk by putting your money in a variety of investments and asset classes, so—if one investment tanks—you won’t be in financial ruin.


3.  Asset Allocation

Have you ever heard these words thrown around at a cocktail party as investors brag about their business ventures: short term bond, large cap growth, small cap value, etc? These terms are categorizations of investments called asset classes, grouped together because they tend to behave similarly in the market.


Asset allocation, then, is just spreading your money among these various asset classes according to your unique financial situation and risk tolerance…which leads me to my next term.


4.  Risk Tolerance

In the game of investments, you have to be willing to risk losing money in order to make money. Some people are conservative—they want to avoid tragic losses even if it means less than impressive returns. Some are more aggressive—they are exactly the opposite.  Yet others are in-between. Your risk tolerance (often expressed as a number) shows where you fall on that continuum.


The driving question to determine your risk tolerance is this: how much are you comfortable to lose in order to gain the possibility of higher returns? Analyzing your risk tolerance helps ensure that you won’t make any poor, fear-based decisions to sell when the market isn’t doing well.


5.  Active vs. Passive Management

Some investors try to outperform the market by forecasting which investments will go up or down in value. They spend a lot of time moving money around, aiming to make big money in a short amount of time. This approach is called active management. Although it can lead to some lucrative gains, it is often dangerous because no one can predict the future consistently (See our blog:  “Investing Fact Check:  No One Can Predict the Future”).


Passive management, then, is the exact opposite. It involves diversifying your portfolio, matching it to your risk tolerance, and then letting the money sit, allowing the steady growth of the market to do its work. Sure, slight changes can be made as needed, but this approach is for people who are in the market for the long haul.


Well, if you have just finished this blog post, your financial literacy just increased! You are one step closer to understanding the jargon-strewn world of investing, and therefore, one step closer to a retirement investment strategy that will help ensure your financial security!


Want a Certified Financial Planner to analyze your portfolio at no cost to you? Call Seniormark at 937-492-8800 for a free consultation.


Is Your Financial Advisor Giving You What You Want or What You Need?

Is Your Financial Advisor Giving You What You Want or What You Need?

From my 20+ years in the financial planning industry, I’ve found that the best advisors will challenge you. They aren’t just yes men who tell you want you want to hear. Rather, they coach you into making the most strategic decisions that may or may not feel best to you in the moment. The relationship of a financial advisor to his advisees should be similar to that of a doctor to his patients. He or she should identify your financial ills and prescribe you a plan that you will both carry out together, hand in hand.


The reason I’m bringing this up today is because it came up in a conversation I had with another financial advisor recently. In said conversation, I was very impressed by the man’s expertise and concern for his clients; in fact, I was so impressed that I was thinking about working with him in some capacity. But when we got into talking about annuities, our opinions diverged.


He wanted to provide most of his retired (or nearly retired) clients with a guaranteed income stream by placing a significant portion of their nest egg into an annuity. I thought that the guaranteed income wasn’t nearly worth the price they would have to pay.


Now, I am not against the right annuity for the right person, although I do think there are some things everyone should be fully aware of before buying one (click here for our blog about things everyone should know about annuities). And I certainly wasn’t against him or his business. But I did have a problem with his rationale.


You see, when I pressed him about the illiquidity of annuities and the high fees that often drain returns, I could tell he understood quite well that he knew these products weren’t always the best fit for his clients. We went back and forth for a little while with arguments for and against annuities, and—at the end of it all—he eventually settled into a very telling statement:


“Well, Dan, are you giving your clients what they want or what you want?”


When it came down to it, his advice was about the client’s wants. An annuity provides the warm fuzzy of a guaranteed income for life. It soothes fears of outliving one’s nest egg. In most cases, it just gives clients what they want (absolute assurance of income) rather than what they need (slow steady portfolio growth over time). It’s an easy sell that is often hard on the long-term returns.


Going back to the “doctor to patient” relationship I mentioned earlier…

Imagine your doctor says to you, “You have anemia, and you need an injection once a month if you are going to live.” Yanking on your collar a little bit, you reply, “But doctor, I don’t really want to. I’m scared of needles.”


What is he going to say? Is he going to offer you a daily pill and say, “I know this isn’t nearly as effective as the needle, but at least you won’t get the jitters”?

No, he is going to give you what you need, what is best for you.


It’s the same thing with an advisor. And this goes far beyond annuities. What if you want to cash out of the stock market during a downturn in a whirl of negative emotions? What if you want to invest in individual stocks rather than a balanced, diversified portfolio? What if you want to stay in an aggressively invested, risky portfolio much later in life?


I’m not saying your advisor should twist your arm to make you do something you aren’t willing to do, but—as I said before—he or she should challenge you to treat your financial ills, even if it doesn’t pad his pockets, even if it’s not what you want to hear.


Want a Certified Financial Planner to analyze your portfolio at no cost to you? Call Seniormark at 937-492-8800.



Get a Second Look Before Buying an Annuity or Your Money May Be Held For Ransom

Get a Second Look Before Buying an Annuity or Your Money May Be Held For Ransom

Two clients of mine, a couple, came into my office one morning, and they mentioned they were heading over to meet with a financial advisor about their Equity Indexed Annuity after their appointment with me. Just as a fair warning, I shared with them what I have learned about the dangers of some annuities, making it a point to mention that some have steep surrender penalties that can extend anywhere from 7-17 years. What I didn’t know then is that they can be even worse than that.


They seemed surprised. Why hadn’t their advisor mentioned those downsides? They would ask him, they concluded, and then come back to finish up some business with me.


They did come back, and with some very concerning news. “He made it sound like we could never take all our money out without penalties,” they said.


And now they surprised me. I asked for their disclosure document, researched the product, and—to my frustrated astonishment—found it to be true: this annuity was basically holding their money for ransom.


You see, according to the rules of this particular EIA, they can never take out their money as a lump sum. Even after they have passed away, their kids will not be able take out their money as a lump sum either. The only way the couple can is by taking it out 10% each year for ten years after a five-year deferral period.

If they refuse to play by those rules and take out their money as lump sum anyhow, the penalties would eat up all their returns, bonuses, and more. They would only get $164,555, which is $61,859 less than their account value of $226,414 and about 10,000 less than what they originally paid into the annuity five years ago! In other words, they would have lost 27% of their money after having been invested for five years.


This illiquidity might be tolerable if the returns were decent, but that is not the case with their annuity. It has a cap of 3%. This means that no matter how good the markets are, the most return they can get is 3%. Period. All in all, this is a terrible deal.


Now, this is not to say that all annuities are bad or that all of them will tie up your money like this one will. But this example does serve as a warning that you can hardly be too cautious around these complicated products. Why? Because annuity salesmen (even those who call themselves “financial advisors”) may not tell you about these downsides.


My clients were not told about these penalties. Instead, they were sold on the guarantees, the promises of market returns without market risk and an upfront 10% bonus. Then, with a skewed perception of what they were getting themselves into, they signed away full rights to their money forever.


So, before you sign anything, I always recommend getting a second opinion, just to make sure the annuity is being portrayed as it really is. I am convinced that if all the pros and cons were laid bare, significantly fewer people would purchase them.


Thinking about getting into an annuity? Call Seniormark at 937-492-8800 and a Certified Financial Planner will give you a second opinion on whether or not it is right for you!


Why the Guaranteed Income of an Annuity Isn’t Always Worth It For Retirees

Why the Guaranteed Income of an Annuity Isn’t Always Worth It For Retirees

Everyone likes a guarantee. It’s like a warm house that shelters us from the cold, unknown outside of diminishing returns and tragic losses. So, for the retiree, someone like you who has a lot to lose, the idea of your income being unaffected by market fluctuations sounds inviting. The assurance that you won’t ever outlive your assets wraps itself around you like your favorite blanket.


But sometimes a guarantee isn’t worth what it is costing you. And sometimes the world outside the guarantee is a little bit sunnier than you might think.


I have found this to be the case with retirement investments. Annuities in general—indexed, variable, and others— often do not live up the glory of their sales pitches, and the world of a conservative investment portfolio with a financial advisor is not nearly as cold and harsh as some might assume.


Let’s start by looking at some of what you are giving up by going with an annuity. Because I’ve found that my clients are less enamored by these products once they see beyond the warm and fuzzy sales tactics.


Access to Your Funds

No matter how you parse it, you are giving up liquidity by choosing an annuity.  When you invest your money in an annuity, you are giving up your rights to access your money as a lump sum as the annuity gives you your set dollar amount of income every month. They are kind of like a parent, giving you an allowance for monthly expenses, but scolding you with penalties for taking out too much too fast. Although they will allow you to take out up to 10% per year, more often than not, you will incur a 10-15% penalty for taking out any more than that.


This might not seem like a big deal if you aren’t planning on any big purchases anytime soon. However, this can change on a dime. What if you come across a real estate steal for a snowbird home in Florida? Or what if you find a promising investment and cannot take advantage of it because your “parent” company will slap you on the wrists for accessing your own money? Then you might start to feel a bit smothered.


But if the lack of freedom doesn’t drive you crazy, I think what I am going to explain next will.


Fees and Returns

This is where the rubber meets the road when it comes to investments. If you aren’t making money with your money, then it is hardly worth it to invest. And, unfortunately, the truth about annuities is that the return is not all that great. Sure, agents make it sound nice with the guaranteed 5% income or maybe a 10% bonus in some cases, but the return (how much money you are really making) is a lot less flashy. Why?


There are a lot of really complicated reasons, but the most drastic one is the draining fees. From the typical annuity options I have come across, the total comes to about 3-4% when you add up all the insurance, rider, and mutual fund fees. Now…that percentage does not sound like a lot when you see it printed on the contract. But the effect it can have on your nest egg over your life expectancy is shocking, especially when compared to the fees of other financial advisors, which are typically 1-2%.


For an example, Let’s say you are investing a  $100,000 portfolio, and let’s say this portfolio averages a hypothetical 5% return over twenty years (a typical life expectancy for those heading into retirement). The annuity with its fee of 3% will allow your nest egg to grow to $168,595. Not too bad, right?


But how does that figure sound when you compare it with $219,112, the dollar amount you would have with a financial advisor who charges 1% in fees? That is over a $70,000 difference, a difference based off only a couple measly percentage points.


It’s also the difference between the warm security of an annuity and the few brave steps out into the world of a conservative portfolio.


The Air is Fresher Outside

Although I understand the hesitation, it is really not that cold or scary outside of that guarantee as long as your portfolio is conservative and diversified sufficiently. It is easy to look at recessions and stock market crashes and worry about running out of money in retirement, but even then a conservative portfolio can save you from any devastating losses.


For a solid example, I like to point to the recession surrounding the stock market crash of 2008, often called the lost decade (January 1st, 2000—December 31, 2009). Even during this severe downturn, when the market was consistently in the negative, the conservative funds we manage were still averaging 6.23% per year after managing fees. Even the most aggressive funds we manage were still making almost over 2% per year on average. Of course, that isn’t a good return by any means, but it sure isn’t doomsday. It’s more like a chilly breeze than a devastating snowstorm.


So, when it comes to retirement investing options, I recommend stepping out into the sunshine. Your nest egg needs some vitamin D to grow up big and strong.


Want a Certified Financial Planner to analyze your portfolio at no cost to you? Call Seniormark at 937-492-8800 for a free consultation.