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Diversify now and be protected later

Drew KitchellInside BusinessAspen, CO Colorado

Recent events have reinforced the need for investors to diversify their holdings and allocate their portfolios. Hedge funds were hot as were some other non-traditional investment vehicles, but this market has humbled even the most veteran traders. How the mighty hath fallen.Traditional investment vehicles that are considered relatively safe are currently generating poor returns.One could choose to put their hard-earned dollars in treasuries at approximately 2 percent. This means investing in a government entity that is over burdened, over leveraged, printing money at a brisk pace, with potential credit risk.Or maybe CDs at the bank? Again, the investor may expect a 2 to 4 percent return at best. To earn the higher rates of interest, the investor must invest significant sums.Considering savings or money markets? This is a very similar risk-reward profile to the other instruments previously mentioned with returns hovering at or around 2 percent, and these vehicles are starting to have credit risk as well. Plus, you have only a $250,000 guarantee per account.What about munis? Laddered munis can be attractive especially for the high tax bracket investor, but credit risk is seeping in. Tax equivalent yields can be adequate, but many of us are a bit light on current income, and with investors in lower tax brackets the advantages of munis are negated. Munis carry both interest rate risk, as well as credit risk now.So what is the solution for the Aspen investor on the go without time to be constantly glued to the depression channel, CNBC?For many, a good solution to consider may come in the form of variable annuities. Annuity contracts generally offer several types of guarantees that can be combined in one fashion or another, and additionally they have an attractive tax deferred nature.Heres a brief overview of three common types of guarantees with annuities: A living benefit is a benefit that provides an income guarantee. These give a guarantee return for a specified period of time. Some can guarantee up to 7 percent compound interest, net of fees in return for a lump sum deposit. If the principal is removed before a certain agreed upon period, there will be penalties and fees, and the IRS will assess a 10 percent penalty if removed before age 60. Depending on need, an investor can set up a guaranteed income withdrawal plan. Annuities are neither short term nor liquid investments, and the primary risk to the investor is the insurance company going out of business. Annuities with a death benefit guarantee are structured very similarly, but the guarantee goes toward a death benefit as opposed to an income benefit. Investors who choose this option are attempting to maximize death benefits for beneficiaries and are less concerned with income. Step-up guarantees in an annuity are like a floor under the investment. For example, an investor puts in $1 million and the account goes up to $1.5 million the guaranteed withdrawal benefit. Subsequently, even if the underlying account value goes down to $900,000 the guaranteed withdrawal benefit is still $1.5 million.The main issues with annuities are their complexity, their fees, surrender charges, and the longevity of the insurance company from whom they are purchased, so it is vitally important to invest with a reputable broker representing a company you know will be viable when you are ready to take disbursements. Most guarantees are net of fees, so the investor maintains a 6 or 7 percent compound interest guarantee even in down markets. Despite their complexities, annuities can be suitable for many investors who desire a better rate of return with a guaranteed protection on the downside who do not need immediate access to the balance of their principle.

Drew Kitchell is a financial advisor, specializing in life settlements, asset protection and estate planning with Financial Partners of Aspen. He can be reached at 925-9600 or dkitchell@FPaspen.com.This article is a feature of Inside Business, featured Wednesdays in The Aspen Times.


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