Equity-Indexed Annuities

An equity-indexed annuity is an annuity linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).

An equity-indexed annuity is different from other fixed annuities in the way interest is credited to the value. Most fixed annuities only credit interest based on a fixed calculated rate as set forth in the contract while equity-indexed annuities accrue interest using a formula based on changes in the index. This formula then decides how interest is calculated and credited. The actual interest earned and when it is credited depends on the contract.

An equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate paid will not be less than this minimum guaranteed rate even if the index drops lower. In addition, the value of your annuity will not drop below a guaranteed minimum. For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent (100 percent in some contracts) of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.

Terms to Know Regarding Indexed Annuities:

Indexing Method
The indexing method means the approach used to measure the amount of change in the index. There are several methods which should be explained to you prior to your purchase of an indexed annuity.

Participation Rate
The participation rate determines how much of the increase in the index will be used to calculate interest.  For example, if the calculated change in the index is a positive 9% and the participation rate is 70%, the index-linked interest rate for your annuity will be 6.3% (9% x 70% = 6.3%). A company may set different participation rate for annuities so you’ll want to review this feature carefully.  The company usually will guarantee the participation rate for a specific period (from one year to the entire term) and when that period is over, the company will set a new participation rate for the next period. Some annuities guarantee minimum and maximum participation rates.

Cap Rate
Some contracts may put an upper limit, or cap, on the index-linked interest rate. This is the maximum rate of interest the annuity will earn. In the example above, if the contract has a 6% cap rate, the interest credited would be 6%, and not 6.3% that was calculated using the index  multiplied by  participation rate. It should be noted that not all annuities have a cap rate.

Floor
The floor is the minimum interest rate you will earn. The most common floor is 0% which assures that even if the index decreases in value, the interest earned will be zero and not negative.

Margin/Spread/Administrative Fee
In some annuities, the interest rate is computed by subtracting a specific percentage from any calculated change in the index. This percentage, sometimes referred to as the “margin,” “spread,” or “administrative fee,” might be instead of, or in addition to, a participation rate. For example, if the calculated change in the index is 10%, your annuity might specify that 2.25% will be subtracted from the rate to determine the interest rate credited. In this example, the rate would be 7.75% (10% - 2.25% = 7.75%). The insurance company subtracts the percentage only if the change in the index produces a positive interest rate.

Perhaps the most valuable aspect of selecting the proper annuity is the advice of an experienced financial advisor.  The process can be stressful, to say the least, and my goal is to remove the stress while helping you to grow and protect your retirement investment.  Contact John P. Dubots, Dubots Capital Management, for a free consultation. http://www.jpdcapitalmanagement.com  888-605-8363

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

September 26, 2011  Tags: , ,   Posted in: annuities, retirement planning  No Comments

What are Variable Annuities?

A variable annuity is a policy that you buy with an insurance company. Under the terms of the contract, the insurer agrees to make periodic payments to you and these payments can either begin immediately or at some future date. You can purchase a variable annuity by making either a single, lump-sum purchase payment or by making installment payments over a specific period of time.

A variable annuity offers a wide range of investment options. This means that the value of your annuity may fluctuate depending on the performance of the investment options you select. Typically, the options for a variable annuity are mutual funds that invest in stocks, bonds, money market instruments, or a combination of the three.

Although variable annuities are typically invested in mutual funds, there are some significant differences between variable annuities and mutual funds. Among these differences are the following:

1. Variable annuities allow you to receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your money- a common fear among today’s retirees.

2. Variable annuities offer a death benefit. In the event of your passing, your beneficiary is guaranteed to receive a pre-determined sum – typically at least the amount of your total investment. Your beneficiary will receive this benefit even if, at the time of your death, your account value is less than the guaranteed amount.

3. Variable annuities are tax-deferred. This means that all increases in value and all interest accrued is not taxed until you withdraw the money. The premise, as with many retirement savings instruments, is that you will be in a lower tax bracket upon retirement and will pay less in taxes at that time. You also have the freedom to transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. This gives you the ability to make adjustments within your portfolio based on market conditions. Working with an experienced financial planner will help you to maximize your return on a variable annuity. When you do take your money out of a variable annuity, you will be taxed on the earnings at ordinary income tax rates rather than capital gains rates. Your investment advisor will help you to determine if this makes sense for you.

There are various fees with variable annuities that typically make them an expensive investment alternative such as mortality & expense charges, admin fees, management fees, and fees for guaranteed living withdrawal benefit riders and death benefit riders. However, a variable annuity is a viable long-term retirement investment option for many individuals. To determine whether or not it is right for you, contact John Dubots, Dubots Capital Management, 888-605-8363, for a free consultation and review of your retirement savings plan. http://www.jpdcapitalmanagement.com

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

September 12, 2011  Tags: ,   Posted in: annuities  No Comments

Deferred Fixed Annuities

Imagine, if you will, building a retirement savings for 45 years only to have a large portion of your nest egg eaten by market volatility when you are just 6 months away from your long-anticipated life of leisure. Unfortunately, for many Americans, this nightmare scenario has become reality all too often during the last 5 years. The result is that more and more individuals have been forced to continue working well into retirement age as they fear “outliving their money”.

There is, however, an investment product known as a Deferred Fixed Annuity that allows for a guaranteed rate of return and tax deferred asset growth. It offers protection against the loss described above. Here’s how it works:

Deferred fixed annuities are issued by insurance companies and offer a rate similar to a bank CD. Terms of the contract may vary depending upon the length of the contract and the life expectancy of the client. Money may be invested over a period of time or as a lump sum at the commencement of the contract. The annuity normally becomes fully liquid based upon the surrender schedule or upon the owner’s death (the deferred fixed annuity can be inherited) but this will depend on the type of contract. Taxes are only due when money is withdrawn from the contract. At death, the beneficiary may have the option of continuing the contract and thereby deferring the taxes. The advantages of this product for the retiree are the likelihood of a lower tax bracket upon retirement and the fact that they are guaranteed to avoid the losses that plague traditional investments.

There may be contract provisions that allow the early withdrawal of a small percentage of the interest and/or principal without penalty, but early cancelation of the policy will result in penalties. These penalties could cause the investment to have a negative return. However, barring early termination, the deferred fixed annuity owner is not at risk for loss.

Although these products are guaranteed, it is important to seek out proper advice and become fully informed before making any financial investment. Taking the time to become educated on deferred fixed annuities could provide you with peace of mind heading into retirement.

Contact John Dubots, Dubots Capital Management, for a free consultation regarding your retirement planning strategy. 888-605-8363. http://www.jpdcapitalmangement.com

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

September 6, 2011  Tags: , , ,   Posted in: annuities  No Comments

Immediate Annuities

Hopefully you have many years ahead of you after you retire.  The US Census Bureau estimates life expectancy at roughly 78 years of age so the average 65-year-old has over a decade ahead while a healthy percentage of retirees will live even longer.

But as Americans are living longer, they begin to worry about outliving their money. Recent market collapses have caused many retirees to watch their stock investments become battered and beaten. Those seeking sanctuary in money markets and CD’s have seen their income wither away.

There is a solution: it’s called an immediate income annuity. This is an insurance product that ensures you’ll receive a check every month for as long as you live. Immediate annuities provide a way to create your own pension by simply using the money you have already saved.

Here’s how they work…

You give an insurance company a lump-sum of money in exchange for a guarantee that you’ll receive a monthly check for the rest of your life or for a specific period of time. The amount of the payment you receive will depend on several factors, including your life expectancy, the amount invested, and the age of your spouse (if included on the policy).

As with any investment, there are “pros” and “cons”. The naysayers will argue the loss of control over your money.  Once you hand over your money, you’re locked into the agreed upon monthly payment. If you underestimate your expenses or need cash to buy a new car or for an emergency, you cannot get funds from your annuity. An immediate annuity is an irrevocable purchase and cannot be cashed in.

If you buy an immediate annuity that just provides payments for the rest of your life, the payments will stop when you die. There will be no residual payment to your heirs, even if you die shortly after buying the annuity. However, there are ways to remedy this problem. You can set up the annuity so that it may outlast your lifetime. How? If you’re married, you can buy a joint and last survivor annuity, which continues payments as long as you or your spouse is alive. If you’re single and have beneficiaries, you can add a clause to your annuity that guarantees payments for a specific period, ranging from 10 to 30 years. This is an asset that can be willed and your heirs would receive the remainder of payments upon your passing. There is a balance between the monthly payments you receive and the length of term.  More years means lower monthly payouts.

Most fixed immediate annuities provide a level payment for the rest of your lifetime. In a volatile market with a future of uncertainty, this feature allows many seniors to sleep better at night knowing they can rely on a consistent income.

Another nice benefit is that a fixed immediate annuity carries no loads or management fees. There are no sales fees or back-end charges to consider.  This adds to the attractiveness.

For more information on annuities, please contact John Dubots of Dubots Capital Management. With over 20 years of experience in retirement income planning, John can help you determine the best way to grow and protect your assets. 888-605-8363.  http://jpdcapitalmanagement.com

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

August 26, 2011  Tags: , , ,   Posted in: annuities  No Comments

Annuities Defined: Immediate vs Deferred

With the volatility we’ve seen in the market recently, stable and secure investments such as annuities are gaining in popularity. While this is a sound strategy, many do not understand how annuities function. This short article should clear up any confusion.

An annuity is a contract between you and an insurance company that is designed to meet retirement and other longer term financial goals.  You can make a one-time lump-sum payment or a series of payments. In return, the insurer agrees to make periodic payments to you beginning on a specified date.

Annuities offer tax-deferred asset growth. Instead, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates.  The theory being that most people will be in a lower tax bracket after they retire.  Early withdrawal, however, carries substantial surrender charges to the insurance company, as well as tax penalties.

There are two types of annuities — immediate and deferred.  Immediate annuities are fairly straight forward and easy to understand. You make a lump-sum contribution into the annuity in exchange for specified payouts that are scheduled to begin immediately. Deferred annuities require more explanation and include Fixed, Variable, and Indexed.  Fixed annuities pay you a specified rate of interest during the time that your account is growing. The periodic payouts are also a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In an indexed annuity, you earn a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuities also provide that the contract value will be no less than a specified amount, regardless of index performance.

A variable annuity allows you to choose your investment strategy from a range of options, typically mutual funds. Your rate of return and the amount of the periodic payments you eventually receive will vary depending on the performance of the investment options you have selected.

Variable annuities are securities regulated by the SEC. An Indexed annuity is not a security; however, they along with Fixed annuities are regulated by the State Department of Insurance.

For more information regarding annuities, contact John Dubots, Dubots Capital Management, 1-888-605-8363.  http://www.jpdcapitalmanagement.com.  In the coming weeks, look for additional information regarding the different types of annuities.

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

August 20, 2011  Tags: , , , , , ,   Posted in: annuities  No Comments

Recent Market Slide Supports Active Portfolio Management

On August 8, 2011, the Dow closed at 10,809.  Just five days prior, on August 3rd, it closed at 11,896.  That’s roughly a 10% slide, the worst single day loss since October 15, 2008, and the 5th largest drop in the last decade- all occurring in the same week. Monday’s market woes were exacerbated by growing fears of further damage to the fragile global economy, already suffering from sagging consumer confidence and Europe’s debt crisis.  President Obama was quoted as saying, “Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we’ve always been and always will be a triple-A country.”  Unfortunately, traders today didn’t find much comfort in Obama’s words as the sell off experienced a few moments of recovery today but closed down 634 points.

While the days ahead pose a grave degree of uncertainty, it perhaps is an opportune time to revisit the practice of Active Portfolio Management. With this strategy, portfolio managers can move capital quickly into more stable investments when declines such as today occur.  Why is this so critical to maintaining your wealth?  Let’s look at some real numbers.

Statistics show that those investors who can avoid the worst days in the market fair better than those who are lucky enough to catch the best days and best timing.  Simply put, you make and preserve more wealth by missing the bad days than you do by capitalizing on the best days.  Here’s why…

If your portfolio was worth $200,000 last Wednesday and then experienced the same 10% decline that rocked the Dow, you now have a portfolio worth $180,000.  However, a recovery now of 10% only gets you back $18,000 (10% of $180,000) and brings your value to $198,000.  You’ll actually need more than an 11% recovery to make up for your 10% loss.

Active Portfolio Management could have shifted assets at the onset of the slide and perhaps could have missed Monday’s crash entirely.  Limiting your losses over the past week to single digits rather than double allows for much faster recovery and, over time, can result in literally tens of thousands of dollars difference in your portfolio value.  In today’s troubled economy, small factors such as this can have a drastic affect on your retirement and quality of life.

If you’d like to discuss this concept further, I invite you to contact me for a no-obligation consultation and portfolio analysis.  Invest 20 minutes into learning about a strategy that could save your family a great deal of stress and capital.  John Dubots, Dubots Capital Management, 888-605-8363

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

August 10, 2011  Tags: , , ,   Posted in: active portfolio management  No Comments

Social Security Trims the Fat

The Social Security Administration adopted a variety of money saving measures this year. Of course, this doesn’t come without some inconveniences.  Here’s a look at a few services that have recently been reduced or eliminated.

Closing early. Beginning on August 15, Social Security field offices nationwide will close 30 minutes early each day. Standard business hours have been 9:00am until 4:00pm and now the public windows will close at 3:30pm.  SSA hopes to eliminate overtime hours with this adjustment.

Paperless payments. The Treasury Department eliminated paper checks for new Social Security beneficiaries back on May 1, 2011. Social Security recipients must now have their payments directly deposited into a bank account or loaded onto a Direct Express Debit Mastercard. This measure is expected to save taxpayers $1 billion over the next 10 years. People currently receiving paper checks must switch to direct deposit by March 1, 2013.

Suspended statements. The Social Security Administration has stopped mailing annual statement to workers. This is expected to save approximately $30 million in fiscal year 2011 and $60 million in 2012. Some of the information previously provided in these mailings is available online.  SSA plans to eventually resume mailing statements to recipients over age 60, but has not set a definitive date as to when this will occur.

Promoting online services. The Social Security Administration has aired a series of public service announcements over the past two years encouraging retirees to sign up for Social Security online.  It is estimated that online applications resulting from the advertisements has saved SSA between $25 million and $30 million.

Seeing these extreme measures from the Social Security Administration should make us all stand up and take notice.  One can only assume that the federally funded agency is not on solid ground as we head forward into massive numbers of people reaching age 65 in the coming decades. It has become imperative for Americans of all ages to take control of their retirement planning and make the proper preparations now to assure financial security during retirement.

If you would like to take an in-depth look at your current retirement plan and evaluate its appropriateness for you and your family, please contact John Dubots of Dubots Capital Management for a free, no-obligation consultation. 888-605-8363.  http://www.jpdcapitalmanagement.com.

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

August 2, 2011  Tags: , , , ,   Posted in: retirement planning  No Comments

Asset Allocation and Tactical Portfolio Management

Asset allocation is a term used a lot by financial professionals.  It is one of those terms that can easily be misunderstood so allow me to define it.  Asset allocation simply means how your money is divided between different types of investments.

It is critical for investors to have a proper asset allocation because the market goes through drastic fluctuations.  Market experts might move from small-cap stocks to technology stocks to bonds to commodities, etc…  It is near impossible for the average investor to keep their thumb on the pulse of the market well enough to keep up with with proper strategy.  Doing so would take an incredible amount of time, research, and luck!
Smart investors should be exposed to a number of different asset classes at all times. Being diversified smooths out the market peaks and valleys. It also reduces the possibility of significant loss due to the downfall of any one sector.

That said, you still need to be strategic. Sometimes certain types of investments are more attractive than others. In those times, having a financial advisor experienced in tactical portfolio management is usually the best course of action.  The ability to move your assets in an instant can save you from double digit percentage losses during severe market swings. This is exactly the type of protection that tactical portfolio management offers.

Now, tactical portfolio management doesn’t mean trying to time the market perfectly every time.  What it does mean, however, is utilizing experience and market analysis to allocate your investments into areas that offer not only growth, but also security.  Protection of your assets is just as important as growth.   In fact, statistics show that “missing” the worst days in the market are far more important than “catching” the best days.
Developing your asset allocation is tricky. Many people will have varying opinions depending upon your age and level of income.  Truthfully, developing a specific formula for assets that “must” be invested in an exact manner is a dangerous proposition. It suggests a buy and hold strategy determined by factors other than market conditions (such as age of the investor).  Any major shift could result in dramatic loss.  Tactical portfolio management, while incorporating proper asset allocation, also provides the added security of making adjustments in that allocation instantly if conditions warrant it.

To further discuss the practice of tactical portfolio management and how it can impact your portfolio, contact John P. Dubots, financial advisor with Dubots Capital Management.  http://www.jpdcapitalmanagement.com  888-605-8363

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

July 26, 2011  Tags: , ,   Posted in: active portfolio management  No Comments

Higher Taxes on the Horizon?

Polls show that most Americans are opposed to raising the federal debt ceiling- a reflection of the desire to return to the good old days. It wasn’t long ago that no one ever talked about tax increases or Medicare cuts, and the federal budget seemed fine. Gone are those days, where we could be ok just by getting spending under control.

Unfortunately, this nostalgic view relies upon a failure to understand the budget. The United States has the world’s highest medical costs, its largest military, an aging population and nonetheless, taxes that are among the world’s lowest. How long can we expect to keep this charade going?

Seems that so many politicians have adopted a “no new taxes” platform- a refusal to raise taxes, regardless of the justification. Unfortunately, these platforms cannot take us back to the good old days. Instead, they will lead us to a very different America. For taxes to remain stagnant, Washington would need to terminate Medicare and Social Security as we have come to know them, and heavily downsize the military.

Beginning January 1, 2011, ten thousand Americans are turning 65 every day, a statistic that will continue for the next 19 years. As these people rush towards retirement, is it realistic that politicians severe their lifeline by cutting Medicare and Social Security? The issue can be debated exhaustingly but the bottom line is that the demise of these assistance programs would not lead to a better America.

So what option does that leave? Higher taxes.

Listen, I don’t like the idea of watching my take-home pay decrease either but realistically, we cannot bury our heads in the sand and pretend it will never happen. Instead, those that make up today’s working class need to re-evaluate their financial plan and take appropriate measures to protect themselves as much as possible from the inevitable increase in federal withholdings.

There are still numerous loopholes, deductions, and shelters from taxation and Americans need to be diligent enough to seek professional advice and put together a plan that allows them to keep more of their future income right where they want it- in their wallet! With tax laws changing nearly every quarter, it is impossible to stay fully abreast of the rules and nuances. But in order to grow and protect assets over the course of the next 10-15 years, this is not a matter one should take lightly.

For a free, no-obligation consultation and to get your tax and retirement questions answered accurately, contact me at 888-605-8363. http://www.jpdcapitalmanagement.com

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

July 20, 2011   Posted in: active portfolio management, retirement planning  No Comments

The Tax Implications of Investing

The smart investor usually holds both stocks and bonds to ensure diversification of their portfolios.  The truly wise, in my opinion, practice active portfolio management in order to maximize growth and provide a higher level of protection. But regardless of the strategy, taxes must be taken into account.

Profits on stocks that are held for more than a year are known as long-term capital gains, and they are taxed at a lower rate than what is owed on ordinary income. The current long-term capital gains tax rate is 15 percent for individuals in the 25 percent income tax bracket or higher. Those in the 10 percent or 15 percent income tax brackets get an even better tax deal. Their tax liability is zero on long-term capital gains.

Short-term capital gains, however, are a different story and are defined as profits from investments that are held for less than one year. Those profits are taxed at ordinary income tax rates, which currently top out at 35 percent.

There are also dividend payments that must be considered as many receive the same preferable tax treatment as long-term capital gains. Known as qualified dividends, brokers delineate which dividend payments meet the tax standards and separate qualified versus ordinary dividend amounts.  Ordinary dividends are taxed at the higher ordinary income tax rates, and appear on annual 1099 statements issued to investors.

There are also potential state taxes on investment income. Many states don’t have separate capital gains tax rates and instead tax all capital gains at ordinary state income tax rates.  This could put a significant dent into your realized profits.

The bottom line for investors is that moving funds in and out of investments is a job which should be delegated to an experienced financial professional- someone that can take into account not only market conditions, but tax implications as well.  Failure to secure the proper advice not only puts your assets at risk on Wall Street, but also with the IRS!

For more advice and to get your investing questions answered, contact me at 888-605-8363 or jdubots@jpdcapitalmanagement.com.   http://jpdcapitalmanagement.com

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926

July 10, 2011  Tags: , ,   Posted in: active portfolio management  No Comments