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What is the New "Contingent Deferred Annuity"

5/15/2022

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ThinkAdvisor has a great article discussing the new contingent deferred annuity, here is the link and key parts of the article.

​Longevity risk is one of the hot topics on the minds of advisors and clients considering expanding life expectancies. The poor performance of equities and bonds so far in 2022 compounds these concerns given the prospect of sequence of return risk for retirees. And while sources of guaranteed income, such as annuities, might be attractive to many clients, some balk at the loss of optionality that comes from taking funds out of their portfolio and putting them into the annuity.
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With this in mind, Aria Retirement Solution’s RetireOne introduced a fee-based Contingent Deferred Annuity (CDA) product (also known as a Stand-Alone Living Benefit or SALB) that allows clients to keep their funds invested in their current investment account (with eligible RIA custodians) while gaining the protection of guaranteed income if their account is depleted. With the CDA, the issuing insurance company guarantees a certain annual income for the purchaser, such as $40,000/year on a $1,000,000 investment account. This income initially comes from portfolio withdrawals from the account itself. If returns are favorable, the distributions simply sustain. However, if market returns are less favorable, and the portfolio is depleted to a specified level, at that point, the insurance company takes over the income payments. In return for this protection, the insurance takes an annual fee from the portfolio (varying from 1.1% to 2.3% per year in the case of the new Aria/Midland product, with fees driven in part by the amount of risk taken in the portfolio). Notably, the total cost of a CDA arrangement will also include the advisor’s own AUM fees for managing the portfolio, and any underlying fund fees.

In a new whitepaper, retirement researcher Michael Finke compares the CDA to sharing a birthday cake at a party. If the slices are made too big (i.e., too much annual income is withdrawn from an investment portfolio), the cake (portfolio) could run out. On the other hand, if the slices are too small, there could be some left over (or in the case of a retiree, they spent less during their lifetimes than what their portfolio would have supported). The CDA ensures that the retiree will be able to have a certain annual income each year without having to make the annual ‘slices’ small enough to make sure the portfolio lasts throughout retirement (because the CDA guarantee backstops the arrangement if the ‘cake’ is running out).

In the end, it is important for advisors to recognize their clients’ retirement income styles and choose a retirement income strategy accordingly. For those with full confidence in long-term market returns, underlying guarantees may not be necessary, and those who don’t want to take any market risk may not want to invest at all. However, for a segment in particular, the CDA structure is aiming to find a balance of serving clients who are willing to stay invested in markets, but are willing to give up some long-term upside (as a result of the annuity costs) in exchange for having some income floor in place in the event of an unfavorable sequence of market returns that is otherwise beyond their control.
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Estate Planning Tax Erosion Guide

5/6/2022

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The brochure from Prudential below is a perfect piece about estate planning and taxes. It breaks down information into “Highlights” and “Examples” to ease understanding.
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Searching for a Fixed Income Alternative?

5/5/2022

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Below is an article from AIG that shows how a fixed index annuity (FIA) can provide a unique combination of growth potential, asset protection and lifetime income that a traditional 60/40 stock and bond portfolio may not offer.
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How Rising Interesting Rates Affecting Bonds and Stocks - Part B

5/5/2022

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In last blogpost, we discussed how rising interest rates affect bonds.  Now let's see how rising rates affect stocks.

Short Term Impact
When interest rates are rising or if investors anticipate a rise, many will sell bonds or some of their bonds to avoid the fall in prices and buy stocks. This commonly results in stocks rising while bonds are falling. Like bonds, not all stocks react the same way to rate hikes. In fact, some sectors historically perform well during periods of rising interest rates. For example, banks typically have stronger earnings because they can charge more for their services. Rising interest rates also tend to favor value stocks over growth stocks because of the way many investors calculate a stock’s intrinsic value. Rising interest rates makes these investors demand more for their investment dollars, so they’ll commonly turn to stocks that have a history of earnings growth. Of course, past performance is not an indicator of future results. 

Long Term Impact
However, over time, rising interest rates can have a negative effect on stock prices. Higher interest rates make it more expensive to borrow money. A business that doesn’t want to pay the higher cost for a loan may delay or scale back projects. This, in turn, may slow the company’s growth and affect its earnings. A company’s stock price generally drops when its earnings decline.

Also, rising rates increase margin rates or the rate in which traders borrow money to trade stocks. The higher rates make trading on margin less profitable, and many traders often cut back the amount of margin they use, which means there’s less demand for stock shares.

Finally, rising rates typically lead to a stronger dollar, which may put additional pressure on the stock prices of multinational companies because it becomes more expensive to do business in some countries.
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How Rising Interesting Rates Affecting Bonds and Stocks - Part A

5/4/2022

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​Generally, bond prices and interest rates move in opposite directions - when interest rates rise, bond prices tend to decline. Think of it this way: Say, you have a choice of a $1,000 bond that pays 2% interest or one that pays 3%. All other things being equal, which would you choose? The higher interest rate can make the lower-yielding bond less appealing to investors, which causes the price to drop.

Not all bonds react the same way to interest rate changes. Some are more sensitive depending on the type of bond or its quality. For example, corporate bonds typically have higher coupon (interest) rates, which generally make them less sensitive than U.S. Treasuries. This is because higher-quality bonds tend to be more sensitive to changes in interest rates. So, if you have a AAA-rated corporate bond, you may see a larger change in the price compared to a AA-rated bond.

Bonds with shorter durations (maturities) are usually less affected by rate changes as well.  An 1% rise in rates could lead to a 1% drop in the one-year Treasury bill’s price. The longer the maturity, the greater the effect a rise in interest rates will have on bond prices. The same 1% rise in rates could mean a 5% decline in the price of a five-year bond or a 16% drop in the price of a 20-year bond.

One way to potentially help minimize the risks of rising interest rates is to create a bond ladder, which involves having multiple bonds with different maturity dates. This diversified approach allows investors to own a variety of bonds with a variety of maturities so when interest rates change, each bond will be affected differently. Additionally, as each “rung” on the ladder matures, you can purchase new ones with higher yields, assuming rates are still rising. You may also want to consider diversified bond mutual funds or exchange-traded funds (ETFs).

In next blogpost, we will discuss how rising interest rates affecting stocks.
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Retirement Income Options

5/3/2022

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​Follow the Route that Helps Achieve Your Income Game Plan -
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Why Moving to a State with Low Income Taxes Could Cost You

5/2/2022

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Below is an article from the Barron's:
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Moving to a state that has little or no income tax may not be a savings panacea.

That’s what financial professionals are telling clients who are fed up with high income tax rates in their home state and weighing an out-of-state move. They’re counseling clients to take an in-depth look at the possible financial and lifestyle ramifications before packing their bags. 

Your money-saving move could end up being a costly one if you run afoul of state residency requirements.

That’s because clients trying to escape a state with high income taxes could experience higher property taxes, sales tax, insurance rates, and other cost-of-living expenses that minimize or negate the financial benefit they’re seeking. 

“States with low or zero income tax are funding their government somehow,” says Rob Burnette, chief executive of Outlook Financial Center, an Ohio-based company that provides insurance services and asset protection solutions. 

Here are several factors financial professionals say clients need to consider. 

The overall tax picture. When helping clients make a relocation decision, financial advisors try to provide a full overview of how things could look in terms of income taxes, property taxes, sales taxes, and estate or inheritance taxes—major budgetary items people tend not to think about when making decisions on where to move. 

Property tax rates, in particular, tend to catch people unaware, says Morgan Stone, a certified financial planner and president of Stone Wealth Management in Austin, Texas. He has had several clients move to his town to escape high income tax states, such as California, only to be shocked by high property tax rates. In Austin, a person could pay $18,200 in property taxes for a $1 million home, compared with $6,400 for the same value home in San Francisco, according to Smartasset.com’s property tax calculator. 

Certified financial planner James Bogart recently ran an analysis to illustrate how much a relocating client who was buying an $800,000 home could expect in property taxes, effective income tax, sales tax, and estate or inheritance tax in six different areas of the country. The analysis also showed the estimated size of the client’s investment portfolio at age 90 based on these factors. The upshot: the state with zero income tax wasn’t the best move for the client’s portfolio. Rather, the client could amass roughly $1.4 million more by opting for the lowest property tax location instead. 

This type of analysis is important, he says, because it shows that income tax can’t be considered in a vacuum. Other taxes can still have a “material impact” on overall financial well-being, even if a client maintains the exact same lifestyle, says Bogart, who is president and chief executive of Bogart Wealth, which has offices in Virginia and Texas.

Sources of income. While the common misconception is that if you move to a state with low or zero income tax, this rate will apply to all of your income, the analysis is more complicated if you earn income from multiple states, says Or Pikary, a certified public accountant and senior tax advisor with the Los Angeles office of Mazars, the global accounting and consultancy firm. 

Say, for instance, you have a business that sells to customers in multiple states. Even if you move to Florida, which has no state income tax, you’re still required to pay taxes to the other states to the extent the income is sourced from there, he says. Rental property owners, regardless of where they live, also generally need to pay income tax to the state where the property is located. As a result, “your perceived income tax savings may be less than you think,” Pikary says.

Additionally, he suggests being cautious about state residency requirements if you’re moving to a lower tax state and maintaining ties to your old community. States have gotten more aggressive about doing residency audits—even more so since Covid began, he says. Your money-saving move could end up being a costly one if you run afoul of state residency requirements, he says. 

Cost of living differences. Burnette of Outlook Financial offers the example of a recently retired client who planned to move from Ohio to Florida. His calculations showed that by moving to Florida she would need to work part time to maintain her lifestyle. This was true despite the income tax savings she’d achieve by moving.

Special deliberations for retirees. Some states, depending on your adjusted gross income, may not tax your income at all. So you may be in the same position—or worse—by moving to a zero income tax state once you factor in other taxes and a higher cost of living, Pikary says. 

“It has always puzzled me when someone retires from a high income tax state and moves to a no state income tax state, such as Texas, when they have no earned income and then make a large real estate. “In reality, it should be the reverse—live and work in Texas and enjoy no state income taxes, then  retire and move to a high income tax state when you have no earned income. Buy a big house there, and pay half the property taxes you paid in Texas,” he says. 

Other considerations. Financial professionals say it’s important for clients to think through lifestyle implications and the potential associated costs. Those with school-age children should investigate the strength of the public school system and whether private school could be warranted and what the cost could be. Another consideration is whether your current state offers vouchers to attend private school and whether that’s a perk you’ll be giving up or gaining through a move, Pikary says.

People should also scope out the medical system in the new location and whether they will have to pay more for car insurance or home insurance generally, or wrack up additional costs due to provisions such as flood protection they didn’t previously need, says Bogart. 

It’s also important for clients to determine whether they will still have access to activities they enjoy, such as skiing or sailing, and whether there may be extra costs involved. People also need to take into account their proximity to family and whether travel costs will increase.

“Many decisions in life are part financial, but also part emotional,” says Bogart. “We need to properly assess as many implications as possible.”
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May 2022 PFwise.com Newsletter

5/1/2022

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For archived newsletters, please visit here.
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