Episode Transcript
[00:00:00] Hello and welcome, everybody, to the Annuity Straight Talk podcast. Episode number 234, I believe.
[00:00:06] My name is Brian Andersen, founder and creator of everything on annuitystraighttalk.com innovating retirement, finding the best solutions, answering your questions, no matter what it means for me, I am here to help.
[00:00:19] Please, like subscribe or comment on any of your favorite podcast platforms or on YouTube if you want to meet with me to talk about an annuity, to evaluate something, you have to run the numbers to figure it out. No strings attached. Figure it out. Top right corner of any page on annuitystraighttalk.com schedule a call.
[00:00:37] You talk to me, or you can talk to Nate. Nate's really good. 20 years as a wholesaler in the business. I love to have him around. He's a great guy.
[00:00:45] He's as honest as the day is long. And you can always count on either one of us to give you the best advice possible. Right now, I have a new prop which you might be able to see in the background if you're watching the video.
[00:00:55] Might have to maybe find a way of, like, featuring him getting a little closer. But that's my grizzly bear from Alaska last year. Just got it back, got it loaded into the cabin, and my modest little trophy room is growing.
[00:01:07] Much respect to all the animals and the outdoor passions that I love to pursue. So today I want to talk about something I've covered in the past and.
[00:01:16] But we've got the software that I created this year, and that's going to do a really, really, really good job of showing it. Right.
[00:01:23] So I'm going to show you, like, everything in a little bit different way. How do fees affect portfolio values over time? Right. So volatility is one of the biggest concerns that people have in retirement. And things have been good for a few years. We had, I think 2022 was low in the market, but people forget the pain of those down years really quickly. And everybody that's in, you know, kind of comes to meet with me. Remembers 2008, 2001, the big times when it took years and years for it to come back, but everybody's still worried about it. Okay, so talk about volatility, but fees can be just as bad for total performance. I know that annuities get a bad rap for fees all the time. And I talk about those openly, and we talk about what they are. It's benefit matching. If you don't want the fee, don't. If you. If you don't want the benefit that you don't Pay the fee, all those kind of things. But a lot of people shy away from investments of any type just because of fees. And some people are more than happy to pay for it because they feel they get a good service. So there are several ways a fee can erode investment gains. But the highest cost may not be what you think it is. And that's what I'm going to show you. I am a proponent of no fees or as little as possible.
[00:02:36] And it might help to explain exactly why that that's the case. So now want everybody to remember there are three reasons to pay for an investment management fee. Okay? If you're going to pay someone to manage your assets, number one reason you do it is to beat the market. If you're going to expect 10 and you're going to pay 1%, then the advisor's got to do 11% to make that worthwhile. He's got do more, otherwise why would you pay them? Okay, Nobody does that consistently over time, okay? The second reason, fairly viable, is if you get good risk management from a professional who specializes in helping you avoid major losses in the market in times when it's really volatile.
[00:03:15] And the third is because you might get other financial assistance from the management and fee only. Planners simply prefer to be compensated that way. They might do tax planning, they could do Roth conversion, they could do legacy planning. Sometimes there's estate plans that go along with it. And that's how they, that's how they make their money is they charge you a management fee for your assets. So I want you to get the highest yield possible, simple as that. I want you to make as much money as you possibly can. I would be selling annuities if you couldn't do it using that. And I'm here for the black and white. Like does it work or does it not? Okay, so most people don't follow the analysis to the point where they can see just how much fees end up costing over time.
[00:03:59] And it's the lost opportunity cost that nobody talks about. The investment manager is just gonna, you know, maybe squirm in his seat a little bit. Well, this is industry standard and this what we do it or ours is a little higher because we also provide this, or ours is a little bit lower because we don't need to make that much money and da, da, da, da, da, right? Whatever the reasons for, they'll squirm a little bit, tell you why they're. But they don't say, well wait a second, what would if you weren't paying that fee, how much Would your assets have grown over time? Okay, so compounded annually, the total loss of the fee plus what it could have grown to, the lost opportunity cost is exponentially larger than the annual fee itself. And I'm going to show you how that works.
[00:04:42] Now, I've shown people in the past a staggering difference and how it adds up. It's even greater when you show it in terms of retirement, of a retirement income plan if you draw it out and talk about taking distributions, management fee with annuities, all that stuff. Okay, so the investment manager is going to gripe about annuity fees all the time. I find it only fair to point out the hypocrisy and we're going to use math to do it. Okay, so I'm going to share my screen and I'm going to go back to my app, the financial planning software, which is getting a major overhaul and going to be really incredible for a lot of people, could actually revolutionize the way retirement planning is done. Let me see where that goes. Okay, so we're going to do a hypothetical case study of a couple that has 1 million in assets. And this isn't about the annuity, but we're going to just say $250,000 or 25% of it into the annuity. Right?
[00:05:37] Yearly income goal of 30,000. That's pretty standard. You know, 30, 40, 50 and Social Security plus 30,000. That's nice. Nice living. Right?
[00:05:47] State of Montana joint. We're going to say there's 60 and they're going to retire at 65.
[00:05:51] Doesn't make a difference. Right?
[00:05:53] Zero management fee. We're going to look at this first. Okay. And if you're listening to the podcast, this, the numbers are on the newsletter or in the newsletter. The numbers are, the charts are in there, the printouts. But if you want to watch the YouTube channel, you're going to get more detail. Okay, so we're in a 25 year scenario that would put the couple to their 85 submit that. And this is without fees. So you're going to see without fees and 100% stocks. Now we're going to add a bond component in there which is going to change a little bit. It's not going to be as aggressive.
[00:06:30] But you can see, obviously it goes without saying that you buy an annuity, you have more money because it reduces the sequence of returns, risk and all that stuff. But in the worst 25 years, you got 1.4 without the annuity and $2,400,000 left after 25 years. So 1 million goes to 2,400,000. If you have an annuity, it's a million dollar difference.
[00:06:53] And in the last 25, a great market scenario, okay, so without an annuity you have 3.77, so 3.8.
[00:07:02] And with the annuity you have 4.4, so 66-650-650-000 more. With the annuity it just works. I mean that's why, why not an annuity and all that stuff. But again, this is not, that's a portfolio with or without an annuity and zero management fees. So I'm going to go back and I'm going to change one thing. Like we know that the portfolio grows better with an annuity. And if you schedule a call, top right corner if you want to look at your numbers, because we can expand the tables and we can show you exactly how that happens in, in the last 25 years, bomber years in the market and you still did better with the annuity. So. Well, again, make schedule a call if you want to see how that works. Okay, so the one thing I'm going to change here is I'm going to add a management fee to the portfolio. Now because you bought 25% of the portfolio was in the annuity, that means only $750,000 would be exposed to the fee. So that's 7,500 bucks the first year and then whatever 1% of the value is over time.
[00:08:13] So in the worst 25 years you went from 1.4 million to 885. So that's a pure market investment, pure fee. So in a terrible market scenario, it cost you more than $500,000 to have the fee.
[00:08:34] All right, in the last 25 years, no market, you had 3 million or no, no, no, sorry, what is that? 2 million 717 versus so you got 2 million 717 versus without the fee you had 3.7 million, 3.8 million. So it cost you not just the 1% fee, it cost you a million dollars.
[00:08:56] Right?
[00:08:58] Now if you had the annuity, it was 2.4 million versus 1.879 in the like in the worst 25 scenario. So that's another 5, 600,000.
[00:09:10] And then you had 4 million 435 without a fee, but 3 million 4 55. So that's $900,000.
[00:09:21] That's the fee you pay.
[00:09:24] Now to illustrate this, because people aren't going to believe me, it's like you're paying 1% fee. It creates a million dollar reduction in your legacy.
[00:09:33] I know how the math works, right so I'm going to say $1 of assets because I got to have something zero in the annuity, zero income goal. And it doesn't matter fee or it out of. No, what I'm going to do is so the first year, $750,000 will be a 1% fee, right?
[00:09:51] That'd be $7,500. So let's say, let's just see what that does over 25 years in these two scenarios. Okay, what's 7,500 compounds to?
[00:10:00] And we'll take the fee out of there, we'll say zero. Okay, so just the 7,500 that you pay in the first year, not the growing portfolio, the bigger values and all that stuff.
[00:10:11] The worst 25 years, that's $26,000 in lost wealth because of that fee. In the last 25, it's 47,357.
[00:10:21] That's just one year.
[00:10:23] So if you don't believe me that it stacks up over 25 years and create a million dollar shortfall.
[00:10:30] That's how it works. You do that year by year and it grows up, it gets exponential for sure.
[00:10:35] So, so it's the same input. I changed the 1% management fee. I showed you what one year of fees would compound to over the 25 years. So it's a million bucks low in the good market scenario. Only 600k in the worst scenario. Obviously the worst scenario, the market doesn't grow as much, the fees aren't as high. Okay? That's the true cost of fees over time. Is the advice you receive worth that much for them to do your taxes? Maybe an estate plan, you can pay attorney to do a bang up state plan for a few thousand dollars one time. Okay, you can pay a CPA even if you got complex taxes. Maybe a thousand bucks a year to do that. All right, Just make sure you get your money's worth. Okay. And if they're going to bang on annuities, fine. Right. So a lot of people are going to point out that the annuity may also have fees.
[00:11:23] And it's true.
[00:11:24] But I never included the residual cash value of the annuity and calculations.
[00:11:29] So the income figures shown are net of all fees. And that's what I want to illustrate. Now, in the early years, the annuity would only add to the legacy. And in the later years, the continued cash flow is where you find the value. Fees on the annuity side are more or less irrelevant when you're talking about legacy. In the long run, it's the fees on the growth side of the portfolio that lead to exponential losses over time.
[00:11:52] The smartest people buy the annuity, thereby reducing risk and cutting the lost opportunity cost of fees throughout retirement. 25% of your portfolio goes into fees. You cut your lost opportunity cost by 25% because you get the guaranteed income and you reduce sequence of returns risk. It's very simple. If you want to be one of those people then get on my calendar and I will talk to you soon.
[00:12:14] Thank you guys for joining me so much. Taking a different look at this using the software I've got in different ways to show you illustrate things that you need to be thinking about when you're going into retirement. This has been episode 234. Like subscribe or comment Share with your friends. Ask people who disagree would love to have a conversation and I will update this and I will change it if I'm wrong.
[00:12:37] I'm not so top right corner of any page on annuitiestraighttalk.com thanks so much for joining me. I will be back next week for episode number 235 and I might have the bear in a better shot. Maybe I'll put him right next to you, put my arm around him. How's that work? All right guys, thanks so much. Talk to you soon. Bye.
