Equity Indexed Annuities

While technically classified as a fixed annuity, an equity-indexed annuity (EIA) can be described as a hybrid of a fixed annuity and a variable annuity, having some characteristics of both, and falling in between with regard to potential for return and level of risk.

With a traditional fixed annuity, the annuity issuer guarantees both the rate of return and the payout. Investors in fixed annuities elect safety of principal and guaranteed returns over market risks and the potential for higher returns.

With a variable annuity, on the other hand, the rate of return varies according to the performance of the investments you choose from those offered by the issuer (these investments are often called subaccounts). With the exception of a guaranteed subaccount, variable annuities don’t offer any guarantees on the performance of the subaccounts. You assume all the risk related to those investments including the risk that you may lose principal. In return for assuming a greater amount of risk, investors in variable annuities have a greater potential for growth in earnings.

EIAs take the middle ground, offering limited downside risk balanced by limited upside potential for returns. They offer safety of principal, and generally a minimum rate of return (provided the EIA is held for the full term). EIAs also offer the potential for higher returns by tying interest paid to the performance of a stock index.

Cutting College Costs

Parents, when planning to pay for your child’s college expenses, you’ll receive an estimate from each school of the cost for tuition, fees, and other expenses. Most often, the “other expense” factor may seem very high, and a little hard to understand.

A recent survey by Student Monitor, tracking the spending habits of college students, shows that students tend to spend an average of nearly $7,000 on discretionary items. The following is a list of some of the discretionary spending that they uncovered:
· Transportation and Travel – frequency of visits, distance, and mode of travel will impact this the most.
· Personal Expenses – phone, laundry, toiletries, clothing, and entertainment
· Additional Fees and Dues – lab fees for science classes, honorary and social fraternities, and other fees
· Health Insurance – quite often this is an included charge on the tuition bill. If the child is already covered on the family policy, be sure to waive the institution-provided insurance.
· Books and Supplies – again, each class will have required books, and some will have required supplies. Used books can help lower the costs, but are often scarce or outdated.
· Room and Board – there are a lot of variables in the cost of room and board, depending upon the residence hall chosen, whether the room is a single, double, triple or quad room. Off-campus living may reduce the “rent” cost, but there will be additional costs for utilities, groceries, etc.
· Computer – many times, a computer is required, and if so the admissions requirements will explain the expectations. This will impact whether the student needs a basic PC or a more expensive laptop.
· Property Insurance – Most homeowner’s policies will cover the student’s personal property in a dorm room, but check your policy’s limitations against the value of the possessions. There may be a limit in the coverage. And if the student lives off-campus in an apartment, a renter’s policy is a must.

The Most Important Factor in Retirement Savings

We’ve all been there: making decisions on the old retirement savings account. It doesn’t matter if it is a Roth IRA, a 401(k), or a deferred comp plan, there are many different decisions that we have to make.

It can be overwhelming, until you step back and realize that there are actually only three primary decisions to make:

1. How much to contribute
2. How to allocate between stocks and bonds
3. Which funds/investments to choose

Once you realize this, it becomes much easier to start the decision-making process. But here’s something about that process that I’ll wager you didn’t realize – one of those three decisions is by far more important to the overall success in your plans, and there is another factor* that you may not have considered.

The most important decision you can make with regard to your saving activity is the first one in the list – How much to contribute.

According to a recent study by Putnam, this one factor makes a much greater difference in the outcome of a savings plan than the other two can, even in the best of circumstances. By choosing to save as much as possible, we are laying the groundwork for the other items, allocation and fund choice, to optimize upon the greatest possible starting amounts.
Putnam’s study indicates that fund choice makes the largest difference in the later years of a plan, and that aggressive allocation makes a smaller difference in the earlier years.

The rule of thumb generally is that you should invest at least enough to get the maximum from your employer’s match, assuming that a match is available to you. Above and beyond that, it is important to ensure that you’re salting away as much as you can, so that compounding can begin on as large an amount as possible.

This doesn’t mean that you should not pay careful attention to allocation and fund choices – what the study indicates is that you can make a mistake here and there with allocation or fund choice, and it won’t sink the boat.

*The other factor that I alluded to earlier is having a plan, and the discipline to stick to it. That means developing goals, mapping out how (incrementally) you will achieve those goals, and then putting the plan into action – sticking to it, through thick and thin, and monitoring your progress. I know, I know, you’re saying to yourself, “what a shock, the planner-guy is advocating that we have a plan”. Touché. Okay – so I believe in what I do. I recommend that you develop a financial plan regardless of whether you hire me to do it. I sincerely believe it is the most important factor in determining success in reaching your lifelong goals.