Broker Check

Mazo Model Retirement Portfolio

| April 16, 2021

Know What You Own and Why

Know What You Don't Own and Why NOT

Description

Advantages

Disadvantages

VA-Variable Annuity w Guaranteed Lifetime Income Rider

  1. Guaranteed lifetime income rider-single/joint 
  2. Capital access
  3. 100% liquidity with advisory version (no surrender charges)
  4. Guaranteed lifetime income is locked in so unaffected by market losses
  5. Upside potential of investments in broad market indices
  6. Periodic lock-in of growth for income rider calculation (aka “Benefit Base”)
  7. Minimum guaranteed growth of Benefit Base before starting income
  8. Minimum death benefit is any capital remaining in contract
  9. Some with increasing income potential based on investment results while receiving income 
  1. Expenses & fees
    So lower ROI than owning identical index in a mutual fund structure due to higher expenses/fees
  2. Capital preservation not guaranteed.
  3. Loss of capital based on investment results is possible.
  4. Complex
  5. Guaranteed lifetime income reduced if capital is partially withdrawn

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FIA Fixed Indexed Annuity w Guaranteed Life Income Rider

  1. Capital guaranteed against market loss
  2. Guaranteed lifetime income rider-single/joint
  3. Capital access
  4. Guaranteed lifetime income is locked in so unaffected by market losses
  5. Upside potential of investments in broad market indices
  6. Uncapped upside potential of investments
  7. Periodic lock-in of growth for income rider calculation (aka “Benefit Base”)
  8. Minimum guaranteed growth of Benefit Base before starting income
  9. Minimum death benefit is any capital remaining in contract
  1. Capped investment gains
  2. Participation Rate
  3. So lower potential guaranteed lifetime income than VA.
  4. Expenses & fees
    So lower return than owning identical index in a mutual fund or VA structure due to higher expenses/fees and cap on gains
  5. Complex
  6. Guaranteed lifetime income reduced if capital is partially withdrawn
  7. Guaranteed capital is reduced if partially withdrawn

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Guaranteed Lifetime Income (joint or single) aka Single Premium Immediate Annuity (SPIA)

  1. Monthly check for as long as either one of a couple lives.
    (Other frequencies of payment available – quarterly – annually etc.)
  2. Guaranteed by issuer (insurance carrier)
  3. Also available to pay heirs if (2nd) death is premature (e.g. less than 10 years) aka Life (Joint Life) with at least 10 years certain
  4. Because capital is not accessible to owner, capital is also not accessible for potential Long Term Care expenses. Only the income is accessible

Give up capital / no access to purchase price
(unlike deferred annuities)

Author's Notes:

NB #1: Above chart indicates potential availabilities at the time of writing. Products change frequently. Products from different sponsors frequently differ. Products with identical names from the same sponsor but issued at different times might also differ.

NB #2: The annuity article footnoted below is included because I feel it is even-handed. The investment marketplace has historically seemed to have been more "pro-consumer" than the insurance marketplaces. But insurance is catching up. It is possible that certain insurance products might continue to only be available by paying a commission. But that is no longer true for "advisory" versions of VA's and FIA's, both of which are now available on a fee-only aka "advisory" basis. Some of the articles I researched for this post did not take this trend into account. The insurance world has long offered certain protections that the "pure" investment world previously did not. While structured products have not been included in these recent posts about models, ironically they now resemble insurance products more than traditional investment products. More complexity, but more protection. Your goals and values are the most important!


Footnotes

1. March 17, 2020 A Primer on Annuities by Mark Miller on Morningstar.com   https://www.morningstar.com/articles/972416/a-primer-on-annuities

2.. Feb. 27, 2019 Video Speech of Robert Shiller  https://www.youtube.com/watch?v=RpbW_kQdc-w

3. July 9, 2014. Stanford GSB (Graduate School of Business. Jonathan Berk: "Are Mutual Fund Managers Skilled or Just Lucky?  
https://www.gsb.stanford.edu/insights/jonathan-berk-are-mutual-fund-managers-skilled-or-just-lucky


Disclosures

Annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index.  Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways.  Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity.  Investors are cautioned to carefully review an annuity for its features, costs, risks and how they are calculated.

There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor.  Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The return and principal value of stocks fluctuate with changes in market conditions. Shares when sold may be worth more or less than their original cost.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value. US Government securities are backed by the full faith and credit of the US Government as to the timely payment of principal and interest. The principal value will fluctuate with changes in market conditions. If they are not held to maturity, they may be worth more or less than their original value.
Mutual Funds and Exchange-traded funds are sold only by prospectus. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained directly from the company or from your financial professional. The prospectus should be read carefully before investing or sending money.
REITs are subject to various risks such as illiquidity and property devaluations based on adverse economic and real estate market conditions and may not be suitable for all investors. A prospectus that discloses all risks, fees and expenses may be obtained directly from the company or from your financial professional. Read the prospectus carefully before investing. This is not a solicitation or offering which can only be made in conjunction with a copy of the prospectus.
Cetera Advisors LLC does not offer direct investments in commodities. A diversified portfolio does not assure a profit or protect against loss in a declining market. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.