Annuities: Buy, Hold, or Surrender?

annuitymapAnnuities are big business: $142 billion sold last year. The hottest ones are deferred income annuities (“DIAs”), an old concept with a tweaked name and sales pitch and lots of new customers. Is an annuity right for you? Sorry, the answer isn’t as simple as the sales pitch.

DIAs were featured in a NYT article on June 6th. Invest now, in a lump sum or periodic payments, in exchange for a guaranteed paycheck for life that starts some years later. Sales man Matthew Grove of New York Life sees it this way, “It’s people realizing that, ‘I can invest in bonds, but I won’t get as much juice. I can buy equities, but I am taking more risk.’ This is kind of right in the middle, where I am driving income, but I am basically doing it with no risk to myself.”

Au contraire, Mr. Grove. Like any investment, annuities come with risk, and often with more risk than a managed investment portfolio.

Here’s an example: a 55 year old man invests $200,000 in a fixed annuity. In 10 years, at age 65, he starts drawing monthly income of $1,750 for life. Actuarial tables tell us he is expected to live to age 85, so an average individual would receive $420,000. The return on his $200,000 would be roughly 3.85% per year. Not a great return, particularly if you are in the 50% of investors who die before age 85. Furthermore, with inflation appearing to be ramping up, how much will $1,750/mo. buy in 30 years? Annuities are illiquid; you can’t tap into the principal. Also, annuity buyers are relying on the financial security of the insurer, for decades into the future.

What about variable annuities (“VAs”) that invest in equities? The concept again is to grow assets tax-free, like an IRA or 401(k), and then withdraw in the future. The problem is the cost. Barron’s annual report on annuities, published Saturday, identified the average contract cost is 1.5% per year. In addition, VAs generally use high-cost, actively managed funds within, adding 1% or more. As a result, there could be a 2.5% annual drag on performance. As our DWM clients know, passive funds and ETFs outperform actively managed funds over time, primarily due to cost. A 1% annual additional cost over decades can take a huge bite out of your investment.

How about a VA with guaranteed benefits? Before the financial crisis of 2008, a number of large insurance companies sold a decent product. It was a VA with a guaranteed annual 7% growth factor. An individual could invest $100,000, for example, with a 10+ year guaranteed annual net return of 7%. Yes, the contract was expensive, 2.5% in fees plus the operating expenses of the funds. But, here is the good part- at the end of 12 years, e.g., an investor could take either the account value (net of the fees) or the guaranteed value of $225,000 and annuitize it (that is, start taking monthly payments). It was a good deal.  In fact, it was so good that insurers aren’t offering them anymore.

Lastly, how about a single premium immediate annuity (“SPIA”)? A 60 year old can invest $200,000 and get a 6% annual return ($1,000 monthly check) for life (roughly 24 years are expected). The return on investment would be 3.24% per year on average. Roughly ½ of each payment is return of principal and ½ is interest.


BUY? In today’s marketplace, we do not think annuities are generally a good investment for clients with investment assets exceeding $500,000. Of course, there are exceptions.

HOLD? If you own annuities, you should review them with an experienced, independent financial adviser such as DWM. You may have a good one (like the 7% program above) or you may not. However, you may be able to exchange them tax-free into a vehicle with lower fees and better investment choices. Jefferson National, for example, has a contract with a low monthly fee and a wide-range of passive investment funds.

SURRENDER? Don’t surrender an annuity before getting advice from an expert. Income taxes are not paid on annuities until distributions begin. So, there may be significant tax consequences and surrender charges. However, if the accumulated earnings are low or the contract is held in an IRA, for example, it may make sense to surrender the contract even if you have to pay a small amount of income tax in order to emancipate your funds.

Contact us to discuss your individual situation.

Summertime Treasure Hunt: Find Your Unclaimed Assets

unclaimed_money-300x300There is currently a staggering $41.7 billion in lost and forgotten assets, and approximately 1 in 10 Americans have unclaimed property. Most people who find their name on a list will have several hundred dollars’ worth or less from things like unclaimed dividends, overpayments, an unreturned security deposit, traveler’s checks, or a final paycheck from a part time job in college. But some people have very large sums waiting to be inherited from deceased relatives or old 401Ks. The largest payout to date was to a woman in Kansas City, MO who received $6.1MM in 2011. Her ancestors had invested in an obscure company, the stock was lost as it was passed through the generations, and the value continued to grow until she found she was the rightful heir. Other states have had similar examples; New York returned $4MM and Wisconsin has paid out $1.5MM, each to a single person. Recently, DWM helped one of our clients identify almost $12k in assets he wasn’t aware he was owed! Clearly it’s worth checking, and getting your money is usually easier than you’d expect.

When a company or financial institution has lost contact with someone for over a year, they are required by law to turn over the forgotten assets or funds to the state of the owner’s last known address, who is charged with trying to find the person or their heirs. Most states sell stocks, bonds, and safety deposit box contents since it would be impossible to warehouse all these items. The proceeds are then kept for the owner.

The best place to start is with your state treasurer’s office, but be sure to check every state you’ve lived in. You can perform a multi-state search (39 states participate) on

Each state’s treasurer’s office has a website, which you can easily find through a search engine. For easy reference, Illinois is: and South Carolina is: When searching for state treasurer’s websites, beware of .com websites, aka “finders”, that charge for searches you can easily complete yourself, for free.

There are a wide variety of situations that result in unclaimed funds. Sometimes checks are returned to the IRS as undeliverable. A family member may have unclaimed VA benefits. You have an old savings bond you forgot about. Also, state and county governments usually list unclaimed child support, but be careful not to fall for a pay-to-search website. The possibilities seem endless. Here are two websites with links for places you might not have thought to check: and–abc-news.html.

It’s also possible you were named as the beneficiary on an insurance policy you weren’t aware existed. You would assume insurance companies would be required to track down beneficiaries, but that’s not the case; it is the beneficiaries’ responsibility to claim the benefits. This is the one situation where you might need to pay a search service since you need to know which company issued the policy to make a claim. MIB Solutions (formerly the Medical Information Bureau) is a private company that maintains a record for almost everyone who has applied for an insurance policy in the last 7 years. After that time, the records are wiped.

Having unclaimed property is so common that ‘Good Morning America’ has a segment to reunite people with their assets called “Show Me the Money”. They have many useful articles and a list of myths and facts at

You may want to perform a search for other family members, your school, or even your church. The best way to prevent unclaimed assets is to keep your and your beneficiaries’ addresses updated, cash all checks promptly, and record safety deposit box and insurance policy information for loved ones. Wishing you luck on this summertime treasure hunt!

Emerging Markets are so Passé. Time to Start Thinking About Frontier Markets!

Frontier marketsIf you haven’t heard of frontier markets yet, get ready, as this area is the popular new kid on the block! Basically, frontier markets are the smaller, lesser-known cousins of emerging markets. Think: Kuwait, Nigeria, Argentina, Pakistan, Kenya, Morocco, and more. These are countries that are at an earlier stage of development relative to emerging markets countries (e.g. Brazil, Russia, India, China, etc.) and in general, are entering a period of strong expected growth due to favorable demographics, infrastructure spending, and an improving business environment.

Although one may think because they are less developed that they’d be more volatile, a recent study by LR Global showed that they are not. In fact, they are not as volatile as emerging markets or even developed ones! Part of this has to do with their limited exposure to the global financial system. Up until just recently, there hasn’t been much public access to these markets. As such, because they have seen lower inflows of foreign capital, they are generally less affected by what goes on elsewhere.

Another thing to be excited about is the diversity of the frontier countries’ economies and market drivers. Hence, they have low correlations with one another… and low correlations with everything else in your portfolio.

So back to the school blackboard: Does anyone recall why low correlations are good? I know some of you may be tired of hearing me repeat this constantly, but it’s important…

Low correlations produce a smoothing effect to your overall portfolio returns,

which minimizes downside, and ultimately leads to better long-term results.

At DWM, we believe frontier markets should receive a minority allocation (2-5%) of a client’s overall equity exposure. And we use the iShares MSCI Frontier 100 ETF (symbol: FM) to get it. This ETF tracks the MSCI Frontier Markets 100 Index. Constituents of the MSCI Frontier 100 Index have to meet minimum liquidity thresholds. Typically, FM will hold about 100 underlying securities, thus providing ample diversification. There are a few other frontier markets options out there, but we believe FM currently represents the only frontier ETF market play with appropriate liquidity. As an extra bonus, it carries a much lower expense ratio (0.79%) than its actively managed peers. Return-wise, it has been putting up attractive numbers, up over 16% YTD at the time of this writing, and up about 50% since the start of 2013. We are cautiously optimistic that this type of solid performance can continue.

If you seek exposure to the next group of countries that are both primed for rapid economic expansion and can potentially provide diversification to your overall portfolio, FM is the ETF for you.

If you have any questions about frontier markets or other investment styles, don’t hesitate to contact us.

The Millenials – The Impact of This Coming-of-Age Group

Generation YThe “Millenials” sounds like a title for the latest summer Blockbuster. In reality, this 18-29 year old generational group is not made up of super-heroes, but includes our youngest voters and economic contributors with some very real and human characteristics. This Generation Y, as they are also called, has some unique perspectives, shaped by some of the most significant political, environmental and economic events in recent history. These young adults are survivors of a post 9/11, Katrina and Sandy-ravaged, 2008 financial-crashed economic and political landscape that has left them with, at best, a “Depression-era mindset”. In the aftermath of these events, and savvy to the explosion of technological advances, the Millenials are already influencing the world around them.

According to a Census Bureau survey, Millenials have higher rates of unemployment and less earning power than their-age peers of previous generations. They are also less likely to be married, have children or own a home. The Generation Y’ers document every move they make with social media, YouTube, and reality TV, and their handheld electronics are never out of reach, even while they sleep. They are serial multi-taskers, looking for instant gratification and possessing a short attention span. According to the Pew Research Center, they also rank “helping others in need” as a personal priority right behind having a good marriage and being a good parent. Reportedly, Millenials are thought to be civic-minded and have a strong sense of community. They are also described as passionate, creative and entrepreneurial. Millenials want to live a fuller life.

On the job front, by 2025, Millenials are expected to make up as much as 75% of the American workforce. Some employers worry that these younger employees are impatient in their first jobs and the sometimes inefficient environment that contrasts with the world they knew in college, where everything was at their fingertips. They can send 4 texts, Google map the nearest Starbucks, order from their Amazon app and pay their student loan bill in 10 seconds with one hand. On the other hand, their altruistic views will demand more of their employers and they are concerned that what they do and where they work will have a positive impact on the world around them. These expectations will all impact how employers do business.

With unemployment for their age group around 15% and earning lower wages than their predecessors, these Millenials also face large burdens of student loan debt and strict credit that make it difficult for them to purchase their first homes. The rates of home ownership for those younger than 35 have fallen considerably and have kept the first-time home buyers from helping in any housing recovery, according to U.S. Census statistics. The obstacles of not having a job or starting one late and having a lot of debt prevents sufficient accumulation of savings for down payments on a home. Many are delaying marriage and home ownership as they focus on their careers and paying off student loans and other debts. This may mean longer periods of renting before marrying, purchasing a first home and starting a family.

How else will the Millenials shape the economy? In a statement that accompanied a Market Strategies International report, “Millenials seem to be permanently scarred by the 2008 financial crisis.” Think of the Occupy Wall Street movement of 2011. They seem to have very conservative investment risk tolerance and do not think long-term investing is important compared to other categories of investors. In an interview with Think, Meredith Rice, a Senior Director at Market Strategies International, thinks that as a result this generation is “very cognizant that they have more personal responsibility for their saving”, even as burdened by debt as they are. The Millenials are skeptical of depending on Social Security benefits or pensions for their future and believe saving is crucial. On average, this generation is keen on keeping larger percentages of cash in their portfolios. They also believe in higher standards of success and report that $220,000 a year for household income is necessary to achieve that success. Many believe the Millenials will be attracted back to the stock market, but that it will take time and consistent stability.

It is hard to know exactly how these conservative, community-minded and tech-driven Millenials will impact the world around them. Certainly, defining success as hard work, saving more and having meaningful relationships suggests that perhaps this younger generation has as much to teach as they have to learn!