Episode Transcript
Speaker 1 00:00:05 This is annuity Straight Talk. Since 2008, your host Brian Anderson, has helped clients nationwide navigate the complex market for annuities With Brian's assistance, hundreds of clients have achieved a profitable and secure retirement. I would know because Brian has answered many of my questions concerning annuities and retirement planning so that you can benefit as well. Let's get started. Here's Brian.
Speaker 2 00:00:48 Hello. Welcome everyone to the Annuity Straight Talk podcast episode number 72. Brian Anderson here coming to you with a new topic on the heels of last week, talked about pension or annuity. Now we're gonna do kind of a case study about the people that inspired that post and podcast and I'm gonna give you a few numbers and something to think about. So again, my name is Brian Anderson, founder and creator of the website, annuity straight talk.com, and sole contributor to this podcast looking to help people wherever I can. I live in Western Montana for anyone who doesn't know, great place to visit in the summertime. Love to take you to lunch. If you make it here, it's easier for you to come see me than it is for me to go and see everyone else cause I happen to live in a part of the country that a lot of people wanna see eventually.
Speaker 2 00:01:32 So here I am right now, it's not so nice except today it's kind of sunny winter day. Anyway, talked about pension lump sums last week. Whether you take the lump sum or you take the income stream for pensions and I have, let's see, a newsletter written just a few days ago, kinda getting warmed up. <laugh>. Sometimes I have to read these things again and make sure I keep my thoughts in line. This one, I'm gonna kinda wing it. I'm not gonna share my screen. You can go to annuity straight talk.com. The case study guaranteed income is back and I'm gonna talk through it as I go through and explain kind of how this case started. But we're gonna back up a little bit and talk about income. Annuities being the most research retirement product ever created. Comparisons to bond portfolio, traditional portfolio management with or without guaranteed income.
Speaker 2 00:02:13 Those portfolios have been analyzed, Montecarlo simulations everything nonstop. The quest in that is to find an optimal retirement. No two people are the same, but it's been proven and over and over that annuities help. Okay? And guaranteed income being the biggest thing they help with and all the other benefits you get in your portfolio. It's not an argument, it's an academic, well-researched, documented study. You know, because of this, I'm a huge fan of annuities. Most people don't, wouldn't recognize that because of my work on the website. And that's simply because of the environment we've been in for a long time. When rates were low, most people weren't compelled to purchase income annuities and the correspondingly low rates or low payouts. Then insurance companies, when the rates were low, the insurance companies came up with bonuses, additional benefits, things to entice people. Oh well yeah, maybe it's not, but you get a bonus.
Speaker 2 00:03:03 I always wanted to look at the bottom lines. I remind everyone the baseline guaranteed basic rate is, you know, it doesn't matter what bonuses are in play, doesn't matter what features live on the contract, they're all working with the same rate. So I always try to like keep it simple. Go for the rate. Build off of that. Most of the time you have an agent or an insurance company telling you, oh you can do this because this contract lets you and you, you don't need permission from anyone to use your money for whatever you need it for. And if you just grow it as much as possible, then you'll be fine. You use an annuity. Again, it's how I'm getting passionate about this. You use an annuity if you wanna protect it while you go for those goals, but it does not take a contractor or person to dictate what you can do with your money.
Speaker 2 00:03:47 Long-term care, death benefits, guaranteed income, all that stuff. You can do it on your own. Depends on whether you want control, you want somebody telling you what to do, okay? There's a difference. The bells and whistles, the bonuses, the features, all the stuff do not change. The bottom line is the point. Low rates are low rates, it's hard to work around them. I had to find different ways of doing it. That's the basic part of, or the building block of a lot of the strategies that I've talked about over the years. And a lot of people will take that to say I don't like guaranteed income. No, I just like to make things as good as possible. Guaranteed income. For anybody who doesn't know in a lot of people, Hey, what do you do? Do you do this? Guaranteed income is by far my biggest personal investment.
Speaker 2 00:04:24 So I do that by way of deferring commissions as much as possible. You know, everybody doesn't like the commission's. Insurance companies pay to agents like me. I put a significant investment that we can defer it. You know, you don't take a very big chunk up front, you just take a little bit of it every year. It's incentivizes me to provide good service to clients because ongoing cash flow and it takes the pressure off of needing to sell new contracts. I put the customer's needs in front of my own. I know if I sell something that's gonna last 5, 10, 15, 20 years, I wanna be compensated every time I touch that. It's not outta your pocket, it's outta the insurance company. And I tell 'em, hold up, don't send it all. Now send me a little bit over time. It's not specifically an annuity but it is a guaranteed annual or quarterly payment from an insurance company.
Speaker 2 00:05:09 So it's pretty similar and a lot of people say, well you know, my savings rate at times is high. I defer a bunch of compensation and that's how I do it. If rates have been consistent throughout my career, I don't think I would've learned as much. It wouldn't have forced me to get creative. It might have become kind of boring, but conditions never stay the same forces me to get creative and the result of that is some pretty cool strategies and ideas that are mine and mine alone. Uh, I've heard from other people, Hey, I like those, you mind if I use it? No, that's okay, go ahead. If you ask me to solve a retirement problem, I guarantee you I will look at and consider probably like several more strategies than just about anybody you're gonna meet. I had to do it, I was forced to do it, you know, stay competitive, all that stuff and I'm not gonna stop doing it.
Speaker 2 00:05:56 My mind works that way. So every time you know, one problem comes in and I consider everything that I've ever used to figure out what would be best. So although I rarely recommended guaranteed income for the past 10 or 12 years, it was only because I found an alternate strategy that would produce similar or better results. If the alternative gave a person more control of the money in retirement, then it was a win all around. And then again, in the early days of being online, what incentive would people have to do business with me if I was just like everyone else? So differentiation was a key cuz I know a lot of people said that, well why would I do it with you? I could go get, get it from anyone. Okay, well I'm gonna give you other ideas that people don't have. I'm gonna demonstrate my value if that makes sense.
Speaker 2 00:06:35 But I had to be different than everybody else to make it work to be great, you gotta be different. If you're just like everyone else, it gets boring. Okay, it might be easier. I'm gonna give you this case study. So this is right before Christmas couple contacted me, they had already decided to take a lump sum from their corporate pension. So these guys are really on top of it, really sharp. They're able to look at what works for them and focus on that and ignore the things that don't necessarily work for them. It's really fun to uh, communicate with people like that and to work to solve problems. You know, roll up the sleeves, do all that. But it was pretty good. So they'd already decided, you know, I talked about last week pension or annuity and the list of things you gotta consider depending on what your situation is.
Speaker 2 00:07:15 So in that podcast I talked about the people who need the income. Well these guys definitely needed the income, well needs a strong word, they don't really need it but they'll use it. How about that? So they took the lump sum of their pension, figured out what the payment would be and again they have lots of different options but joint life option for them, they're young, right around 60 years old was about 4.8%. So that's about when I first talked to 'em. We figured out what they had given up in payments in order to take this lump sum of money rolled into an ira kind of sitting there, what's the plan, what are we gonna do? So I jumped into the database and did a calculation based on their age and their state and all that stuff and right away instead of a 4.8% payout, an annuity would give them almost 6%.
Speaker 2 00:08:00 So right off the bat they had already figured out they didn't need me to do that. It was already the right move to forego the pension income and take control of the asset. So if they didn't need the income, they had control of the asset, the remainder, you can use it for a legacy, all that stuff they went from 4.8 to 6%. So that's about what a 20 over 25% increase. Five to six is one divide by five 20, yeah, maybe 2025. That kind of difference, that kind of increase makes a meaningful difference no matter who you are, whether you need the money or not, you might as well get as much as you can, right? So about a only a year ago, and this is goes back to why I didn't think about it. These guys are right at age 60. You wouldn't have seen that high a payout until at least 70 for an annuity and I think it's probably it got low enough to where it might, you might have had to be 75 to get that kind of payout and a few years ago the proof of that in my mind and I don't have to prove and show you document, I had a similar pension scenario with a guy.
Speaker 2 00:08:56 He had not decided to take the lump sum and he was getting about a 5% payout from his employer pension and the annuity actually paid a little bit less by just a few hundred bucks. So slightly under 5%. So then the question was, well what's more secure? The annuity or the corporate pension he ended up staying with the corporate pension is just, you know, avoid the paperwork. What's the point? He was comfortable with the company and it actually was a very solvent plan. Don't need to tell you the company, but they had really good assets and I thought okay well I can't, I'm not gonna try to start a fire in a house <laugh> the fire, the house isn't burning down anyway so I'm not gonna start the fire. However I'm supposed to say that. So where a joint annuity for a six year old couple a year ago is paying 4%, it's now paying 50% more, 50% increase over what you would've done earlier gave them a justifiable reason to use the annuity over the pension.
Speaker 2 00:09:49 A lot of you, if you don't do this all the time, the 6% payout is hard to compete with for a young couple. They extend, they stand to collect income for probably 25 years. You look at the actuarial tables, there's probably an 85 or 90% chance at the, at least one of them lives to age 85. So like on a 6% payout that's about a 16 and a half year break even. Okay? So that means on a 25 year deal, nine years of they're living out of the insurance company's pocket, it's a pretty good deal. Whereas before when it was 4% over a 25 year expectancy, you're not getting into the insurance company's pocket for 25 years. Obviously when payouts were much lower there was more room to do it a different way and a better reason, a more compelling reason for people that have tried the alternative.
Speaker 2 00:10:33 So you guys know I used the flex strategy and this is whether it proves an alternate strategy is better. It's an excellent way to look at the effect of an annuity on a portfolio over a 20 year time period. In this case, because of the annuity paying 6%, the results were split. Typically with a flex strategy, I wouldn't recommend a 6% withdrawal rate until uh, probably age 70 or later at 60 you could usually do five. So if a traditional annuity's paying four but you could get away with 5% withdrawal at age 60, that's where the flex strategy worked. And I'm sorry if this is moving too fast for people, those who are on it will get what I'm talking about. But if an annuity's paying 4%, you want a 5% withdrawal rate, you need an alternative strategy to get it done anyway. So in this situation with this couple, the results were split, the income annuity was better about half the time and I run probably, you know, 20 different scenarios and not random, but specifically based on how a market might behave.
Speaker 2 00:11:32 And the key to it is really try to determine how it behaves in like the first five years of that retirement. So you can go back historically and I've got a bunch of 'em stacked up and I just change the period, click, click, click, click, click, and I look at the total portfolio value at the end. So I do it pretty quickly and that's where I use that to determine whether it's something I need to dive in with whoever I'm talking to. Since I like to err on the side of being more conservative. It was, it was the rare instance and I hadn't done it in a while where I said, oh yeah, guaranteed income is definitely the right way to do it. But again it was a 50 50 split. So then you had a husband and a wife, husband kind of, he liked the idea of control maybe and he was fully on board with the guaranteed income.
Speaker 2 00:12:15 But you know, the wife I would say definitely was more convinced that guaranteed income was the way he was never resistant. But he is just a real inquisitive person. The only thing I'll tell you is he, he's an engineer. Engineers like to stress test and think about all sorts of different possibilities and there's always one more thing to consider and they will get through that list of things cuz they're used to finishing problems, right? So he, he finished the problem. So I like it was a first call, I did the numbers, I kind of thought, all right, I'm gonna recommend income for these reasons. We had a second appointment scheduled before I was able to share what I found with them. They did a lot of different research and and ran some different ideas. They had already decided to take it one step further, increase the income even more by skipping lifetime income and instead going with a term certain income stream that only pay for 20 years.
Speaker 2 00:13:04 So it's a, an immediate annuity with a term certain only. So real quick, a lot of like the immediate annuities that you say, all right, I want lifetime payments with 20 years certain and that means that it will pay for life or 20 years, whichever is longer. So if you live past 20 years, it pays until you die. If you die at years, say 17, it's got the 20 years certain on it, it will pay to a minimum of 20 years. So they decided well we get a bigger, we get an increase in payment if it runs for 20 years and then stop. So that's only the term certain not the life. I'm gonna start looking at this situation now. So I wanna thank these guys for like giving me an idea and something else to analyze. I don't go this route because rarely do I see someone who says, eh, we don't really need lifetime income.
Speaker 2 00:13:49 We're okay if the money runs out when we're 80 dicey, you gotta have other money essentially leaves the giant gap late in life. When I ran it through my spreadsheet and all the scenarios, I was on the phone with them and they and we're talking and as I'm doing this and I'm clicking through the scenarios, I think, oh wow, the difference was astounding. The income was increased instead of the lifetime annuity was 6% of the lump sum. This increased it to 7.8% of the lump sum. Do the math percentage of payout times the portfolio value. I don't need to tell you the numbers. You go from six to 7.8, that's almost a 2% increase, that's about a 30% increase in income. But that extra juice, the extra income meant that they didn't have to touch the rest of their portfolio. The income would run out at age 80.
Speaker 2 00:14:39 But if they left their portfolio alone the entire time, you know, this is where curiosity wins over skepticism with me, I ran the numbers and compared it to previous two options. Results showed the higher income stream produced substantially, like lots better results in every scenario. There wasn't a single scenario where that didn't win and the reason was because it took all the pressure off the portfolio, they could do whatever they want with the other investments. Now they have, I'm keeping this general in nature light on specifics. Number one cuz it's personal information that I don't need to share everybody's situation with you. Sometimes I'll go into a little bit more detail, but there's a lot of things coming at play in this and there's a lot of other things to work on. You talk about risk tolerance between husband and wife, they're a little bit different but they work together so they will stay on the same page.
Speaker 2 00:15:25 I do appreciate that about these guys. They seem to make a very good team. Then there's RMDs, maybe potentially some Roth conversion. There's a tax issue okay down the road. But things that I kind of seed that with them, it's again not to try to scare anyone, but if you're gonna use the term certain only option, you gotta be able to comfortably project enough money remaining to finance the later years of retirement. Money stops 80, you gotta have something else there. It only works in a relatively small percentage of cases. The reason it, there's two major reasons that work for these guys. First, the pension lump sum represents about a quarter of their assets. So if that can cover all their income, if you can cover your necessary retirement income with a quarter of your portfolio, then this is definitely something you should look at because it leaves three quarters of your portfolio even in the worst 20 years, you can leave it in the s and p 500 that's gonna double.
Speaker 2 00:16:13 So income is not a problem later in life. The other thing I'll say with these guys is what really made it work is because they're only 60 years old, they're on the young side. If they were 70, the guaranteed lifetime income would pay a fair bit more, but the 20 years certain term would pay the same. So that gap between the difference wouldn't be as much. That's why it's not n no two solutions are the same for everyone. Everybody's gotta do something different. And so I think that's the biggest thing to consider. I've got another couple that just came in with less. They have, I would say another couple right around age 60 that came in similar situation, not a pension, but they've gotten got less background and I really think in this case the pension kind of got those guys geared up toward, you know, thinking along these terms.
Speaker 2 00:17:01 So the point is, guaranteed income takes stress away from a portfolio, allows someone to comfortably pursue the growth needed to offset all potential retirement costs. It's been studied and verified mathematically for decades. It's my last paragraph. Anyone who disagrees is ignoring reality. It's not an argument. There are lots of other ways and even though rates are higher, there's still other strategies that are gonna appeal to more different group of people. So that's why it's important that I went through what I did and you guys withstood the period of low rates. A lot of people that are starting to listen to this now don't remember what grades were available 8, 9, 10 years ago and are not really worried. They're, oh okay, this is cool, but if this is your first time looking at annuities or you're relatively new to it in the past year or so, you're looking at things that haven't existed for a long, long time.
Speaker 2 00:17:49 But, so we got plenty of ways to get it done. I am certainly glad that guaranteed income has made a comeback. Some people don't like all the other options. It does take a kind of a hands-on approach. It's accepting some level of risk, albeit much lower than maybe a market-based risk. So it's really nice for the people that kind of set it forget, hey, I just want to know it's there. It's like, uh, what did I say? I went back and listened to one of the other podcasts is that it's kind of like, uh, hiring yourself for creating your own paycheck, but it's one more tool to solve the puzzle if you wanna see how it works for you, whether you are dealing with a pension lump sum or not, if you're really serious about pulling some money off getting retirement income. One other way to look at it, I wanna thank these guys for doing it.
Speaker 2 00:18:29 Not gonna mention 'em by name. I didn't clear that with them, but I told 'em I might talk about it a little bit. Very interesting. So if you wanna see how it works, make an appointment. You can do that at any page on annuity straight talk.com. Top right corner, schedule a call or you can call me at (800) 438-5121. I'm around. I'm considering getting rid of the phone number, maybe you guys let me know what you think about that just because I get so many spam calls and it's getting kind of tough. I, I'm at the point right now where I hardly, I rarely answer the phone, I just wait to see if they leave a message and see if it's legitimate. So I'm thinking about that. Probably not yet. But anyway, I'm here if you need something. I wanna thank you guys for joining me for episode 72. Come back next week. Got a really good idea and I'm gonna work on writing that out. So anyway, thank you so much for joining me. You guys have a great day and I'll see you next week. Okay, bye.
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