Episode Transcript
[00:00:00] Hello and welcome everybody to the Annuity Straight Talk podcast, episode number 198. I am your host, Brian Andersen, founder and creator of annuitystraighttalk.com the best source for solid retirement planning advice and information.
[00:00:12] Take your time. Kind of an underlying part of this coming up episode. Please like subscribe or comment in any of your favorite podcast platforms or on YouTube. Share it with your friends if you think somebody needs to hear it or if there's something that might disagree with me, add a different perspective. That's always good. That's what makes this thing better going forward. Little bit of a bone to pick this week. No big deal. It's not as serious as it seems.
[00:00:36] Are CDs a scam? Why would he come up with that title? First and foremost, I want you guys to know that I've kind of thought about some of these topics for quite a while. But I don't just normally randomly pick a topic. You know, it's kind of an idea that's brought in because it's something I'm hearing a lot at the current time. So this is a pretty good timeline of how things happen and what's trending as far as information or perspective on that. So I want you guys to relax and hear me out. I know some people like them. It's really easy. Go to the bank, right? There are times when it makes a lot of sense to use a cd. We'll talk about that too. Limited numbers of times and for some very general reasons. Short term interest rates are a gamble and taking a one or two year deal is a good idea if you expect interest rates to rise. I always talk to people about that when they're choosing an annuity. Well, if it's a short term and especially CDs, it's like, what are you going to do in a year or two or three?
[00:01:26] I don't know. Then you have the conversation of what you could be giving up if rates don't rise.
[00:01:32] And I'm not sure I honestly thought about going in. It's like, you know what, maybe I should go into the bank and tell them I want to buy a CD and just see what the process is. Because I honestly don't firsthand know. Because I don't know. Getting 4% for a year, I'm not a lot fired up about it. But it's a place to park money. So I'm curious what they do. There's a lot of people that put way too much money in CDs, sometimes all of it. And no one bats an eye. And it's the kind of thing that would get me in trouble if I did that with annuities or an investment guy in trouble if you did that in the market. I guess unless you're Ken Fisher gets to put a hundred percent of assets in the market for just about anybody and nobody has a suitability issue with that. I don't don't want to get too far off track and I do not blame anyone for not wanting to dive into the complexity of other financial products and then instead take the simple route with a cd. There are some key differences, but really we're just talking about safe money. So it's a way to keep money safe and kicks the can down the road. Then I've a lot of people like I don't know what to do about this whole annuity. I'm just going to put it in a CD for 14 months and then I'll think about it. Now that which is good if you're doing your research and figuring out what your plans are, then you just get to 14 months, you do it all over again. Right. If all you plan to do is park money for a rainy day, it's not the only thing you can do. There are advantages to other stuff. Flexibility is an issue for any real planning opportunities with CDs and often the terms are short, so you don't get compounding of the interest either. And this is one of the biggest issues that I'm not sure people realize. Like just looking at the interest rate. Well, that's good. So in the past few years, obviously interest rates are better on anything. CDs, annuities, bonds, commercial accounts. I even had somebody ask about structured assets are going to have to pay higher as well. There's some risk in those. A candidate guy asked for that to be the 200th episode. That's not general enough to take a keystone episode, but I might talk about it. So yeah, and like I said, I talked to a lot of people. Just quit analyzing annuity options maybe forever and say I'm just going to use CDs, I don't care. In the past few years, the most common thing I heard was people really excited. Well, I don't have to lock up for five years because they've got a 12, a 14, 16 month CD rate that's really good and they could get 5% or more. So it's like cool. That's all I need to do. Big deal. And no one ever talks about the fact that you don't get compounding interest with only One year. Maximizing safe assets requires two variables. Only one of them is the interest rate. You also need time to compound. If you want the exponential effect, you got to have more than just interest. So on $100,000, the difference between 5% and 4% is only 1,000 in a year. But it's almost $15,000 over a 10 year period. So the compounding takes more money out of your pocket. One of the things that caught people's eye for quite some time, the short term rates were higher than those with longer terms. It's an inverted yield curve. When the long term rates are lower, longer commitments are supposed to get higher payouts. But that wasn't the case. I know a lot of people saw the rate alone and thought it was the best deal. That's not always how it works.
[00:04:10] So again, asking people what the plan is, after one year, most said they would just renew the contract and get another one for the next year. And that works fine if rates are stable. If rates rise over that year, then wow, you were a genius. Right. And it's a bad idea. If rates fall, it's like, oops, now I don't quite get as much and I never got the compounding. Now I had 5%, now I got 4%. That's exactly where we are right now. And why this became a topic, because I'm starting to hear from people that they're seeing lower rates in the renewals. One couple I talked to who's had a big chunk of their portfolio, that's been their safe money side and they've been enjoying some cash flow off of that with a ladder they had and all that stuff. Now that cash flow that they can expect is going to go down quite a bit.
[00:04:53] And so they're like, oops, they only got it for a year or two. That's not long term planning. If that income is part of the long term plan, you need a different asset. And it doesn't have to be annuities, it could be bonds. Right. You can look at income products and that's a whole different story. That's more detailed planning and all that stuff. But anybody that locked into a MYGA two to three years ago for five years or more is in really good shape right now. They're way ahead of it. Now you can still get good MYGA rates because annuities are not directly linked to the Fed reductions. I talked about that a couple of weeks ago. Bank rates, which I should have clarified. Yeah, those will immediately react because that's the funding source for banks and they'll reduce things a little bit. The couple I talked about that was getting guaranteed income, they had CDs close to 5% they can still get with whatever their CD rates are, they can increase that by 1 1/2%. MyGas will almost always pay better. To keep it simple, CDs are most suitable for funds that are earmarked for another purpose within a couple of years. If you have something that you need to do with it within a couple of years, just use a cd. It's a lot easier if you got one for one reason or another, you can't make a longer commitment. Go ahead and stick with the bank. But you have to understand the potential consequences. Potentially lower yields. And aside from having some easily accessible money with low penalties for early termination, there really are no advantages to using CDs. Please do not bring up FDIC insurance because there's. That's where the scam comes in. All right, we'll talk about that real quick. Banks have insurance because they need it. When you buy the $100,000 CD, the bank may get to loan it out as many as 10 different times. If they even make 5% on a loan at 10x, they are making 50,000 per year on your money and giving you $4,000. That's why banks are the most profitable business in the world. I don't. I mean, that's just how it works. Whatever their leverage ratio is, they're loaning it out multiple times. They're making leverage on your money. That's why it's the biggest business in the world. They make money on every other business and even on every penny we save, unless we put it somewhere else where a bank can't touch it. But even then, they've got some hook in it, right? So after this, I'm not going to take anyone seriously who complains about a 2% commission on a Myga that's a fixed annuity. Because people are going to ask. That term became so synonymous with fixed annuity that everybody said myga. And when I said fixed annuity, what's that? Now everybody's saying, what's a myga? Man, the memory is short out there. Stay focused, everyone. Or an insurance company might make 5% and pay you 4% and they grab, oh, I want them. Why don't you complain about what the bank makes? Okay? That's why they give you those free Tupperware sets and frying pans and stuff. Banks and investment institutions, institutions make far more off your money than anyone in the insurance industry. One last time, benefit of CDs is easy accessibility and decent rates for a short period of time. If you need a longer term plan, do some research on a longer term product. So if you got short term goals where a CD fits, then take that time to educate yourself. Do it here because this is a great place for it. When you switch to mygas you will always get a better rate. Actual compounding if you take a longer term that's interest on interest, not just the interest and you even get to defer taxes. Mygas have all the advantages, but there's a little more work to it in my opinion. You shouldn't mess with an annuity for anything less than a three year term. There are one year and two year annuities. There's more paperwork to it. So if you're afraid of the commitment to use a CD while you educate yourself enough to engage in more detailed planning, you can do that. So hit the calendar link you want to talk more about your goals. What fits better if you get some CD money where you want to increase the rate? If you're worried about rates dropping, my guess, still got it. We're over 5% and we got good safe money. So hey guys, thanks for joining me for this quick easy episode where a topic I've been thinking about for years fun finally had its place in time because I'm getting a lot of questions about what do I do now. So like subscribe or comment on any of your favorite podcast platforms or on YouTube. Share it with your friends. Someone who agrees or disagrees, fine with me. Tell them to get a hold of me. Top right corner of any page on annuitystraighttalk.com if you want to schedule a call. Thanks so much for joining me. I will be back next week for episode number 199. Have a great day guys. Okay, bye.
