Episode Transcript
[00:00:00] Hello and welcome everybody to the Annuity Straight Talk podcast. Episode number 215. The Biggest News I've ever been able to share in my career. I'm going to talk about it, but we got a patent pending on some groundbreaking financial planning software that's going to show you the optimal way to allocate an annuity in your portfolio, help you determine if it is the right idea and if so, what strategy works best and right down to the actual product that is optimal. Pretty incredible stuff. So the new calculator for optimal annuity allocation. This is episode 215. Please like subscribe or comment on any of your favorite podcast platforms on YouTubes. This is one you want to share? I'm going to go through the software, the app that we created. At the very end, I'm going to explain where it came from and this is to kind of set it up and I will show case studies as we go along. We've got the patent filed, so we're protected. And I want to protect my intellectual property because this has been literally decades in the making.
[00:01:01] Going to share my screen. So I've got a little story to tell that goes along with this. So you guys know where I came from. Everybody asks, how did you start this? How did you do it? I've covered it in the past. We kind of need to go over it again.
[00:01:12] But if there's one thing that I can point to that's been a career long project and this is it right here.
[00:01:19] So the Flex strategy, as a lot of you guys have seen and some of you haven't, so pay attention and we're going to get into that and you can also find it in other areas of the website. That started for me when the guaranteed lifetime withdrawal benefits were introduced to the annuity market in the mid 2000s. Early to mid 2000s, I was a couple years in my career, I think it was 0506 is when I started really seeing them getting pushed. And at the time I thought it was better to avoid fees and make a shorter commitment with deferred annuities rather than locking into a lifetime income contract. Now, there were good rates then, so those were probably some pretty good deals that people could get. And I've seen older contracts, they were good, but there were advantages to both, just like there are today.
[00:01:59] And I thought everyone deserved to have a choice. If we're advisors, we're going to give you the options, not just say, here's the path, here's the thing I do more often than not, I hear from people. Well, I talked to three people. They all had an idea. Well, all it takes is one person to explain the three options, right?
[00:02:17] Well, most of the time those people need a totally different option. I've seen some wild ones, but we're not going to try to talk about positive things for a while. So depending on individual circumstances, the mathematical advantage will fall to one side or the other. Even when guaranteed income seems to be the best options. Many people take the flexible route because they want to stay in control of their assets from then until now. So human nature, whatever is important to you, whatever makes you feel comfortable, feel in control, Some people pass it off to an insurance company, some people want to hang on to it. So starting in the early 2010s now, like when I was saying, wait a second, these are cool little writers in the contracts, I'm two, three years into the business, no one cared at all what I had to say. Ah, young kid, sit down, right? Literally would tell me, young man, no, no, no, don't do that. So I've been fighting something of an establishment from the very beginning, and now I can say I'm a seasoned veteran because it's been 23 years.
[00:03:09] So early 2010s, longer maturity bonds and Treasuries dropped so low, there was almost no real advantage to using guaranteed income contracts. So when I had a flexible approach, it became more popular because people who wanted to protect some assets would have the chance to reposition the annuity into other investments 3, 5, 7 years down the road. Early users of the strategy could avoid the hefty price tag for guaranteed income, but kept enough safe assets to weather any storm with more assets remaining in the market. Those guys all came through the lowest rates in history with very robust portfolios. As opposed to putting a big chunk into guaranteed income, they put a smaller amount in so they had more growth. I still work with a lot of those people today who have completely changed their strategies and it wouldn't have been possible if they did things like everyone else. So I'm glad I was able to make a good enough living doing it so I could stay in the business and continue offering alternative ideas as economic conditions changed and I wasn't like a lot of insurance agents who are like, going highest commission possible, make the most you can. And for me it worked out because I've sold some of those people annuities two or three times. It works out in the long run, but they got what's best for them and we get a long term relationship out of it. Through those lean Interest rate years. I continue to look for ways to explain to people how the strategy works. Now I came up with an idea based on the sequence of returns. I've been using it for seven or eight years. It had taken a couple of different forms. Now, income annuities are meant to provide cash flow. So market fluctuations don't affect retirement, but they provide income in all years of retirement. If you're trying to avoid a negative sequence of returns, I. E. Selling market assets when they're down in value, then you only need a pool of cash to access in the years when the market is down in value. Longest bear market's been seven years. You need to weather that storm. Average bear markets two and a half to three and a half, depending on, you know, conditions and whatnot and which one you're looking at. So really you need three to four years of cash that you can sit on those assets and let them recover. So the result is we could justify a smaller allocation to the annuity. If all a person needs to do is weather two or three years of market storm, some people avoided the annuity altogether. They understood the principle and they said, okay, well, I'll just keep plenty of cash handy. These are all options for you. You use the annuity if it gives you an advantage. When interest rates were low, income annuities were prohibitively expensive. We could use the Flex strategy and cut the annuity allocation in half.
[00:05:31] Since most people started this, the stock market started one of its best runs in history, probably 2015, 2016 to now.
[00:05:40] So any of those guys have been in the investment business for 10 or 12 years, they know nothing but good times, right? And because they spent less on the annuity, they had more money exposed to it. Now I built the spreadsheet just in Excel, real quick and easy and put some market returns in it. Portfolio lump sum did the, you know, basic formulas to see how the portfolio and the growth would look over time. Then I would manually deduct withdrawals from the account to simulate an income scenario. And it takes just one year to see how damaging a market withdrawal is. In a negative performance year, it's exponentially negative in your total return over time. And so multiple negative sequences of returns will make that big difference over time and dramatically affect your portfolio value, which affects everything and all the oops and what ifs and potential things you need to spend money on retirement. More money is better defense. If I took a piece of the portfolio initially and put it into a fixed account, the long term growth would be reduced in growth scenario. In the market. But when taking income, the distribution would come from the safe side, thus eliminating the sequence of returns risk.
[00:06:42] That's all you're trying to do in retirement, is eliminate that risk and then everything's fine, really. The result was a much larger portfolio, which obviously gives the owner a much higher probability of meeting all the other challenges in retirement. Long term care, legacy inflation, all that stuff. Right. Those are all the thumbs up for the people who watch the webinar. That's going to get redone with this. Okay. And this had positive implications for anyone needing a retirement distribution, whether it was an income planning scenario or even if you just, hey, I'm just taking RMDs, you could own an annuity, take much less risk, enjoy a stable retirement and have more money than if you didn't have an annuity at all.
[00:07:20] Wow. That's why I did all that stuff last year, make more money. So now you can probably see why it wasn't that popular with the other people in the industry. Investment managers didn't like to see any advantage with annuities because they want all the assets under management and the insurance guys wanted to sell the biggest annuity possible in every scenario.
[00:07:36] So this wasn't a new idea. I just found a way to put it into practice. Academic research on this topic has been settled decades ago. Annuities improve a retirement portfolio. That's all there is to it. What's important about this is that it takes that research and turns it into an actionable strategy that works in the current environment and can change depending on the inputs we have.
[00:07:58] If rates change, we can alter it. I'm not worried about anything that happens in the market because I will have an annuity strategy that improves your portfolio, period. I hope I get to sell these high paying annuities forever. Be great. But if we don't, then we're gonna have an idea for that. So I really like my rudimentary spreadsheet and that could illustrate the problem and solution at the same time. It was far from cutting edge. It was just numbers on a spreadsheet with a couple of basic formulas. I used it in meetings to show people an alternative. And one guy who was a business analyst, John, I think you might still listen to this once in a while, so. Thanks, John. He, he said, hey, I'm pretty good with formulas and stuff. Can you send me a copy? I was like, okay, sure, yeah. So I sent it with formulas added, or he added more sophisticated formulas. So the calculations were automatic, where you could put your income goal and then it would choose what side the money was pulled from. He really liked. Never bought an annuity because we were looking at index annuities. He didn't trust the rate adjustments, and that's fine. He probably did pretty well, so he's okay. And that works seamlessly to show the benefits of having an annuity. But it was in an Excel spreadsheet and it was fairly complex. And so we took it one step further. Right.
[00:09:00] We basically took it and put it into a Google sheet with more presentable. And I should have popped that up here because some. A lot of you guys have seen it. I forgot. So it's a failure of this episode. I should have had it ready, but it worked just fine. To show the effect of an annuity in a portfolio, we had a way of showing guaranteed income or the Flex strategy. While the rates were low, the Flex always came out on top. People liked it because they could stay in control of their assets. Now, in the middle of 22, 20, 22, rates came up and the advantage shifted heavily toward income annuities. We could still compare the Flex strategy and the final portfolio numbers turned out the same. It didn't make a difference how you used an annuity, but using an annuity made everything better. What was once a strategy that heavily favored the Flex path or the Flex strategy turned the advantage toward income annuities. Portfolio values in the future projected to be the same with either annuity option. If one has a guaranteed income and the other does not, then obviously the same value with guaranteed income is going to be better. Didn't matter. About half the people who see the comparison have chosen to use the Flex strategy. Most of them agree that they may change their mind when they get, you know, five, 10 years down the road and want things a little bit more automatic. You can do that with the Flex strategy coming on to today.
[00:10:13] Thanks for sticking with me because it needs to be mentioned the path that I took to get here. So my buddy, Case Williams, the Mexican American Canadian who has been working on the website for three or four years, he designed the site, keeps it updated and working well. Then he designed the annuity calculators that I released last year. It's helped a lot of people search for annuity quotes without sales pressure. When that was finished, Case wanted another project. I dusted off the old spreadsheet and said, all right, let's get to work. Right. The immediate plan was to turn that into some interactive software with basic input and automatic analysis. For the past several months, we have been working on it and recently filed a patent for the finished product. I'm excited to share it with all of you. It is unlike anything else available in the financial services industry because it uses actual income annuity quotes to see how it affects your portfolio over time.
[00:11:02] Basic inputs are total portfolio value, age today, income start age, inflation rate, management fees, desired annuity allocation. We've got a few things we can add to it along the way. And we'll use a historic market return so you can see how your portfolio will perform with and without an annuity. Expanding the calculations tables will show you how much more performance you get by eliminating sequence of returns risk. Once the outputs have been calculated, you can use a slider bar at the top to automatically adjust the annuity allocation to find the optimal balance for your portfolio. One quick click of a button will show you how the Flex strategy compares. In short, back to the beginning. It tells you whether annuity will help you and gives you two different options. No sales involved, just cold hard numbers. That's it. Right. Make it as objective as possible. Without further ado, gonna show you. Here's the annuity strategy calculator. A lot of the other planning software will give you a hypothetical. I'll just put some other income in here and do this and we'll see what happens. And more happens on the management side, very basic inputs. I want a little feedback. We could make it complicated. Hey, add the Social Security and do all this stuff. Right. I'm going to do a sample portfolio. Million bucks in assets. Okay. Zero in the annuity. We're going to start there and illustrate a few points. Okay. I'm in the state of Montana.
[00:12:19] We'll say joint life. Even though I'm not married. This is a typical couple. We're going to look starting at age 60 and taking income at age 65.
[00:12:27] Basic stuff we can put in inflation if we want to. It's easier to analyze without that. Inflation for me has always been kind of a next step. All right. And we can also. We're going to have a button for the management fee so you can see how that affects. Probably do another podcast just to show you just that. So I'm going to submit this and here's what we're going to get. So it's very basic because we don't have an annuity in here, but this is essentially what it means. If we had a thirty thousand dollar income goal, you remember from over here. Right. And that's 30,000 on top of, you know, Social Security, this would be a really solid average couple in really good position. You could do More or less. But we want to, you know, just stick with something. It's kind of average. And so you see zero annuity allocation in the wor 20 years, you can have a million bucks, pull 30,000 out per year.
[00:13:10] This is what I'm going to show you now. We'll clean this up a little bit. But on the right side you've got your stock balance. Okay. Starts as a million. And a lot of those bad years in the worst 20 were before you started taking income. What's wild is you had $497,000. You're cut in half before and then you started taking income. Most of you guys wouldn't retire comfortably doing that. But when the market's down in value, you draw from principal. That's your negative sequence of return once that $33,000 comes back. So if you look at like you pulled 30,000 out and then next year the market gained 50. So what did that cost you in the long run? It cost you 45. That lost $15,000. The lost opportunity cost, dramatic effect going forward. So we can see where your risk is and where the sequence of returns hits. But that thing muddled along and you still ended a 20 year period with almost 1.2 million in assets. If we do the last 20 years, more of a robust market, fewer downturns in there, and it was $2 million. Now what I'm going to do is I'm going to run another calculation. We're going to say, let's say this couple does $250,000 into an annuity. This is a good standard case. Buy it at 60, they wait till 65. So let's run it again. And then it's going to give us two outputs. We can say, should you buy an annuity? So this is a case right here where investment guy be like, ah, you're fine, it'll work, right? We have more outputs right here. So when you put pay an annuity premium at 250,000, the annuity provides guaranteed lifetime income of 26,031 per year. That is a legit live quote on an annuity. And we debated where we can have the annuity that it is can pop up. We took it off for now. I just, I don't want people getting too distracted by that. So you don't have enough assets left to invest in the market. So you got to drive 39.69 per year out of your portfolio. It's much less risk. Right. And by adding the annuity, you go through the worst 20 year period and you have 1.481 million left. So almost 400,000 more. And in the last 20, you have 2.22 and a quarter, minus 2,036,000.
[00:15:09] Wow. You have more money because you used an annuity, obviously in the worst 20, but even in the last 20 you grow more. So let's look with the annuity. What we did in here is we reduced the sequence of return risk. Instead of pulling 30,000 out and losing growth on that money, when the market's down in value, we only pulled 3, 900 out. Because you're not hammering away at your portfolio and damaging it, you're going to grow more over time. That's what the annuity does for you. And the result is of nearly 1 1/2 million an increase, a much larger increase in wealth. And the last 20 years is the same, just fewer down periods. Income drawn for principal only one time. That's an area where you're only taking income. There's only two down years and the annuity still produces a higher balance at the end. Very compelling case for an annuity. So I want to look back here. Some people will see these numbers and they'll come in and say, well, I want to put 250,000 into an annuity, but let's test different values. That's the slider bar we talked about. Right. So 20% percent. Let's get down to where we can see the numbers and let's just click 20%.
[00:16:12] Boom. It goes from 1 million 481 to 1 million 422 and then from 2 million 249 to 2 million 206. So you're better with a little bit more annuity, you can go up as well, 50% of your money into an annuity.
[00:16:25] So what happens there is the annuity kicks off 52,000 and the additional is being reinvested into the market in the worst 20 year period. Well, in both of these scenarios, we can run this out 25 years so we can talk about different ways of doing it. And we've also tested tons and tons of scenarios. I believe it's going to hold up. We'll add Monte Carlo just to verify the averages top and bottom. So we can really see on average does an annuity do better? Because that's what people are going to ask right now. The key is this is the income annuity scenario. That's our strategy. What if we change it to the flex a little bit lower on the income? I'm not going to change the slider bar. That goes real quick, but I want you to look at this. So this is the flex strategy that a lot of people like. If you look at the income drawn from principal, the annuity allows you to never sell stocks at a loss. So every time the market's down in value, you pull in your 30 from the annuity. And this is just run as a 5% fixed annuity. It's not nothing crazy about it. We do 5%, so those can go out 7, 10 years. Then obviously you'd reposition, but give us a long range look at a current strategy. And I really like it because it's going to give you two options and we can go through this. And obviously I'm trying to do it as quick as I can, but be thorough and in individual cases that we. And talk about it more with the people that are considering it. I'm incredibly excited about this. This Idea goes back 20 years for me. And as it's evolved, as the thinking has changed, we've got a versatile tool that's going to be usable no matter what scenario we have or what market conditions, the interest rates, the stock market, annuity payouts, all that stuff. It's been years in the making. It's very important to protect my intellectual property. I hold this close. I don't think anyone out there in this industry has done this much work to present the value of annuities to people who can benefit from it. For now, we plan to keep it behind a firewall and use it only for individual meetings. But I plan to offer plenty of case studies on the podcast to demonstrate its versatility. Now I might release to a few advisors. I know Nate's going to have a hold of it. I've given it to John Ballmer. He's got to look at it. If you're one of those guys who wants to use it for testing, we may give it out for a short period of time. Big investment on my part, years in the making. But feedback is extremely important. So please let me know what you think. Tell me what you think it could have and what it should have. The fundamentals are sound, but there are a lot of little features we can add to just make it as thoroughly analytical as possible, I guess. So we just did the quick demonstration of the podcast. Check it out. If you get on my calendar and you want to see a demo with your numbers, that's easy. Top right corner of any page on annuitystraighttalk.com see, it's right there. Schedule a call. This has been episode 215 new calculator for optimal annuity allocation, patent pending. My name is Brian Anderson. Share it with your friends. Like subscribe or comment. Let me know what you think. You guys have a great week and I will see you for episode 216 next week. And we'll do more of this going forward. All right, thanks again, guys. Have a great day. Bye.
