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From Tom Dyson and Grant Wasylik in The Palm Beach Letter: In 2009, a small group of Schwab employees left the company to create a new income solution for retirees.
It guaranteed lifetime income, much like a traditional annuity. However, clients didn’t have to “cash out” of their investments to get the income. They could bank the income while continuing to enjoy the stock market’s upside.
If stocks rose, their income would increase. But if stocks pulled back, their income would maintain its “high-water mark.”
In 2012, the group struck a deal with a major U.S. insurance carrier—the first to insure these “hybrid annuity” accounts.
The SEC approved the account in 2013. Here’s a quick overview of how it works…
- You purchase insurance on your investment portfolio. The insurance carrier, mentioned above, provides the insurance.
- You can withdraw a certain amount of money from your account each year.
- The amount of money you’re able to withdraw depends on current interest rates, your age, and the all-time highest value of your account.
- If your account goes up in value (due to your investments increasing), your payouts will also increase.
- If your account goes down in value, your payouts do not decrease. They remain steady—based off the previous “high-water mark” of your account.
- If you deplete your account, your payouts do not decrease. The insurance company will still pay you the same payout amount you had been receiving. The money comes out of the insurer’s coffers.
Unlike traditional annuities, this approach doesn’t require you hand over a lump sum of cash to an insurance company. You can even withdraw your entire portfolio from the plan at any time, with no termination fee.
The only requirement is you invest your money in funds preapproved by the insurance company. (There are currently 194 mutual fund and ETF choices.)
Now, let’s touch on Nos. 4 and 5 from above to make sure you understand them. They’re huge benefits to you…
- If your investments rise in value, the insurer will reappraise your plan and let you withdraw more money. No other annuity would ever let you do this.
- If your investments go down in value, the payments you receive won’t drop by even one dime. You essentially “lock in” payments based on the highest value of your investment account at the end of a given quarter.
It’s a bit like refinancing a home. You secure lower payments based on the lowest all-time interest rate you locked in. But in this case, you’re securing higher cash payouts—based on the highest all-time value of your account.
Bottom line: You get exposure to market upside, without any exposure to market downside. There’s no other financial product out there that offers this same opportunity.
Reeves’ Note: The feedback on this investment idea is some of the best we’ve ever received. Current Palm Beach Letter subscribers can click here to read the full July issue. Others can click here to get immediate access to this recommendation (there’s no long sales video).