Slagle Financial

Annuity Insights

The Insured Retirement Institute (IRI) – a trade association for the retirement income industry – advocates annuities as a vehicle that can help provide retirees income, guaranteed by the insurer. The organization has been actively educating and lobbying legislators to expand annuity access as part of employer-sponsored retirement plans.¹ Under this scenario, whatever portion the investor contributes to an annuity option in his 401(k) would be eligible for distribution throughout his lifetime based on an estimated calculation of life expectancy.

A deferred annuity is a contract between an insurance company and an individual. The individual pays a one-time or ongoing premium in exchange for eventual payouts that include both return of premium plus interest.²

There are many types of annuities. They are complex and include additional fees and restrictions that make them more expensive than other types of investments. Then again, there are no other products that guarantee a combination of minimum income payout, an option for guaranteed income for life and a guaranteed death benefit. It’s important to work with a financial professional to ensure an annuity is appropriate for your situation, and to choose the best option. We would be happy to help you with that evaluation.

Outside of a qualified workplace plan, retirees may purchase an annuity to diversify their retirement portfolio. Historically, bonds offered guaranteed income that retirees could count on, but today’s lower yields have investors searching around for other alternatives. An annuity can offer a similar level of guaranteed income without market risk.

In a fixed-index annuity (FIA) an investor pays premiums to an annuity company, which then invests to earn enough money to distribute contractual payouts plus interest, as well as generate revenues to run the company and hold a general reserve fund. Because the insurer does the investing, it bears all the market risk. With an FIA, the investor’s principal is protected from market volatility and he receives a minimum interest guarantee.³

Some fixed-index annuities are linked to a specific index, such as the S&P 500. The insurer provides the annuity owner a certain percentage of the index’s return but limits any losses. That way the investor can earn more income in any given year, based on how well that index returns.⁴

Note that when the owner withdraws money from an annuity, regardless of whether it is part of or separate from a workplace retirement plan, the full distribution is taxed as ordinary income, not as long-term capital gains. However, note that when annuity interest is earmarked to pay for long-term care insurance premiums or qualified long-term care expenses, it may be withdrawn tax-free.⁵

Content prepared by Kara Stefan Communications.

¹ Mark Schoeff Jr. Investment News. March 4, 2021. “Insured Retirement Institute wants more worker access to plans, annuities.” https://www.investmentnews.com/insured-retirement-institute-wants-more-worker-access-to-plans-annuities-203567. Accessed March 4, 2021.

² David Rodeck and John Schmidt. Forbes. Feb. 4, 2021. “What Is a Deferred Annuity?” https://www.forbes.com/advisor/retirement/deferred-annuity/. Accessed March 4, 2021.

³ Insurance News Net. March 3, 2021. “Are Annuities A Good Alternative To Bonds?” https://insurancenewsnet.com/oarticle/are-annuities-a-good-alternative-to-bonds. Accessed March 4, 2021.

⁴ Sandra Block. Kiplinger. Feb. 19, 2021. “The Case for Indexed Annuities.” https://www.kiplinger.com/retirement/annuities/602301/the-case-for-indexed-annuities. Accessed March 4, 2021.

⁵ Ken Nuss. Kiplinger. Feb. 12, 2021. “How Annuities Are Taxed.” https://www.kiplinger.com/retirement/annuities/602248/how-annuities-are-taxed. Accessed March 4, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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One way for the government to potentially earn more tax revenue is by eliminating the early withdrawal penalty. This is the typical 10%-tax penalty on distributions from retirement accounts by people younger than age 59 ½.¹

If that penalty didn’t exist, investors may be more inclined to pull money out of their retirement accounts, whether to purchase necessities or to splurge on a luxury item. Without that penalty, they would pay only income taxes on the distribution, which seems somewhat equitable since they received a tax break on the contributions that went into the account. But paying 10% to the government on top of those taxes? It can be very discouraging.

On the one hand, that means the government will have to wait longer to receive tax revenues on those tax-deferred assets. On the other hand, it means the government will likely receive higher tax revenues because taxes will be due on long-appreciated capital gains. However, the other way the government benefits is because the more that people put away for retirement, the less they will have to rely on government benefit programs during retirement.

So, in many ways, the early withdrawal penalty is a win-win for both investors and the government, except during times when financial struggles are particularly difficult, such as during a pandemic. After the COVID-19 outbreak, millions of Americans lost income, and many had no choice but to pull money out of their retirement accounts to help make ends meet.

If you are considering making a withdrawal from your 401(k) — or any other investment account — to meet your current income needs, give us a call. We can review your financial situation to see if there may be a better way to leverage your assets that will help protect your potential for investment growth in the future.

Recognizing that Americans needed cash fast, the government stepped in with the CARES Act in the spring of 2020, permitting retirement account owners younger than age 59 ½ to withdraw up to $100,000 from their savings without paying the 10% penalty.² That provision ended in 2020, but a major disaster declaration was signed into effect for account owners who experienced federally declared disasters, not including COVID. For example, during the Texas winter storm.³

However, Olivia S. Mitchell, executive director of the Pension Research Council at Wharton School of Business, says withdrawing money early from retirement accounts for any reason is a terrible idea. According to Mitchell, the biggest danger to doing so is the opportunity risk, and she cited the following example:

Assume a 40-year-old withdraws $50,000 from her retirement account today. By retirement at age 67, she would have given up more than $223,000 in retirement assets (assuming an annual return of 5.7%). Converted into annual benefits, that’s about a $14,000/year reduction in retirement income for the rest of her life.⁴

In other words, taking $50,000 out of your savings today may save you a 10% penalty, but it could potentially negatively affect your retirement lifestyle in the future.

If you did make a 401(k) distribution last year, note that the CARES Act also included a provision to help restore some of your potential investment gains. Investors have three years to pay the amount withdrawn back to the plan without any tax consequences — income taxes or the early withdrawal penalty.⁵ This is a substantial expansion period compared to the usual 60 days — and hopefully gives many retirement plan owners time to recoup and repay that “loan” to themselves.

Content prepared by Kara Stefan Communications.

¹ Jim Blankenship. EFT Trends. Feb. 23, 2021. “16 Ways to Withdraw Money From Your 401(k) Without Penalty.” https://www.etftrends.com/16-ways-to-withdraw-money-from-your-401k-without-penalty/. Accessed Feb. 25, 2021.

² Mark Paller. Forbes. Feb. 25, 2021. “How The CARES ACT Changed Retirement Plan Distribution Rules.” https://www.forbes.com/sites/forbesfinancecouncil/2021/02/25/how-the-cares-act-changed-retirement-plan-distribution-rules/?sh=6a4193b64add. Accessed Feb. 25, 2021.

³ Alex Briseno and Todd J. Gillman. The Dallas Morning News. Feb. 22, 2021. “Additional 31 Texas counties included in federal major disaster declaration.” https://www.dallasnews.com/news/politics/2021/02/22/additional-31-texas-counties-included-in-federal-major-disaster-declaration/. Accessed Feb. 25, 2021.

⁴ Knowledge@Wharton. Feb. 23, 2021. “Why Early 401(k) Withdrawals Are a Bad Idea.” https://knowledge.wharton.upenn.edu/article/why-early-401k-withdrawals-are-a-bad-idea/. Accessed Feb. 25, 2021.

⁵ Andrew Osterland. CNBC. Jan. 21, 2021. “Here are tax issues to consider if you tapped retirement account to weather 2020.” https://www.cnbc.com/2021/01/21/here-are-tax-issues-to-consider-if-you-tapped-retirement-account-in-2020.html. Accessed Feb. 25, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.

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Amid lost jobs and a scaled-back economy in 2020, some workers may have decided to retire earlier than planned. There are a couple of Social Security strategies worth considering in this scenario.

First, if both spouses are over age 62, determine if you can make ends meet by taking only one Social Security benefit while letting the other benefit accrue to a higher level. Depending on your circumstances, it may be better to let the higher earner’s benefit accrue untapped as long as possible. This tactic not only provides higher income for the latter stages of retirement, but also allows the surviving spouse to receive a higher benefit – which is important when the household income is cut in half.

A second strategy is to wait until the economy recovers and then look for another job. If you start Social Security and then go back to work in fewer than 12 months, you can stop your benefit and actually pay back the money received. That will reset your start date and enable your benefit to continue accruing until you’re ready to retire again.¹

Remember, there are various strategies you can use to create bridge income should you retire early or just want to give your Social Security benefits and/or investments more opportunity to grow. For example, if you downsize to a less expensive living arrangement, you can use excess equity to create a reliable income stream either throughout a specific period of time, or for life. Please contact us if you’d like to learn more about strategic retirement income solutions.

One of the silver linings of the pandemic was that the average savings rate among Americans increased significantly last year. According to the Bureau of Economic Analysis, the U.S. personal savings rate soared to a record 32.2% in April 2020 – which coincided with many state and local lockdowns. The previous one-month record was set back in May of 1975, at a mere 17.3%. Throughout the past decade, our savings rate has floated between 6-8%.²

Even if for only one month, Americans proved that they could live without many everyday goods and services. For the sake of saving more aggressively for retirement and other long-term goals, consider keeping your savings rate high, even post-pandemic. If that seems too challenging, consider appointing a “cut-back month” when you and your family commit to reducing expenditures just for one month. You may have done that last April; consider doing it again. If you are successful, consider deploying a cut-back month once every quarter.

What’s the best way to accumulate extra savings to build your wealth? Here are the 2021 contribution limits for various tax-advantaged accounts:³

• Employer-sponsored 401(k)/403(b) plans – $19,500 ($26,000 for age 50+)
• SIMPLE IRA and SIMPLE 401(k) – $13,500 ($16,500 for age 50+)
• Traditional and Roth IRAs – $6,000 ($7,000 for age 50+)
• Health Savings Accounts (HSAs) – $3,600 individuals; $7,200 families

If you’ve maxed out your available tax-deductible contributions, consider stashing extra cash into a Roth IRA. They’re funded with money you’ve already paid taxes on, so qualified distributions are tax free.⁴ Moreover, a Roth does not mandate required minimum distributions (RMDs) at any age, so if you don’t need that money during retirement, it’s a way to continue accumulating assets for your heirs.

While it is generally recommended that investors save at least 15% of their annual earnings to generate adequate retirement income, that number may need to be higher or lower based on what age you started saving and your retirement goals. To determine the percentage of income (“savings multiple”) you should consider saving going forward, divide your total retirement savings by your annual income.⁵

Content prepared by Kara Stefan Communications.

¹ Ilana Polyak. BenefitsPro. Dec. 28, 2020. “3 Social Security changes coming in 2021.” https://www.benefitspro.com/2020/12/28/3-social-security-changes-coming-in-2021/. Accessed Feb. 18, 2021.

² Alex Gailey. NextAdvisor. July 31, 2020. “The Pandemic Has Resulted in Record U.S. Savings Rates, but Only for Some.” https://time.com/nextadvisor/banking/savings/us-saving-rate-soaring/. Accessed Feb. 18, 2021.

³ T. Rowe Price. Feb. 4, 2021. “2021 Key Financial Numbers That You Need to Know.” https://www.troweprice.com/personal-investing/resources/insights/key-financial-numbers.html. Accessed Feb. 18, 2021.

⁴  Roger Young. T. Rowe Price. Feb. 3, 2021. “What You Need to Know When Deciding Between Roth and Traditional.” https://www.troweprice.com/personal-investing/resources/insights/what-you-need-know-deciding-between-roth-and-traditional.html. Accessed Feb. 18, 2021.

⁵  Judith Ward. T. Rowe Price. Feb. 4, 2021. “What Adjustments Should I Make to My Retirement Savings?” https://www.troweprice.com/personal-investing/resources/insights/what-adjustments-should-i-make-my-retirement-savings.html. Accessed Feb. 18, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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One of the more glaring lessons of the 2020 pandemic was that the economy and the stock market are not the same thing, nor do they necessarily move in lockstep. They are measurements of two different things, often indicating how the other will react. However, as we saw last year, the economy is a greater indicator of how Main Street is doing while the stock market is more a reflection of Wall Street.

The day-to-day performance of major stock indices, such as the S&P 500 and the Dow Jones Industrial Average, is not usually an accurate account of what’s happening in the lives of most Americans.¹

As a general rule, economics is more of a social science. It conveys a picture that captures the interplay between real resources and human behavior. Finance, on the other hand, is a proactive measure. Its focus is on the tools and techniques of managing money.

We hear these two terms used interchangeably all the time, though, and that’s because they often do move in the same direction. That’s not what happened last year. While millions of Americans lost jobs and other sources of earned income, after an initial drop in the stock market, many investors saw their portfolios make ample gains. This was a good demonstration of how your money in the market could be working as another source of income. It’s another way of diversifying your assets, so that your investments can keeping earning money even if you can’t. Remember, we’re here to help you put your assets to work, so call on us if you need guidance.

Economics covers the production, consumption and distribution of goods and services and how people interact with them — through buying, selling, or working to buy or sell them — and how they react to price changes driven by supply, demand and inflation. It is, after all, people who drive economic activity and ultimately growth. There are two main branches of economics: macroeconomics and microeconomics.²

Macroeconomics measures the overall economy through factors such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP) and changes in employment levels.³ Microeconomics tracks specific factors within the economy, largely the choices made by people, households and industries. It is a study of the incentives behind those decisions and how they affect the use and distribution of resources.⁴

Finance, on the other hand, deals specifically with the use and distribution of money. As a discipline, it comprises three basic categories: public finance, corporate finance and personal finance. Within those realms, we often talk about the difference between Main Street and Wall Street. Main Street describes the average American investor as well as small independent businesses, while Wall Street consists of high net worth investors, large global corporations and the high finance capital markets.

There are inevitable conflicts between these two sectors. For example, government regulations frequently are designed to protect individual investors and/or small businesses, but they can pose a detriment to Wall Street profitability. The opposite can also be true, where benefits for large corporations can hurt small businesses, local jobs and small investors.⁵

Early on, the Federal Reserve and other central banks stepped up to infuse the economy with capital, thus stemming the tide of the economic decline. While these moves helped bolster the stock market, they did not prevent the loss of hundreds of thousands of jobs or stimulate consumerism. In other words, policy and even legislative intervention may have helped Wall Street, but it didn’t do that much to encourage economic growth or job creation.⁶

Content prepared by Kara Stefan Communications.

¹ Clark Merrefield. Journalist Resource. Jan. 11, 2021. “The stock market is not the economy. Right? Here’s what the research says.” https://journalistsresource.org/studies/economics/stock-market-not-economy/. Accessed Feb. 4, 2021.

² Stephen D. Simpson. Investopedia. Nov. 2, 2020. “Finance vs. Economics: What’s the Difference?” https://www.investopedia.com/articles/economics/11/difference-between-finance-and-economics.asp. Accessed Feb. 4, 2021.

³ Investopedia. Dec. 29, 2020. “Macroeconomics.” https://www.investopedia.com/terms/m/macroeconomics.asp. Accessed Feb. 4, 2021.

⁴ Investopedia. Nov. 2, 2020. “Microeconomics.” https://www.investopedia.com/terms/m/microeconomics.asp. Accessed Feb. 4, 2021.

⁵ Corporate Finance Institute. 2021. “What is Main Street vs Wall Street?” https://corporatefinanceinstitute.com/resources/knowledge/finance/main-street-vs-wall-street/. Accessed Feb. 4, 2021.

⁶ Shyam Sunder. Yale Insights. June 17, 2020. “Liquidity Injections May Have Driven the Stock Market Recovery.” https://insights.som.yale.edu/insights/liquidity-injections-may-have-driven-the-stock-market-recovery#gref. Accessed Feb. 15, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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The beginning of the year is typically full of hope. We make New Year’s resolutions, and it may take a few months for our enthusiasm (and vigilance) to wane. There’s also the “January Effect,” when the stock market generally gets a performance boost thanks to tax harvesting in December and subsequent reinvestments. But even that phenomenon tends to fade.¹

When it comes to investing in the stock market, we recommend a strategic approach. First, you want to consider your big picture — which includes how you ultimately want to use accumulated assets (e.g., college tuition, retirement) and when you’ll need them. You also want to make sure you don’t take on too much risk, so that requires a strategic asset allocation across a diverse group of investments. Finally, one of the basic tenets of stock investing is to buy low and sell high. We can help you with all of these tactics.

We expect 2021 to be an interesting year. Assuming wide distribution of COVID-19 vaccines and successful containment of the virus, the economy should get back on track. But as we saw in 2020, even the coronavirus didn’t have a long-term impact on the stock market.

With that said, Merrill Lynch sees a broad market uptrend in 2021. In equities, the money manager sees upside in cyclical sectors (e.g., financials, materials, industrials), U.S. small-cap value stocks and emerging markets — which are supported by the continued downtrend in the U.S. dollar.² Bear in mind that while some of these investments pose higher risk, they also follow the tenet of buying low and selling high. The key is to find stocks that are currently selling at low prices but have the potential to rise given (1) the current economic environment, (2) market trends and (3) individual company fundamentals.

Buying low and selling high involves monitoring and due diligence, but it’s not quite the same as market timing. In fact, the best time for some to engage in a buy-sell strategy is during periodic portfolio rebalancing. Rebalancing is important because if one asset class outperforms others, your portfolio allocation may drift out of range from what’s appropriate for your risk tolerance. By selling off “winners” and reinvesting those gains, not only do you rebalance to your original strategy, but you have ready cash to “buy low” and reposition your money for further growth.³

When rebalancing, if prices seem too high to reinvest, don’t be hesitant to hold cash for a short time. Investment legend Warren Buffett maintained a highly liquid allocation over the past year, but he did so in preparation to pounce on good buying opportunities when they surfaced.⁴

On the other hand, there are times when buying low may not be advisable. For example, airline stocks continue to struggle despite congressional relief. Industry experts predict that revenues are unlikely to return to pre-pandemic levels for several years.⁵

Note that stocks tend to rise on positive news, especially if that news shows some promise of economic growth. A good example of this is when, on Jan. 19, Treasury Secretary nominee Janet Yellen advised Congress to “act big” with regard to increased coronavirus stimulus relief. Following her remarks, the Dow Jones Industrial Average rebounded from a recent losing streak and both the S&P 500 and the Nasdaq made significant gains.⁶

Content prepared by Kara Stefan Communications.

¹ Eric Reed. The Street. Jan. 17, 2021. “January Effect: What Is It and Why Does It Occur?” https://www.thestreet.com/investing/what-is-the-january-effect. Accessed Jan. 20, 2021.

² Merrill Lynch. January 2021. “Weak Periods May Be Buying Opportunities.” https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/Viewpoint_January_2021_Merrill.pdf. Accessed Jan. 20, 2021.

³ Sachin Nagarajan. Morningstar. Jan. 15, 2021. “A Responsible Version of Market-Timing.” https://www.morningstar.com/articles/1017362/a-responsible-version-of-market-timing. Accessed Jan. 20, 2021.

⁴ Theron Mohamed. Business Insider. Jan. 18, 2021. “Warren Buffett advised NFL linesman Ndamukong Suh to be ready to buy when bargains appear.” https://markets.businessinsider.com/news/stocks/warren-buffett-advises-ndamukong-suh-be-ready-buy-bargains-2021-1-1029977459. Accessed Jan. 20, 2021.

⁵ Alan Farley. Investopedia. Dec. 22, 2020. “Wrong Time to Buy Airline Stocks.” https://www.investopedia.com/wrong-time-to-buy-airline-stocks-5093391. Accessed Jan. 20, 2021.

⁶ Joseph Woelfel. The Street. Jan. 19, 2021. “Stocks End Higher as Yellen Tells Congress to ‘Act Big’ on Stimulus.” https://www.thestreet.com/markets/stock-market-dow-jones-industrial-average-banks-yellen-011921. Accessed Jan. 20, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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