Forbes Magazine Article Link for Jan 7, 2019, 10:58am

Indices and Insurance: How Indexed Strategies Changed Retirement

The year 1975 was a watershed for American investors. It was the year that John Bogle started the Vanguard Group of mutual funds with a strategy on indexing. He initially called his new approach to investing the Vanguard Experiment — and what an experiment it has been!
In reality, the Vanguard Experiment changed the world of Wall Street forever, resulting in John Bogle being named as one of the greatest American investors of the 20th century.1

And why is that? The returns of indexed mutual funds have consistently outperformed the returns of managed mutual funds by a significant margin for many years. For example, during the 15-year period between 1983 and 1998 — years in which the S&P 500 experienced both bull and bear markets2 — the average managed equity mutual fund had an annual return of 13.9%; the broad market, as measured by the Wilshire 5000 Index, had an annual return of 16.7%. That’s an index advantage of 2.8%, or in other words, a 20% greater return per year for 15 years.3

Indexed mutual fund basics

An indexed mutual fund is a very simple investment strategy. The fund consists of only the specified stocks followed by a particular index. For example, Vanguard’s S&P 500 mutual fund tracks the 500 stocks in the S&P 500 — that’s it. And why not? These are 500 of the largest publicly traded companies in the United States. If you’re going to own stocks, you may already own them.

By narrowing a mutual fund’s choices down to these 500 stocks, two very important properties can be better achieved: the elimination of human error in stock selection and the ability to reduce fund management fees and expenses since there is no active stock selection or trading activity. This reduction of fees and expenses can be huge when it comes to long-term fund performance.

In his investment book, “Take On the Street,” Arthur Levitt, a former chairman of the Securities and Exchange Commission, writes about the seven deadly sins of mutual funds, stating, “The deadliest sin of all is the high cost of owning some mutual funds.”

Bogle is of the same opinion.

Over the last 40 years, he has preached with missionary zeal and proven statistical analysis that the annual expenses and fees of an actively managed stock mutual fund end up costing investors a whopping 2.25% per year reduction in overall return.4 This can add up to over one-third of the long-term return of the stock market. Consequently, the two most important properties of indexed mutual funds — low fees and stock selection not based on an active fund manager — have shown to make indexing an innovative investment strategy over the last century.

The rise of indexing

The success of indexing has not gone unnoticed, even by some of Wall Street’s most legendary investors. Warren Buffet, dubbed one of America’s most successful stock investors, is an ardent supporter of indexing. Back in 2008, Buffet made a million-dollar bet with the hedge fund industry that they couldn’t put together a group of hedge funds that would outperform the S&P 500 index fund over the next 10 years.5

Needless to say, the S&P 500 index fund won by a landslide. Some of the brightest minds on Wall Street were beaten by an index fund.

Indexing with insurance?

The insurance industry has also taken notice of the successful track record of indexing. In 1995, insurance companies began offering a hybrid product called a fixed index annuity (FIA). This product offers buyers the principal protection of an annuity along with the upside potential of a stock index, such as the S&P 500.

The way it works: When the index is up, the insurance company takes a portion of the gain, applies it to the client’s account, and locks it in — that’s the client’s indexed interest for the year. If the market is down, no gain is made, but, most importantly, the insurance company protects the client’s contract against market losses. In other words, with an FIA, buyers are protected against stock market losses while, at the same time, enjoying a portion of the indexed interest when the chosen stock index rises.

Just as indexing the S&P 500 has proven its worth since its inception, FIAs have been proving their worth by providing upside potential—with no market risk to principal.

Still not convinced? Consider this: From March 2000 to March 2015, the S&P 500 lost over half its value twice and had a cumulative annual compounded return of just 2.53%.6 However, if you had utilized an annuity product that offered an indexed crediting strategy, you could have gained a portion of that index performance while eliminating any market-related losses.

Of course, no one knows what the future of the financial market will be. In my opinion, we’ll see more of the same in the market’s future. And, like Warren Buffet’s wager demonstrated, it’s probably a good bet that indexing has the potential to outperform some of the brightest minds on Wall Street. For those who would like to utilize index strategies without risk to their principal, the insurance industry would definitely be an option worth looking into.

This content was brought to you by Impact PartnersVoice. Annuity guarantees, including optional riders, are backed solely by the financial strength and claims-paying ability of the issuing insurance company. Fixed indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. This index does not include dividends paid on the underlying stocks and, therefore, does not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets. Clients who purchase indexed annuities are not directly investing in a stock market index. Investment advisory services offered through Pacific Empire Financial, a Registered Investment Advisor. Insurance and annuities offered through Daniel Crosby, insurance license #0A83588. DT5842-1119

Article By: Dan Crosby / Published December 2015 Featured on

With retirement, as with life, timing is everything.
Years ago, at a strategy meeting in Boston, a group of top financial executives discussed the gross disparity between the published returns of mutual funds, and the actual returns fund investors made. One executive conceded his mutual fund investors made less than half of the published fund’s returns. How could that be? The answer was quite simple: poor timing.

Average investors are often notorious for bad timing. They consistently buy at the wrong time and sell at the wrong time. They tend to buy high and sell low, which is the exact opposite of what they should do.

According to financial firm Dalbar, during the twenty-year period between 1994 and 2013, the average stock fund investor earned just below 5% annually, while the S&P 500 Index averaged just over 9%. These results are in line with my experience, and apply to several twenty-year periods. Essentially, when it comes to investor behavior, the No. 1 mistake the average investor makes is trading too much, in the wrong direction, and at the wrong time.

Not only is poor investment timing detrimental to long-term returns, but it is also devastating to investors who are taking income from their portfolios. That’s because losses can be recouped if left alone until markets recover, but losses incurred due to portfolio withdrawals used for income are never recouped. Consider the following scenario: A 65-year-old person retiring at the beginning of 2000 begins taking income from his/her IRA. These withdrawals are systematic and are at a 5% rate. In just nine years, the value of the IRA account is down 50% due to the market crashes of 2001-2002 and 2008 plus income withdrawals. This individual runs the risk of running out of principal, and therefore income long before normal life expectancy. This is what is called longevity risk. And market losses only increase longevity risk.

According to the Census Bureau, American life expectancy will reach 79.5 years in 2020. For individuals, this creates a risk called longevity risk. This is the risk of outliving ones’ assets, resulting in a lower standard of living, reduced care, or a forced return to employment.

So what should investors do to help ensure that they do not run out of money during their retirement years? First, they should consider sources other than the stock market for income, and should limit their exposure to the stock market to an appropriate level. A common rule of thumb to use is the Rule of 100, which is to take the number 100, subtract your current age from it, and that number is the percent of your assets that should be in the stock market.

Another strategy that some financial advisors suggest to their clients is to use a laddered portfolio of bonds to provide for annual income. The bonds mature at regular intervals, thus helping to avoid unnecessary market risk, and help provide annual income along the way. Also, buying a protected income annuity from a highly-rated insurance company can be another way to provide lifetime income with little market risk. That is because with the use of a rider, the insurance company can guarantee the lifetime income based upon its own claims-paying ability and financial strength.

With proper strategy and the right timing, retirees will have no need to worry about income as they age.

Article By: Dan Crosby / Fortune Magazine

The most recent Congressional budget bill has altered Social Security in several significant ways, most notably by closing several loopholes such as File and Suspend and Restricted Application. However, the basic structure and benefits offered by Social Security have not changed, and have not impacted the most common question asked about Social Security: What are my benefit payments?

Everyone with a Social Security number can open a Social Security account online at Once you open an account, you can see your work and income history, as well as your projected Social Security payments. It is important to keep track of your work history, since any errors can impact your benefits. To be eligible for Social Security benefits, you must have worked at least 40 quarters or 10 years. These quarters do not have to be consecutive.

Once you have determined your projected benefits, you may ask, “When should I start my benefits?” The earliest age is 62, but this would be considered an early distribution, and all future benefits would be reduced since benefits are based on Full Retirement Age (FRA). Full retirement benefits are paid at the FRA, which for most baby boomers is age 66. Therefore, someone with an FRA of 66 who begins benefits at age 62 will incur a 25% reduction in benefits. If your FRA benefit is $1,000 per month, beginning your benefits at age 62 would pay you $750 per month for the rest of your life.

A 25% reduction in benefits can dramatically impact your retirement lifestyle. Conversely, delaying future benefits can be a boon to your golden years. Delayed benefits are projected to grow by a factor of 8% per year up to age 70. Therefore, if your FRA benefit is $1,000 per month, delaying to age 70 could grow your benefit to $1,360 per month.

In most cases, once benefits begin you only have 12 months in which to change your mind, but there are caveats if you do. Before beginning benefits, make sure to consider your personal health, longevity, retirement assets, income during retirement, and more.

A note of caution: Should you begin Social Security early while continuing to work, there is not only a reduction of benefits, but also an earned income penalty. Those receiving benefits early are only allowed to earn $15,750 annually without losing benefits. For every $2 of earnings over this limit, $1 of benefits is lost. That’s a hefty penalty. However, the good news is that once you have reached FRA there is no penalty for earned income, meaning you can earn all the income you want without a loss of benefits.


When the Social Security Act first became law in 1934, benefits were non-taxable and remained non-taxable until 1983. Today, if a taxpayer’s total income exceeds $32,000 for a married couple filling a joint tax return ($25,000 for an individual), 50% of any benefits above that threshold are subject to income taxes. Also, if a taxpayer’s total income exceeds $44,000 for a married couple filling a joint tax return ($32,000 for an individual), 85% of any benefits above that threshold are subject to income taxes. This is a significant tax and requires planning in order to counter the effect.

Maximizing your Social Security benefits requires achieving your peak monthly payments while minimizing income taxes on those payments. Doing so requires careful planning—seek out the advice of an experienced financial advisor familiar with Social Security to ensure you get the most comfortable retirement possible.

Article By: Dan Crosby / FOX Business


The Reality of Retirement Spending

During the summer of 2001, when the U.S. stock market was beginning its long decline, a husband and wife came into my office for some advice on retirement income planning. He retired three years earlier and rolled over both a 401 k and a pension buyout into an IRA.

The man was managing his own account and had a portfolio consisting of several stock mutual funds. When he retired, his IRA was worth one million dollars. During the heady markets of 1998 and 1999, his account had grown to over $1.5 million dollars. Unfortunately, it was now back down to its original value and was losing money fast.

One reason for his account’s decline was because the couple was taking $100,000 annually from the account as income. They were too young for Social Security, so his IRA account was their only source of income. When his retirement account was growing 15-20% per year, it was possible to take 10% as income while still growing the account. When the market started losing and they were still taking income of 10%, they were facing a crisis.

I began our discussion by defining their income needs. I asked if they truly needed $100,000 annual income. They both replied, “Yes.” I asked the husband if he made $100,000 per year while he was working. He said, “No,” and that he made only $85,000 annually. A little surprised, I asked why they now needed $100,000 when they lived off of $85,000 before. They responded, “We need the $100,000.”

Since they were willing to delineate their monthly expenses, I started to make a list. One of their expenses was $800 a month for the wife to play bingo. When I asked her if $800 per month for bingo was necessary, she replied that it was and she would not give it up. When we were done making the list, it was apparent they did “need” $100,000 of annual income.

Of course, their budget was full of pork and luxuries they didn’t enjoy while working, but they weren’t willing to compromise on their “special” needs. Finally, I agreed with them that they needed to earn 10% on their portfolio to maintain their lifestyle. The couple already knew that and wanted me to structure their portfolio so it would earn 10% annually. I politely told them their expectations were too high and they should either reconsider their income needs or find another financial advisor that would offer them higher returns.

I’m sorry to say they did not become clients, but it was probably a blessing in disguise. I didn’t know what eventually became of them, but I do know this: Over the next two and a half years, the U.S. stock market lost almost 50% of its value. So much for their 10% per year! In fact, over the last dozen years, the U.S. stock market has crashed twice, losing trillions of dollars.

The point I’m trying to make is this: Having realistic expectations of future investment returns is critical to a successful investment plan. Investors get enamored with past returns or an advisor’s overly optimistic projections, and they end up taking on too much risk. This is a recipe for disaster. Markets are very unpredictable and, at times, very irrational. Even Alan Greenspan, the former Chairman of the Federal Reserve who warned against “irrational exuberance,” confessed that he did not anticipate the punishing stock market declines of 2001, 2002, and 2003. He never saw it coming — neither did millions of others.