Episode Transcript
[00:00:00] Hello and welcome everybody to the Annuity Straight Talk podcast, episode number 168. My name is Brian Anderson, founder and creator of AnnuityStraightTalk.com coming to you from Mexico. So I got a little bit different backdrop and the beginnings of the jungle behind me. I'll try to get some better shots for everyone, but just want to encourage everyone to enjoy life wherever possible. Episode 168. Wanted to bring it to you guys because it's something I should have done for a long time. Registered index linked annuities. Several people have asked about them. They're out there in the ether. I'll talk about what's good about them, what I don't like about them, why I don't use them. Doesn't mean you shouldn't, but it's something I won't do. If you guys wouldn't mind, please like subscribe or comment on any of your favorite podcast platforms or on YouTube. Share it with your friends. Anybody you think who could use this information. If somebody's looking at a registered index linked annuity, show them the podcast and it might give them something else to think about. Might confirm what they're considering and what they think about as well. I'm not trying to push you one way or the other. That's just my deal. So if you want to make an appointment with me, top right corner of any page on annuitiestraighttalk.com in fact, I'm going to share my screen so we can go through the newsletter and I'll show you where that button is because it's right there. But on the top right corner of that page is schedule a call, name time, zone time, what you want to talk about. I will give you a call. But you want to look at this newsletter if you're watching the video and if you want to go to the website. One of the best photos I've ever taken is the Moon over Playa del Carmen. When I got here last week, I got a really cool camera and I zoomed on in on that sucker. I'm not even all the way in, but man, the detail in that is amazing. Anybody wants it, I will text it to you or email it to you. It's a really cool photo. All right, so, registered index linked annuities.
[00:01:54] I also want to tell everybody. It's funny when you go through life and you see something that was perfectly suited for you. I don't normally go sleeveless T shirts on the podcast, but I had to. I went to the gym this morning. This is usually Gym attire, but it's a laid back atmosphere here in Mexico.
[00:02:13] Pretty humid, I'm getting used to it. But sun's out, guns out. Why not? Here we go. So back to the topic at hand. It's an alternate type of annuity product that has been around for quite a while really. And every now and then I get people ask about it and I should have cleared it up and I haven't. It's not that I've been avoiding it. Some people are like, why don't you sell these? It's not that I've been avoiding it, I just, I wasn't that motivated to do it. But it does need to be in there and we do need to talk about it. It could be part of an analysis of different products for everyone.
[00:02:48] So there's nothing wrong with it. I just don't like them. And it's more accurate to say that it doesn't suit my style of planning and everything else I talk about.
[00:03:00] But it is an available option that somebody, some people might want to consider.
[00:03:04] So I'll explain how the product works and I'll explain my issues with it and you can be the judge. I've had a lot of people come in and say, what do you think? Should I buy this? As long as they understand it, they know what they're getting into. I'm not gonna step in the way. First of all, an advisor has to be securities registered to sell these, just as the same as a variable annuity. Now I was registered in the past very first year of my career. I'm not now. And I don't want the headache of dealing with the added compliance and the SEC oversight and all that stuff. Now my business might get big enough to where I'm required to do it, but we'll see what parts I add to it over time, how hard I really want to work. And that's going to determine whether I add that back at some point in time. But I'm not going to do it for a product. So investment advisors are the guys who sell these products and it typically goes along with a recommendation for managed money. They want to manage your investment portfolio as well. So I brought this up a few weeks ago. Somebody came to me and said, what do you think about this for half of our 401k? And again, the problem was they didn't really know what it was or why they would need it. They couldn't demonstrate perfectly a reason to have it. So whether any type of annuity for them was inappropriate if they didn't truly understand it or have a goal that it was going to meet.
[00:04:24] So registered index Linked annuity annuities, I will call them RILAs, are very similar to fixed index annuities except for the fact that you can lose money. So RILAs offer a buffer. Better way to say that is there is a certain level of losses that the insurance company will absorb before it affects the account value. The account only drops if the market decreases more than the buffer. So that buffer will protect a certain portion and then past that you actually experience losses. So because you take some risk with the product, you have much more growth potential. Higher caps, higher participation rates. Okay. And depending on the period of years that are illustrated, it can show some pretty impressive projections. So I've looked at a lot of these over the years and I will say from a sales standpoint, they could be pretty catchy. And I'm gonna share one specifically with you guys in the podcast right here. Anybody who's reading the newsletter, watch the podcast. I'll talk to a couple of people. I think if it's a good idea, maybe I'll link the spec sheet. It's a company market piece that I could put in there. But I only put this out. I'm not saying it's the best one, but this is the one that the people who came to me a few weeks ago said, hey, this is what they told us to buy. So whether it's the best doesn't matter, but somebody certainly thinks it is or it's the one they sell.
[00:05:45] So material points below, I'll highlight those and I think I've got that PDF up here. Oh yeah. So buffers are available from 10 to 20% depending on the index and the credit crediting period chosen. And remember, that's the amount of the initial loss the insurance company will absorb. If you want the 10% buffer, meaning they'll take the first 10% percent of losses, then you, you have more upside than the more protection you get, the less yield you get. Crediting periods range from one to six years. Think about that. Yes, if chosen, one option will make you six years, make you wait six years to receive a positive credit. Those are ones I really don't like. I remember somebody came to me with one a few years ago. One of my mentors said, hey, isn't this a cool product? And I looked at it and I said, well, okay, the previous six years would have returned 8.5% on average, pretty good. And the six years before that would have returned 1%. So it all depends on what you get at or what period you're using and what your end result is. If the market dumps at the very last second, you might end up with losing a fair bit of the return you would received.
[00:07:04] So one benefit is any withdrawals during the crediting period. So if you're in the middle, if you got a one year option and you're somewhere like month six and you want to pull it out, pull a little bit out, they will calculate interest on the date of the withdrawal. It could be positive or negative. So you might have a positive interest credit. It could be negative as well. So some fixed index annuities do this as well, but those are no loss contracts. With a RILA it could be a negative result. And I think that's a really nice option to have people I know who have done it before say, well, because your money, oh, in four months it's like, oh, we hit our cap, we're going to cash out. Then your money just sits there for eight months. It's not a bad thing. Some people it's not all that great because there's not a lot of options where or not a lot of years where you actually exercise that biggest kicker. Several of the highest potential index options have a fee of 1.25% annually, increasing the likelihood of experiencing a loss.
[00:08:05] So I'm going to an educated assumption is that fee will not be buffered. If an index does not move then or if it goes down say 5%, you got a 10% buffer. Insurance company is going to give you zero because they covered the first 10% but you might still go down by one and a quarter. That's really the rub for me because I don't think, you know, in the long run you really want to put a fee like that on your safe assets unless you're going for maximum guaranteed income or something like that. Another thing about this is also includes no loss index options, just like a fixed index annuity, but the rates are no higher. So is it really better? And I will pull this up and show it in the podcast. I said I would. Okay, participation rates with no cap with crediting advantage, 1.25% fee, six year deal. So what is that going to be? 7.5% in fees over six years. They will buffer 15% of it and you get 125% of the of what the market does. If the market offers 60 or 70% return, you're going to get 125% of that. So you're going to get 80% or say 80, 85% in six years, they're going to subtract seven and a half in fees. It's going to mute the return, but it would still be good in that case. But you got to wait six years to do it. And again, the ones I ran said really good one term, not very good in the other, and you gotta wait six years to see it happen. So the people that I've known that do this and like that are people that say, because it's not a bad option. If you say, well, I got, I'm saying like 5%, maybe 10% of a portfolio in that neighborhood or a little bit more. If you have money you just don't need and you want to try it, that's not a bad way to do it. And they've got six year cap rates. A 10% buffer is uncapped, meaning you have more growth potential. You get everything the S and p does in six years and they'll protect you up to a 10% loss. Or if it's a 20, if you want 20% protected, they're only going to give you 250% of what the S P does. Then again, go look at the averages of six year periods over time. Pick and choose, start in different months, whatever you want to do. Same thing I did when I sat down with these products. I looked at them and said, are these really an advantage? They can be. But again, I usually talk about liquidity distributions, discretionary spending, and in that case it could turn into be a real headache. So I don't bother with them. So a lot of these things on the sheet will show a one and a quarter fee. And one thing that I have to add to the newsletter that I will. So it'll go out, we'll call it the number six on the list is they will let you have a reset start date. So if it goes down, if the index goes down at least 5% but no more than 20%, they'll let you reset it and start at that lower index value. So that's a nice feature. I suppose you get to use it one time. So if it works, great, because you get three years into it, Market Crest 20%, you don't want to reset your entire contract to go back to that spot.
[00:11:17] So I would say that's probably an advantage in the first year. That's just my educated assumption on the deal. But down here, cap rates. So the fixed account is about the same as most index annuities. And which is fine because that's a money market account, but that's all there is to It. So you got a little more growth potential, potential for loss. All right, there it is. Not sure if I'll put that in there, but it might. So the bottom line is that you might be paying fees and you can lose money. So is that worth the potential trade off for higher yields? You have to make the choice. But I don't think it gives any real advantage to a well balanced portfolio. It most certainly cannot be considered safe, perfectly safe. So I don't think it's the optimal asset to actually balance a portfolio. So the security side most likely has fees. If you got a manager or if you're in a mutual fund that charges fees and you can definitely lose money on the security side, why would you want the same thing with complexity on the safe side of your portfolio? So I've run a lot of numbers in the past and a good fixed index annuity balanced with securities and portfolio will at worst run neck and neck with a Ryla instead. I think you're better off with a no loss product and no fees. If you're talking about accumulation, that's really what this is all about. It's all about accumulation.
[00:12:35] You want to add withdrawals into it and talk about the layer of complexity that a RILA will add. That would be a nightmare. So the fixed index annuity reduces fees in total because you're not paying fees on that side of it. If you got a one and a quarter fee on a Rila and a one and a quarter fee on your managed side, that's one and a quarter across the board.
[00:12:55] Whereas index annuity is going to cut that to 625 because only half of it's getting one and a quarter. And if you're really conservative and you just want a guaranteed return, use a MYGA for the safe side of your portfolio. Now, if you understand the terms, and like I said, in the situations where people say, I just want to take a little bit of my money, I don't need it, and let's see if it works. You got money to play around with, go ahead and do it. But as far as sophisticated planning, where you got withdrawals, maybe RMDs, all those types of things, if you're using the Flex strategy to produce income or discretionary spending in retirement, those things do not work. Now the final choice is up to you. And like anything, I think you should see all the options. What I didn't like about the proposal from the couple I talked to a few weeks ago is that they were never explained to why they should use it and they were not explained why or they were not explained any other options for doing a similar type of protection. So when I talked to him, I said I would get rid of this one because I do think there are better ones than this one out there. Transamerica is a great company and that's got some interesting features to it. But what I would say to those people is like, you got to decide first if you want an annuity at all. You guys remember the podcast last summer I took the really cool pack trip in Montana with my buddies, the two successful guys, and neither of them were suited for an annuity. I said, you got to want an annuity now, either one of them could use one for sure, but you have to want it. And that's the goal. That's the key. So the final choice is up to you. Get in touch if you want a true look at everything available. And I'm willing to analyze these against anything else I recommend. And if you choose to go the Ryler route, I have no problem with that. So this has been episode 168 again. Brian Anderson here in Mexico, enjoying it. Gonna go for a walk, see the sights, maybe grab some tacos tonight. I don't know, I think I might be in a mood for a steak. First night I got here, these Mexicans made me a fantastic steak. 7 out of 10. Which is a really good score in my opinion because the only one that makes a 10 out of 10 is me. I get real picky with my steaks. Anyway, like subscribe or comment on any of your favorite podcast platforms or on YouTube. Schedule a call with at the top right corner of any page on annuitystraighttalk.com appreciate you guys joining me. Episode 169 next week coming from Mexico again. Have a great day. Okay, bye.
