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 00:00:49 Hello and welcome everyone to the Annuity Straight Talk podcast episode number 82. My name is Brian Anderson, founder and creator of Annuity straight talk.com. Been online for 15 years or so in the business for more than 20 now. Seen a lot, learned a lot, criticized a lot. And here I am just trying to do the right thing for good people who are looking for solid solutions for retirement planning. And this topic that's coming up today might not be super exciting on its surface, but I assure you that there is good value here and that is the point of using annuities in retirement. You got value whether for income or just protecting assets. There's a lot of good stuff that you can do and a lot of assurances that I can give you to let you guys know that these are great assets to use. I'm on location right now in Tucson, Arizona for the recording of this and right now there's the Tucson Air Show going on over top of the campground that I'm at.
Speaker 2 00:01:43 I wanted to do some more backdrop stuff, but, and you should see the setup, uh, bring all my stuff from Montana. You see the setup that's in here. It's a little bit tougher. Lots of cords and wires going on behind the scenes. Imagine if I get out in somewhere in the desert with a cool backdrop and big mountains, uh, beautiful mountains. It might be kind of tough. And then I'm gonna have a gen, I'm have to have a generator, so I'm not gonna do that. Anyway, I'm gonna share my screen and I'm gonna share you guys a newsletter. That's just the point of doing that, right? Just to give you guys a visual aid for anybody that watches a video, there's a newsletter you can go read and I'll add a little more commentary here as always. So we're talking about guaranteed minimum annuity values.
Speaker 2 00:02:24 Now the effects of higher interest rates on annuities been a popular topic. Everybody thinks annuity rates are going higher, annuity rates have actually dropped. It has nothing to do with what the Fed does on a daily basis. I'm gonna have to keep saying it. And as a repeat for anybody who is tired of hearing it, I am sorry, but every single meeting I have, well, the fed's gonna keep raising rates. Are they gonna get better? Well, actually no, they've tailed off a bit. They're still really good. Now's the time to buy and I'm gonna give you one more reason to do it right now. Okay? Again, this doesn't look like a whole lot on the surface, but it gives a little bit of assurance to first time, time annuity buyers. A lot of the people are first time index annuity buyers. Justifiably skeptical of how it'll work out.
Speaker 2 00:03:04 I tell everybody that I was not a fan of these when I first saw them. I was a fixed annuity guy. When fixed annuities rates dropped. I learned that we had to do something a little bit different to Chase higher yield index annuities allow you to leverage those low rates. We got better rates right now. You leverage those better rates and even higher potential. I've always seen index annuities outperform fixed annuities. Worst case scenario, maybe by just a bit, but goes back into, that's kind of another topic anyway. So index, index annuities are just fine, but you gotta make sure there's a lot of different things working there and you gotta make sure you do it in the right way and by the right contract for your specific situation. Okay? Back in the day, as in 15, 20 years ago. So Index annuity's only really been around since the late nineties, but they used to have a guaranteed minimum rate of say 3% for an example.
Speaker 2 00:03:51 So you'd get either, you know, in some cases it's 3% plus what the index return does. In other cases, it was either the index return or 3%, whatever is greater. It was a great worse case scenario, but rates were a whole lot higher back then. Insurance companies could use the good yield to build value into various parts of the contract, and that's what they're doing again today. Albeit not quite the same way I think you go back to Fisher Investments podcast, I talked about the 10 year treasury 20 years ago was close to 6% right Now we've got it at about 3.3 the day I'm recording this and it's dropped off about seven tenths of a percent 70 basis points in the last couple weeks ever since the banking crisis. Go back to podcast 2 20 23. Bank failure apocalypse banks are not where you should have the majority of your money when you're retiring cuz you need yield and you need safety.
Speaker 2 00:04:43 So we don't have what we did 20 years ago. That's just the world we live in. Okay? And if you wanna sit around and wait, and then one thing I can tell you throughout my career is everybody's waiting for rates to go up. And that goes all the way back 20 years. We had 6% mortgage rates and a lot of people were really excited about it then. And nobody wanted to lock into anything longer. I mean, as a borrower it's good at 6% then, but as a saver, nobody wanted to lock into a 10 year deal. At the end of 10 years we had mortgage rates, were down two and a half, 3%. So you can sit around and wait for something to happen. You know, and I don't mean to disparage anyone, but a lot of people I consider to be armchair economists. Oh, well Fox News said this or CNN said that, I'm gonna wait for a better deal.
Speaker 2 00:05:28 I've seen a lot of people waiting in my entire career, okay? Rates really didn't start rising until about March last year. So we're about a year into it little more. Then since then, we've covered everything from better income payouts to higher fixed rates on growth potential, on fixed income annuities, index annuities, people who have been around for a while realize how good it has been in the last year. And hopefully those new to it, don't wait too long. A lot of people just looking at it don't realize how good this is compared to what we had even a year ago, 14 months, 18 months, and anything prior to that. We've not seen this since 2008, 2009. Aside from the top side, there's one important place where value has been added to guaranteed minimum return. In every illustration there's a specific uh, page that specifies, and I'm talking about indexed annuities that specifies the guaranteed minimums in the contract.
Speaker 2 00:06:19 I use it to prove to people that they will never pay fees and never lose money. Every penny that goes into the contract is guaranteed to be there in full at the end of the surrender period, less any withdrawals. If you pull money out, obviously it's not you took it out, right? Same as a bank account. No one ever got a whole, all that excited about the guaranteed illustration. And what I always told people in speaking of indexed annuities, if that's what happened, you're gonna be damn glad you got that annuity because obviously rates are in the tank and the market dropped for 5, 7, 10 straight years. And if that happened, you had an asset that was guaranteed the whole, yeah, you'd be pretty happy. I think I've seen too many other agents disregard the guaranteed minimum page. And I think it's very important because if you wanna learn about annuities, you need to learn about the structure of 'em, how they're built, why they're protected, and why they're guaranteed.
Speaker 2 00:07:06 I've talked about all of that stuff. A lot of agents just wanna show you the upside. We talked about that last week. BS annuity illustrations. Ah, we're just gonna show you the top line figures. That's not fair. Okay? So I'm gonna talk about the minimum guaranteed value and I'm sorry if that's not too exciting to you, but that is actually where the most valuable part of an annuity is. So first and foremost, there's a difference between the surrender value and the guaranteed minimum surrender value. So I'm gonna define those things right now. The surrender value is the money you put in less prior withdrawals and the surrender charge, right? And this assumes you surrender the A contract in full, okay? The surrender charge declines over time. So this slowly rises to equal the total premium less any withdrawals you take. So in the past you put a hundred thousand dollars in your surrender value is say the surrender penalty is 9% in the first year.
Speaker 2 00:07:56 So your surrender value 91, then it goes 92, 93, 94, and then at the end of the surrender period, your minimum value is a hundred thousand. Okay? Before I go to the minimum guaranteed surrender value, which is a difference. All right? The technical terms for people who really wanna understand there's a market value adjustment. It's an important additional component, adds an adjustment to the surrender value based on the interest rate change since the purchase date. So if you buy it and you surrender it three years later, if the rates have gone up, they're gonna adjust your value. It's like a devaluing bond. Bond values drop as interest rates rise, they climb as interest rates fall. So in this situation, if you surrender it, then you're gonna have not only the surrender charge plus, but you're gonna pay an adjustment based on, and a lot of people in the past had positive, you can have a positive market value adjustment.
Speaker 2 00:08:47 It's not always a bad thing, but it's something you need to keep in mind. And again, if you plan to surrender annu an annuity well before the surrender schedule, if you have a use for that money, then you should not buy an annuity. Okay? Uh, the M V A is null and void once the surrender period ends. All right? Now that gives us to the minimum guaranteed surrender value. This is a minimum surrender value when both surrender fees and an M V A market value adjustment are applied against the contract. Annuities are highly regulated in each state and this is a mandated minimum value that protects consumers from the combination of a surrender charge and a negative market value adjustment. So if interest rates rise a bunch and you decide you want to bail on the annuity and you're only a couple years in, they set this additional guarantee, that's the minimum guaranteed surrender value.
Speaker 2 00:09:33 Without that you could pay a seven, 8% surrender charge and a 15, 20% market value adjustment lose nearly, you know, 30% of your value. So the state stepped in and will say, we're gonna give you a minimum guaranteed surrender value. You can say you don't like it, but these are the things that, because people aren't capable of making really good decisions, people fall for garbage all the time. And I'm sorry, but if you didn't have this, if it wasn't mandated, you'd have higher potential on an indexed annuity. That's the way it is. So you are getting all this protection, you're protected from interest rate risk and you're protected from market volatility, right? If you knew how to pick a contract or most agents and, and it's not, I will never blame the consumer. I apologize for actually saying that. I blame the advisors for not explaining it appropriately.
Speaker 2 00:10:20 If they explained it appropriately, we wouldn't need to mi minimum guaranteed surrender value, we'd just make good decisions for good economic reasons and we'd have way more potential and better interest rate yields because of it. But sorry, the consumers are fighting uphill battle because there's a bunch of idiots out there that have no clue what any of this means. So sorry if you don't think this is exciting, but this is extremely important, okay? The minimum guaranteed surrender value is what I'm gonna talk about because that's the true guarantee that's much higher than it was a year ago. And forget withdrawals for a minute, it's gonna be easier if I just talk about the numbers. So traditionally in the every contract, now if you own an annuity, you can go look at this. The minimum guaranteed surrender value has been calculated as 87.5% of premiums paid compounding one to 3% annually.
Speaker 2 00:11:12 Each company declares a rate between one and 3% each year. That applies to all new contracts issued. Okay? Now 87.5% compounded at 1% does not quite rise to a hundred percent over time. That's why they give you a true up, okay? That's the company's gonna give you that guarantee, you'll get your money back. Worst case scenario, right? So if it's only 1%, which it was close to that a year ago cause we started the year, uh, the other thing I learned recently and something I didn't know is every company declares that rate for the year. Okay? So it doesn't matter what happens in the interest rate markets, all contracts issued in that year are going to get that minimum guaranteed surrender value compounding. All right? So all companies have increased that minimum compounding the one to three, all of 'em are getting closer. Like two and a half, two and three quarters closer to 3%.
Speaker 2 00:12:00 That means the guaranteed, there's guaranteed growth not just guaranteed to get your money back. Okay? If you bought a hundred thousand dollars in a contract one year ago, you're guaranteed to get a hundred thousand dollars back at the end. In the worst case scenario, if you buy it this year, the guaranteed rises to about $117,000. And it depends on the company. I calculated a few different ones. Everyone's different. And I'm not talking about one specifically cuz it has nothing to do with the company. But if you want to value shop, you can look at those. I've got really good companies at 2.2, I've got really good companies at 2.5. The highest one I think is 2.85 for the minimum G. So that's 87 and a half percent of your premium compounded 2.85% annually over a 10 year period that turns into a positive yield in the worst case scenario.
Speaker 2 00:12:43 Getting back to what we had when we had really high rates and you had a baseline guarantee plus index returns, right? And no, I do not know that this is gonna go higher based on what's happened in interest rates next year in 2024, this will be lower. Keep that in mind. I've gotta timestamp all these things and let you know that these things don't always stay the same. Everybody says how do you get all this content? Well things are always changing the basics and the principles do not change, but the environment we work in does. So I've gotta disclaim this and keep adding additional information so people get up to date. Again, if you did something years ago, this doesn't matter, right? But if you're doing something two years from now, you pick up this podcast, it's gonna be a different scenario. But go ahead and ask me about it.
Speaker 2 00:13:26 That's why I put it out here. So it's not an a minimum guarantee plus your index earnings, it's one or the other, whichever is higher. I think it's a great way to demonstrate the additional value built into annuities when rates are higher. But it is mostly irrelevant and I'll tell you why it's irrelevant. I've never seen an index annuity that didn't grow by a fair bit more than that. So on a 10 year contract that's, you know, simple interest 1.7. So it's about compounded 1.6%, a hundred to 117. You didn't get robbed if you didn't get this a year ago, sorry to anybody who did that. A lot of people last year got really good contracts, some with even higher base rates that are available now, but their minimum guaranteed surrender value is not as valuable. Doesn't matter cuz all my clients buy it for the right reasons.
Speaker 2 00:14:07 They'll probably hold 'em to surrender schedule and they're not gonna get dinged by market value adjustments cuz they're not morons. I deal with smart people and I love every one of you guys. Thank you very much. So it only applies to fixed annuities that are surrendered early because if held through the surrender period, fixed annuity rate would obviously be higher. Okay? Aside from the basic value provided by the minimum guaranteed surrender value, this reinforces an ID. Ds shared with you guys last year in episode 52 titled Splitting Annuities. That was sometime last October, probably September, October. I talked about the value of using both an index annuity and a fixed annuity for those who couldn't decide, which they were more comfortable using half the money with a nice guaranteed rate and a a fixed annuity and half the money with more upside with the index annuity.
Speaker 2 00:14:55 Great way to protect money and grow it as well as the option to use it for creating an income or R M D plan. So as it stands now you can get about 5% on the fixed annuity. So put half the money in there and get 5% guarantee that for a term of years, anywhere five to 10, however long you wanna lock that rate in. Okay? Let's say the minimum guaranteed cylinder value of the index annuity is 1.7. It's not quite that. That's, uh, after compounding, that's a worst case scenario. You're 1.7, the combination of the two products creates a roughly 3.3% yield on the whole basket of money. That's a whole lot better than even just a fixed annuity was in early 22. And anytime before that, probably 20 20, 21, 22, 20 18 and 19 we were doing okay. A solid guarantee on one side and substantial upside on the other side with no risk.
Speaker 2 00:15:42 It sounds like retirement dream come true. That's exactly what you want on a safe asset. You got a guarantee, but you're not stuck there cause you can go up a little higher. Holy cow. Really? It's so easy. The worst case for an index annuity is actually equivalent to that's what happening now is equivalent to cash sitting in a savings account or money market with opportunity for much higher yields. I know rates on cash are quite a bit higher at the moment, but that's not gonna stay there. They've probably come down a fair bit. It's a recent phenomenon. I also know plenty of people who have been sitting in money market funds for several years without doing any better. I know a lot of people doing that. It's a great time to buy annuities and this is just one more reason guaranteed returns with plenty of upside anyway.
Speaker 2 00:16:25 So hope that, uh, hits home with a lot of you guys and you understand the value of this. Again, just talking about, you know, the basics of the contract, how the mechanics work, why they're safe, why they're good, why they're valuable. Okay? We talked about banks a couple weeks ago. Annuity insurance companies are far more stable. It's not even, they're not even the same ballpark. So you should have a chunk of money with an insurance company in an annuity if you don't have a life insurance policy. And I do actually do a, i I met some really good case cases with guys that had big insurance policies. Pretty interesting. So one guy said, why, why do people buy annuities? And he had a whole bunch of whole life insurance. And then I said, oh, they're for everybody that didn't buy it an insurance policy when they were younger.
Speaker 2 00:17:05 So anyway, this has been episode 82, guaranteed Minimum annuity values. My name is Brian Anderson, subscribe to the podcast on your favorite platform or on YouTube, like share, comment, whatever you gotta do, let me know what you think gets the reach. Helps me get out there. One guy said yesterday, I can't believe you don't get more people viewing it. Well, I don't know. We're working on it and it's there if you want to help me out, I'd appreciate that. But anyway, uh, I'm grateful for all the case studies and all the information you guys provide to me that help me figure it out and share it with other people. It's, uh, I enjoy what I'm doing. I'm enjoying a trip to Arizona Road trip. I'll be in California sometime next week, so maybe that's the next recording. But we'll see. You'll be back with me, I hope. And I thank you again for stopping by. You guys all have a great day. Okay, bye.
Speaker 1 00:18:01 You have been listening to Annuity Stray 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 the qualified and licensed professional. It's important that you read all insurance contract disclosures carefully before making a purchase. Decision guarantees are based on the financial strength and claims paying ability of the insurance company.
