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Why it might make sense to take the money and run

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It is said that temptation usually leaves a forwarding address, which may explain why financial products with upfront bonuses are so popular, even when there is a definite future cost.

At a time when bonus enticements are still popular with many products, such as annuities, it may make sense to take the upfront bonus, as the outlook for U.S. stocks is murky for the next 10 years, according to many analysts. 

There are all kinds of behavioral and logical reasons why savers and investors are prone to take a lump sum and invest the money, even though it seldom makes rational, logical sense to do so. Investors love to see, touch and feel even an intangible asset benefit now, rather than later. This is borne out by the numbers of individuals who opt to take Social Security at the early age of 62, or those who opt for a lump sum payout and subsequent IRA rollover

With stock market forecasts all over the place for the next few years and polarized between star studded pundits like Jeremy Siegel, author of “Stocks for the Long Run,” who is bullish, and Nobel prize winning economist Robert Shiller, who is bearish, there are obvious reasons why the advisor folks amongst us are a little confused. Then there is the author of “Aftershock,” Robert Wiedemer, who is calling for an epic crash that will make the 2001 and 2008 crashes look like child’s play. 

So when it comes to the choice between a lower cap and a higher bonus in an indexed annuity, it will once again be like Social Security and a lump sum payout and come down to an individual choice. Once again, it depends on individual circumstances — especially the need to access funds or liquidity.

It should also come down to a calculated, historically-driven antidote, such as the valuation of stocks currently. That is where the financial advisor needs to be of value in assessing the past landscape as valid for the future outlook for any product linked directly or indirectly to the stock market. 

This writer, who is usually a fan of higher caps, consistent renewals and avoids getting mesmerized by fat upfront bonuses in indexed annuities, believes that with the outlook for stocks moving forward, it may be time to take the money and run. History has shown us, according to Lipper Analytical, that with stock earnings multiples over 17 times current earnings, the market has tended to perform at an abysmal 5­6 percent for the subsequent 10 years. That’s less than 6 percent annually for the S&P 500, compared to 12.5 percent on average the last five years, according to S&P.

Several companies offer indexed annuities feature products with no caps or caps in excess of 4 percent, but one should gear up for several zeros after a phenomenal run the last five years. Some prognosticators feel that the markets gains have been driven the last five years by an over accommodating Federal Reserve, or those evil, cost-­cutting, bottom-line-biting CEOS who have delivered surprisingly strong and consistent earnings results. 

Several companies also offer both vested and non-­vested bonuses that can provide returns as high as 12 percent in the first four years of the contract. Most of these contracts require the saver to hold the contract to maturity to capture the full bonus. Surrenders and withdrawals can also affect the level of the bonus, but securing locked-in gains go much further now as incentives for purchase rather than just an offset for a CD surrender charge or poorly performing investment.

It would seem that if history repeats itself, then these bonuses, which are non-vesting, could be used to enhance the years in which the index produces zero or low return. In the past, bonuses have been used with increasing regulatory scrutiny to offset early surrender charges on certificates of deposit (CDs) or older annuities. Now, may be a decent time to use them to take the money and run or hedge against future mediocre returns through the legitimate use of an annuity. Always remember that a surrender or withdrawal can potentially affect the bonus, as well. 

Steve Miller’s 1970s smash hit song was about Billy Joe and Bobby Sue robbing a man’s castle. Don’t let your castle get robbed. Take the money, enjoy a higher first year surrender value, and don’t worry about that other mid-70s smash hit by KC and the Sunshine Band, “Get Down Tonight”,which prognosticated the flash crash of 2010. Go on; take the money and run (if it makes financial sense).

See also:

4 more answers every investor needs to know about annuities

How not to invest an IRA in real estate


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