Episode Transcript
[00:00:00] Hello and welcome everybody, to the Annuity Straight Talk podcast, episode number 225. My name is Brian Anderson, founder and creator of AnnuityStraightTalk.com here to answer all your questions about retirement planning, offer alternatives, show you where the benefits of annuities are, how they fit into improving your portfolio in retirement, and if they can't do something else, that's perfectly fine.
[00:00:24] But give it a second thought. If you've been hesitant before, please, like, subscribe or comment on any of your favorite podcast platforms or on YouTube. To schedule a call, hit the top right corner of any page on annuitystraighttalk.com to talk with me or Nate, and we'll be here to answer your questions.
[00:00:41] I left something out of last week's episode where I talked about the difference between single premium, immediate annuities and guaranteed lifetime withdrawal benefits. There is one more income option, and maybe you guys want to hear it. We've talked about it before, not in this context, but I'm coming out with a new webinar series and it's important to start kind of laying the foundation for that so everybody understands there are alternatives available. Now a lot of people ask me how an insurance company makes an income annuity work. Hey, how are they able to pay so much or such high rates for a lifetime? I don't get it. Now, I don't have specific insights into the investments of the insurance company. I kind of know generally how it works, but I can use some readily available numbers to illustrate the point. This is what I did when I was learning this, and a lot of people don't believe me when I say if I would have proven that this is a bad deal, I would have chosen a different path for my career.
[00:01:40] But I know it's good and it really works well. It improves it for a lot of people. That's why I do it. And these are some of the things that I've figured out over time. And if you want to put the work into, you know, allocating a large chunk of your retirement, I think this is worthwhile. This is a good 10, 12, 15 minutes, whatever it's going to be. If you learn how to think about it, you'll understand why it makes sense. And it's all very simple. So this is a problem I solved years ago. It helped me develop the alternate strategies so that people do have a choice.
[00:02:09] It's not complex, but another example of what the other guys are not going to talk to you about.
[00:02:16] You're going to hear it here first. And the other guys Will pick up on it, say, oh, I got this great idea, often copied, never duplicated. Here it is. Annuity straight talk on the cutting edge of retirement planning. From the beginning, 20 years ago, this stuff was not out there. Fifteen years ago, it wasn't out there.
[00:02:33] So again, here I am telling you something else that nobody else will. So in last week's case, there was one guy that was trying to decide between a single premium immediate annuity and a guaranteed lifetime withdrawal benefit. Talked about the difference in guarantees on that, the different income levels. Now, when I met the guy three years ago, which happens with a lot of people, I was actually talking him out of another product. It was before. The income contracts are kind of as they were rising in value. So I was really still kind of educating people on this alternate strategy. I actually showed him something completely different at the time. If you don't want to lock into a lifetime contract, there is a more flexible option. And a lot of people, you, even with the high payout rates for income annuities, decide to go this route because they want the control.
[00:03:20] Now it does mean that you're going to retain a little bit of risk. And I'll explain how that works and what you got to keep in mind, if that's what you do. So back when rates were low, I noticed something interesting. People were buying income annuities that barely paid 5% of the initial premium. It would take 20 years to get back what you initially put into it.
[00:03:40] And for people in their mid-60s, they might be close to 90 years old before they even saw profit from the deal. I started telling people that get rid of the income rider and just buy a contract for accumulation. Hey, I want guarantees. I want the money safe so I can always access it. Here's a good option.
[00:03:57] So knowing that the principal would last 20 years after earning some modest interest, they actually had quite a bit of money left in the account. What we could project on a guaranteed basis. They stayed in control of the money the entire time. You can still do the same thing now, and that's why I show it to everyone, or at least consider it as part of every deal. I would say that about 30 to 40% of my clients still prefer the flexible route, even though the income payouts are so high. Now, income annuities have much higher payouts, but you can also get a whole lot more growth out of a multi year guaranteed fixed annuity or an index annuity. So you kick the income rider, no fees on it, have control of the balance the whole time. Now, depending on the situation. The advantage usually tilts heavily to one side or the other. I honestly don't think any advisor is doing a thorough job job without running an analysis like this. This is something I think everybody should do and everybody should consider. And you guys as consumers should at the very least be curious if there's a lot of money on the line. Last week's example, we found that New York Life would pay this couple 82, 000 per year starting in four years for the upfront cost of $1 million. That's an 8.2% payout. If you want to use a different amount, you can use that level. But again, they're 58 and 59 waiting four years. It's going to be different for someone who's 63 and waiting two years. So you got to keep that in mind. This is not a recommendation or for anyone to say, hey, this is just like you. There might be somebody out there that has really close parameters, but most people are going to be a little bit different. It was guaranteed to pay at least 20 years if they didn't live that long. So that's what we're going to compare it to. Or what if they want to have maximum flexibility and control of the asset? Okay, now they could buy a multi year guaranteed fixed annuity instead that doesn't have guaranteed income.
[00:05:37] Right now they can get a 10 year deal that pays 5.1% and allows 10% free withdrawals every year. Now, it'll accumulate on a guaranteed basis for four years and then they can take withdrawals that match the $82,000 per year from New York Life. I've got some amortization software that does this really quick and clean. So these numbers are to the penny accurate. Now, after taking free withdrawals of 82,000 per year for 20 years at 5.1%, they have 497,000 left in the contract. The guaranteed period from the income annuity would have expired by then. So taking the flexible route is ahead in total payout by nearly half a million dollars. Wow. Interesting, huh? Now, there are two problems with this.
[00:06:21] First, they're going to run out of money if they live in their late 80s.
[00:06:24] And second, the 5.1% rate is only guaranteed for the first 10 years. They don't know how long they're going to live or what interest rates will be available in 10 years, 20 years.
[00:06:35] Now, I chose that MYGA for a reason. Because it has a contractual guarantee to pay no less than 3% annually for the life of the contract. They get 5.1 for 10. And every year they declare a new rate contract says it will be never less than three. Now if at 10 years, if you want to roll the Dice, you go 10 years out. I think the calculation they had over 900,000 left in this deal at 10 years.
[00:06:58] And then if better rates are available, you can improve that and you can move to something different. And you got to keep the withdrawal in mind and all that stuff.
[00:07:05] But they've got the guaranteed minimum as a solid backup plan. So this is where you can see it's important to shift some of the risk to an insurance company. If we assume the guaranteed minimum and we reduce the rate from years 10 through 20 to the minimum 3%, you're going to get an entirely different outcome. Now there's only $208,000 remaining in the account.
[00:07:26] It still beats the income annuity, but I think it's a little too close for comfort.
[00:07:31] So most people would pass on that number because it defeats the purpose of getting a lifetime guarantee. In that example, you might be stressed out in your early 80s.
[00:07:39] Where are you going to get the income from? That's where other assets are going to come into play. That's why planning is important, because we're not talking about the rest of their portfolio. Right now, doing it in your 80s is the last thing anyone wants. That's when everybody wants the easy, the guarantee.
[00:07:54] Maybe you got to go into a nursing home and you can just change the direction of the payments to cover the cost of that. Right. But this shows what an insurance company does on a minute scale.
[00:08:05] They go long on interest rates. They're going 15, 20, 30 years. A big ladder. Right.
[00:08:11] They've got a secure portfolio and reserves to back it up. And they're going to stamp a guarantee on your contract. Your money is pooled with thousands of other people.
[00:08:19] Some people check out early and leave a whole bunch of money in the insurance company's general account, so to speak. Right.
[00:08:26] Others defy time and live longer, depleting the general account.
[00:08:31] When all the dust settles, the insurance company figures it out correctly. They've been doing this for hundreds of years. It's one of the most perfect sciences that exists. Everybody gets the guarantee. Insurance company makes a little profit from everyone on average. Now you are welcome to carry the risk yourself. And this gives you a serious choice to make. As soon as I started showing these numbers to people long time ago, made a big difference in how people plan for retirement and started looking at it. I've had many clients who used flexibility as a short term strategy. And moved over to guaranteed income several years later when rates were better, when the deal was better. Even with income payouts at a high level, lots of people are still choosing the flexible route right now. For every single income annuity I've sold, rest assured, if you don't remember this and you bought one from me, I ran the calculations for a flexible strategy just to make sure I'm recommending the right path. I'd look at it. Hey, let me run it through here and see. Ah, yeah, that's too close. I'm, I really get behind this income deal. Every case is different, whether it's single or joint life, the deferral, how long you let it sit and grow before you take it, and life expectancy showing different results in every case. I have some people that know, hey, nobody in my family has lived past 80. I think I can conservatively plan to then, and that might be more appealing to them. Whereas some people say, hey, my mom's still lives on her own, she's driving a car to the grocery store and she's 97 years old. I got a plan to 100. But again, everybody's different. And I'm not telling you what to do. I'm just trying to give you ideas so you start thinking about it.
[00:09:57] Now, the next thing that happens, I realize you don't have to take money from the flexible annuity, the myga, or the index annuity every single year. You certainly can. But when the market does really well, you can trim gains from those assets and let the annuity grow. In reality, you only need a guarantee because you can't trust the timing of the market. And income annuity provides income in all years of retirement. It's easy, it's valuable. I'm not saying it's a bad idea, but if the market is generally climbing, perhaps you only need an annuity in certain years when the market is down in value. A lot of people have taken this and said, okay, well, I don't have to put a million in. I can comfortably do it with 600,000, right? 60% of what I was going to do. Otherwise, it doesn't have to be $1 million. Now, when you do this, it naturally balances your portfolio over time, and there's a lot more money left in the annuity when you are in your 80s.
[00:10:45] That is why the calculator app I created is so important. It shows you two strategies for using annuities to show you how that annuity will affect your portfolio, depending on how you do it. In most cases, the two Annuity strategies kind of produce about the same portfolio values. And in most scenarios, your portfolio grows bigger with the annuity than it would without the annuity.
[00:11:08] So a lot like if it's neck and neck, obviously the one with guaranteed income, same portfolio value, it still has guaranteed income, so it's worth more as a whole.
[00:11:17] But there's other people that want the flexibility. And they say, if it's going to work out about the same, I'd rather have it under my control. And most of those people, like, they start when they're in their, you know, 60s, mid-60s, whatever. They take the flexible path five, 10 years, and they get to 75. Hey, let's shop this out. Market's done. Well, the point here is that no one else is going to give you this level of detail to help you figure out a retirement plan that works for you and talk to you about on the numbers. If you want to know how an insurance company does it, just start running the MYGA numbers and try to recreate that income stream and see if you can do it. There is a level of risk you're going to take with it. And buying the income annuity means you want to shift that risk to the insurance company. A lot of times in a couple, two married people, one person wants flexibility, one person wants that guarantee, and they got to figure out which one they like better. And sometimes you split it. It's like, well, I like the guarantee, he likes the income.
[00:12:09] So let's do half and half, right? Everybody's happy. So if that's important to you and you really want to understand all sides of it, get on the calendar. I will take you through it. It's no problem. It's nice and easy. Or skip it. Cross your fingers.
[00:12:21] And I also hope it works out for you if you do that. So this has been episode 225. There is one more income option. That's what it is. A way to handle your money allocated appropriately. Use annuities to benefit and grow your portfolio, but provide the safety you need.
[00:12:35] Like, subscribe or comment on any of your favorite podcast platforms or on YouTube. Top right corner of any page on annuitiestraight talk.com to schedule a call. Thank you for joining me. I will be back next week with episode number 226. Have a great day, guys. Bye.
