Thread: Why I hate bonds and what I use for my clients instead.

One of the most common financial 'rules' is not to have all your money in the stock market.

And, to break your money down into something like 60/40 stocks to bonds.
Now, if you're completely unfamiliar with either, here is the basic difference

(If you already know, you can skip down a couple of tweets for the good stuff)

A stock is where you OWN a portion of a company, and so you participate in both the gain of their stock,
AND, you can receive dividends if they pay them (essentially passing along some of their profit to their shareholders.)

A BOND is where you LEND money to a company and they pay an interest rate and promise to pay you back at a set time, like 5 or 10 years.

They have all of the volatility of the stock market, but without the opportunity to gain the way the stock market does.

Basically, all the bad, and none of the good.

20+ years ago, we started used fixed index annuities in our clients portfolios to replace bonds where we could
Of course, @daveramsey is going to tell you that annuities suck (and some do, just like anything.)

But not all do.

Here is how they work:
This is one of the most overlooked investment strategies in the last few decades .
It offers guarantees and security that mutual funds, stocks and bonds simply cannot match, while offering comparable returns somewhere between what bonds and stocks offer.
However, it is also one of the most misunderstood products there is, and one of the most wrongly criticized.
With that in mind, I’ve prepared this primer to get you up to speed, and hopefully help you understand while I personally feel that no retirement portfolio is complete without somewhere between 20-40% of your money in this vehicle, at the absolute minimum.
First, what IS a Fixed Index Annuity? (FIA for short)

Simply put, it is an account that goes up when the underlying index goes up (usually a major index like the S&P 500 or the NASDAQ).

Each year, any gains are locked in, and the account resets and the process starts over.
However, the magic is that during a year when the market drops, there is NO loss to your account.

Let me repeat that, because that is the best part:

You keep ALL the money you’ve previously made, no matter WHAT the market does.
Better still, after a year where the market drops, the index resets, and the process starts over…

Meaning, you don’t have to wait for everybody else to ‘catch up’.

You go on to make new profits even while everyone else is still recovering from the latest market crash.
In other words, you get a decent portion of the upside of the stock market, with none of the downside.

And, that is exactly why I recommend them for a portion of your money.

What’s the catch? Well, there are a couple, which I’ll get to in a minute.
But first, let me explain the top reasons that I like them:

First: They dramatically reduce the risk to your portfolio.

Right now, if you have $100,000 all in the stock market, and the market drops 40% like it has done TWICE in the last 20 years---you lose $40,000.
Your account now dropped to $60,000.

(If you go check your financial statements from back in 2008, you’ll find that, like a LOT of people, you lost actually closer to 50% in just under 6 months, so this is no joke!)
Worse still, in the scenario above, you have to make a 66.67 gain to get back to your $100,000…. because you’re earning the return on a smaller amount of money.

So, if you earn 22% a year following the crash, it would still take you 3 years just to get back to break even.
THAT is what the stock market jockeys don’t tell you.
However, if you have 40% of your portfolio in a FIA, on that $100,000 example, then the 40% loss only drops you’re account by $24,000 (which still sucks, by the way),

because the gains on the $40,000 in the FIA were locked in.
So, you have protected a portion of your portfolio from the losses of the market.

And, you didn’t sacrifice performance.


Because the annuity lost NOTHING during that time AND it doesn’t need the market to ‘catch up’ because of the annual reset.
The annuity gets to make new profits while the other account is struggling to get back to where you were before the crash.
In the last major downturn we had that started at the end of 2007, the market was in a free fall until it bottomed out in March of 2009… however, for the average index mutual fund was not back to where it
was before the crash until March of 2013!
So, if you had $100,000 in October of 2007 in an index mutual fund, you would have had around $45,000 left in March of 2009…

and you didn’t get back to the $100,000 until March of 2013.

You would have lost 6 years of gains and interest.
Let me give you an example of how this type of an annuity would protect you:

Let’s say you have $100,000 in a market account like the Vanguard 500 Index, and the market drops 40%.

At 10% annual gains, that account is going to need 6 years just to get back to $100,000.
But, during that time, a FIA that started with $100,000 before the crash, would still have $100,000 after the crash.
And, it would have grown by $41,851 (even with market caps, which I will explain in a minute) during those 6 years it took for the Vanguard account to get back to even.

So the FIA now has $141,851, not $100,000.
And, at a 10% steady gain, it’s going to take 4 more years for the Vanguard account to get up to over $140,000 but by that time, the annuity would be worth $179,083.

That reminds me of what Warren Buffett says:

Rule #1 of investing: Don’t lose money.
Rule #2 of investing: Don’t EVER forget Rule #1.

Or, as I like to say: the losses always hurt you more than the gains help you.

Point #2: An annuity can give you lifetime increasing income, so you never have to worry about running out of money.
Once you retire, all the rules change. Most importantly, losses hurt you even more when you’re withdrawing money from your accounts.
If you doubt this, ask me to send you the Sequence of Returns Case Study, which shows two families earning the exact same returns, just in a different order.

So, both families are earning an average of 7% annual returns, with 3 positive years and one negative year.
However, the family with the ‘bad’ sequence (the one negative year first, and then the least profitable next and so on) ran out of money 13 years earlier.

No, that is NOT a typo.

13 YEARS earlier,

yet both had the same ‘average’ return.
And what IS the number one fear of retirees?

It is outliving their savings.

Modern annuities prevent against this because they will give you lifetime increasing income…even after you have exhausted all of the money that you gave them and the interest it earned.
You literally receive money forever… with the definition of ‘forever’ being ‘for as long as you AND your spouse are alive’.

So, with an annuity, you can turn on the income feature and forget about it: they’ll send you a check each and every month….
and you can spend ALL of it because they’ll send you another one next month… until you, or you and your spouse if you choose, pass away.

If you pass early, and there is still money in the account, no worries, it all goes to your heirs.
But, with the average life expectancy being in the late 80’s for both men and women, you need your retirement dollars to last longer than ever….and an annuity can guarantee that you never run out of money, which is something no mutual fund or bond portfolio can provide.
The increasing part of the income is a big deal too.

As we age, not only do medical bills tend to increase, just about everything else does as well.

For example, what does a designer woman’s purse cost these days?
I looked up one on sale on Macy’s website, and it was $148, on sale for 50% off the normal price of $296.

In a Sears Catalog from 1976 (remember those?), a designer woman’s purse was……$13.
So, in just about 40 years, the cost of the purse is over 10 times as much as it used to be.

THAT is what I mean by inflation, and why everyone needs increasing income.

With an annuity having those advantages, what are the disadvantages?

Well, there are a couple:
First, anytime anyone is going to protect you from loss, there has to be a cap on the upside.

So, most annuities have some sort of a cap on the index.
For instance, if the market goes up 10% a year, like I showed in the example before, most annuities will have a cap around 5 or 6% (which is what my example reflected)..

so you would ‘only’ get a 6% return on your money for that year.
Whenever anyone bashes an annuity, that is usually the first thing they bring up.

However, again, since you’re not going to be taking any losses, or paying any management fees (in most cases), it’s not as bad as it sounds.
Go back and look at my illustration above about how long it takes to truly recover from the losses you take.
The other downside is with some annuities is there can be a waiting period before you can convert it to income, so you’ll need to have at least some idea when you’d like to start drawing lifetime income.
Also, there are limitations to how much money you can withdraw each year during the initial years without being charged a penalty that eventually goes away.

But…..that’s pretty much about as bad as it gets.
And remember, we're not TRYING to get stock market returns.

This is to replace th BONDS in your portfolio.
So, what are the most common concerns my clients have about getting started with a Fixed Index Annuity.

First, I get a LOT of questions about the fees. Many people have heard they’re ‘really high’.

However, that’s not the case at all.
Annuity is just a generic term like ‘car’ or ‘boy’ or ‘girl’.

So it can apply to a lot of different types of products.

One that gets a lot of scorn universally (and I happen to agree with the haters) is a Variable Annuity.
A Variable Annuity is just a mutual fund with a death benefit, basically.

But, because both the mutual fund manager AND the insurance company have to get paid, the fees ARE pretty high on these.
If you read the headlines about a prominent investment advisor who ‘hates’ annuities (and thinks you should too), a variable annuity is what he's talking about.

However, with most Fixed Index Annuities, there ARE no fees to you. Whatever you gain each year, you get to keep 100%.
Occasionally, an annuity will have a rider that incurs a fee; but that will always be clearly disclosed to you upfront, and is usually quite reasonable.

So, what’s stopping you from adding this to your portfolio?
Well, I’ve come up with a few ideas as to why people might be reluctant to diversify into one of these.

Here they are:

First, FOMO. (fear of missing out)

I see people who get really worried about the Fear Of Missing Out on the next big upside of the market.
But, as Shaquille O’Neal (and several others) once said:

‘It’s not what you make, but what you KEEP that counts’.

So, does it really do you any good to have made amazing returns over the last few years if you just give all of it back during the next big market downturn?
Again, I’m never going to suggest that anyone put all of their money into a FIA (in fact, the companies wouldn’t take all of your money anyways…. it simply isn’t allowed),

so you will still have PLENTY of money left in the market….
I’m just suggesting that you take SOME of your money off the table and lock in your profits while the market is high.

But what if I have to bail out early? What THEN?

I get this concern a lot also.

However, here is the reality: Most of my clients are using their IRA money to
fund an annuity.

So, while there would be a modest penalty from the company itself to cash in early, that is NOTHING compared to the Federal and State taxes and penalties you would have to pay to access the money.
So, really, the money would only be accessed in a dire emergency, where you probably wouldn’t care as much anyways.

However, at the worst, if you set this up and just a few months later needed all your money back, you might pay 7 or 8 % of the account value.
But, if that same money was in the stock market, you could lose 7-8% in a week or less….so it’s all relative.

Let’s take another example: if you have a mutual fund with a 1.5% expense ratio (which is actually on the low end, even for so-called ‘no-load’ funds.
I’m happy to prove that to you if you doubt the number)…

Anyway, if you have a mutual fund with a 1.5% expense ratio, after 3 years, you’ve spent around 4.5% of the value of your mutual fund. After 4 years, it would be 6%, and continue to increase.
The surrender charge on most good FIA’s is around 5% after 4 years. And, it goes down each year, until it disappears completely.

But, assuming you had an emergency and needed the money ASAP after 4 years, it would cost you around 5% to access all of it.
Which is still less than what you would have paid in fees to keep the same money in a mutual fund.

And, you never have to worry about having this portion of your money drop by 10, 20, 30% or more; so if you do have an emergency, it will be there when you need it.
Also, most annuities allow you to take up to 10% a year penalty free.

So it’s only under extreme circumstances that we see our clients actually ever pay a surrender charge, and usually something else drastic is going on so it doesn’t matter at that point.
Actually, I can’t remember the last time we had a client bail out of one of these early, so this really is hypothetical.

General Questions I Get

Think of this section as the FAQ of the annuities. Here you go:

Why don’t I just put the money in bonds? Aren’t they safe too?
Early in my financial services career, which started in 1990, I paid close attention to the bond markets as well as the stock markets.
If you recall, there was the junk bond meltdown in 1989, and then another collapse in bond values in 1994, which Fortune Magazine named The Great Bond Massacre.
Never, ever forget that bonds can drop in value just as quickly as stocks can, however the upside is strictly limited.

So, basically, with bonds you have all the potential bad of the stock market (double digit losses) and none of the good (the potential for double digit gains).
For over 20 years, we have used Fixed Index Annuities instead of bonds in our clients’ portfolios.

With a FIA, you get the potential for high single and double digit returns, but zero losses: the best of both worlds.

'What amount do you recommend I put in my annuity to start?'
Everyone’s situation is a little different, but roughly 20-40% of your entire portfolio is where we recommend you start.

20% if you’re a little younger, 40% if you’re a little closer to retirement.

'What if I put too much in?'

No worries.
You can withdraw up to 10% a year without a penalty, so we can even things out later.

'What if I want to add more money later?'

Most annuities will let you add money down the road for a period of time, usually 1-3 years.

If we’ve gone past that period of time, no worries….
we’ll simply get another one started for you.

'What if I don’t live that long? Will they keep my money?'

Absolutely not.

Whatever balance you have will be given to your beneficiaries.

'What if I need more money than the lifetime income option is giving me?'
Well, remember, we’re never putting ALL your money into this type of an account, so you’ll still have money other places for things like emergencies, vacations, new cars/roofs/transmissions/etc or simply living expenses.

'What if I don’t WANT lifetime income?'
No problem: you can take your money out in any manner you please, and you can defer it as long as you like, unless it’s in an IRA, in which case you just have to follow the Required Minimum Distribution Rules.
BUT, you cannot, according to math AND science, retire optimally withOUT guaranteed income.

Even the Government Accountability Office agrees with this.
But, if you run the math, you’ll see that 99 time out of 100, you’re going to get substantially more money in the long run than you would if you just took withdrawals.

However, it’s your account, so you can take it as you see fit.
And there are special annuities that focus more on the accumulation benefits than the lifetime income benefits.

'I read that you really don’t earn as much money from these as you would in the stock market.

What do you say about that?'

First off, you’re not supposed to.
This is supposed to be your ‘safe’ money, and replace the bonds in your portfolio, NOT the stocks.

In fact, really a Fixed Index Annuity is giving you the following:
-The Safety of AAA Rated Bond s(the highest, most secure rating…. currently only TWO companies in the US possess this, according to Investopedia)
-with the Yield (payout) of CCC rated bonds (very speculative bonds, sothey pay a much higher interest rate than other bonds)

- with zero standard deviation (meaning no losses).
Again, a Fixed index annuity is not SUPPOSED to give you the returns of the stock market, it’s meant to replace the money you would put into bonds.
However, please see my example above again, because this really CAN give you a stock-market-ish rate of return because of the ‘no losses’ provision.

'Will I get taxed if I transfer my IRA or 401K or Roth IRA to an annuity?'

No. It is a non-taxable transfer, so no need to worry.
'I read/heard bad things about annuities'

If you did any research, you might have come across some negative articles or comments. Really, that’s true about anything, right?
However, it’s worth it to keep in mind a couple of things: First, there are different types of annuities, as I mentioned before.

Most of the criticism is against variable annuities, especially when it comes to the fees, which ARE really high.
Second, most TV, radio, and print columnists are journalists, NOT financial planners.

They took journalism in school, so they never studied finance; and even if they did, they never worked with families actually solving their biggest problems, which include :
-having market risk mess up their retirement, and

-having to worry about running out of money, and keeping up with inflation as they age.

A good Fixed Index Annuity can solve ALL of those problems at once.

Which is why I strongly urge you to research this for yourself.
And, since everyone’s situation is a little different, there is no one perfect annuity, but we work with over 50 top companies to provide the best options for YOUR situation.

So, if you want to see how they line up for you, feel free to reach out in the DM's
Quick note: My DM's ARE a bit of hot mess right now, but I'll work on getting them cleaned up over the next few days.

If you want to know more about this, put FIA in your message and we'll flag it sooner.
Maybe you have more questions and/or concerns, and I’ll be happy to do my best to answer them and see if this is right for you, and if so, which is the best annuity for YOU.

I’d like to close with one quick story:

I’m mentioned a Shaquille O’Neal quote earlier.
He earned $292 MILLION while he was playing basketball.

Now, as an announcer and spokesman for a number of products, it is estimated he will earn an additional ONE BILLION DOLLARS.

Yep, he’s got a lot of money coming in over the next few years.
But, check out this quote he made a couple of years ago:

“I don’t pay any attention to the money, if I lose it all it is no big deal, myself and my family are already financially secure because when I started in the NBA, every year I invested in annuities.
Annuities now provide more income than myself and my family need. The money I earn now is just for fun.”

Unlike a lot of NBA players (and families in general) who end up broke within a few years after retiring, Shaq took care of his family with annuities.
Ben Stein is a big fan too.

Why not add some of these to your portfolio as well?

Remember, the benefits are:

-protection against the downside of the market;
-an income that continues for life, even after you run out of money;
-and adjustments each year the index increases, so that your income increases as well, even after you run out of money;

-the rest of your money paid out to your family if you happen to pass away before you receive it all.
All so that you have safety and security no matter what the coming years bring.


I know some of you are going to read this and INSTANTLY try to dismiss what I say because

MUtuAl fUnDs dOnT ChArgE 1.5%

So, for you, please refer to a thread I wrote just over a year ago:

Addendum #2:

If you want to see the Sequence of Returns Report I mentioned, you can access it here:

(It's produced by one of the companies we work with, but like I said, we work with a bunch of them depending on what we're trying to do.)…
Have more questions?

Message me here:

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THIS is some good work right here!

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