How to Avoid These 2 Deterrents to Wealth Creation with an Annuity
Creating wealth is one of the most challenging, while at the same time, one of the most rewarding endeavors one might undertake. To be certain we have the right perspective on wealth, money isn’t everything and it certainly won’t buy you happiness. However, having money (and lots of it) certainly can help make life easier while you focus on other aspects of life that bring intrinsic joy and happiness to you – separate and apart from money. With that being said, if you take a look at what took place on Wall Street in 2013, it’s easy to see that a lot of wealth was created that year. With the DOW up 26.5% for the year, the S&P 500 up 29.6% and the NASDAQ up 38.3%, creating wealth within the financial markets seemed easy in 2013… So easy that even a caveman could do it…right? Sorry, but I couldn’t resist that one. The truth is that creating wealth isn’t easy by any stretch of the imagination. To do so, you will fight a bloody battle with many of the enemies of wealth. These deterrents to creating wealth come in all shapes and sizes. For purposes of our discussion today, we’ll focus on just two: Market Losses and Inflation. And, within our discussions, we’ll talk about how the design behind an equity indexed annuity (EIA) can help you avoid both of these deterrents to wealth creation. Let’s look at each deterrent individually:
- Market Losses – We all remember years like 2013, when we can gleefully talk about how strong the financial markets were. However, many of us would like to forget years like 2008, when the S&P was down 37% for the year, but down more than 50% from the market’s peak in October of 2007 to its bottom in March of 2009. The thing about market losses is they don’t play fair. Suffer a 50% loss to your portfolio and simple math would indicate a 50% gain the next year would have you back at break even right? Dead wrong! While “-50” plus “50” gets you back to break even mathematically speaking, when dealing with your wealth, a 50% loss in your portfolio will necessitate a 100% gain just to get back to break even. And, if the markets only average about 10% per year, then not taking compound interest into consideration, you’d be looking at about 10 years just to be back at breakeven. So how does an EIA help you avoid this? Simply by its design. EIAs were designed to be safe financial vehicles. Since you are never invested directly in the markets, you never have to worry about suffering a 50% loss, which is part reason the insurance companies can guarantee that. Your money is held in a safe bond portfolio. Every year, through the use of call options, the insurance company offers account holders the ability to participate in the upside potential of the market up to certain limits known as CAPS within your annuity contract. Assuming your CAP was 7% and the S&P was up 10% for the year, then the amount of interest credited to your account for the year would be “CAPPED” at 7%. If that same index was down 30% the following year, your account would still reflect your original contribution, plus the 7% gain in year one. You’d avoid that 30% loss in year two and simply stay “FLAT” on the year since 0% is the amount of interest credited in year two to your account. This “annual reset” feature within these contracts allows you to not only avoid significant market losses, but it also allows you to avoid losing time by simply having to play catch up after significant market losses
- Inflation – Our government would like to have us believe inflation is around 3% to 4%. Several independent studies question the validity of those numbers and point to something closer to 6% to 7% as real inflation. Then, you’ve got your real life experience to point to when you look at the increases in the cost of milk at the grocery store or gas for your vehicle. While this isn’t the forum to debate what true inflation is, we know it will certainly rise from here thanks to all of that money our government has been printing. Using the rule of 72, if real inflation is at 6%, then that means the purchasing power of your money cuts in half every 12 years. Let’s say you’re 41 years old with intentions of retiring on $80,000 a year at 65. At your age 53, $80,000 will only purchase $40,000 worth of goods and services. At 65 when you retire, $80,000 today will only purchase $20,000 worth of goods and services. What this means is: However you manage your investments, you must do so in a manner that consistently outpaces inflation… not barely keeps up with it… that is, if you want to retire comfortably. The ability to participate in market gains, while completely avoiding market losses with an EIA will certainly go a long way in helping your investments not just keep up with inflation, but perhaps even outpace it.
In order to create wealth over the long term, you have to be cognizant of what the enemies of wealth are. Not only should you be aware of them, but you should have a game plan to avoid these deterrents to wealth creation. When battling the threats that market losses and inflation pose to your wealth creation journey, perhaps incorporating the use of an equity indexed annuity might be worth your consideration.
About the Author:
Best Selling Author and Financial Strategist, Ike Ikokwu, gets it. He’s walked through the same fire that most of us are walking through right now: The disappearing nest egg, the investment returns that never happen, and the house with the white picket fence that’s worth less now than it was when we bought it. Through experience, education, and a lot of hard work, Ikokwu has survived the American Dream turned financial nightmare. He has discovered that most of us are following 9 specific financial myths he calls the “Mom and Dad Plan,” and these inadvisable, yet staple, beliefs have us on a collision course with financial disaster. For access to his best-selling book and other financial products to help you avoid the collision course with financial disaster, visit him on the web at www.ikeikokwu.com.
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