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Here's How Annuities Protect Your Principal Investment

Things You Need To Know About Annuities: Part 1

I am a fiduciary. I don't have a horse in the race, other than yours. I am licensed in the State of Florida as an expert in annuities. I hear all the time that a 6-8% guaranteed annual return, growing tax free on your principal balance on an annuity is "less than if I invested the money for a higher return." In some cases, yes. In some cases, no. And in most alternative cases, you're either accepting a low rate (CD's) or high volitlity (the markets). In our annuities, you get a guaranteed income for LIFE (you cannot outlive your money, as the annuity guarantees lifetime income even if that's more than what you paid in) and you'll never face a loss of principal beyond a set floor, regardless of what happens to the stock market.

An Annuity can be a powerful tool in retirement because of the ability to avoid Sequence of Returns (SOR) Risk. This SOR is what most people who want to be your stock broker don't tell you. I am not a stock broker, I am an annuities expert. I eliminate risks. Market stock traders take calculated risks with your money, and some times they guess wrong. Our annuities are never wrong. They protect you for your lifetime. My favorite annuities provider has been around for over 150 years. They'll still be protecting people long after you and I are on the other side of the sod.

If you are unfamiliar with the term SOR (because your stock guy didn't tell you) or have never really dove into the power of it, here's an explanation and some examples.

SOR Risk is the risk associated with how having a negative return (or a few) can effect the net outcome of that investment over a period of time.

Example #1

If you had $1mil invested and that investment fell 30%, what are you at?

Answer - $700k

Now lets pretend the next year that same account gained 30% and you took no withdrawals, what are you at?

Answer - $1mil? WRONG.

700k + 30% is not 1mil,

Equation is $700,000 x 1.30 = $910,000

You are 9% or 90k down. Why?

Because the return is not what you care about, its what your break even point is. When you dig a hole, you ALWAYS need more dirt to fill it back in, right? Same thing here.

Example #2 Using $100k

A 5% return average does NOT look like this in the stock market:

Year 1: 5.00%

Year 2: 5.00%

Year 3: 5.00%

Year 4: 5.00%

Year 5: 5.00%

Final - $127,628

It's going to have an up and down sequence, so this is a more realistic example:

Year 1: 3.00%

Year 2: -6.00%

Year 3: 10.00%

Year 4: 8.00%

Year 5: 10.00%

Total Average 5%

Final - $126,524

Same average but a different sequence. The sequence will always yield a lower result.

The more drastic the loss, the larger the gains needed to get back to break even.

2008 saw retirement accounts losing 50% in some cases. That would need a 100% Gain JUST TO BREAK EVEN. Since they lost your principal, what has to happen on your remaining balance has to be even better to regain just to break even point.

Now imagine you are retired and taking 4% to 6% out every year. Are you going to stop doing that to let your account recover? Probably not. Your principal balance is going to be whittled away by your withdrawls.

When an Annuity is used, you don't have that downside sequence, therefore it's easy to predict and use for a good yield with essentially no loss to principal + gains.

It's also what makes an Annuities Average Return VERY powerful.

A 6% annuity average vs a 6% equity average is very different.

When we talk about a 6% to 8% annual return, that's without a loss to your principal in an annuity. There's no negative sequence. No SOR. You can remember the Sequence of Returns (SOR) Risk by thinking of the word SORry. That's where you will be if your stock guy or gal loses your principal and your remaining funds have to try and somehow make up for the losses.

It's a great buffer to a managed portfolio if you use a MYGA (Fixed Rate for period of time - Multi-Year Guaranteed Annuity) or FIA (Fixed and Index rates but has complete protection against loss.)

If you have 20 years or more before retirement, you can ride the roller coaster. If you are nearing retirement age, we can give you a free consultation about getting some of your retirement savings into guaranteed annuities and we can make your income outlive you.

Remember... insurance is for your family if you outlive your money. Annuities are for you if you outlive your money.

The More You Know!

One more bonus for people who read this far. Here's a look at money market rates. If you or a family member have money sitting in a money market account, call me IMMEDIATELY and lets fix that by next week. Get your money OUT of money market accounts.

(c) David Happe, licensed Florida annuities advisor. Call (888)434-6471 for a free annuities consultation.

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