NWP Monthly Digest | March 2023
The Last Dollar: Attack of the Killer Funguities
2022 was an unprecedented year for the stock and bond markets, and nobody expected an easy 2023 to follow. The dichotomy between the market fundamentals and the economic data is enough to make anyone reevaluate their investment strategy. When was the last time you took a second look at your portfolio?
Annuity sales hit record levels in 2022, possibly spurred by volatile markets and rising interest rates. It’s possible you already own an annuity or have considered purchasing one. Annuities can be a valuable tool for a tiny percentage of individuals, but their abundance stems from obscure investment characteristics and extravagant sales incentives - creating a blatant misalignment of interests between financial professionals and their clients.
March is an excellent time for some spring cleaning, and those of you holding annuities in your investment portfolios may want to freshen up your financial plan and put those dirty investments in the garbage…
I’ve kicked off the new year with a post-apocalyptic series on HBO called The Last of Us. In the highly recommended show, a Cordyceps fungus mutated and evolved, making it capable of infecting human hosts and destroying life as we know it. While watching this show, my inner financial geek couldn’t stop drawing parallels between the Cordyceps fungus inside a human host, and annuities within investment portfolios. Like the fungus, annuities always evolve to find new ways to infect financial plans and eat your wealth. Ok….maybe I’m reaching, but it’s worth understanding these complex products, so the fungus-like annuities, or funguities, won’t devour your wealth down to the last dollar.
Annuities were once a product designed to provide income in retirement, and those owning these products had a clear understanding of the trade-offs they were making. Lavish commissions transformed the asset into a zombie-like creature that cannot be controlled, consistently mutating to survive and wreaking havoc on financial plans. Annuities latch onto their victims with enticing promises and their hosts cannot escape due to the illiquidity provisions of the contract and onerous fees. Instead of teeth, annuities inflict damage using astronomical fees and unfriendly tax provisions. These zombie investments may take a bite out of your retirement income and hinder your ability to achieve your financial goals. It’s time to fight back against this annuity outbreak and find a cure for infected portfolios!
A History of Annuities
Unlike post-apocalyptic zombies, annuities have been around for centuries. In America, the first annuity was created by Pennsylvania Life Insurance Company to help fund Philadelphia’s fire department. In the 19th century, the popularity of annuities rose with the adoption of pension plans. In its most basic form, buyers of annuities would transfer a large sum of money to an insurance company in exchange for a stream of income that would typically last until the end of their life. Today, this transaction is called an “immediate annuity.” Insurance companies would price these products to compensate them for the risk they were taking.
In recent years, the rising popularity of 401(k) plans has led to the demise of pension plans. With the wide adoption of 401(k) plans, the employee was now responsible for generating an income stream for their retirement, rather than employers providing pension plans for their employees. At this time, insurance companies turned their focus to the employees.
Evolution of the Fungi
It wasn’t long before the insurance companies realized they were missing an opportunity to capture income while those individuals were saving up for retirement. This led to the “deferred annuity,” which is an annuity that you purchased now, but did not convert into an income stream until later. Annuity providers then charged fees for holding the investments until the assets were annuitized. After annuitization (conversion to an income stream), firms offering annuities use an assumed interest rate to calculate the income stream. If interest rates and returns generated from those proceeds were higher, insurance companies reaped the benefits. But after lackluster returns following the Dot Com Bubble and the Financial Crisis, insurance companies were not satisfied with the returns generated relative to the risks they assumed. But what if there was a way to generate equivalent profits without the risks?
And the Destruction of Your Financial Plan…
Fast forward to today, and annuity providers conjured complex products designed to increase the appeal of leaving the funds invested in the annuity. Allowing insurance companies to profit from excessive fees built into the annuities while assuming little or no risk from the product – what a business model!
Unfortunately, if annuity holders do not annuitize the investment, they do not benefit from the income stream, nor do they reduce potential risks in the financial plan. Furthermore, those holding annuities suffer from unfriendly tax provisions and are sitting on a restrictive product that’s near impossible for a layman to understand, all while paying unreasonable fees.
Like cordyceps, few truly understand the intricate details of annuity products. The seemingly endless annuity structures, or mutations, paired with hefty commissions earned from brokers selling annuities, only exacerbate the problem. Be wary of the advice from those with livelihoods dependent on selling these products. The need to utilize annuities in a financial plan is incredibly rare. Unless you have a vivid understanding of the impact this insurance product will have on your wealth, it’s probably wise not to play with fire. Unless, of course, the fire kills off fungal zombies…..
NWP Pro Tip of the Month
Tax Season Is Here
With the April 15 tax deadline quickly approaching, it's important to review your tax situation and make any necessary adjustments. This includes maximizing contributions to tax-advantaged retirement accounts, identifying deductions and credits, and planning for potential tax liabilities. We’re happy to help if you have questions.
Medicare Advantage Open Enrollment
This opportunity is designed for beneficiaries who have discovered their Medicare Advantage plan doesn’t meet their needs: maybe costs are higher than expected, or a favored doctor doesn’t participate in the network. Among those who might want to make a change: Enrollees who selected a new plan last fall only to find it hasn’t met their needs and those whose old plan is making unwanted changes for 2023.
Benefits of Benevolence
Here's a round-up of perks that research suggests we can receive by helping others:
Healthier hearts: those who volunteer are less likely to develop hypertension and simply donating money to good causes can lead to lower blood pressure.
Longer lives: numerous studies reveal that those who volunteer tend to live longer than those who don't. One study found a 44% reduction in early death among frequent volunteers, making volunteering more effective than exercising four times a week.
Sharper minds: research also shows that older adults who volunteer could delay or possibly reverse declines in brain function.
Lower weights: the physical activity involved in volunteering can help you reduce the risk of weight gain and obesity-related conditions.
More joy: extensive research suggests that when you help others your brain releases "feel good" chemicals like serotonin, dopamine, oxytocin and endorphins. This can lead to a euphoric experience called "helper's high."
Less depression: the release of those "feel good" chemicals also can combat feelings of depression; specific research shows decreased depression levels for people over 65.
Reduced stress: helping others can also reduce cortisol, the stress hormone that can make you feel overwhelmed or anxious. The American Psychological Association points to myriad physical conditions caused or exacerbated by stress, including chronic pain, respiratory problems, obesity, irritable bowel syndrome and even heart attacks.
Delayed Required Minimum Distributions (RMDs)
SECURE Act 2.0 now allows Older adults can now wait another year before taking mandatory withdrawals from their retirement accounts. The law increased the age for required minimum distributions (RMDs) to 73 from 72, with a provision to increase it again, to 75, in 2033. Should you delay your mandatory withdrawals?
While the increased flexibility is welcome, those who can afford to wait should consider whether that's really the best move for them. Postponing RMDs generally means you’ll have to take out a larger amount later on, and pay more in taxes - increased income could push you into a higher tax bracket, increase the taxable portion of your Social Security benefits, and trigger bigger Medicare premiums down the road.
Smart planning can help mitigate the tax impact of your RMDs. Start early - if you wait until you’re 72, there’s a lot less you can do.
Find the Right Financial Advisor
Having the right financial partner can pay both figurative and literal dividends. Without knowledge of how the industry functions, it's difficult to isolate meaningful factors to help you pick the right financial advisor. With all the buzz about AI, it's interesting to see how it responded to the question of how to find the best advisor in Denver. I can't disagree with the results…but I’m biased - Noble Wealth Partners checks all these boxes.
What We’re Reading
Unfu*k Yourself: Get Out of Your Head and into Your Life | Gary John Bishop
The author opines that you may be the only thing getting in the way of your best life. This book provides strategies to help you get out of your head, get out of your way, and begin living your life on terms. Don't let your negative self-talk and negative self-critical beliefs drag you down. Instead, use positive assertions to help you change how you talk and live your life!
Unworking: The Reinvention of the Modern Office | Jeremy Myerson
The modern office came into existence over 100 years ago when engineer Frederic Taylor introduced the concept along with the organizational diagram, or “org chart.” There's been a dramatic shift away from an office environment where workers need constant surveillance, to an environment where knowledgeable employees can thrive - fostering collaboration, creativity, and productivity. Most of all, employees can feel good about their contributions to their employer. Move from the archaic way of doing things and graduate to an office of innovation, embracing technology, and positioned to succeed in the modern age.