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 28. My name is Brian Anderson, founder and creator of annuity straight talk, going solo again. I think in the next couple of weeks, we're gonna have a couple of guests. I like a different perspective of mine. I'm sure you do as well. But again, trying to get back on track in 2020 to get good content out to people who are trying to make the right decisions for retirement, you can go ahead and subscribe to the annuity podcasts on any of your favorite podcast platforms and also on YouTube where there's video. This one's going to be important for video. Cause we got a lot of visual aids. Cause I recently released a newsletter. The newsletter goes into a deep explanation of it, but it doesn't have a lot of charts or visual aids. And so I thought that'd be a great thing to put onto a podcast and in light of a market volatility right now, I kind of wanted to talk about, I always say it play off fence in retirement, be aggressive when you can smart.
Speaker 2 00:01:45 There's great ways to protect assets, but also keep yourself in a position to maximize yields because that's, what's going to offset inflation, spending increases, legacy, all that stuff. And so we're going to talk about one of those today. It is called how to beat the market with an annuity. So let me share the screen. There we go. So recent newsletter, I don't know when the podcast is going to be released. I'm guessing probably 1st of February anyhow. And what we've had is we've had, so you can see I've just published this today, January 25th. And we had another wild day in the stock market, the S and P 500 closed down about 9%. And again, I've always said, I do not want people to feel pain. I don't want people to lose money. I want everybody to do well, but you know, again, be smart about it. So I released a short video about this.
Speaker 2 00:02:34 About two years ago, I've talked to several of you about this idea in it. And for me it's more just really finding just some interesting ways of looking at retirement planning. But what happened is I looked it up because I was going to send it to someone and it was on YouTube and it was a way deep down the list. It was a quick six minute video and I was going to send it to somebody and I looked and the video had been deleted. I don't know why, but I thought, well, no better time than now to redo it. And especially with a lot of volatility, just kind of give everybody a quick little idea about why that shouldn't concern you and maybe you can be opportunistic about it and do do well. So I think for a long time, if this paragraph here I've really hesitated to jump into the argument or the discussion about what is better the stock market or index annuities, because it's not a fair comparison, apples and oranges, to be honest with you, it's a shotgun versus a rifle.
Speaker 2 00:03:31 They do not do the same things. They're not meant to do that, the same things. And so I think the problem being, you know, you get investment managers are real gung ho stock market, long run. You know, you can fishers stick with it, high yields. That's where you get the best bang for your buck, but it switches in retirement, you know? And then there's the annuity guys. That'll say market's going to fall to pieces and you want to be protected on the downside. And the problem is they're both right at different times. So why argue about it? Why don't we look at clearly, you know, prudent financial management paths, well thought out diversification of a portfolio. And you talk to your security side of the portfolio, obviously stocks, mutual funds, index funds, all that kind of thing. ETFs should all play a part in the growth side of your portfolio.
Speaker 2 00:04:19 And so the decision to use an annuity is often what side do you, what product do you use to protect? And some people choose cash. Some people choose bonds and really the annuity is more comparable to bonds and cash. And right now with rates real low and on the rise, I think bond for portfolios are going to suffer, but that may be a real short term thing. So maybe it's not bad to use bonds for maybe in the next year or so. Bonds will take a hit in asset value, but it might turn around 2018 was one of those years where the rates really went up and the market dropped. It was a double whammy. So securities, port, securities lost value. And so did bonds because rates rose. But then when the pandemic hit in early 2020, those rates dropped way down. And so the bonds shot up in value and really offset a lot of losses for people.
Speaker 2 00:05:05 So be that as a man, I mean, that's kind of going off on a tangent, but again, it's a matter of what you choose as far as how to protect some assets and everybody's going to do something different. My job is to explain, not to tell everybody, to buy annuities, but explain where your advantages and that's what we're going to talk about today. So, and again, the point being when you're saving for retirement, annuities don't necessarily have a place. There are a few people that I know that maybe in the early fifties, 10 years from retirement or so have chose to use annuities for, to protect some money, but when you're saving and that's the point of this when you're saving, it makes sense, take a lot of risks. You get dollar cost averaging. And I think the point of this and the numbers I'm going to run, we'll show you that it's the dollar cost averaging that created the portfolio values you have.
Speaker 2 00:05:48 Now, now that the S and P is down 9%. So, you know, look at it, don't be bummed out that you lost money because a year ago it's not money you had anyway. Okay. That's I always say, well, it's not yours until you sell it. Okay. But this, like this idea came up and I was just crunching numbers a few years ago. And I thought of I've showed it to investment guys and I've showed it to prospects and clients and stuff. And it was like, wow, that's really interesting when everybody's kind of skeptical about it. But, you know, I really thought it was like, wow, this is ingenious. I got this crazy new. But then I heard, I w I was watching a webinar for financial advisors. And then I heard someone make mention of an academic study that had been done by a well-known academic writer.
Speaker 2 00:06:29 And a lot of people know him like his name's Wade fowl turns out that he had studied this and done a lot of academic research and had proved that this fit in with the best way to use annuities and retirement, to meet everything, income, security, inflation protection, limited volatility, and maximum growth over time. So I kind of fell into it accidentally on my own if you will. But it was not my idea. The point being one of the points that's important is he wrote a whole book about it. Okay. Goes into all the factors, little bit of an annuity, everything in an annuity, everything in between Monte Carlo simulations, different time periods over a hundred years or more, all the justifications for it. You talk about taxes, income, RMDs, all sorts of stuff. Right now, I tried to make the newsletter. So you could read it in five minutes or so.
Speaker 2 00:07:20 And I'll go into a little bit more detail here. It's easier to talk. The podcast has become an easier thing for me to do, because I can just start talking about certain things, but it's hard, but it's, it's a good mental exercise to write writing is where creativity comes from. So I kind of force myself to continue to write, but I'm not going to dive into the weeds again, I'm touching on one part of a topic that was an entire book that somebody wrote over several years of research, right? So I obviously can't do that. I could, but it's not my life's work. This is just an idea. Okay. And honestly, it's pretty point like any given plan for you or anyone else has a lot of personal variables involved. And so for me to take one of those and make that a case study where we could probably do it with this, but those personal variables for the one individual are not going to match up with the specific personal variables of another individual.
Speaker 2 00:08:18 And it's too broad an idea to offer something generally either. So it's not, again, we're sticking to the idea. I know there's lots of different considerations to make, and I understand that. So no matter how you use annuities in retirement, the point is to protect assets and limit volatility. A lot of people hesitate to use annuities because there's a significant time commitment. Now, some of them short like two or three years, but income contracts can be lifetime contract. You know, you get a lifetime contract you're really jumping in with both feet because you don't have a lot of outs to be honest with you. So you have to know what you're doing, and that's caused a lot of hesitation. That's one of the reasons why I've come up with alternative strategies that can do the same thing. And again, the use of annuities has been academically proven over time.
Speaker 2 00:09:05 I just like to talk about different ways of annuities. It appeals to more people. And I think a lot of people will let go of that hesitation once they, uh, see a couple of different ways to do it. So I explained the terms of this example, that's where I'm going to jump to, um, this and I left it populated. So I'm going to delete that. And what's interesting. So I don't need a few of these columns cause we're not using the annuity column. Now, this is my sheet where I compare different income scenarios, portfolios that are mixed with annuity and the stock market. And we can do bonds. We can do cash and we can see, are you okay with all stocks? Are you okay with all bonds? Anybody that's got a low spending rate in relation to a lot of assets can survive the worst periods in market history with all stocks and mutual funds.
Speaker 2 00:09:52 If you want, I'm just going to simplify this and make it, I guess I should have done this ahead of time, but you'll see where I'm at. And essentially what we're looking at as the market allocation for the worst 20 year period in market history. And I'll explain some of that later. So let's just use an example. You're going to put a hundred thousand dollars in the market. And so this is an average retirement for a 65 year old, I'd say. So if you look at the time from your 65 until you're 85, now we're not talking about spending. We're not talking about RMDs. We're just talking about we're looking at the numbers. And if looking at the numbers can give us an idea or see the thought about how to add the benefits of that into a complex retirement plan. Then you might find some ways of improving your rate of success over, over your retirement years.
Speaker 2 00:10:39 Okay? The worst period in market history, a hundred thousand dollars in reinvested dividends over the 20 year period, it grew to $214,000. So that's not too bad. It's only about a three and a half percent yield, but you can see that even if you go through the worst period in history, then you're going to double your money. So I think in, and this was the years, 19 26, 7 to 1946. It was the great depression. I think it's irrelevant stress test, considering that we've just seen one of the greatest run-ups in the market in the past 10 to 15 years. And I'll also say it's a stress test. We've seen the, one of the greatest roundups in the market history. We just had one of the worst starts in the market to 2022, as far as the S and P 500, the NASDAQ is getting hammered right now.
Speaker 2 00:11:28 And again, I'm not saying get out and go to an annuity, an annuity, but you know, the point being is you put it through, you put your portfolio through a stressful historic period, and it gives you an idea of, and a lot of people that have seen this specifically will say, I'll use the last 20 year period. And then I'll use the worst 20 year period. And in the worst 20 year period, it tells you to use more or less annuity in the worst 20 year period. It tells you, you use more. So the point being, I think, you know, if you're planning for a worst case scenario and you use an annuity right now, when the market's high, I'm going to show you ways to get out of it. That way, if you over commit to it, you can get out of it. And actually you have chances of exceeding the best case scenario, no matter what.
Speaker 2 00:12:11 Okay. So the market came to 214,000. All right. Now let's assume, instead of being in the market, say you retired now. And because this is basic, we're not talking about income planning, RMDs taxes, Roth conversion, whatever else you do, this is actually an idea that would work incredibly well for a Roth conversion. But that's up to, I'm not telling anybody they're going to do it. I'm just saying like, that's an idea. So the disclaimers, I'm not giving anyone advice. I'm just trying to open your mind to an idea. So let's say, so we take the money and we put it into an annuity somewhere else. Okay. And instead of having a hundred thousand dollars in the stock market exposed to risk all the time through that whole period, we're going to take a withdrawal from the annuity each year, and we're going to put $5,000 in.
Speaker 2 00:12:56 So this is an investment 5,000, it's a negative draw, which adds $5,000 to the total. And we're going to repeat that every year. So that over the 20 year period you had put in a total of $100,000. Now I kept saying I was going to do it, but I wanted to calculate the reduction in risk by doing it that way. Okay. So I don't know what it is, but it's dramatically less risk because you know, in the first year you only have 5,000 at risk, second year, 10,000. And as compared to a hundred thousand arrests, it's dramatically lower. That's going to average out over time because at the end, as you'll see, we had $214,000 and the other one, we came within a hair of it at $200,130. Now, to me, that's astounding that you could come that close by carrying that much less risk.
Speaker 2 00:13:55 And what I want to explain to you now, okay, this is the worst period in market history. What it is is it allows you to dollar cost average again. So, which I don't think is such a bad idea when the market's really high, you got more money than you've ever had. Take a piece of it, use an annuity, but you can get back into the market incrementally over time. What's interesting is if, instead of doing 5,000 per year, I just put larger amounts when the market was down, down, down, okay. Then the number goes even higher. So if you're actually doing this and you're looking at it on an annual basis or every other year, or even just when there's a huge correction in the market, you can actually time the purchase because this would all be after the fact. Right? But what happens if I just do the 5,000 per year, I've run probably 40 or more scenarios, different market periods.
Speaker 2 00:14:42 I tried all of them. If I started, like, instead of doing January one to December 31st, I tried them all quarterly. I played with this a and there's only a couple of periods where you'd better off being all in the market. That's why Wade fowl gets his numbers. I would assume now I didn't sit there and look at all the sheets, but on average, this is the best way to do it. The areas where it's better in the market, we're talking eighties and nineties, where there were very few years, there were like two negative years and they were like 3% down. And the rest of them were like positive 15, 20, 30%. So you just had an incredible amount of exponential growth in those two decades. But most of the other ones, the average scenarios you take in a scenario where the market starts down and then climbs back up.
Speaker 2 00:15:31 It's just as good. Okay. We're just talking about how to put a hundred thousand dollars in the market. Okay. We're close. Now the question everybody has. So we put that a hundred thousand in the annuity, and then we pulled out basically the principle, okay, now I'm going to show you the annuity. And I picked different ones every time. Of course, I always liked great American. This is where their rates are today. They just bumped them a little bit. So I can tell you the terms of this contract. I have several people that have terms that are similar to this and the contracts are doing very well. That speaks to the timing of when you purchase as well. So obviously someone who reset this contract at the end of December probably did better than someone who's resetting at the end of January. Those times typically average out.
Speaker 2 00:16:15 But again, that's where timing comes into play. So what I did is let's see where it is. So I put a hundred percent of trying to blow this up as much as I can. I put a hundred percent of it in the SMP risk control, 10%, okay. A hundred percent of the money. Now we could obviously, again, real quick on the annuity, you can put any percentage of money in any of these, any combination of these indexes, you get to choose, change them once a year. So it's something we work with over time. Obviously the goal is to maximize potential. All right. So as you can see, the S and P 500 risk control is giving you a participation rate of 50%. Now, a lot of it's a risk controlled S and P 500. So a lot of people will say, oh, I want just straight S and P well, the best participation rate on the S and P right now based on rates is now 25 to 30%.
Speaker 2 00:17:08 The S and P was up 27, I think at the end of last year. So if you take a quarter of that, then you're at about 7%, well S and V risk control. 10 was up 21.9, maybe 21%. And he got 50 of it. So there's your double digit annuity yield. There's still a lot of potential in this contract and double-digit yields are possible. And obviously, you know, as volatility goes in, the market drops and comes back. You know, you catch some of them, you lose on others that you always stay even right. But I think this is a really good contract. So it's seven years from great American. And we're going to see, so our guaranteed values, this would be, if the inuity never gained anything, you can look down here at the bottom. And after 20 years you pull your final 5,000 out and you've got zero.
Speaker 2 00:17:56 So no matter what, guaranteed minimum, no fees, right? Never lose money in that scenario, your a hundred thousand is gone, but you still have 200,000 in the market, right. In that scenario. But here's the most recent 10 year period. So I now understand this 10 year period does not match up with the same numbers from the spreadsheet. Again, that's one of the issues. That's why I've actually done the real market numbers, uncertainties, indexes. But I just wanted to show you one thing I didn't do on the last illustrate. I didn't show you an annuity. Okay? So again, interest earned, you know, 1.3%, then it went zero. Then it does 4.9 about, and you're pulling 5,000. So here's your, you know, seven year you're doing something like 85 on 82. So there's your 10%. It all averages out. And this has runs to about 3.9% average over time.
Speaker 2 00:18:47 But at 20 years when you had 200,000 in the other account, you got 49,609 on very conservative numbers. All right, 3.9 is not, we could probably work this illustration to go higher or lower, but it's, you know, it's about three and a half percent is really conservative with the contracts you get right now. But again, it's just an illustration. Anyhow, you've got the $5,000 withdrawals, 49,690. Add that to your 200,001 30. And that's where the write-up is. So surely the annuity grew a little bit. You only drew with an aggregate equal to the basis contract at about 3.9. I didn't count. I just guessed it. That it's pretty close. It's not quite four, but it's this left 49, 609 in the annuity account, total assets, 2 49 using the annuity as compared to two 14, by carrying all the risk in the market. That's a point, that's the idea.
Speaker 2 00:19:39 So again, that's how you beat the market with an annuity. It's a different strategy. The annuity doesn't beat the market, but how you use it does okay. Allows you to protect your basis. And that periods of volatility. When the market corrects, you have freedom to take a withdrawal and go buy into the market at really low values. If someone came to me today with a contract and they said, market's down 10%, should I pull it? Withdrawal, transferred over to my IRA. Okay. But it's not a bad idea. I know the math works. Now. One big thing to consider is this works best for qualified assets only and qualify, meaning you got a tax deduction for using so IRA 401k, when you buy an annuity with an IRA or 401k, it becomes a traditional IRA. You it's a tax-free transfer, but every withdrawal is subject to ordinary income taxes.
Speaker 2 00:20:37 But if you took the, you know, the withdrawal and transferred it to another IRA, there'd be another tax-free transfer there. Okay? So that's why we can show the numbers without doing the tax calculation. Because in theory, you're getting a tax-free transfer and it doesn't really matter. It only matters if you take the money out, put it in your checking account, but then we're talking about income planning. Now, if it's non-qualified annuity, meaning you already paid taxes on the money, you just write a check, then you've got a tax calculation for it. So you take a withdrawal and there's partial part earnings, part basis, all that stuff. But I would argue, and I'll bet the numbers turn out the same, because if you had a non-qualified investment in the stock market, then you'd also have, you'd pay ordinary income on your dividends each year. And you pay capital gains tax when you sold it.
Speaker 2 00:21:22 So I think they'd work out the same. That it's just something you should consider. And again, a Roth conversion, it would work extremely well because you are, your plan was to pay the taxes on the IRA. When you transferred it to the Roth, you just, you take $10,000 out of your IRA. You pay 2000 bucks in taxes, then you invest $8,000 in the Roth dollar cost, average excellent strategy for a legacy to the next generation. So I'm glad I got a chance to illustrate it. There's a lot of other ins and outs. So I don't want criticism. I'd love to talk to people about it. If you want to go ahead and ask questions, by all means, email me whatever you need to do. But the biggest thing is like this last paragraph is really important to me. You don't have to buy into an idea in its entirety.
Speaker 2 00:22:11 You don't have to take this and say, oh, I'm going to put all my money into an annuity. But if you do pieces and parts and you remember this lesson, you remember this idea. If you do some of these things incrementally, every time you do it, it's going to put you in a better position for success. And that's a positive improvement. So annuities are nothing to be scared of. You just got to have the right strategy. So if your annuity and this works great for people, oh, I don't know if I want to. I understand. I need to protect that money for income and all this stuff, but obviously there are going to be points in time where the market does really well. Maybe the annuity doesn't quite keep up, but knowing you have the opportunity to take the money out and invest it incrementally over time.
Speaker 2 00:22:54 That's exactly why everybody should use an annuity because you could just do this, right. It's very simple. And I appreciate you guys taking the time to watch this and understand, you know, my perspective and how I'm trying to help people just think of different ideas for using a nudies in retirement. Again, I appreciate the opportunity. I really do. If you want to see these come out in real time, I think the podcasts are on Thursday. Most times newsletter goes out on Saturdays most times. So, but if you want to be notified, go ahead and subscribe on your favorite podcast platform. I think the newsletter and the podcast are kind of going to a mirror each other, because there are people that want the written word. They want to just read it and they consume it that way. There's other people that want to look me in the eye. There's other people that want to see the numbers play out. If you want a specific situation done for you, call me at (800) 438-5121. I'd be happy to run the numbers. Let you play with them a little bit, or you can hit the schedule, a call and top right of any page on annuity, straight talk.com again, episode 28. How to beat the market with annuity. My name is Brian Anderson. Thank you for stopping by and I will see you next week. Have a great day guys. Bye
Speaker 1 00:24:17 You've been listening to annuity straight talk. The proceeding for patient is for informational and educational purposes only and does not represent tax legal investment. 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 licensed professionals. It is important that you read all insurance contract disclosures, carefully purchase decision guarantees are based on the financial strength and claims paying ability of the insurance company.
