Imminent Stock Market Correction Predicted in 2019
Are you concerned about your retirement savings because of stock market volatility? Consider that in 2019, the current 10-year bull market is the longest on record. Institutional investors predict its end within the next 12 months, with a 40% to 70% retracement (fall). Take note, that if the stock market drops 50% you need to make a 100% to get even. If you need to withdraw money while the market is low and recovering, which could take years, you might never be able to recuperate your losses.
This present a real risk, especially for Small Business Owners that are semi-retired, close to retirement or close to/over 60 years old. Considering mediating between current short-term potential returns and expected losses. Is the risk worth it? Do you want to stop worrying that stock market volatility endangers your retirement savings? Maybe it is wise to move some portion of your portfolio to money market accounts, CD’s or annuities.
Annuities could be a good investment option for you as small business owner. However, consult with your financial advisor and it is always a good idea to get a second opinion.
What are Your Investment goals?
When taking to your financial advisor you need to be clear on what you want to achieve with an annuity:
- Principal protection / capital preservation?
- Income period or lifetime income?
- Legacy planning / death benefit?
- Growth requirement?
- Long-term care costs?
- Tax reduction / tax-deferred growth?
- Creditor protection? (consult with a specialist)
What is an Annuity?
An annuity is a contract between you the small business owner and an insurance company to meet your specific investment/retirement goals. The purpose of an annuity is to provide you with a steady stream of income during retirement. You can choose between making a lump sum payment or series of payments and in return, receive regular disbursements immediately or at some point in the future. An annuity transfers the risk from you to the insurance company, subject to the terms, conditions and limitations of the insurance contract.
What are the Types of Annuities?
There are three basic types of annuities, fixed, variable and indexed as follows:
- Fixed Annuity: The insurance company promises you a minimum rate of interest (around 3%) with guaranteed income payout for a specified term or for life. Fixed annuities are regulated by state insurance commissioners.
- Variable Annuity: The insurance company allows you to direct your annuity payments to different investment options, usually mutual funds. Variable annuities differ from fixed annuities, which offer a guaranteed return. Your payout will vary depending on how much you invest, the rate of return on your investments, and expenses. You have the assurance that you will get back the principal paid. The SEC regulates variable annuities.
- Indexed Annuity: An indexed annuity is a type of fixed annuity that guarantees a minimum rate of interest, but its value is also based on the performance of a specific stock market index, such as the Standard & Poor’s 500 Index. It combines features of securities and insurance products. Indexed annuities are regulated by state insurance commissioners.
What are Annuity Riders?
Annuity riders are attached to an annuity insurance policy that expand or restrict the policy’s benefits or excluding certain conditions from coverage. Examples of annuity riders include:
- Commuted Payout Rider
- Cost of Living (Cola) Riders / Inflation-Adjusted Riders
- Disability, Unemployment & Terminal Illness Riders
- Guaranteed Lifetime Withdrawal Benefit (LIB) Rider
- Guaranteed Minimum Accumulation Benefit Rider
- Guaranteed Minimum Death Benefit (GMDB) Rider
- Guaranteed Minimum Income Benefit Rider
- Guaranteed Minimum Withdrawal Benefit (GLWB) Rider
- Impaired Risk Rider / Medically Underwritten Rider
- Long-Term Care Riders / Nursing Home Riders
- Refund / Return of Premium Riders
These riders are generally available for both fixed and cover future scenarios such as if you lose your job, become disabled, become terminal ill or die. However, riders come with an additional fee (could be expensive) that’s charged for the life of the policy. Remember that each additional rider reduces the income that you will receive.
What are the Annuity Fees/Charges?
It is important that you as small business owner understand all charges associated with investing into annuities. Ask your investment advisor about the fees that you will incur.
Common fees associated with annuities are:
- Administration/Contract Maintenance Charge: The administration/contract maintenance charge covers the cost of maintaining the policy (e.g. accounting, record-keeping and other administrative expenses). This charge could be a flat annual fee or a percentage of your account value.
- Contingent Deferred Sales Charge (CDSC)/Surrender Charge: A surrender charge is a type of sales charge that you must pay if you sell or withdraw money in excess of the scheduled payment amounts from an annuity during the surrender period. The surrender period is typically six to eight years after you purchase the annuity. The Contingent Deferred Sales Charge (CDSC) pays for sales expenses such as commissions, promotions and sales materials.
- Mortality and Expense Risk Charge (M&E): A mortality and expense risk charge compensates the insurance company for guaranteeing that annuity purchase rates and charges will not change, regardless of mortality rates or actual expenses. This charge is a percentage of your account value, typically about 1.25% per year.
- Premium Tax Charge: This charge reimburses the insurance company for any premium taxes levied by a state or other government entity.
- Commissions: All annuities have commissions that are paid to the insurance agents. They normally built into the price of the contact and not highlighted in the contract.
- Annuity Rider Fees: Annuity Rider Fees are additional fees for rider features mentioned above.
- Penalties: If you withdraw money from an annuity before you are age 59 ½, you may have to pay the Internal Revenue Service a 10% tax penalty.
- Mutual Fund Expenses: Mutual fund expenses are subtracted from your underlying mutual fund assets to pay for fund management distribution (12b-1) fees and other expenses.