MONEY Master the Game: 7 Simple Steps to Financial Freedom (66 page)

Okay, but what happens if the market goes down?

If the market index drops, even if it’s one of those nasty 20%, 30%, or 50% drawdown years, you don’t lose a dime.
You get to avoid all the bad years and only participate in the up years of the market index.

Now, I know what you are thinking. It’s exactly what I was thinking when
I first heard of these products:
“How in the world can insurance companies give you the upside with no downside?”

“There is no magic here,” said Dr. Babbel when I asked him the same question. He explained that the insurance company parks the bulk of your money safely in its cash reserves, never actually investing it in the stock market. This is how it guarantees your principal. The remainder is used to buy “options” on the stock market index and to cover expenses. So if the market is up, you receive your portion of that gain. If it goes down, the options “expire,” but you don’t lose—and neither does the insurance company. Win, win.

LOCK IN YOUR GAINS

In addition to having the upside without the downside, these FIAs have another special benefit. Look, we all love opening our stock account statements and seeing our account balance on the rise. But we never
really
know if those dollars will truly be ours to spend one day or if another market drop could wash away those gains.
One of the huge benefits of an FIA is that each and every year, any gains or upside are locked in,
and now this becomes our new floor. For example, if I earn 6.5% on my $100,000 account, I now have $106,500 locked in. Never can I lose that $6,500 in growth. Each and every year, the account will be either flat, because I am guaranteed not to partake in market losses, or the account will be up. Like an elevator that only goes up, this unique feature of locking in gains each year is a powerful tool for our safe money.

INCOME! INCOME! INCOME!

As powerful a tool as these FIAs can be for a safe-money return,
it’s their ability to simultaneously provide you a guaranteed lifetime income stream
that makes make them so darn attractive. And while I
like
fixed indexed annuities for the reasons above (principal guarantees, tax efficiency, upside without downside), I have come to
love
them for the guaranteed income aspects. This is what happens when we elect to add a
guaranteed lifetime income rider.
Let me translate into English.

No matter how your account performs, even if it is flat or up moderately over many years, the addition of a guaranteed lifetime income rider ensures
that you will receive a guaranteed annual income stream when you decide to turn it on, regardless of what happens to your base account.

Get this:
I have an annuity in which the income account is
guaranteed
to grow at 7% per year for 20 years with no market risk.
The day I went to buy it, I received an income schedule, so that whenever I decide to turn it on,
I will know exactly how much income I am guaranteed for the rest of my life (no matter how long I live).
And the longer I wait, the more my income account will grow, and thus, the higher the income payments will be. This account has become an important part of my Security Bucket. Again, sounds too good to be true, right? I had my fiduciary advisor dig beneath the surface, and he discovered that not only was it legit, but also it was attracting billions in annual deposits from baby boomers like me.

After all, who wouldn’t want a product with a 7% guaranteed return in their income account while simultaneously avoiding market risk, sequence-of-returns risk, and so on? Remember, this was early 2009, when the market was melting down. There was seemingly no such thing as a safe place. And other guaranteed vehicles like CDs came with tiny returns. As you probably recall, there was a panic in the air, and people were scouring the world for financial safety. I found out later that this specific product became the fastest-selling annuity on the planet at the time.

After I made the investment, my next thought was, “How do I set this up for my kids and grandkids? This is too good to be true.”

So what’s the catch? I came to find out that the insurance companies offer this product only if you are in your mid-50s or older. They can’t offer 7% forever, so they give a maximum of 20 years. If you are younger, the insurance company obviously can’t afford to give you a 7% return in your income account forever. Also, this annuity requires a sizeable lump-sum deposit up front. I was baffled and frustrated. If this product is this powerful for someone my age, it would be even more powerful for someone in his 20s, 30s, or 40s who has so much time to allow his deposits to compound.
That day, I made it my mission to create an affordable solution for younger people.
Where else could they build a secure lifetime income plan that would allow
them to carve a clear path to financial freedom without all the stress and volatility of the market?

YOUR PERSONAL JACKPOT

Cody Foster and his two partners, David Callanan and Derek Thompson, are living Horatio Alger stories. In 2005 these three buddies sat around Cody’s kitchen table in sleepy Topeka, Kansas. They had pooled their life savings, and with $135,000 in the bank, they decided to launch Advisors Excel. You might never have heard of Advisors Excel, because it doesn’t service the end consumer. The firm services only top-tier financial advisors. And “service” is the understatement of the year. Advisors Excel works with the top insurance companies to give financial advisors access to the most innovative and secure annuities in the country. You could think of their company as the advisor to the advisors.

Fast-forward just nine short years.
Advisors Excel is now the largest annuity wholesaler in the country, with nearly $5 billion in annual deposits.
In an industry of firms that have been around for decades, Advisors Excel dominates. In the company’s short existence, it’s grown so quickly that the three founders have outgrown their office space five separate times! Their first location was in the basement of a dentist’s office (where they used boxes as a makeshift desk for their first employee). Today they are in an 80,000-square-foot state-of-the-art facility. Who knows how long until they outgrow that space!

When you meet Cody, you would never know that this humble man from Topeka owns a multibillion-dollar company. He is salt of the earth and hasn’t forgotten his roots, or the grace of God that he credits for his success. I met Cody for the first time in my hotel in San Jose, California, the morning after he attended a 6,000-person Unleash the Power Within event. We had been brought together for this meeting by my son Josh. The meeting was scheduled for an hour but ended up going three hours (not uncommon in my world!).

I dove in . . .

“Cody, I have an idea that I believe can transform the lives of millions of people by helping them reach their financial goals sooner and with a whole lot less stress and risk.”

“Okay, shoot,” he said and inched to the end of his chair in anticipation.

“I want to see if we can take what’s available for wealthy older folks and give the same opportunity to younger people who may or may not have a lot to invest. A fixed indexed annuity where younger people could contribute monthly, similar to how they would a 401(k), and know that for every dollar they contribute, they are guaranteed a lifetime income stream. A personal pension plan.”

Cody sat back. He seemed slightly skeptical.

This was outside the box by a mile.

I went into full-on “seminar-style” assault mode. I gave him my most passionate plea as to why this solution could be a game changer. Engaging with the millennials is the Holy Grail for the financial services industry, as they are independent self-thinkers and notoriously tough to reach. And studies show that they aren’t huge fans of the stock market. Just as they were getting their feet wet, the crash of 2008 wiped out the little they had saved. Even worse, one study by LIMRA, the largest trade association for the life insurance and financial services industry, found that Gen Xers lost 55% of their median net worth between 2005 and 2010! Ouch. Now they want guarantees! They want protection. They want income. And they want it to be easy.

Cody began to nod. He understood what I was thinking, but he also knew the challenges. After all, he has been in this industry since graduating college and knows intimately the limitations and strengths of each of the biggest insurance companies in the world.

“Tony, I can see what you’re going after, but you need to understand the business. Insurance companies can’t do this for somebody younger because what makes lifetime income annuities work, and what makes the insurance numbers work, is that they are driven by understanding mortality rates. And at fifty-five, they know your lifespan, on average, and they can make financial decisions based on that. It’s harder to do it at forty-five or thirty-five or, heck, twenty-five.”

I had anticipated this answer and had an idea:

“What if you gave them a guarantee that they won’t lose their money, first and foremost? And since it costs more to insure their future income, why not give them a smaller annual growth guarantee and then
add to it
whatever upside the index in the stock market brings? That could end up
being more than seven percent, especially for younger people in their twenties, thirties, or forties, because they have so much time for their investments to compound. Most people know that, over time, the stock market has produced the greatest growth, but the problem is the risk of those nasty market drops!
You could give them upside without the downside on their deposits and a guaranteed income for life.

“You still have to
make it affordable
by not requiring a lump-sum payment up front,
but instead, only small monthly payments in the amount they choose.
With this approach, the insurance company won’t have to worry about superlong life expectancies, and the client has the potential for a much higher income stream since the majority of the income is tied to the market upside.”

Cody liked the idea because over long periods of time, the market will perform for investors, especially when you are participating only in the up years. But one major hurdle remained:

“Tony, the way I see it, this product would need to be efficient and lean. But traditionally, the most expensive aspect when pricing an annuity is the commission. Insurance companies pay commissions up front from their own pocket so they aren’t deducted from the customer’s account. So for this to work, insurance companies can’t afford to pay large amounts of compensation to sell this, which means it is tough to get traditional agents to sell it. It’s a catch-22.”

Again, I had a counter prepared.

“What if they don’t pay any up-front commissions?” I asked. “Think outside the box in terms of sales. Fifty years ago, life insurance was sold door to door. Today you can do it online and never speak to a salesman—and as a result, it’s now ultraconvenient and cheaper than ever before. This new annuity should follow suit. Younger ages actually prefer
not
to talk to anyone!
Cut out the middleman!

“This should be as simple as going online, deciding how much money you want to invest per month, and having it deducted automatically from your checking account. Set it and forget it. The site could project exactly how much income it will provide for you at any future age—fifty, fifty-five, sixty—depending on how much you can afford to set aside. With just a few clicks, a person could be set up with an income plan for life. They don’t have
to be rich or old to take advantage. Heck, they could even track it with an app on their iPhone.”

Cody was catching the vision. So I asked him, “Cody, how many lives do you think this could impact? How many lives could be touched if you guys used your sway with the insurance companies to create a product that anyone could access and would provide them with a more secure financial future?”

Cody smiled. “Over the years?
Millions! Tens of millions! The vast majority of America!”
My words had struck a chord with this small-town farm boy who grew up on the lower end of the middle class. Cody is incredibly benevolent with his wealth and wants everyone to get a fair shot. Especially a fair shot at financial freedom.

Cody left the hotel. He was on fire. He left on a mission: to see if he could use his influence to convince the world’s largest insurance companies to build a “lifetime income plan” solution for younger ages and with smaller deposit requirements.

FAST-FORWARD

Just a few years back, the minimum age for most fixed indexed annuities was 50 or 55, depending on the company, and most required a minimum $20,000 to $50,000 deposit. And finding a guaranteed lifetime income rider for the younger marketplace (below 50) was virtually impossible.
But the game has now officially changed. I’m proud to report to you that through the efforts of my partnership with Advisors Excel, we have managed to get some of the largest insurance companies in the world to begin to set up and build new, revolutionary products for you, regardless of your age or income level.

These new FIAs provide benefits such as:

• 
Guarantee of your principal:
whatever money you’ve invested, you’ll never lose.

• 
The upside without the downside:
you participate in 100% of the stock market index growth. That’s right: 100% of the upside with no downside, no chance of loss, and no cap on your winnings. The insurance company simply shares in your profits by taking a small “spread” (ranging between 1.25% to
1.75%). If the market is up 10%, and it keeps 1.5%, you get 8.5% credited to your account value.
Conversely, if the market is down in a given year, the insurance company does not keep anything, and you don’t lose a dime or pay any fees!
You pay the spread only if you make money.