GROWING MONEY
Financial columnist Eric Gemelli puts annuities under a microscope, gets the skinny on the product from Tara Fitz and rethinks risk according to Baby Boomers. So should you
A Bank Investment Consultant was quoted recently about the market melt-down. His take: traditional investments “clearly didn’t weather the storm.” His observations included the fact that there was no real difference to diversifying into 20 stocks instead of five. Diversifying between stocks, bonds & real estate had similar results: they cried out like the wicked witch of the West (I’m melting!)
Five Rings Financial is on a mission to educate Middle America about money. It’s a mission that Agent Tara FitzGerald says is due. “We go to school for 12 years or more and are never taught how to stay married, how to raise kids or how to manage our finances.”
FitzGerald’s parents were typical, she says. They were “good people who worked hard but didn’t know how to make their money work for them.” FitzGerald was also acquainted with a woman who had a $400,000 windfall over a two year period. Within five years, the money was gone; a life-changing opportunity dribbled away due to a lack of knowledge.
Five Rings Financial founder and president Mike Wilk gives this illustration to illuminate the power of how money grows over time: If a grandmother left $5,000 to each of her three grandchildren and each invested all the money at age 29 and left it alone until they retire at age 65, the results would look like this if they each received the following interest rates:
4% 8% 12%
$20,000 $80,000 $320,000
You can see by doubling the interest you didn’t just double the outcome – the money growth is exponential the more interest you get.
FitzGerald ran the calculation on herself. If she invests $100,000 at age 45 and leaves it for 25 years, an annuity product she sells would guarantee a return of at least $614,176.
Modern annuities are quite different than the products of years ago. Annuities are investment products guaranteed by an insurance company. Conceptually, they offer the safety of a CD but now also include a respectable portion of the upside potential of the stock market. The beauty is they never have a downside risk.
Imagine investing $100,000 in October 2007, when the market was poised for its biggest drop ever. FitzGerald’s favorite product has a 7.2% minimum return per year. While the rest of the country was in the process of losing 40% you actually had a positive return.
Annuities have one characteristic some don’t care for. In order for the company to ride out bear markets, they require a minimum time commitment—in this case 10 years. In exchange for that commitment, they also give you a bonus of 8% in the first year. So in this particular example, you actually would have made a tax-deferred 15.2% return, or over $15,000, even though the market was in the middle of a historic cataclysmic collapse.
FitzGerald tells the story of a Boulder, Colo. couple who built a beautiful home to retire to and had $1,000,000 invested in the stock market. When the dust settled on their losses, after the market collapsed, they only had $500,000 cash. They had to sell their dream home and return to work at age 63. Had this couple invested in annuities, they wouldn’t have lost a penny.
During good years, annuities can pay between 50% & 85% of market gains in addition to the base rate of 7.2%. They absorb the risk so you always make a minimum return, but you also do especially well if the market performs well – kind of like profit sharing at work.
Annuities are contracts and offer a variety of features. One alternative is to convert the accumulated savings into a lifetime income stream. In the case of Ms. FitzGerald, her $617,000 would yield a minimum $36,850 income stream for life, assuming no good years in the stock market. If the market does better, she does better.
A popular feature of annuities is their ability to convert the income stream into payments for Long Term Care. One of the products represented by Five Rings Financial doubles the payout if the client is confined to a nursing home. FitzGerald’s income becomes $73,700 if paid to a nursing home, instead of $36,850.
Author Eric Gemelli founded Cornerstone Financial Services LLC in 1997 and as the managing member has worked in mortgages, life and health insurance, raised venture capital, and trading commodities averaging 30% a month doing so. He offers market forecasting services, and is “sure enough of [his] ability that 80% of [his] fee is based on performance.”Ms. FitzGerald can be reached at 720/935-3377 or tara@tarafitz.com.
