Whoops!

Carried it a couple of years too far!

Nums would be based off a 1.78MM portfolio and the fee based would have skinned off only $122,185 (for sake of the discussion we'll assume that the lack of commission gave the client enough extra earnings to pay off this burden and still have the equivalent interest income to invest like the "commission based" broker!)

The commission based broker would have been at $17,804 which is not entirely fair to say because he would have had some bonds maturing and or called which might have added to his total. Assume that he built a 20 year ladder, 50M every other year (and then filled in the even years with the 50M subsequent investments) of course this isn't fair either because he's not going to get a point on 2, 4, 6, 8 year paper...) but with that he's bumped to $24,804!

The Zero guy comes in at $24,000, but let's see what happens for him going forward!

In the next 15 years of retirement, the Zero portfolio, which has a ladder of 100m "rungs" per year is going to be plucked of it's maturing bonds, $72,000 will be retained and the other 28 thousand will be used to buy zeroes at the back end of the ladder(call it 30 years). In this manner, the zeroes will provide the same income as the coupon ladder. 28,000 at 2% is 560 per year and 8,400 for the 15 years, he totaled out at $32,400.

Coupon bond guy had more bonds to buy each year, 50 per year = $500 =$7500 + $24,804=$32,304

Fee based guy got...well, assuming he didn't get fired! on 1.78MM he was sucking down $13,353 per year for 15 years or $200,295. He totals out at $368,142.

Do you still wonder why you firm wants you to push "Wrap Products"/ it has NOTHING to do with what is "in the client's best interests"!

Mr. A

I mean $322,480.

Been a long day of taking 20% profits off a stock I bought in Oct. (+4% in dividends).

Mr. A

[quote=anonymous]

In another thread, I was raving about the benefits of annuities, but I really don't like them for non-qualified money because capital gains is being traded for income tax. 

A diversified portfolio of no to low dividend paying common stocks can be a significant part of the answer. 

[/quote]

So the value of tax deferral is zero? Are you stupid about everything or just about money?

 Are you stupid about everything or just about money?

From reading your posts, I guess all of us are stupid about everything that when we disagree with you.

So the value of tax deferral is zero?

Actually, I would say that in many instances, the value is worth less than zero.   It's very convenient to ignore the fact that depending on the specifics of the investment, capital gains are largely being traded for income tax.  Additionally, if someone is successful, it is very possible that future tax rates will be higher than now.  Let's not forget that the gains must be removed first.  We also have those nasty penalties for pre 59 1/2 withdrawals.  Finally, we have the loss of the step up of basis at death.

CD money going into a fixed annuity can make sense.  Equity money going into a non-qualified VA doesn't make sense from a tax standpoint.   If the guarantee allows someone to invest like they should, it might make sense, but the tax deferrals on these products is not an advantage.  (Yes, there can be the exception where someone makes a ton of money now and expects to be struggling financially in retirement and the money is invested in such a way that much of the taxes need to be paid annually.)

Don't forget a comeback that criticizes me personally instead of one that backs up your viewpoint.

“Actually, I would say that in many instances, the value is worth less than

zero.   It’s very convenient to ignore the fact that depending on the

specifics of the investment, capital gains are largely being traded for

income tax. Additionally, if someone is successful, it is very possible that

future tax rates will be higher than now. Let’s not forget that the gains

must be removed first. We also have those nasty penalties for pre 59 1/2

withdrawals. Finally, we have the loss of the step up of basis at death.”



----anonymous



____________________________________________________________ ____________

_



No one has to criticize you personally when you make statements that are

THAT stupid.

Starka, since my comments are THAT stupid, it should be easy for you and Inner Child to point out where I'm wrong. 

Most of what you put forth as fact in the post that I quoted from is wrong.

For example:



“Equity money going into a non-qualified VA doesn’t make sense from a

tax standpoint.”



(Just flat wrong)



“Finally, we have the loss of the step up of basis at death.”



(The death benefit takes care of that very nicely, thank you.)





I do use VAs on occasion, and like almost anything in life can be very

effective when used properly. In fact, the VA that I use has lower internal

expenses (including M&E) than many if not most mutual funds. But it’s

not a panacea for every financial problem.



All we’re saying, simply put, that there is no black and white answer with

respect to investment products and their vehicles.

"Equity money going into a non-qualified VA doesn't make sense from a
tax standpoint."

(Just flat wrong)

Please explain why I'm wrong so that I can learn. 

"Finally, we have the loss of the step up of basis at death."

(The death benefit takes care of that very nicely, thank you.)

How?  Stock grows from $40,000 to $80,000.  The owner dies.  The cost basis for new owner is $80,000.  New owner sells next day.  No taxes are owed. 

VA grows from $40,000 to $80,000.  The owner dies.  The cost basis for new owner is $40,000.  The new owner sells next day.  New owner has $40,000 in taxable gain. 

[quote=anonymous]

“Equity money going into a non-qualified VA

doesn’t make sense from a tax standpoint.” (Just flat wrong)

Please explain why I’m wrong so that I can learn.

“Finally, we have the loss of the step up of basis at death.” (The

death benefit takes care of that very nicely, thank you.)

How? Stock grows from $40,000 to $80,000. The owner dies. The

cost basis for new owner is $80,000. New owner sells next day. No

taxes are owed.

VA grows from $40,000 to $80,000. The owner dies. The cost basis

for new owner is $40,000. The new owner sells next day. New owner has

$40,000 in taxable gain.

Starka,

Come on, man.  Stop the strawman argument. 

You're the one who said that the death benefit takes care of the step up of basis.  In the vast majority of cases, (any time that the annuity doesn't lose money) this step up in basis is a huge disadvantage.  Why is it so hard to admit that you are wrong?

Some annuities do provide protection against loss at death.  This comes at a cost.   That being said, what really stinks about the death benefit of an annuity is that the more that the client pays for it, the more worthless that it becomes.

Ex. The insurance company charges 1.0% for M & E.  The client invests $100,000.  The charge is obviously $1000.  The investment drops to $87,000.  The M & E is now $870 and could pay the client's beneficiary an extra $13,000 at death.  After many years, the investment has grown to $500,000.  The M & E is now $5,000, but the death benefit above the investment is $0.  The investment would have to drop over $400,000 for the death benefit to have any value.  It's a hell of a lot of money to pay for something with no value.

[quote=anonymous]

Starka,

Come on, man. Stop the strawman argument.

You’re the one who said that the death benefit takes care of the step up

of basis. In the vast majority of cases, (any time that the annuity doesn’t

lose money) this step up in basis is a huge disadvantage. Why is it so

hard to admit that you are wrong?

Some annuities do provide protection against loss at death. This

comes at a cost. That being said, what really stinks about the death

benefit of an annuity is that the more that the client pays for it, the more

worthless that it becomes.

Ex. The insurance company charges 1.0% for M & E. The client invests

$100,000. The charge is obviously $1000. The investment drops to

$87,000. The M & E is now $870 and could pay the client’s beneficiary an

extra $13,000 at death. After many years, the investment has grown to

$500,000. The M & E is now $5,000, but the death benefit above the

investment is $0. The investment would have to drop over $400,000 for

the death benefit to have any value. It’s a hell of a lot of money to pay for

something with no value.

"If the investment grew to $500,000 (after the anniversary date!), then fell back to the original $100,000 and the client died, how much does beneficiary receive? Answer: $500,000. That's what the insurance component is for."

The overwhelming majority of VA contracts have a standard death benefit.  This DB will pay the higher of the purchase payment or the contract value.  This means that $100,000 that grows to $500,000 and then drops to less than $100,000 will pay $100,000.

For an additional cost, one could buy an increasing death benefit, such as one that increases 5% a year.

I have never seen or heard of one that pays based upon a resettable high water mark like you are describing.   I am not doubting you, rather I am looking forward for the opportunity to learn.  Can you please name one company who offers this type of DB reset and what is the cost?

Most of the ones I have seen have the anniversary feature, either as a

standard benefit or as an add-on rider. Hartford’s Director comes

immediately to mind, as does the Protective Life product. In fairness, I

should add that I don’t use these products any more, but I have in the past.

Starka,

Any idea of the cost and is this a "cash and carry" benefit or does it require annuitization?  If it requires annuitization, are the rates legitimate (ie. competive with SPIA rates) or do they use artifically low rates?

If memory serves, it was anywhere from 35 to 65 bps. As with everything in

our business, it’s not for everyone…but the need pops up often enough for

the insurers to keep offering it.

Thanks.  I’ll look into it.  I’m guessing that there might be a catch that I’m missing because 35-65 bps is what I’d expect for a 5% death benefit roll up.  An annual reset would be much more valuable than this.

I'm not trying to take this thread in a different direction, but it seems like the question is how to manage taxable accounts in a tax efficient way. I have been trying to figure this out myself. I have used Eaton Vance Tax Managed fund so far, and the history looks like net of taxes, you end up in about the same place as some American Funds. They have higher gross returns, but more tax.

Does anyone here have a specific strategy for managing taxable money in a tax efficient way? In a fee-based format especially.

CIB

I should have added-an equity based portfolio (equity mutual funds) without using variable annuities (assuming it's not appropriate).

For tax efficiency, in this low capital gains environment, I’m partial to individual stocks that pay low or no dividends. 

[quote=CIBforeveryone]

Does anyone here have a specific strategy for managing taxable money in a tax efficient way? In a fee-based format especially.



[/quote]

Muni bonds and ETF's.

Remember that qualified dividends are taxed @ 15% so dividend income is usually quite tax effecient. ETF's have zero cap gains distributions.

But seriously, you only pay tax if you have taxable income/gains, so I say bring it on!!