When it comes to financial planning, there is no silver bullet. But an indexed annuity comes peerlessly close to earning that label.
Does the term annuity scare you? I understand. Read my post from last week if you haven’t yet for a full debriefing on good vs. bad annuities, and why an indexed annuity is different. If you, like so many others, are looking to 1) grow your nest egg as quickly and predictably as possible; 2) avoid the pitfalls of the stock market; and 3) create an income stream that you can never outlive, you owe it to yourself and your family to learn more about indexed annuities.
First things first: What is an indexed annuity?
An indexed annuity is a new form of insurance that allows ordinary people like you and me to invest as the wealthy always have. Most of us have been conditioned to behave as amateur financial traders, risking as significant a portion as we can muster of our hard-earned income in the stock market. The wealthy bypass that gamble and opt for far more lucrative––and safe––financial tools unfamiliar to most Americans.
The uber-wealthy do not invest in systems as uncertain and unregulated as the stock market. Instead, they choose highly predictable investments such as corporate bonds, high-value real estate, AAA bonds, and commercial mortgages, which each churn out returns of 5-8% every year––and which are all virtually guaranteed to deliver a positive return.
A 5-8% gain may not seem competitive with potential stock market gains, which can rise to 20% or even 30% in a single year. But you cannot forget the flip-side of the stock market: losses. As the chart below illustrates, the lower but insulated-from-loss growth rate generated by the financial tools mentioned above ends up outperforming the market, sometimes as much as 2 to 1:
It’s a tortoise-versus-a-hare mentality.
In the catastrophic stock market downturn in 2008, Warren Buffett lost $23 billion. He emerged with two fixed rules of investment:
Rule 1: Never lose.
Rule 2: Never forget Rule 1.
As for me, I’ve learned the following two things about growing wealth:
- The wealthy aren’t stupid. They invest the way they do for a reason.
- If I want to grow wealth faster and safer than everyone else, I need to do something almost no one else is doing––or, as Tony Robbins put it in his book MONEY: Master the Game, “People who succeed at the highest level are not lucky; they’re doing something differently than everyone else.” It’s no coincidence that similar, safe, no-lose strategies are being employed more and more by smart, unconventional thinkers in all arenas. Think Michigan football coach Jim Harbaugh.
Insurance companies are the wealthiest entities on the planet. Some hold nearly half a trillion dollars in assets. Guess which strategy they have employed to grow their wealth for centuries. That’s right: safe, predictable, steady growth.
Folks like you and me don’t have that kind of cash, so we haven’t had the same access to these safe, lucrative investment strategies. Until now.
Relatively recently, a handful of the more progressive insurance companies made some game-changing observations:
- The established financial industry is failing the American public. Less than 4% of us say we’re ready for retirement.
- There is a real need for products that help the average American grow wealth for their senior years in a safe and predictable way.
- The insurance industry is the only entity with the financial assets and expertise required to meet this need.
I know. Casting insurance companies as the good guys can be a hard pill to swallow. But in this situation, some of them are. Let’s make one thing clear: I am not talking about insurance companies that are in the business of fielding, accepting, or denying “subjective claims.” I am talking about insurance companies that insure life, employ some of the world’s brightest money managers, and offer annuities with objective benefits backed by lawful contracts––the same financial behemoths who’ve been around for hundreds of years and have weathered two world wars, the Great Depression, 9-11, and every other calamity, all while making an annual 5-8%.
Today, we can participate with these insurance companies and put their proven money-making engine to work for us.
Insurance and us: The partnership
Here’s how our relationship can work with insurance companies who have embraced this model: Instead of putting your nest egg in the unnecessarily risky stock market or a money market account that builds cash reserves too slowly, we can put our nest eggs into an indexed annuity. As part of that indexed annuity, insurance companies will offer you some––if not all––of the upside of stock market gains, as well as insulate the value of your egg from ever decreasing.
Why and how can insurance companies offer such a great deal?
- Insurance companies want our money to invest with theirs because that means their core investment is larger, which in turn means that the 5-8% they know they’ll gain year after year is a larger sum. Think about it: Having $500 billion is nice, but having $600 or $700 billion is even nicer.
- Insurance companies do not invest our money directly in the stock market, but in what are known as “options.” Options are like bets on the market’s performance. If the market goes up, we get much––if not all––of the gain. If the market falls, we stay right where we are and lose nothing.
- Insurance companies can guarantee that our nest egg will never decrease because the companies only invest about 1% of their total available assets in these options. The other 99% is invested in safe and predictable investments. That means that even if none of the options pay off and the insurance company loses the entire 1%, they’re still earning a 5-8% return on the other 99% of their portfolio and can therefore easily absorb the loss of the 1% investment.
Once you’ve let all of that information sink in, consider this: For most indexed annuities, you pay no fees.
An important disclaimer: I am not talking about traditional “annuitization contracts,” which required participants to give up ownership of their nest eggs to the insurance company. The indexed annuities I’ve covered here ensure you maintain sole ownership and complete control of your money.
It must sound extraordinary to those of you who have never heard of this model. In a future post, I’ll delve deeper into how you can actually put this cash engine to work for you so that you can plan a comfortable retirement.
Here’s to leveling the financial playing field. All people deserve access to safe, responsible growth of the nest eggs it takes so much hard work to build.
Live happy, healthy, wealthy and safe.
Cort Dial is the President of Cort Dial Consulting, LLC and the author of Amazon Top 10 book, Heretics to Heroes, named the #1 Business Book of 2016 by Canada’s Globe and Mail. He offers business performance coaching to corporate executives and superior financial products and expert portfolio guidance to people of all income levels.