Annuities and Free Steak Dinners

FAMILY UPDATE

My ten-year-old, Jesse, loves his Mommy. He cuddles her each night. When he does he asks her:
"Are you comfortable?"
If she says, "yes," then Jesse says, "Can we have a conversation?"
If she says, "yes," then he says, "Then it's a real cuddle."
We've been watching a show on Netflix on how to train your cats to do tricks. We've been trying with limited success. We have a training table that we use for the dog, but as you can see below Hemingway the cat wants in on the action.

With the present market volatility, annuity salesmen are out in full force. They take advantage of people like you using fear as their main selling point. During scary times, they know that their message is going to get more attention.

Recently I’ve had a few clients move their money into annuities which is so upsetting. They are moving their money from a diversified portfolio of stocks and bonds- which is a powerful, long-term growth strategy- to a far inferior product. Moving money into annuities will cost them a huge amount of gains over time.

I’ve heard the same pitch over and over. Maybe you have too.

"You don’t want to lose all of your money, do you? This could be another 2008. Back then people lost all of their money. You are retired now. Are you willing to take that much risk?" they say.

(In 2008 no one lost all their money. While it was one of the worst recessions since the Great Depression, you would have seen your accounts drop temporarily by 37%. Even then your accounts would have recovered and then some within a few short years later.)

"Don’t you want guarantees on your money? We can offer guarantees," they say.

It sounds great right? Who doesn’t want guarantees on their money?

But the devil is in the details.

These products can only be sold by brokers, not fiduciaries (like me). Brokers get paid commissions. Fiduciaries do not. Brokers can put you into products as long as they are loosely suitable for your situation. Fiduciaries are bound by law to put your interests ahead of their own.

The commissions on annuities are high. Usually around 7%. That’s right. If you put $100,000 into an annuity, the salesman receives $7000 in compensation. No wonder they give you such a hard sell.

Brokers are also notorious for churning accounts. This means that they move people from one annuity to another in order to get paid over and over again.

Annuities come in all kinds of flavors, sizes, and colors. I would argue that annuities are the single most complicated product I see on the consumer financial market. I’m going to make this as simple as possible.

The definition of a pure annuity is actually pretty straightforward. An annuity is a contract that guarantees you a set amount of money each month for the rest of your life.

Social Security is an excellent example of an annuity. The federal government is guaranteeing you a check for the rest of your life. Once you die, the check stops. That is the very definition of an annuity. A teacher’s pension is another example of an annuity.

But the financial industry likes to take very simple concepts and make them incredibly complex.

The most common types of annuities being peddled right now are variable annuities and equity-indexed annuities.

Variable annuities are complicated products that allow you to invest in variable accounts — similar to mutual funds. A variable annuity allows you to have certain monthly income guarantees while still investing your money in the markets. The prospectuses for these things are hundreds of pages long.

Variable annuities have significantly higher fees than index funds and exchange-traded funds. When I say "more," it is pretty extreme. The low-cost funds that I use charge an annual fee of .05% on average. Variable annuities charge fees anywhere from 3-4%. That’s right. Annuity fees are thirty to forty times more expensive.

Insurance companies make huge profits from this vehicle, and consumers get very little benefit if anything at all.

Equity indexed annuities are a hot topic, as I see them being sold at nearly every "free" steak dinner seminar in town. The sales pitch is: you can’t lose any money if the stock market goes down, and if the stock market goes up, you get some of the gains.

What they don’t tell you is, that while you won’t lose any money if the markets go down, you are very limited in the amount of money you make if the market goes up.

Last year the markets were up 28%. Most equity-indexed annuity holders made between 0-3%. Doesn’t sound as good, does it?

Here are some more things you should know about annuities before deciding.

Taxes.

Annuities are taxed in a rather inefficient manner. All growth in an annuity is taxed as regular income. Generally speaking, income taxes are higher than capital gains rates. Growth in stock prices is taxed as a capital gain.

Surrender Penalties.

Want some money out of your annuity? Not so fast. Most annuities charge you a significant penalty if you take more than 10% of your money per year. Most penalty periods can last anywhere from 5 to 12 years. Penalties for withdrawals in excess of 9% are common. In other words, once you buy an annuity you’re stuck.

Age Restrictions.

You must be at least 59-½ to withdraw money from an annuity or the IRS assesses a 10% penalty.

So what do you do if you are pitched an annuity at a free steak dinner? Be wary, chew your food, and take your time. Of all the annuity owners I’ve met, about 5% of them actually understand what they own. Try not to listen to the hype.

Dave’s final take on annuities: grrrrrr…. (that’s a growling sound).

I can’t help but go back to the fact that a diversified portfolio of stocks and bonds has unparalleled historical success. Why reinvent the wheel? Why make something more complicated than it needs to be?

If considering an annuity, please let me know, and hopefully, I can talk you off the ledge.

Be Blessed,

Dave

 

Being Rich is Overrated

FAMILY UPDATE

The kids are back at school and we are all back on a schedule. Each morning Alex, my middle son, has a particular breakfast routine. On to his oatmeal, he adds banana, peanut butter, cinnamon, and sliced almonds. Pretty sophisticated for a 12-year-old.
My oldest son, Chris, is on the tackle football team. It's the first year his school offered the sport. He comes home all scratched up and grass-stained but is grinning from ear to ear.
Lastly, and sadly, Desmond the dog got neutered. He did not like the cone.

Over the past twenty years, I’ve met a lot of different people who possess different amounts of savings. I’ve met many people with nothing. I’ve met millionaires. I’ve met lucky dogs who have tens of millions of dollars. I have never met a billionaire. (If you know one and they are looking for a financial advisor, send them my way).

It sure would be nice to be rich, wouldn’t it?

Maybe not.

I have noticed a striking phenomenon throughout the years. The amount of money you possess has a diminishing return on your happiness and enjoyment of life.

What does that mean? Let me show you a few illustrative anecdotes.

Meet George.

George is close to broke. He owns a small home without a mortgage, but he and his wife must survive solely on social security benefits of $2,700 per month. That’s pretty tight.

I’ve done hundreds of budgets with clients and I’ve found that — in Sarasota, one of the leading retirement spots in the country — if you have no mortgage, you can get by pretty well on $4,000-$6,000 a month.

But, at $2,700 a month, George and his wife really need to be careful. They can probably only own one car. Probably can’t go out to eat much, and need to clip every coupon. They will get by, but a broken air conditioner can put incredible stress on their lives. In fact, I am willing to bet George and his wife live with a lot of daily stress over finances.

I don’t want to live like George.

Meet Nancy.

In addition to her social security, Nancy and her husband have cobbled together about $400,000 in savings. They own their home and their social security totals $3,200.

Nancy invested her $400,000 in a balanced and diversified portfolio of stocks and bonds, with more than half the money in stocks. It is reasonable for her to withdraw $1,600 a month from the account without putting herself in danger of running out of money.

This now equals $4,800 a month, which is much more doable. They go out to eat a few times a month, at moderately-priced restaurants. They made a game of finding the best dinner specials in town. She and her husband play golf on the municipal courses, which keeps them both social, active and healthy.

They even take a small but nice vacation once a year. Nothing fancy, but great memories nonetheless.

While this is not a lavish lifestyle, I’ve found the Nancys of the world can be perfectly content with her $5,000 a month. Of course, there are things she wishes she could do, but the European river cruise and new kitchen just aren’t in the cards. It doesn’t bother Nancy all that much. She has a roof over her head and can buy what she needs.

Meet Bob.

Bob was an executive at a small company in Tampa. His salary was in the six figures, and, together with his wife, they were able to save $1.2 million dollars. I can’t believe we’re millionaires, Bob would often think.

With their house paid off, Bob and his wife, between social security and investment dividends, brought in $9,000 per month. After taxes that left $8,000 a month in cash, deposited straight into their bank account.

Now, this is some pretty serious money. Their budget was only $5,000 per month, which gave the couple $36,000 a year of "play money."

Bob and his wife travel. Alaska, Europe, and New Zealand. They replaced the floors and add a patio on the back deck. Bob plays golf at some of the nicer public courses. They go out to eat basically whenever they want. Every once in a while, they really splurge on a good steakhouse dinner.

While Bob and his wife enjoy the money, they find that, after a few years, spending $36,000 of play money is unnecessary. They find a new source of joy in giving generously to their church and spoiling their grandchildren.

Bob and his wife ended up well-traveled with an upgraded home, living a quiet life they enjoy.

Lastly, meet Charlene.

Charlene was rich. Between her social security and her investments, she realized about $20,000 a month in retirement income. This gave her nearly $100,000 of play money per year, while living a very nice lifestyle.

Charlene’s husband is a member of an exclusive country club and plays golf at their world-famous course now and then. Even though it is only the two of them, they live in a 4,000 sq/ft house, which they can easily afford.

They travel whenever and wherever they choose. African safaris, cruises to far-off exotic lands — always in the upgraded suite of course — and other adventures. They eat at the finest restaurants, own the finest clothes, and have the best of just about everything. Charlene and her husband quickly ran out of ideas on how to spend the money. They had everything they wanted.

What is the point, Dave?

George (the broke one) desperately needed more money. His current income puts him under incredible stress. He had to watch every penny.

Nancy is your standard professional woman. She saved some money which allowed her to do some of what they wanted, but the cheap version.

Bob, with his one million dollars, had a lot of opportunities. He and his wife traveled, and they found other, fulfilling ways to spend their money.

Charlene could do whatever she wanted. She and her husband belong to a fancy country club, eat wherever they want, and take exotic, exclusive vacations all over the world.

The difference from George to Nancy is significant. But, the difference between Nancy and Bob is actually pretty small. They both play golf. Maybe the greens were not quite as nice at Nancy's municipal course, but the game is just as fun.

The difference between Bob and Charlene is smaller than you would think. I can tell you, from personal experience, that a five-star French restaurant’s food doesn’t taste all that much better than the nice Mom and Pop place down the street. Nancy and Bob were basically eating at the same places. Both got to travel.

Now, here’s an important point: Nancy, Bob, and Charlene all had the same amount of fun on their trips. Maybe Bob and Charlene got to take more trips to more exotic locations. But is that really that big of a deal?

Charlene’s Mercedes gave her no more joy than Nancy’s used 2016 Honda CRV.

Nancy, Bob, and Charlene all ended up eating at essentially the same restaurants.

They all got to enjoy being terrible golfers.

I don’t want to be George. You don't want to be George, either. (Sorry, George!)
Not having enough in retirement is a very tough situation. But, as for Nancy, Bob, and Charlene — they all lived relatively similar retirements.

Being "rich" does not give you all that better of a life compared to the "kinda-rich" compared to the "working/middle class." Sure the levels of fanciness are different, but does it really matter that much if your hotel room has newer carpet than the other?

Don’t have a false impression that more money means a totally different retirement lifestyle. It doesn’t. I’ve done this for 20 years. It doesn’t.

As long as you have enough to not worry about paying the bills, like George.

We have been put on this Earth for relationships. The relationships you have in your lives are far more important than your monthly income. The cliché is true — I’ve met very wealthy, lonely people, and I’ve met people without a penny to their name with lives full of love.

Be Blessed,

Dave

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A Crash Courses of Market Crashes

Did you know that most "normal" investors actually lost much less money during market "crashes" than the media reports?

I’ve been doing some historical digging and I’ve discovered some shocking truths. I hear a lot of horror stories about how much money people have lost during past crashes. You never know! You might be next! Get ready to live in a cardboard box!

The markets have had five significant crashes in the past 100 years.

The Great Depression (1929)
World War II (1939)
Oil Embargo/Nixon Resignation (1973)
The Dot Com/Technology Bubble (2000)
The Great Recession/Real Estate Bubble (2008)

It may come as a surprise to many of you that there were decades-long periods without any major ‘’corrections" in the markets. But I want to point out another interesting statistical curiosity.

Crashes typically cause short-term damage.

Allow me to explain through an analogy. If you invested all of your money at the beginning of 1929,1940, 1973, 2000, or 2008, you would have had a bad time. But in the real world, you generally don’t suddenly invest all of your money at once. It is a gradual process as you save money and contribute to retirement accounts over many years. We need to look at the years preceding the crashes to get a true sense of how damaging they were to real people’s financial lives.

Let’s start with the years preceding the Great Depression.

1926: +11.6 percent
1927: +37.5 percent
1928: +43.6 percent

This means that if you had $100,000 invested in 1925, you saw it grow to $220,000 by the time the markets faltered. Over the next four years, your value dropped to $80,000. The markets then skyrocketed upwards again. By the end of 1936, your account was worth $241,000.

This means that over ten years (1925-1935) your investment in the S&P 500 would have increased from $100,000 to $241,000. That’s an increase of 141 percent.

This was during the worst downturn in the history of the stock market.

The World War II crash saw a similar phenomenon. From 1935-1945 (with the markets dropping significantly in 1937, 1940, and 1941) your $100,000 investment would have turned into $242,000. How?

1936 had a +34 percent return.
1938: +31 percent
1942: +20 percent
1943: +26 percent
1944: +20 percent
1945: +36 percent

Who cares if you had a few bad years in between?

The years preceding and following the crash in 1973-74? Same thing. If you invested money from 1970 to 1980 (with the markets dropping 40 percent during the downturn), your $100,000 turned into $170,000.

The years leading up to the Dot Com Bubble in the early 2000s is the best example of this concept. The 1990s was the best decade the markets had ever seen. Your $100,000 investment turned into a whopping $530,000 during the 90s. Did you lose 40 percent from 2000-2002? Yes. But you would have still been WAY ahead.

Lastly, the crash nearest and dearest to our hearts; the real estate bubble was possibly the worst economic event since the Great Depression. But the 37 percent lost in 2008 was mitigated by solid returns before and after. If you invested $100,000 in 2005, today it would be worth $327,000.

I think you get my point by now. Stock market crashes do not occur in a vacuum. We need to look at returns before and after to get a better understanding of the true cost of downturns.

What does all of this mean for you?

Keep calm and carry on.

Be Blessed,

Dave

 

I’m Right 87.4% of the Time

FAMILY UPDATE

As you may know, my daughter got her driver's license last week. We haven't seen her since. With her newfound freedom, she is out and about all the time. She goes shopping, goes out to eat, watches movies, visits friends...I fear I won't ever see her again.

We got the cats spayed and neutered. I never realized it but spaying a female cat is a much more serious surgery. She has to wear a cone on her head for ten days. She is not happy.

I was in my car the other day when I heard a commercial on the radio that got my attention:

"Most investors took a huge hit with the Coronavirus crash and now we are seeing signs of another crash. That pain, suffering, and financial loss don't have to happen, and we’ll show you how with a free demo of VantagePoint. Text the word FREE to 411411 to learn how we’ve applied artificial intelligence to protect your capital so you can navigate and thrive in volatile markets."

You will hear my extremely emotional response in a moment, but before that I need to point out: This is a criminal act. They are selling snake oil. They are scamming unsuspecting people.

These kinds of advertisements really start popping up when the markets are volatile.

I heard this on a reputable national station reaching untold numbers of listeners. I’ve listened to it several times since.

I don’t know exactly where to begin.

1. If I were to make these kinds of claims I would be stripped of my license. If you are registered with the SEC as a registered investment advisor you can NEVER—never, ever, ever—make claims like this. These yahoos get away with it because of a loophole in the system. They are not selling "investment advice;" they are selling software.

2. When was the huge crash with the Coronavirus exactly? The market was down a month and a half.

3. "The pain and suffering of financing loss." I see this tactic used quite often. These con men feed off of fear. It doesn’t matter if their "medicine" makes it much worse. They don’t care.

4. The part that completely floors me is where they say "We’ve applied artificial intelligence." What does that even mean? It certainly sounds exciting and cutting-edge. Maybe they do have some sort of algorithm they could use to help smooth out my portfolio, right?

No, they don’t.

Let’s think about this logically. If VantagePoint has this fancy software that will help you make all this money, why are they not using it for themselves? If their "artificial intelligence" can predict the movements of the market, wouldn’t the developers of this software be unfathomably wealthy? Why would they offer it to the public? They would make so much money by "navigating and thriving in volatile markets."

Next, I went to their website. Front and center was:

"Created by world-renowned trading software pioneer Louis B. Mendelsohn, VantagePoint forecasts Stocks, Futures, Forex, and ETFs with remarkable proven accuracy of up to 87.4%. Using artificial intelligence, VantagePoint’s patented Neural Network processes predict changes in market trend direction 1-3 days in advance. With this information, traders can confidently get in and out of trades at the optimal time. With nearly four decades and more than $10 million dollars of research and development invested, VantagePoint helps traders preserve their hard-earned capital and create real wealth."

This really gets me upset.

Making the claim of 87.4% accuracy is ridiculous. Again, I would probably go to jail if I ran around touting these claims. But these guys don’t go to jail. They are only selling software.

They use a "patented Neural Network process!" What could that possibly mean? I mean, seriously. It is just a bunch of fancy-sounding words strung together.

What is especially sad about these scams are all the unsuspecting investors out there losing all kinds of money day-trading using this worthless software. Not only are they paying a bunch of money for the software, but, by using the software, they lose even more. Remember, day trading doesn’t work over the long term.

Testimonials from the site:

Jeff S.

"In 2 months I was able to recoup my investment. I have since paid off my mortgage and car."

Sam A.

"I started using VantagePoint 6 months ago and my account has tripled!"

By now you clearly understand that this is a scam. I don’t understand how it can be advertised on national radio. I don’t even understand how this is legal.

What is the total cost for the VantagePoint Software system?

A mere $4,900.

Be Blessed,

Dave

 

The Oldest Old

FAMILY UPDATE Jesse does his morning workout with our dog in the pool. Then they relax and watch TV.

My daughter got her driver's license! She passed the first time. I failed my first time because I ran through the very first stop sign on the course.

Her first destination as a licensed driver? She went to Publix to buy donuts with her brothers.

I watched a couple of fascinating episodes of 60 Minutes recently. One covered how many Boomers are now taking on roommates to help defray the cost of their living expenses.

Many of my clients bristle at the idea. “Roommates in my 60’s and 70’s? Like on the Golden Girls? No way,” they say.

So I see them struggle to get by on their meager savings and Social Security.

This all goes back to the idea that having to ask for help shows some sort of weakness.

My wife fought breast cancer six years ago. As you can imagine, we learned a lot about a lot of facets of life. She had great doctors, and the surgeries were very difficult, but overall we made it through. That isn’t the part of the experience that surprised us the most.

What surprised us was all the help.

When you face a life-threatening illness (with four very young children) certain thoughts run through your mind. “How are we going to make it through this?"

We have some family down here, but they could only do so much. Somehow, we had to balance my wife's care, and the rest she needed, with the very real-life demands of raising four children.

Then something amazing happened.

People came out of the woodwork to help us. While some were friends before the illness, most were mere acquaintances. Maybe someone we met once or twice. Sometimes we were served by people who didn’t even know us, but knew we were in a time of need.

It was an incredible experience. You don’t know what support is there until you really need it.

So what’s my point? For whatever reason, the American culture has taught us to be completely self-reliant less you be a burden to society and those around you. In almost every culture throughout human history it was assumed that those in the community supported each other. It wasn’t a sign of weakness. It is simply how humans naturally organize societies.

There are people out there waiting to help. It gives them purpose and joy to be the helper.

So why not explore the option of having a roommate? If you are curious you can go to www.SilverNest.com. It is well-designed and useful. You don’t have to barely survive with lots of other people out there with limited resources as well. Not only does it save a ton of money, but many people also find they like having someone else around the house. Humans are social creatures.

The other episode reported on a fascinating study about the “oldest old”. Meaning, those in the ’90s and ’100s. The study followed 14,000 people. They were tracked throughout their lives, and it came away with some fascinating insights into how they are living so long.

Smoking obviously lowered life expectancy dramatically, and genes had a big part to play, but some of the other findings were more surprising.

They found that drinking between one and three cups of coffee a day actually increased life span.

And get ready for this…drinking 1-2 alcoholic beverages daily increased life expectancy by 1-2 years. When you’re done reading this article crack open a beer without shame. Your spouse might look at you strangely if you are reading this at seven in the morning.

The common belief is that red wine is healthy in moderation, but the study found that alcohol, in any form, was equally effective.

What about exercise? Not surprisingly it was an important indicator. Their findings revealed that forty-five minutes of exercise a day was ideal. Two hours was not better than forty-five minutes. You don’t need to kill yourself doing hardcore workouts, as moderate intensity yielded equally good results. You don’t need to do all forty-five minutes in a row either. It can be spread throughout the day.

Another interesting finding was that it was advantageous to be overweight. While being obese is always bad, being a bit overweight as you get older is an indicator of a longer life. You don’t want to be slim in your 90’s.

Non-physical activities: book clubs, socializing with friends, board games, all good. They lead to a longer life.

Vitamins and supplements are a hot topic, but the study found no correlation between taking vitamins and living longer.

If you want to watch the segments go to:

https://www.youtube.com/watch?v=wqKfL3z5yM4 (the oldest of the old)
https://www.youtube.com/watch?v=xB8CddeNG2c (silver nest roommates)

Be Blessed,

Dave