Corn Futures and Annuities?

There’s nothing like a MoneyShow show attendee or reader. Market savvy, educated, well read, opinionated, confident, and open to new ideas. But when it comes to annuities, it’s like throwing a garlic light at a vampire! Annuities! Those “non-investments” are for simple-minded fly-over types that troll the weekly bad chicken dinner seminars for their next meal.  Right?…..well maybe.

I have officially “burnt the boat” when it comes to annuities. That’s all I do. That’s all I recommend. I’m so “committed” that I call myself and my company… Stan The Annuity Man®. I’ve been a regular speaker, sponsor, exhibitor, and supporter of all things MoneyShow, so I am very familiar with the valid argument that traders and stock-market-type investors have against annuities. I get it. But ever since the volatility of 2008, I have seen a trend of high IQ investors using annuities as non-correlated assets, and for what they were designed to do…transfer risk.

A lot of my clients, surprisingly, are high-octane traders that consistently roll the dice with a running start when it comes to their investment strategies. One such client is a top corn futures trader that sits in his penthouse overlooking the Atlantic Ocean, and consistently dominates his world of corn. When “Trader Jim” (let’s call him that) approached me at a past MoneyShow event a few years ago with what he called a unique idea, I thought he was going to describe his quant trading strategies and how Wheaties (i.e. made from corn) should actually put a picture of him on their cereal box.

Instead, “Trader Jim” started telling me about his past military background, his kids, and his wonderful wife who he said could care less about markets and how good he is at his craft. In other words, “Trader Jim’s” trading secrets and capitalistic instincts were going to follow him into the grave. His wife was so disinterested in all things having to do with the market that she was doing some power shopping at a local high-end mall instead of listening to all of the “master of the universe” presentations at the MoneyShow event. The gall!  How could she?

What “Trader Jim” wanted to set up was a lifetime income stream for his wife because she definitely didn’t care about trading algorithms or candlestick charting, and voiced that sentiment to him repeatedly just to make sure that he was crystal clear on the subject. All she cared about was lifestyle. To be more specific, she only cared about her lifestyle, her kids’ lifestyle, and her future grandkids’ lifestyle when Jim finally went to the final corn trading pit in the sky.

So my new friend “Trader Jim” and I set up a regimented and disciplined plan to take some of his trading profits at specific dates throughout each year and buy a target-dated lifetime income annuities for both him and his wife.

What we set up was a target-date income plan using fixed annuities that would guarantee that she would never outlive the money and the insurance company would never keep one penny, meaning that all unused proceeds would go to their beneficiaries. The two strategies used were fixed annuities with attached income rider benefits, and longevity annuities (aka: deferred income annuities).  Here’s how they work, and how you can do the same thing as good old “Trader Jim.”

Fixed Annuities with Attached Income Riders Income riders attached to deferred annuities guarantee a growth rate (normally 6-7%) during the deferral years, with that amount to be used for future income only. In other words, the 6% or 7% annual growth is not something you can access lump sum, but you can use that total dollar amount for lifetime income. Income riders also come attached to variable annuities as well, but the actuarial payout guarantees are usually much lower than a similar rider attached to a fixed annuity. In addition, the total fees using a fixed annuity are much less than a variable.

Some annuities with income riders also offer a bonus on any money put into the policy, so that was part of our decision of which annuity products to chose as well.

The positives about a income rider structure is that the strategy is totally flexible. You can defer for as long as 20 years and still receive a contractually guaranteed growth amount every year during that deferral time period. In addition, when you start the income, you have the option of turning it on and off at your discretion. “Trader Jim” has spread his money around over many carriers with income riders, and has also set them up to pay income for life on him, as well, just in case he decides to stop trading. I had to laugh at that one, but I guess you never know how ugly corn futures trading can be!

Longevity Annuities The other way to achieve target-date income is with deferred income annuities, or longevity annuities. Like income riders, you can defer for long periods (up to 45 years!) of time before taking income. The difference between these two strategies has to do with flexibility. Longevity annuity contracts are rigid from the standpoint of when you are going to start the lifetime income stream. That date is contractual, locked in, and cannot be changed. So if you want the lifetime income stream to start five years from now, then it’s going to start five years from now. Period.

There are no annual fees on longevity annuities and these are truly deferred pension products, and a pure transfer of risk.

The plan in place for “Trader Jim” and his wife include a combination of both longevity annuities and fixed annuities with income riders. “Trader Jim” is happy with the plan, and more importantly, his wife is ecstatic with the fact that she never has to worry about income when her husband passes.

Who knew that corn futures and annuities could work so well? Obviously, “Trader Jim” did, and many of my other trading clients do as well.

Originally published by 8.7.13 –