Don't Just Jump Into An Indexed Annuity

Episode 121 January 19, 2024 00:21:37
Don't Just Jump Into An Indexed Annuity
Annuity Straight Talk
Don't Just Jump Into An Indexed Annuity

Jan 19 2024 | 00:21:37


Show Notes

  1. ‍♂️ Don't rush into indexed annuities; it's crucial to consider a progression of safe money options before making a decision.

  2. Advisors should prioritize educating clients about different safe money choices rather than pushing a particular product.

  3. Consider multi-year guaranteed annuities (MYGAs) as a bond-like option with an added layer of security for those seeking safe investments.

  4. Bonds provide consistent interest payments but carry interest rate risk, making them a choice for those comfortable with their portfolio's stability.

  5. Fixed index annuities offer potential for higher yields based on external index growth but should be explored only after understanding simpler safe money alternatives.

  6. Knowing all available options and their advantages is essential for confident decision-making in retirement planning.

  7. Going to cash in your portfolio can provide short-term safety while you evaluate other investment options, reducing exposure to market volatility.

  8. Fixed annuities offer the safety of a bond with additional insurance protection, making them an attractive choice for some investors.

  9. Advisors should take time to ensure clients have a solid foundation of knowledge about safe money options to make informed choices.

  10. Building a clear understanding of each safe money choice and its suitability for your goals can help you make more informed and confident decisions in retirement planning.

View Full Transcript

Episode Transcript

[00:00:00] Speaker A: Hello and welcome to the Annuity Straight Talk podcast, episode number 121. This is Brian Anderson, founder and creator of, here in western Montana, another frigid winter day. We're going to have this for a while and snow removal is done, so I guess I just get to go play in it. Somebody asked me about snow angels. No, not a chance. I'm not five years old and it is really cold out there. So I also had somebody last week said one of my clients emailed, said, hey, you sounded rather upbeat and I thought, oh man, have I been a downer recently. So I'm going to try to be as excited as I feel inside to be here sharing good information with you. Episode 121 do not just jump into indexed annuities. I'm going to explain this process and why I came up with the idea. Some of you might recognize it and it's going to be a lot of simple information. I'm not patronizing anyone, but if you want to make an appointment with me, go to the website Upper right corner, schedule a call button, click that, get on the calendar, phone number, name, and some notes. I'll give you a call anyhow, sharing my screen visual aid newsletter and let's roll with this one. So again, just a visual aid to give me some notes that keep me rolling on this as I go through it. It's not something that's going to have tables and charts in it, so anybody just listening to it's not a requirement. But the newsletter on here ended up kind of being a long one, so I'll probably won't follow it all the way through because it doesn't need to be too long. I believe that education is the key to making really good decisions, so we do a lot of work on that and you guys have noticed it. That's why it's taken a lot of effort from me over the past several years to make sure that you get good, unbiased, straight to the point information, help you make good decisions. And I put it out there, and I don't expect everybody to read all of the newsletters or see all the podcasts coming in, but I can tell how educated you've been, and it's never your fault. But 90% of the appointments I have, 95% are people that have already seen an annuity, and they're kind of just looking for a second opinion or shopping around to see if they can do something better. And most of the time I have the burden of educating them when someone else was just trying to pitch them a product, it wears me down because someone is in advanced talks with planning, with another advisor. Something they saw from me resonated. They wanted to check it out, and it turns out that they've had none of the background work done to even figure it out. Hey, this guy's trying to sell me an annuity. All right, well, why do you want one? I don't know. Big red flag. You got to have a purpose. Remember, I always talk about goals first, then products. Meet with. Go meet with ten different people. Nine out of the ten of them are probably going to just show you a product. Oh, you should buy this. A lot of the advisors have one track mind, fail to explain all the options a person has. I mean, we're talking about protecting money or generating income. There are lots of ways to do that. Annuities are just an option. They have advantages in certain areas and they're preferable to certain people. So at the very worst, if you go with just the first pitch that comes up, you could be one of those people that gets into a contract that's inappropriate and doesn't really work at all for what? Maybe locks them in for a longer period of time that they weren't planning for. But on average, it's usually just okay. And a lot of people buy stuff that isn't actually the best or as good as it could be. So I'm not saying that everybody has to come here, but you need to learn all these options. And there are people that do this. Absolutely. But most advisors do not. If you understand all the options, you're going to do a lot better, no matter which one you pick. A truly educated consumer that understands all the options and the benefits and disadvantages of each could effectively go wheat with five or six people. And you could probably find the one guy that's not full of Bs. Right. I think there's a correct progression of options. Okay, so when you're using an annuity in retirement, it means making a structural change to a portfolio. You could be reducing risk or trying to improve a safe allocation, or it could represent a change in objective and a departure from all you've done while saving for retirement. You get to that point where you use annuity. It's a big shift in trying to protect assets or to generate income, way different than anything you've done to this point. And like I said last week, the science is not settled. We're closer to a consensus. But again, to state that I don't think we'll ever truly have a consensus. There's always going to be people with an opinion that are trying to get you to do something else. It's up to you to decide which one is best for you. This is often one of the largest financial commitments that you will ever make. So it deserves some real attention and some real due diligence. So, yes, again, there are advisors doing it the right way. But judging by what I see on a daily basis, that's the exception rather than the rule. If everybody comes to me and lacks education on the building blocks, the basics, and the other options, then I have to think that it's a prevalent issue in the financial services industry as a whole. So here's about how it goes. Someone goes looking for a way to generate income or just to protect some assets, and the salesperson jumps right into selling them. A fixed index annuity. This happens all the time. The customer may or may not have heard about them and most often doesn't know much about annuities in general. So they'll go home, they do some research, they find me, make an appointment, and I have to figure out why the index annuity was recommended in the first place. In a lot of these cases, people don't even understand that they want an annuity. This goes for people that maybe aren't intentionally trying to protect assets. They're like, I'm nervous about the stock market index annuity. That's not the only way to do it, right? But more often than not, that was the only option given. Hey, go buy this Athene contract. Why? Why are you doing it? And do you know that you have other options, even at Athene, if you like the company, for everyone who makes it through the proposal meeting without buying and is able to do some research online, find me or someone else that gives them a second opinion. There's at least one other who just accepts it and says, okay, yeah, sounds like a good idea. So in order to illustrate the point, we have to make some assumptions, give you a little bit of an example of what I'm talking about. It's not a case study, but this is a real deal. Let's assume there's a person with 100% of assets in the stock market. This is the case with a guy I talked to, and this idea hit me. I remember saying to him, you can't just jump to the index annuity. And he told me, he said, well, I didn't need any of my portfolio when I retired. Pension, Social Security, house, paid off lives well within his means. We never talked about assets. I don't know how much money he has, but he's well off because of all those things. Regardless of the size of his portfolio, he's going to be 70 in a couple of years. And he decided, you know what, I don't need to take another ride. Done well enough, and now it's time to reduce risk and preserve some capital. So current broker, he's got one broker, and then I think some of the stuff's just sitting in an IRA that he kind of manages. Just a stock market guy, only gave him the typical line that's like, hey, if you don't need it, just let it ride. It's going to go up over time no matter what. So that guy's probably correct, and that is certainly an option for someone who doesn't need to touch the money. But the customer wanted to reduce risk and take an easier path through retirement. So he had met with a couple of other people before he got to me. And during our first call, he jumped in and I think in the meeting notes, he said, I want to know what you think about this annuity and this annuity. So there were two of them that have been recommended. If you write that in your meeting notes, I automatically know to first figure out whether you even want an annuity or need one. Okay. And that's what not a lot of people are doing now, to be honest with you. I used to kind of like, oh, cool, this guy's going to buy an annuity. Well, I've grown up a little bit. I've learned a lot in talking to you guys over the past several years. And I realize there's a lot of people that when it gets down to the complexities of it and all the details, they're going to pull back and not do it anyway. That's why I've gotten better at making sure we first determine whether an annuity is the right thing. So had to first figure out if he knew there were other options for safe accumulation. Didn't take long. He didn't. Now he's a sharp guy and been successful enough to not need his portfolio. So he understands cash, bonds, all that stuff. He's looking at annuities as an option, disregard everything and jump right to fixed, indexed annuities. He didn't know there were migas, there were fixed annuities. Did you know that you could just have safety, guaranteed growth for a period of years? And he's like, oh, what's that all about? So they jump from market, oh, you don't want to be in the market sure. Go buy this fixed indexed annuity. You missed a whole lot of steps in the middle of there. So fixed index annuities are the most complex safe money option. They're not hard to understand, but it's a lot easier if you have the building blocks first. And in putting the building blocks together to understand how they work, you also cover all the other options. So if you do that the right way, then you get to fixed index annuities and you have a better educational foundation. Right. The analogy is it's hard for a child to learn to read without first knowing the ABCs. Right? ABC. You got to teach them that first and they figure out what putting those letters together means. That's how you read. It's the same thing. It is that simple. So if you're using an annuity reduced risk, then you have to go through a progression of options with fixed index annuities being the last option to consider, not the first or the only option, which is what a lot of people do. May seem like I'm patronizing people, but there's a lot of people who don't understand one or more of these options. As simple as that may seem. This is a real problem. The fact that it popped into my head, wow. I didn't just make it up. This is something that happens all the time. Okay, so number one, go to cash. Easiest way if you want to liquidate a piece of your portfolio, reduce risk, is to go to cash and stick it inside a money market fund in your IRA or brokerage account. Regardless of what many say, all brokerage accounts, iras and variable annuities have a fixed interest account. And I can tell you, I hear this all the time. My 401k doesn't have. I have to be in. No, it does. They have a money market account. They all do. This is fully liquid. It's easy. Can be a great place to park money while you consider other options. Don't just sit and it could be some people sit in cash. Long term, the rates are pretty good right now. They're variable. They're going to change from day to day, week to week, month to month. So you're not going to get to lock that rate for a long time. But that's the first place. A lot of times if somebody comes in and they got more money in the stock market than they want and they're really trying to get out of it, it sounds simple, but a lot of people, forget it, just go to cash for now and then you don't have to worry about what the market's doing to those assets for a while. We got to cover cds. If you want some FDIC insurance and desire to lock a fixed interest rate for a longer period of time, here's your option. Right. It's likely the most popular place to park money. Cds don't have liquidity and are taxable annually if you don't own them inside. If you got them inside an IRA, then they're not taxable. But if you have them outside an IRA, you pay taxes every year. So cds are not really a dynamic retirement planning tool, but they're an option for safe assets. I'll just say that quitty aspect, taxable aspect in a lot of cases can be a problem. But that's also, and I tell you, a lot of people say I don't want the annuity, I don't want the term, I don't want the complexity, I don't want this or that. I'm just going to go to the bank because some people just like walking to the bank and buying a CD, right. It's got disadvantages, but you got that guaranteed rate. You got FDIC insurance because it has to have it, and then you got bonds. So this is the order of complexity, right? Investment management crowd likes this one because it's the traditional safe money allocation they get to keep the money under management stays with the big brokerage companies. You get consistent interest payments, but there's interest rate risk if you need more cash flow. And it's better to be the primary owner of a bond than it is to buy bond funds because bond funds sell and trade. They got interest rate risk. Right now, bonds are a decent option because you can get a pretty solid rate, provides income if that's what you want. And if you own the bond itself, you're always going to get your principal back or for the most part, now bonds get written down. They do. So there is risk in there, but comparatively little up against the stock market. So fixed annuities, next one. And this is the one that, when I talk about this, I guess I wasn't really trying to pick on fidelity or vanguard or Schwab last week when I talked about them starting to say recommend, hey, maybe you should buy an annuity. But I am kind of picking on insurance agents or investment guys that sell insurance because a lot of them go to, they skip the mica and they go right to the fixed indexed annuity. And a lot of them will just go in bonds and never consider the fixed annuity or the indexed annuity. So what you get with a fixed annuity a miga. I put Myga in there because a lot of people have just come to call them by that name. Multi year guaranteed annuity. It's essentially a bond with an additional layer of security. So the insurance company buys the bonds. You get similar, if not better rates because they're buying institutionally of hundreds of millions of dollars at a time. And the insurance company reserves on top of that give you an added layer of protection. You don't have to worry about the bonds being written down. If you're not in an IRA, your taxes are deferred until withdrawals are made. And a lot of them have up to 10% withdrawal annually without interest rate risk. Same thing. Grow your money through the term, then you can move it, take it elsewhere. It's a bond with extra insurance on it. Simple. So a lot of guys that really want to sell annuities are skipping that step, which was the case with the guy I told you about. He didn't understand mygas sophisticated otherwise in terms of investments. So I'm not saying he's stupid, but that's what he did. You get a couple of meetings and guys are just chomping at the bit to sell this and they're skipping steps. So, and finally, the fixed index annuity, they're not too complicated, but they are more complex. So what you understand is that it's an alternative to a fixed annuity. The indexed annuities have the same structure and protection from interest rate risk, but offer potentially more yield based on growth in an external index. So that's for someone who says, hey, I get it. I get that there's a fixed rate that's just 5%. But I understand with the index annuity, I won't lose money and I might make more than 5%. I'm willing to take that chance. Similar protection from interest rate risk, similar liquidity, equal safety. So this could be honestly, like, number four and five are the highest levels of safety in all these assets. So you understand when you see this, the one through five, like three, four and five are, it's a progression of assets. Migas are built by bonds. Fixed index annuities are built off of migas. You understand that. Then you just add the layer of, here's how the index option work and you're done. That's all it takes. So that's a progression of options to save money. So I think a lot of the problem with other advisors, and again, not everybody, now, if you're an advisor and you're listening to, it's like, I don't do that way. Don't get bent out of shape. I'm not picking on anyone in particular. If I do, I'll call you out by name. But this is just in general. I'm telling you how prepared most people are when they come talk to me, if they've got a favorite, and they never offer anything else, like an investment advisor is going to say, oh, you want to protect money, we'll go to bonds. Well, maybe you don't like bonds. And if you take somebody else's, else's advice, they're going to say, an insurance guy, they're going to jump to indexed annuities right away, or some of them are going to stop at fixed annuities. I don't think it's appropriate to do that either. You can say, I only sell my goods. That's fine, because that's 70, 80% of what I sold last year. You have to understand why you're not buying the index annuity as well. They're built to do better. Will they? And in a lot of cases they do, some cases they don't. But it's all relatively close. You want to decide if you want to take the chance. So three of the five, the first three of the five, I like to do this because again, in the first meeting, I like to determine whether we have, or whether we have reason to have a second meeting. If I'm not going to sell you something, I want to help you as much as I can, but I also want to reduce the amount of time that I spend doing it. If I tell you, like, hey, just go do this, or if I say, hey, all right, first of all, you want to get out of the market, you realize you can go to cash. Yeah, I can go to cash. So they go to cash with a portion of assets, and if they're comfortable there and having a hard time deciding what to commit to for a while, that's a great place to be. So maybe, hey, I don't really like the idea of locking up and they're paying me four and a half percent, whatever it is, I like that we'll stay there. And when it's time, and if you see something that you want and you have time to evaluate everything, watch a few podcasts, read a few newsletters, take your time doing it, then maybe you get to the point where you explore annuities, the different types you can get, right? So, yeah, to save time for both of us, I need to first make sure that the best option for you isn't something that you already have access to. If you already got access to what you need and what suits your situation. Thanks for calling. Best of luck. Good job. Right. And again, I think that moving through this options first eliminates the people who probably won't use annuities and the people that will. It gives them the proper building blocks to understand and truly find and I guess own or embrace the option that they finally choose. So each of the above had its advantages in terms of time, liquidity, and overall benefits. Unfortunately, it is up to you to figure out which works best. And someone who can effectively explain all the options is going to be more beneficial than someone who does not. Most guys probably don't. They just give you what they think is what they like the best. And that's also going to save you a lot of time from talking to other people and getting a whole bunch of different proposals. I mean, if you do, if you go into it as a really astute, with a really focused knowledge of all the options going on, then yeah, you can probably handle it a little more easily than most people. If you want to make decisions based on confidence, knowing that you did indeed get the best option, then this is the way to do it. If someone takes you and jumps straight to index annuities, know that they skipped a couple of steps and you either got to go figure those things out on your own or you got to find somebody else who will. So I hope this one makes sense to you. It makes sense to me because I see it all the time. Happens 80 90% of the time. I talk to people about annuities and figuring out what they need to do for retirement. Didn't really talk about income annuities because index annuities have that as well. You can get income writers on them. But again, that's a whole separate topic. Income. Just income. Go for the highest income. Right? But this has been episode 121. Don't just jump to indexed annuities. Go ahead, like subscribe or comment on any of your favorite podcast platforms or on YouTube. You can give me a call or you can set up an appointment. My name is Brian Anderson, top right corner of any page on I'll be back next week with more annuity comparisons from some of the brokerage companies. That's what I wanted to do this week, but this came idea popped into my head and I've had it halfway written for a while. Decided to do it. So I appreciate you guys enjoying joining me on episode 121 and I look forward to seeing you guys next week. Okay, thanks a lot guys. Have a great day. Bye. [00:20:40] Speaker B: You have been listening to annuity straight talk. The proceeding information is for informational and educational purposes only and does not represent tax, legal or investment advice. The views expressed by guests on this program are their own and do not necessarily reflect the views of annuity straight talk or its partners. No information presented today should be acted upon without meeting with a qualified and licensed professional. It is important that you read all insurance contract disclosures carefully before making the purchase decision. Guarantees are based on the financial strength and claims paying ability of the insurance company.

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