Episode Transcript
[00:00:00] Hello and welcome everybody to the Annuity Straight Talk podcast. Episode number 210, second one of 2026.
[00:00:08] Gonna go a little more technical just a touch this week.
[00:00:12] Appreciate you guys joining me again. Please like subscribe or comment on any of any of your favorite podcast platforms or on YouTube.
[00:00:18] Let me know what you like, what you don't like, so I can improve it the best I can to make it as relevant as possible. Had somebody last week, fortunately, thank you for telling me. They thought it was really boring and a waste of time.
[00:00:30] If that's the case, let me know. That's cool.
[00:00:34] However small. I think all of these things are important at times and sometimes we need to take a step back and think or talk about from various different angles. But yeah, I think the use of artificial intelligence is a very important topic. Some people don't.
[00:00:50] This week I want to talk about something that's been a topic been on my mind for well over a decade. And it's been the point of a lot of these things that I've done. And me settling into the career with annuities that I have, I wouldn't do it if there wasn't a logistical advantage. There's a lot of ways for me to make money. I want to do it in a way that makes sense. It's something I could be proud of.
[00:01:14] So I always told everybody I'm unemployable at this point because I've worked for myself my entire career.
[00:01:20] I'd be really bad at punching a clock. I'm not. I'm great at putting in the time even more than is necessary. But anyhow, probably go back to being a fishing guide or something like that. Or take all my meals and do drop hunts and drop fishing trips for people. I don't know. There's actually pretty good money in that if I really get fed up with it. But you guys that have stuck with me and are clients of mine, you will always have me at your disposal, whether I'm out here in front of the public or not.
[00:01:46] So today let's look at the newsletter. Give me a visual aid. I finished writing it this morning.
[00:01:52] Bonds versus annuities. Bonds are that traditional safe asset, right?
[00:01:58] And just a lot of people, and I think people do target date stuff ahead of retirement, which rebalances and adds more bonds to a portfolio over a certain period of time.
[00:02:11] A lot of 401ks have that as the safe option. You've got a money market and then you've got bond funds and all those kind of things.
[00:02:19] If you're in a retirement plan other than cash, it's bonds, and that's your option. We could talk about annuities, insider retirement plan. That's such a technicality.
[00:02:29] It's not really possible yet. Such a technicality. Not a lot of people would understand it. To get an annuity with IRA or 401k, it's gotta go into an IRA. The annuity would be an IRA. But actually owning the annuity in that it's not really out there. If it is, it's in a very small way. I think it's possible, but not a lot of people have adopted it. Investment companies and managers use bonds to balance portfolio. So common, no one, almost no one ever questions it.
[00:02:54] But is it the best safe asset to use for retirement? It is an option and it works in certain cases.
[00:03:01] But whether it's the best deserves a second thought, in my opinion, because annuities provide a few key advantages in several different retirement applications. Now, I've been in this career for almost 23 years. Got three weeks to go, I think. And I've been studying this since then, because when I make a recommendation, it's not just understanding what that option means, it's also understanding how it compares to the alternatives to that option.
[00:03:30] So I've done a lot of looking at bonds. I've talked to a lot of people about bonds, bond managers, bond fans, all that stuff, right?
[00:03:37] And again, if they were great, I would say, okay, maybe I'll just be a bond guy. I'm not ever gonna tell somebody to avoid bonds altogether. They work in a portfolio, but in most cases, most people would benefit from mixing it up a little bit. And a lot of my clients have, and a lot of people, hey, they buy some annuity for income or safety or whatever it is, and then they keep bonds as part of the allocation too. That's fine. So my biggest issue with bonds can be seen in how most people own them.
[00:04:04] It's not the bonds themselves that I have a problem, but bond funds reveal a lot of the shortfalls. Bonds are basically a cash flow asset with return of principle at the end. In a bond fund, managers are seeking to produce the highest cash flow and will buy and sell individual bonds regularly. It happens all the time.
[00:04:26] The underlying price fluctuates with every trade, so the value of the holdings is always different.
[00:04:31] You don't get total huge movements unless you get major swings in interest rates, which we've seen in 2018, 2020 or 2022 all those times. Talk to that about that in a little bit, but it's just a little bit of volatility. I talked to a couple last week and I thought, hey, I really need to hit this topic again.
[00:04:50] And they said, ah, they're, we're in mostly bond funds and we pay a fee. Which is weird. I thought, I thought bonds were commission deals, but they said they're paying a fee to Fidelity mostly in bond funds. They take their RMD and they got a little bit less money this year than they did last year or something like that.
[00:05:07] And so they really have to think about it and I don't want to scare them that other people had scared them. Oh, you got to get out and do this or do that and no, just cooler heads prevail. Start looking into it, start understanding it. Take your time. Okay, so the value of those bond funds fluctuates at time your interest is consistent. You'll still get interest, but the value.
[00:05:33] Now the good thing is you can get out of em at any time because they're pretty liquid.
[00:05:37] Value is calculated daily. You don't have to wait until maturity like you owned the actual bond, but you might be in a down at a down point and then it wouldn't make sense to sell at a loss. Maybe you'd wait and see what happens. Right. The preferred way to use bonds is to own the individual bonds, but then you aren't as liquid. If you own the actual bond, you get regular interest payments and a return of principal at maturity, more or less. Okay, some sell at a premium, some sell at a discount. Right? It doesn't matter. But essentially your principal back at maturity.
[00:06:10] If you sell before maturity, market value is going to determine the price and the changes in interest rate in relation to on the purchase date are going to determine whether that price is up or down. If rates are up, then if the interest rates climb like a bond purchase in 2020 sold in 2023 would have a significant reduction because rates went way up in that time period. Bought a 5 year bond in 2020, best thing to do is probably hold on to it for five years. Okay, so most of the time if you're gonna buy bonds, the best thing to do unless you have a giant drop in interest rates. And there's a time in recent history where that was good. I actually did a whole newsletter on it about six years ago, almost six years ago.
[00:06:57] So another issue with bonds is that it takes a lot of individual bonds to create a portfolio. Bond defaults are not non existent and it happens more frequently the lower you go in credit rating. When I hear People say, oh, I got a bond portfolio that's averaging seven and a half percent.
[00:07:13] You're probably in that below investment grade category and those.
[00:07:21] I think if you get into that subcategory, I think the default rate is about 4% per year. Now they're written down. It's not a total loss. But again I talked about that in one of the podcasts last year. I don't know exactly which one it was. I'm going to spend a ton of time on it. But man, if I had a 4% default rate in the annuities that I sell who.
[00:07:42] Nobody would buy annuities if you did that. So you have to really spread it out just in case. And the AAA stuff is like 1/10 of 1% get written down in a year and again it's not a total loss. It's usually like ah, 60 cents on the dollar, 70 cents. I don't know what it is but there's some value there.
[00:08:02] That's why a lot of people just use the bond funds because default risk is significantly diluted and they don't have to go work on it. If you're going to build the bond portfolio with individual bonds, it takes some specialty in that area. I do not have that.
[00:08:16] Let the insurance company do it. That's what they specialize in. So I started talking about this more than a dozen years ago. Since then bonds have literally been on a roller coaster ride. There was an all time low, I think it was about 2016 where you didn't get a whole lot of interest.
[00:08:30] Rates could go nowhere but up. I think the 10 year treasury was about one and a quarter, one and a half maybe. And if the rates were going to go up, you're not getting much interest and if the rates go up then your principal value is going to drop as well.
[00:08:43] We had a nice hike in interest rates in 2018 where we got some really good viable products income or growth.
[00:08:49] And bond funds lost 15 or 20% in that change.
[00:08:53] Now 2020 came along and rates crashed.
[00:08:57] You saw there was a significant increase in the value of bonds and that offset some of the market losses in the COVID crash.
[00:09:04] That's what they're supposed to do.
[00:09:06] There's a big crash in the market. People rush to safety. Usually those baseline rates will drop because everybody wants it so they don't have to pay as much to get it. Right now people are don't really want it. So the rates are gonna stay up. It's gotta be.
[00:09:20] You're not gonna put your money into safety Unless it is appealing to do so. The higher the rates, the more you're getting for protecting it. So if you wanna know what my advice was, six years ago I told like a lot of people were stressed out about that crash, but the rates crashed and bond values shot up like 15, 20%.
[00:09:41] I just said, here's an idea, don't sell your stocks, do this instead.
[00:09:45] And that's the purpose of rebalancing. You're gonna take the increase in bonds is gonna offset, you're gonna get rid of some of those and you're gonna go buy into the market cheap. Along about 2022, rates started to rise again and bonds took another hit. They have sense and they've stayed in that range. I think the highest rates we saw were probably, I think late 2024, they're down a little bit. That's helped bonds a touch. Okay.
[00:10:10] Sometimes it works in your favor and other times it doesn't.
[00:10:13] Now it's just another form of volatility that works in a portfolio.
[00:10:17] If it's a set and forget deal when you start taking money out of it, you don't need that kind of volatility. Eliminate at least one of them. Okay, so the two biggest limitations with bonds are restricted cash flow and liquidity.
[00:10:31] Annuities provide an advantage in both areas by a significant margin. Everyone needs to remember that annuities are basically a bond fund backed by the insurance companies reserves.
[00:10:42] They accept the default risk, they accept the interest rate risk.
[00:10:46] You don't have to, you get a guarantee instead. An annuity is essentially an upgraded bond portfolio. At the top of the top, the yields are about the same. Everything that you can do with a bond can be done with annuities to a greater extent. Maximum guaranteed cash flow and more liquidity provide specific solutions for retirement.
[00:11:06] That's why annuities are the retirement asset.
[00:11:09] Like these guys that are retirement advisors and they don't, oh, we don't use annuities.
[00:11:14] There's an entire asset class that works. Not everybody does it, but still, guaranteed income payments from annuities are at least 50% higher than interest payments from bonds. You can look at that two ways. Either get more cash flow from safe assets or allocate less money to the safe side.
[00:11:31] If you're focused on growth, legacy or control of your assets, then spending less money to get the same amount of cash flow is an efficient move.
[00:11:38] Others want or need to maximize income. And that works to boost portfolios as well. We've covered that a ton. Consistent cash flow that eliminates the volatility component from retirement portfolio will allow you to increase that portfolio better. It's set and forget if you don't have to touch it when it's down, don't touch it. Be in it for the long run.
[00:11:58] Deferred annuities like Mygas or fixed index annuities don't require income payments to be taken. It's just safe money with a guaranteed interest rate or fixed to the market. Guaranteed downside, whatever it would be. Take your pick between those two. You gotta understand both.
[00:12:13] You can get contracts where you can take up to 10% per year from the account without a penalty. That includes interest rate. Risk yields are similar to bonds with additional benefits. Extra liquidity allows you to take higher withdrawals. So you don't have to worry when markets are down in value and even presents the opportunity for rebalancing the total portfolio.
[00:12:33] Got a number of people that bought lower interest annuities in 2 20, 20, 20 21.
[00:12:39] And they've been taking their withdrawal and average it back into other things. Some people bought CDs, some people put it into the market. Whatever your flavor is right, Never stuck. You can always do stuff with it. Either of the above benefits make an exponentially positive difference in a portfolio over time. It stands to reason why most of my clients have purchased an annuity with nothing more than a portion of the bond allocation in a portfolio.
[00:13:05] Not a huge move. It's not scary.
[00:13:09] You realize you're sitting out on a bond portfolio that's ho hum anyway. Might as well get some juice out of it. One more thing I need to cover about is the part about locking your money up into an annuity.
[00:13:19] And there's a psychological feeling that buying an annuity means you're losing control of your money. It's just going to a different account. You get online access. You can go see it. Right? It's your money in one way or another. Your money is locked up anyway. And buying an annuity is no different. Lifetime annuities are obviously a lifetime commitment. You better be sure that's what you want to do. You better have the advantages calculated and understand that it is a really good deal. But deferred annuities are usually in place for only five to ten years.
[00:13:46] Now you compare that to a lot of bond portfolios I've seen where individual holdings are stretched to almost 20 years in a bond ladder. Let the insurance company do that and just buy the annuity again through contractual obligations, taxes or volatility.
[00:14:01] Your money is locked up one way or another. And one guy Said it last year. It could be an entire podcast episode. He's like, I've been saving in this 401k for 35 years. My money's been locked up the entire time. I don't get it. But I understand the emotional side of that for sure.
[00:14:18] So bonds are just fine. They're the building block for annuities. So they do work really well. Just a matter of managing the risk and what type of risk you want to carry. I will never tell you to eliminate them entirely. And I've advised certain people in certain situations, nope, hang on to them. It's not attack every single bond.
[00:14:34] A few years ago, I sold a couple some annuities for retirement and somebody else was trying to take what they wanted to put in the annuities and loop some bonds, some individual bonds.
[00:14:44] At the time they were paying five and a half percent and he had seven years to go. I said, that's good interest. Keep it. Keep the bonds AAA five, five and a half. He was doing good, so he kept them. So there's cases where he do it. It's not a blanket statement that get rid of bonds. Just that's where you can probably make a positive change if you really want to.
[00:15:02] There are distinct advantages over bonds and for most people, that's the only change that needs to be made.
[00:15:07] Obviously, if you own individual bonds, one of the best options is to hold into maturity. Like I told you one of my clients did.
[00:15:14] If you own bond funds, you should be evaluating other options at all times.
[00:15:18] So if you want a consultation, it'd be good for anybody who wants to remove interest rate risk, increase cash flow or enhance liquidity. You wanna get on my calendar, we can talk about it. And again, it's just talk about benefits. I'm not gonna push for sales on people, just here to help you figure things out.
[00:15:36] One of the best things you can do is learn something new. So this has been episode 210, bonds versus annuities. How does that stuff work?
[00:15:45] I would appreciate if you let me know what you think by commenting on YouTube or replying to the email that this goes out. Post a comment on a website. I even posted the one, the guy that was upset last week. I even posted it right. Like subscribe or comment any of your favorite podcast platforms or on YouTube. Let me know what you think.
[00:16:03] And I appreciate you guys joining me. I will be back next week for something good in episode number 211. You guys have a great day and I will see you soon. All right, bye.
