Protecting income and lifestyle - Part III

Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters. Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

In this third and final part to our discussion on protecting income and lifestyle, the use of variable annuities and outside managers/advisors will be covered. For those not familiar with variable annuities, they are specialized investment products offered by insurance companies in many cases as an option to mutual funds.

The opinions of many professionals vary on the benefit of these products. Many decry their use because of the additional expenses some of the products have. Others avoid using variable annuities for retirement assets because the benefit of tax deferral on the growth is already provided by the type of account, “retirement”, and the tax deferral benefit of the variable annuity is not required.

Like all products, there are both high and poor quality product selections as well as features. There are variable annuities that have very low expenses, thus the argument of high expenses does not hold. Many of the added expenses of a variable annuity are tied to features other investment products do not have. And these features are elective, thus if they are not needed do not add them to the contract. To cover all of the benefits of the variable annuity in this column is impossible, but I will touch on a few items to consider.

For retirees, there are usually two objectives most would like to have. The first is an income stream they cannot outlive. Today, with longer life expectancies, having sufficient assets to last a lifetime can come into question especially when investment markets dish out the type of returns we have experienced in the last two years. The second objective most retirees share is the ability to leave their spouse in satisfactory financial shape should they pass away prematurely. While the variable annuity is not the sole solution, in my opinion, it should be part of the solution. But, not just any variable annuity will meet the requirement, so selecting the proper product is crucial.

There are several insurance companies offering products with features that will guarantee a lifetime of income, not only for the purchaser, but also for their surviving spouse. In the past this meant the investor gave up the value of the contract, but that is not the case in today’s market. Insuring a home or car is done without much thought today. Using the variable annuity to insure part of the ten to thirty years of retirement income should also be considered. The potential loss for most retirees may come closer to the value of their home than their car should this income stream be lost, and yet for most this income is left to chance.

In the event the variable annuity is purchased, even with the guarantees the product provides it still requires management of the underlying investments. This is where the manager or advisor can become part of the solution as well. Investments do not manage themselves. When a 40 year old invests their entire retirement account into growth funds, the fund manager will not call up and say “it is time to be more conservative because the markets are headed for a rough spot”. The growth fund manager will continue on their required course. For some, that means they are required to stay fully invested even in difficult times. Other fund policies permit the manager to shift assets when appropriate even to the point of going to cash. If you as the investor do not want this job or are not suited for the position, then the only choice remaining is to find a suitable investment advisor.

It is true I am still active in this profession and manage many large and small accounts totaling millions for my clients, but this is not why I generally recommend the public to seek assistance from financial advisors. It is because like any other competent financial advisor, we are uniquely qualified to know what it takes to mange investment accounts, whether it is the $25,000 401-K, or the $2.6 million IRA. We know the research required and the amount of reading including the variety of sources of information necessary to make intelligent decisions. Software and other tools are also required to make investment selections as well as tracking performance. Those investment professionals that truly manage investments can be a great addition to the team. But, those investment professionals who are more salesman than manager can leave their clients believing there is a watchful eye over their investments when in fact, they are on to the next sales call rather than managing clients’ investments. Just like selecting the correct product, selecting the right manager is also required.

For help with managing investments contact me at Quality Financial Concepts or one of the other Certified Financial Planners our area. To continue a personal quest for education, you can also view our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.

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