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Understanding Annuities Life is confusing…and so are annuities!

The complexity of modern day life seems to add to confusion, and annuities are no exception. There are many types of annuities and the variations of them continually evolve, making them even more confusing.  Before you consider using an annuity in your deferred compensation plan or other retirement planning, make sure you understand the benefits, costs, and surrender charge period. Not all annuities are created equal. Annuities can provide valuable benefits, but there are typically costs associated with these benefits. As with any investment decision, you need to make certain it is appropriate for your unique circumstances.

There are basically two types of annuities: deferred annuities and immediate annuities. A deferred annuity defers payment, while an immediate annuity begins payment immediately. While this is pretty simple, from this point, annuities get very complex. There are many variations, and they are changing all the time.

If a concern of yours is to help manage your principal from potential losses associated with downturns in the market, annuities can be used to help manage risk. We tend to think that principal protection is always a financial goal that should be considered, but it is even more important as you enter into retirement.

If providing yourself with an income stream is a goal, an immediate annuity might fit into your plan. When you buy an immediate income annuity you are buying an insurance product in which you exchange a lump sum for guaranteed payments for life or a period of time. This may help you manage two big retirement risks: a down market or outliving your money.

Have you used an annuity in your retirement planning, or are you considering using one in the future?  If you have further questions on the various types and features of annuities, feel free to give us a call.

Lineweaver Financial Group w 9035 Sweet Valley DrivewValley View, OH 44125w216.520.1711

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC. Lineweaver Financial Group is independent of Sigma Financial Corporation.

Some fixed annuities come with high guaranteed interest rates that can decrease after a set number of years to a much lower minimum interest rate determined by law.

Investors can lose principal if an indexed annuity is terminated prior to the end of the surrender period.

The principal guarantee and income for life guarantee features of fixed annuities are subject to the claims-paying ability of the issuing company.

If you take an early distribution from an annuity you may be subject to a surrender charge which could result in a loss of principal.  You may also be subject to a tax penalty if you make a withdrawal before age 59.5.

 

 

Monitoring Risk in a Volatile Market


Determine Your Need for Risk

Many individuals will claim they are adverse to a high level of risk, while others embrace it and feel that a long-term strategy can make up for any short-term losses.  However, it is still prudent to try to mitigate and control risk at all stages in an attempt to manage your long-term returns.  I think "risk" is the most widely misunderstood investment concept. The consequences can be dire—running out of money before you run out of time. My favorite framework for thinking about risk looks at risk in three ways: your willingness, your ability, and your need to take risk.  Most individuals can measure their willingness and ability for risk, but few factor their actual need to take on an appropriate level of risk.

Risk is often defined as the odds of losing money or the chance of getting a return different from that which you expect. Against this backdrop many individuals—understandably—focus on their willingness to endure "risk." Others will focus on their ability to take risk. These investors will ask themselves if, given their age, income or profession, they have enough time, future earnings or job stability to stomach risk.

But the question that I don't hear asked nearly enough is whether or not one needs to take risk. For example, take a 65-year-old retired police officer with an investment portfolio and no debt maintaining an all-equity portfolio.  His living expenses are more than fully covered by his pension, required minimum distributions, and his reduced Social Security benefit. In this case the "need" to take excessive risk is not there even if the willingness is. On the other end of the spectrum is the 22-year-old new hire Patrolman who elects to put his entire 457(b) in a stable or fixed fund. In this case, the willingness to take risk is absent but the need for "risk," in the face of potential long run inflation, would be high.  In both scenarios, they did not consider what their need for risk should be.

Everyone’s comfort level of risk can be different, and the outcome of performance is likely to be affected by that level.  However, with proper diversification and active management of your portfolio, there are ways to control and alleviate your level of risk, while still allowing for potential returns that can meet your long-term goals.  Having a well structured, diversified portfolio is a prudent way to help manage your risk level.  Some people prefer to have professionals manage their account for them, so it takes the emotion out of the decision making. This can help prevent the “panic sell”, which may turn into a “buy high and sell low strategy”.

Potential Returns

So how does the typical investor’s returns compare to some of the major market indices over the past 20 years?  To make it very simple, the S&P 500 averaged 7.8% per year, while the Barclays Capital US Aggregate Bond Index returned 6.5% per year over the same time period. A 50/50 blend of these two asset classes would have yielded a nominal annualized return of 7.2%.

However, the average investor's 20 year annualized return is dismal compared to those figures. According to an analysis by Dalbar, the average investor earned 2.1% over the twenty year period ended Dec. 31, 2011. But wait, it gets even worse.  After including inflation, the average investor actually got a negative real return. Inflation (CPI) grew at an annualized rate of 2.5% during that same period. So the average investors' net real return was -0.4%. The average investor is not very good at capturing the market return of a simple balanced portfolio, never mind outperforming it.

As you can see, many investors make decisions based on “short-term concerns, crowding out longer-term, more rational strategies,”  and are overly influenced by the daily noise about stocks in the media.  By taking emotion out of the equation, you are more likely to benefit from a "Buy low, sell high” strategy.   Note that that phrase does not call for buying at the "lowest" or selling at the "highest," which is, of course, impossible to do on a consistent basis. It simply recommends a process of harvesting those holdings that have done well, and reseeding a portfolio with holdings that have underperformed. This, essentially, is what rebalancing a portfolio is all about: a prudent strategy for managing an investor's overall risk. Most people think that "buying low and selling high" is the magic formula for above-average returns, but in fact it is a strategy for managing portfolio risk and many individuals aren’t able to do this by themselves.

While risk and reward go hand in hand, it's important to think about all three elements of risk—your willingness, ability, and need to take risk—before making investment decisions. If after reviewing your current portfolio or level of risk you have questions, feel free to give us a call.

Lineweaver Financial Group s 9035 Sweet Valley Drive s Valley View, OH 44125 s 216.520.1711

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC.

Lineweaver Financial Group is independently owned and operated.

It is not possible to invest directly in an index. Diversification and asset allocation does not guarantee against loss or ensure a profit. They are methods used to help manage risk.

 

 

 

The Changing Real Estate and Interest Rate Environment

Interest rates have been at historic lows but have since started to rise in 2013. However, it still may make sense to act quickly before they continue to escalate.  Real estate prices have started to reverse their steep decline and long slump; so if you are thinking about selling, buying, or refinancing, now might be a good time to be aware of your options.

According to the S&P 500/Case Shiller Home Price Index, home prices nationally have risen at their fastest annual rate in seven years, with some markets seeing double-digit price gains as buyers compete in a market with dwindling inventory of properties. Many areas of the country, including some vacation-home markets, are recovering at a slower pace; and the choices for buyers remain plentiful. Not only have prices started to turn, mortgage rates have started to increase.  Average U.S. rates on fixed mortgages jumped in late May to their highest levels in a year, signaling slightly higher costs for homebuyers and fueling buying demand, according to the Mortgage Bankers Association. But rates still remain low by historical standards.

Due to the real estate crisis and the lack of any recovery, many potential sellers have been on the sidelines, not wanting to sell at depressed prices. Buyers have also been on the sidelines, waiting for prices to fall further, and for interest rates to drop. Sales activity is increasing due to a combination of increasing rates and rising prices and/or if there is an uptick in mortgage rates. If you have been on the sidelines, either as a seller or a buyer, be aware of the changes in the market. You're never going to time the market exactly right. What you want to see in front of you is that prices are starting to appreciate, which is where we are today.

If you are considering tapping into some of your savings to pay down your mortgage debt, make sure you keep in mind the following things.  Mortgage rates could be higher or lower in the future, as could savings rates, and your mortgage interest may be tax deductible, potentially lowering your after-tax effective rate. Don’t use too much debt, but don’t use too much of your liquid emergency fund either. Just like most things in life, the proper balance is important.

Another way to potentially take advantage of the low interest rate environment is to consolidate and refinance higher interest debt.  During these tough economic times, many people have had to resort to racking up expenses and bills on high-interest credit cards.  If you are only able to make the minimum payments on these cards, it may take an extremely long time to pay them off and your interest charges could well exceed the original expenses.

Police Officers and Firefighters may also have another alternative.  Some 457 deferred compensation plans allow for an emergency loan feature, where you can borrow some of your funds to help you out of your current situation.  This is not treated as a distribution, it is a loan because you are promising to pay it back at a reasonable rate of interest.  This is not a cure-all solution, and you want to make sure it makes sense for your personal situation before dipping into your retirement savings.  Not all plans allow for this, and there are restrictions and guidelines that must be followed.  At Lineweaver Financial Group, we currently work with several cities; and our deferred compensation plans do allow this loan feature.  If it’s something that you feel could help your current situation, let us know and we’d be happy to discuss your options.

While low interest rates can have a negative impact on your savings and checking accounts, you can still take advantage of them with your personal and household debts.  As the real estate and interest rate environment continues to change, your choices and opportunities to take advantage of the current situation could also be modified. Make sure you consult a professional before making any big decisions.  If you have further questions, feel free to give us a call.

Lineweaver Financial Group s 9035 Sweet Valley Drive s Valley View, OH 44125 s 216.520.1711

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC

Lineweaver Financial Group is independently owned and operated.

Investment advisory services are offered through Sigma Planning Corporation, a registered investment advisor.

 

 

 

Which 457 Deferred Compensation Plan is Right for You?

Life used to be simple.  Your community’s 457 deferred compensation plan probably offered only one option.  Now, however, many communities have adopted several options that are represented by various private financial firms, along with the state-run plan.  Each plan may have different features and investment options, along with a range of fees.  Some plans provide active management and will choose the funds on your behalf, making adjustments based on market conditions--while others require you to make the decisions yourself.  You may find yourself wondering which plan or plans are most suitable for your situation and how to know if you’ve picked the right one.

With the pension reform that took place last year, and more potential changes on the horizon, your deferred compensation assets are going to become even more important in your retirement planning strategy.  We encourage all employees to at least contribute something to a 457 plan, even if it’s a small amount to start.  Your contributions go into your plan pre-tax, thus lowering your taxable income for the year.  They potentially grow tax deferred throughout your career, and then will be taxable as earned income when you take distributions in retirement.  This compounding effect can really help you save money over your career as a Police Officer or Firefighter.  457 plans also allow for high contribution rates.  If you are under the age of 50, you can contribute up to $17,500 this year.  If you are age 50 or older, you can contribute an additional $5,500 for a total of $23,000!  Some employees are also eligible for a “special catch-up contribution,” which could allow you to contribute up to $35,000 per year for up to three years prior to your retirement (restrictions may apply).  The bottom line is that whatever amount you can spare to save, you will want to make sure it is managed properly and you are making the best use of these funds.

Our company currently services numerous municipalities in the Greater Cleveland area as a deferred compensation provider.  We are constantly fielding questions on how all the different plans work and their advantages and disadvantages.  To help you through this process, we felt it would be important to arm you with some questions you can ask your provider(s) to ensure you know how your deferred compensation plan works and to help you decide if it matches your goals and objectives.

Here are some questions to get you started:

  • How many investment options are available?
  • What are your current fees and fund expenses?
  • Does your current plan have a surrender charge?
  • Does your plan allow for an easy access emergency loan program? What are the start-up costs and interest rate charges?  Is any of the interest credited back to your account?
  • Does your plan have a principal protection feature, regardless of market conditions?
  • Does your plan have an income or withdrawal benefit attached to it?  If so, what are the fees for this and how does it work?  What are the restrictions?
  • Does your deferred compensation provider offer full financial planning services to handle and coordinate all your financial, tax, legal, and insurance matters? Do they offer an ongoing program of current educational programs for you and your family?

At Lineweaver Financial Group, we feel knowledge is important, and an informed client often results in a happy client.  Retirement planning can be a very stressful process-- and in some cases, you may not get a second chance.  Having a properly structured deferred compensation plan can be critical to the success of your plan.  If you have further questions or would like a complimentary analysis of your plan versus your other available options, feel free to give us a call.  We would be happy to assist you.

Lineweaver Financial Group

9035 Sweet Valley Drive

Valley View, OH 44125

216.520.1711

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC

Lineweaver Financial Group is independently owned and operated.

This is for informational purposes only and should not be construed as tax, legal, or financial advice. Please consult your tax, legal or financial advisor.

 

Bridging the Gap to Medicare

Many of you may be planning for your upcoming retirement, and it is our experience that the majority of Police Officers who retire are under the age of 65.  Have you thought about how to keep healthcare coverage costs in check during the “Gap Years”?  Upon your retirement, if you have not yet reached age 65 and thus become eligible for Medicare, you and your eligible dependents may participate in the Ohio Police and Fire sponsored healthcare plan, and have the premiums deducted from your monthly benefit check.  However, not everyone realizes that health care is going to be the single largest expense you will face from the time you retire and until you hit age 65 and qualify for Medicare.

What are your monthly premiums if you take the Ohio Police and Fire health care?

In retirement, the Ohio Police & Fire sponsored healthcare plan will subsidize 75% of the members’ healthcare premiums, but only 25% of dependent premiums, if you began receiving benefits on or after July 25, 1986.  This can get very expensive, especially if you need to add your family members to your healthcare plan.

If you are an OP&F member retiring in 2013 and planning on being the only one on the OP&F healthcare, prescription drug, vision, and dental plans, your monthly premiums will be approximately $285 per month.   If you add your spouse to each of those plans, your new combined monthly premium is approximately $870 per month.  For a family of four on OP&F health care, prescription drug, vision, and dental plans, you would be looking at approximately $1,410 per month! *

What are my other options?

Depending on your situation, there may be some alternative options.  First, if your spouse is employed, you may be able to join his or her health plan to save money and still maintain coverage.  It could also make sense for you to stay on OP&F’s healthcare plan and have your spouse and children join your spouse’s plan.   You also might decide to continue to work in some capacity that provides health care even if you have to pay a supplemental premium to have the complete coverage you need. You could choose to get a part-time job to cover the premium shortfalls within the OP&F healthcare plan.  Last, but certainly not least, you can ensure that your DROP and deferred compensation assets are invested properly and structured correctly to cover the entire gap between the lower premiums you paid when you worked full time and the higher retirement premiums.  This can really help supplement your pension instead of you having to feel the full pain of the increased healthcare premiums.  If you have questions on how to do this, just give us a call and we’d be happy to help.

However, there is a benefit to staying on the OP&F healthcare.  Ohio Police and Fire members classified as “public safety officers” may be eligible to take a gross income exclusion for health insurance premiums of up to $3,000 annually.  This is an added benefit from the 2006 Pension Protection Act.  This essentially lowers your taxable income by up to $3,000 per year.  To qualify, a member must have retired under normal service retirement (i.e., age 48 or older with 25 years of service); have achieved age-commuted service; or been granted a disability benefit.  To receive this exclusion, retired or disabled officers must have qualified health insurance premiums deducted directly from their pension.  This exclusion can also include premiums paid for the member’s spouse and dependents, again assuming premiums are deducted directly from the member’s pension.

Don’t forget to plan for healthcare costs in retirement.  There are many ways to help cover or reduce these expenses before you are eligible for Medicare.  Be aware of all your options now to have a healthy retirement later.  At Lineweaver Financial Group, we feel that education and planning is vital for a successful retirement.  If you’d like more information on any of the topics discussed and how they may impact your specific situation, feel free to contact us.

*Source: www.OP-F.org

Lineweaver Financial Group

9035 Sweet Valley Drive
Valley View, OH 44125
216.520.1711

www.OhioRetire.com

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC
Lineweaver Financial Group is independently owned and operated.


Last Updated (Friday, 14 June 2013 09:12)

 
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