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The ‘Roar’

Oftentimes when people talk about investing in stocks, they talk mostly about their winning trades. Predictably, less often discussed are the stocks that went from dollars to cents, or less. In the investment business, trading individual stocks results in what the industry terms ‘binary outcomes.’ In other words, you are either going to win or you are going to lose.

As advisors, our first job is to prevent a binary outcome when it comes to the financial plans of our clients. While it might be fun to roll the dice literally, or figuratively in the markets with minor amounts, the goal of our investing activities is to produce a singular outcome – don’t run out of money!

Which brings me to the topic of this issue - insurance. Insurance products by design are ‘binary outcome’ situations. But, unlike investing, with insurance products, we hope to lose - think auto and home. So what does this do with having to run out of money?

Annuities are sold as solutions so that you won’t run out of money. However, over the years I have noticed that the fact that annuities are insurance products is often lost in the purchase and sale rhetoric. Surely, when investing retirement funds, we aren’t hoping to lose, so why use an insurance product? When they are being marketed, annuities make big promises like ‘guaranteed returns’ and ‘lifetime income,’ which sound pretty good.

In a homeowner insurance policy, there are limits, deductibles and exclusions to keep the claim amounts down. So, while your home may be insured for up to, say, $500,000, it is highly unlikely that you will ever file a claim for that maximum amount. A significant claim could run $10,000, $30,000 or even $300,000, but very few homeowners will claim the maximum. So it goes with annuities, too.

Receiving income is the ‘annuitization’ phase of an annuity - you are on the claim side. Most insurance companies don’t plan on paying many maximum claims - it runs counter to their objective of making profits for shareholders (or policyholders).

But what about all the guaranteed returns and lifetime income? In the ‘real world’ returns are assessed periodically – quarterly, annually and they are constantly changing based on markets. With an annuity, despite talk about guaranteed returns, we generally have no idea what the return really will be. You’ll get the answer when the payments stop, also known as death. At least that’s guaranteed!

Another feature are lifetime income riders that promise you will get some money forever. This is where the details become devilish. While money forever is a good thing, the question is whether that specified amount is a fair or ‘correct’ amount compared to your investment and time in between. Now is a good time to mention that most annuities come with annual fees that run double, triple or more typical retirement and brokerage account fees. Also, there are often large (~6% – 10%) upfront commissions that get paid out right when you buy, further impairing your capital and liquidity. So, no, it is not a fair or ‘correct’ number compared to the results that would be achieved by conservatively investing in markets, rebalancing and not gambling. It’s also important to know that most annuities, when taken to life expectancy, will not pay anything out to heirs after death whereas a portfolio will transfer whatever is left.

Annuities appear to be a viable option to guarantee life income and reduce the likelihood being on the wrong side of a binary outcome. However, if you buy one then there are only two outcomes that are certain. Both the insurance company and the broker who sold it will make a lot of money off you. 

As we enter the fourth quarter of 2019, our office is beginning the process of taking required minimum distributions from retirement accounts (IRA, 401(k), etc.) for those clients that are in that phase.

Should you have interest in making charitable contributions from your personal accounts, we recommend using appreciated stock shares instead of cash. Clients avoid capital gains taxes on the shares and secure a deduction, if you itemize, on ordinary income.

The annual exclusion amount for gifting is $15,000 per person. For these gifts, we recommend using cash or securities that are not appreciated – the opposite of the charitable gift.

As always, please keep us posted on any updates to your financial situation and call us with any financial questions that need answers. Enjoy the Fall.




Scott Lasky     

IMPORTANT INFORMATION: You should not construe the contents of this letter as legal, tax, investment or other advice. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein by Lionshead Wealth Management, its Member and its employees, and no liability is accepted by  such persons for the accuracy or completeness of any such information or opinions stated herein. This information does not constitute an offer to sell or the solicitation of an offer to buy any security.

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