Timing an Annuity Purchase

Episode 29 February 10, 2022 00:28:09
Timing an Annuity Purchase
Annuity Straight Talk
Timing an Annuity Purchase

Feb 10 2022 | 00:28:09


Show Notes

Timing an annuity purchase feels like you're solving a maze. As we get higher and higher in market value, the thread of a downturn becomes more likely. What point is a market correction enough? How can an annuity help you time the market? 

Understanding the interest rate annuity puzzle is very important. It makes you have smarter decisions and implement an efficient strategy. In this episode, listen to Brian as he gets to the bottom of that. He will teach you how to manage your annuity purchase with these important steps. Don’t miss out on this insightful solo session because there’s a lot to unpack.

What You’ll Learn In This Episode:

[3:21]  Timing an annuity purchase

[5:27] What is the purpose of the annuity?

[10:28] Fixed Rate: Annuity removes the uncertainty

[11:49] Declared rate performance trigger

[16:05] The S&P 500

[21: 03] Why is it important to look at the index that you’re going to be using?

[21:31] The Multi Asset Risk Control

[25:09] Why should you watch the index and not just watch the market?

Key Quotes:


View Full Transcript

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 29. My name is Brian Anderson. If you didn't know that you must be new. I built the website. I wrote everything on it and I've been doing it online for 13 years. Coming next week actually is by the time you guys see this, I will have my 19th anniversary in the insurance and financial services business. As you can see joining me this morning, Rambo doesn't want to be left out of the party. He likes some, uh, morning cuddles after his walk. And we're going to talk today about something that's going to follow up episode 28 really well, I think because it's kind of, it's a consistent thing because consistent concern for a lot of people last week, I sent it out or wrote a newsletter a couple of weeks ago. Last week the podcast came out and it's all about how to beat the market with an annuity. Speaker 2 00:01:45 It's just another way to look at how you can use an annuity in retirement. It's not to say this is what you should do. It's back-tested and academically proven in a lot of ways. But again, just like I said, if you can just add little pieces and parts, beneficial, strategic moves to your plan over time, then you'll, you'll, uh, increase your chances for success in getting everything you want out of it. So it is time for Rambo to get down and hopefully he'll stop biting me. There were a lot of questions, a lot of interest in episode 28. And I guess, you know, possibly I'll do a follow up on that and just kind of address some of those things. Criticism concerns about the time period I use again, I thought I explained it pretty well in the podcast, but it's the subject of an entire book and I try to make it easily digestible. Speaker 2 00:02:33 So this week, however, I want to talk about something that's kind of on the other side of things and it's timing and annuity purchase with the market being really high. A lot of people hesitate, well, I don't want to get into an index link product when the market's high, because if it drops. So I'm going to talk about that a little bit. And there's a newsletter that went out last weekend as I'm recording this, I have not written the newsletter yet. I told everybody it's been kind of hard for me to, so I'm kind of flying by the seat of my pants. I haven't written it. And I will, you know, I'm just going to show you a couple of visual aids and talk about a few things that I think are important to consider. If that is something you're trying to do now for the past five years, probably I have heard people say the exact same thing. Speaker 2 00:03:13 Well, I'll wait for the market to correct. And then I'll buy the contract. Now, as we get higher and higher and market values, the threat of a downturn becomes more and more likely. We've had it's February 4th, today. So yesterday there was a disastrous day in the market. It was starting to climb back. I think the S and P is still down about 10%. It's up a little bit this morning, anyhow, but when I heard people say this, I thought, okay, fine. That's all right. And the result, however, was that if they were saying it 20 16, 20 17, that's about when, like, I think it was 2015 or 16 when like the NASDAQ and the S and P like finally broke above their previous high from 2008. It took six years to get back. Right. And so that they say everybody was still real nervous about the market. Speaker 2 00:03:59 And they saw 2017 was a 20% return or something like that. It was a really good year. And they looked at it and said, no way, this can continue. Okay. Well, we did get 2018 was down a little bit, 19 20, 21 all up. We had the big dip in 2020, obviously for a reasons we all know too much about don't need to talk about, but it roared back. And I, and I think it was, uh, 2021 was a positive 27% year. So I'll have to say like a lot of people in 20 16, 17, who said, I'm going to wait to buy one until the market corrects never bought one because, and then they missed out on all of those yields in both the market and potentially what an index Lincoln annuity would do. Question is, you know, at what point is it a correction is a correction enough. Speaker 2 00:04:41 And that's really the, the one thing you can't answer is the, right now the S and P 500 is down 10%. Right? But are you waiting for it to go 20%? Is it 30%? When are you going to know? I mean, nobody knows where the bottom is. You know, I'm talking to people who believe the fundamental suggests we could go even, you know, another five, 10, 15% lower right now, but it remains to be seen. We don't ever know where that low point is. So it's kind of a tricky proposition. It's the same thing as well. If the market corrects and you think it's going to go back up, then why wouldn't you just wait for that correction and put your money in the stock market? Why are you using an annuity? Because the purpose of the annuity is to get gains if it goes up, but not lose if it goes down. Speaker 2 00:05:27 So in a way, the annuity itself will help you time the market. But again, everybody wants to be as specific as possible. And I don't disagree. I mean, obviously I try to outsmart the financial markets as well in certain ways. So I don't blame anybody else for wanting to do the same thing, but it's hard to, it's hard to find the bottom of that. And so, like in the past five years, a lot of people never got into anything. And some people probably did go into the market eventually, or maybe they bought an annuity from somebody else. And didn't tell me, but I do know several people who kind of sat in cash too scared to get in, maybe not with everything, but with a chunk of assets where they would have done really well to have an annuity that whole time. But instead they sat in cash, you know, half a percent, 1% super low right now going forward. Speaker 2 00:06:11 We don't know what happens. So if you buy the index annuity, if the market, I mean, it seems like the last few years defied logic, why is it going up? You know, businesses are failing. People are out of work. It's because there's been a ton of government spending that artificially prop up the market. So you can't be happy with your investment account balances and disappointed with excess of government spending at the same time, because you got everybody got their stimulus. I don't care whether you got the $1,200 COVID check, or whether you have a bunch of money, you don't have any money. Everybody got something. And the people with a lot of money got even more because if you have a large 401k IRA balance, well that propped up and boosted the market. Without that we would have had a serious disaster financially. So it helped, but again, be grateful for it. Speaker 2 00:07:07 That was a form of a financial stimulus as well. And I don't know if everybody really thinks of it that way. So timing, the annuity purchase is tricky. Now, there are a couple of things that are interesting about the annuity, an annuity itself, where, and I think a lot of people don't understand the basic of how it works. And I think I'll probably do another podcast on some of the index options and explain exactly how they work, but there are a couple ways that you can mitigate it. You're worried about not having the right timing a lot of time. It takes a couple of years for people to get into it and like really relax and say, ah, just let it work. And it's doing fine. So again, most index annuities have a fixed rate account. Okay. If you think the market's going to dive in the next year, but we don't know when, or by how much you can put the money into the annuity and get a fixed rate account. Speaker 2 00:08:02 Many of them are paying between one and a half and 2% right now. And that is far better than what you're getting in the bank. That's far better than what you're getting in the money market fund. And it allows you to get into the annuity and have a little bit of earnings in the first year, one and a half, 2%. It's not the most exciting thing, but if you're sitting on a quarter of a percent of the credit union or a money market fund, uh, well, that's, that's pretty dang good then. And then you can, you know, at the anniversary you can switch up and get the equity base index and go up. So that's one of the quick ways to do it. And I guess, I mean, basically I should have explained from the beginning that obviously on the past few years, people did, did buy annuities to protect money, saw the market go up, you know, and I've showed you several contracts that did really, really well. Speaker 2 00:08:48 10, 12, 15% was the highest I've seen. I've heard about others that were even higher. It's a matter of timing, but because we don't know what's going to happen, that's what the annuity is supposed to do. So if it goes up because where we're at right now with a 10% correction and they didn't pass a stimulus bill a month ago or so, but it's not to say they won't come out with another one. That's going to juice that up. And then, you know, you might see, uh, the year finished with 10, 15% total yield from the beginning. I don't know what's going to happen again. That's what the annuity removes the uncertainty. So what happens is in a contract, if you miss it the first year, you typically get it the next year. So if you buy into an equity-based index this year, and let's say a year from today, the market is 30% lower, big correction. Speaker 2 00:09:34 Okay. I don't think that it's impossible for that to happen, but again, I don't know. And I'm just trying to make sure everybody understands all of the ins and outs, but if it's 30% lower in a year, well, you get to start at that lower figure for the second year. So typically, you know, I've seen a couple of contracts do zero 1%, 2%, you know, where the index is, didn't perform well or the timing wasn't right. In most cases, those will come back. And in the second year, third year, then you might see a big jumper, a rebound where you get 10, 12%, maybe more, but you know, if he goes zero the first year in 12, the second while you're still averaging six, which is well above what our projections are. I'm not saying you couldn't do it. I know people that are five years into a contract timing was perfect. Speaker 2 00:10:19 Their average in 6%, uh, that can certainly happen. So again, the annuity removes the uncertainty. So the second thing is, so we talked about the fixed rate. The second thing is there options that move inversely to the market. Okay. There's a lot of indexes that are based on bonds or treasury yields, and simply track the movement in the treasuries and the percentage gain in the bond markets or the treasury market. So typically if you get a lot of stock market volatility, you're going to get, if you get a major correction, a lot of times people flood the us treasuries that typically pushes the rates down, consumer rates down a little bit. And so that would create a positive yield in a bond based index. Okay. So there are ways to capitalize. Now, it all comes down to picking correctly at the beginning. So that's where again, the uncertainty. Speaker 2 00:11:11 So the worst thing happens. You come at the end of the year and you're zero. The other thing is there's a handful of contracts that have an inverse option on the S and P 500. And I'll tell you what that means is if, if you can bet on the market going, it's a put option. You can bet on the market going down. So if you buy the contract and you put all your money into the S and P inverse, then if the S and P is flat. So if it's 0% or negative, by any amount, you'll get a positive interest credit. So they call it most of them that I know of, that they don't have like participation rates on them. It's just called a performer or a declared rate performance trigger. So if it's negative, you get 4%, 5%, whatever. It is really nice to be able to do that in times when the market's down, where maybe your other assets, if you've got anything left in the market is down in value and you get a four or 5% credit on the index annuity. Speaker 2 00:12:06 So it doesn't matter for those ones. So let's say the performance declared rate is 4%. It doesn't matter if it's down one or down 30, if it's down or negative or down at all, you just get 4%. So there's an inverse trigger. So if you really believe the market's going down, don't know what to do, that's an option. But again, you're still taking the risk of do you know, that's exactly where it's going to be. Haven't had great luck with the inverse in the past few years, obviously because the market kind of kept climbing and then, but it's still out there. And there's going to be a point in time when, uh, when it does hit. So if you choose that, then you'll do well. And you'll be happy when everybody else was kind of scratching their head. Eh, that's the money. The third one, which I think is good. Speaker 2 00:12:47 There's, there's probably a lot of other ones. I mean, there's 450 some odd index annuities in the market, and you can break them down into categories really in the end, it's not, I mean, I looked at one for somebody the other day and they, it was, it was an AIG contract and there was a five-year index annuity, and AIG had six different versions of the same contract. And it was all based on who sells it. So they had one for chase bank, one for Wells Fargo, one for an independent channel, one for another, I mean, there were six different of the identical product. So that's what, you know, you start looking at some of those things, you whittle them down. There's not as many as it seems, but there are probably a lot of interesting ideas out there as well. So one that I liked that was in a great American contract, another other contracts have similar type indexes, but it's called the SPDR gold shares. Speaker 2 00:13:39 So you're tracking the price of gold, which hasn't didn't do that. Well last year, a couple of years before it did really well, but you could get a 5% cap rate on the gold market. And because the market was really high, people were rushing into risk assets, and that's where they got their biggest yield gold kind of settled. Now, I will tell you that. I think golden, silver is precious. Metals are far below. I think they're intentionally suppressed in value. And I think they're far below what I think there's a lot of value in those contracts, but that's a different subject about precious metals and owning them. And you know how that might, may or may not be a part of your plan, but as far as the gold index, if you've got that in, in an index annuity, that's something that certainly could perform positively when the market's down in value. Speaker 2 00:14:24 So there are ways to grow. Even when the market drops, I've written a news letter about it in the past, probably covered the basics of those three options that I just talked about. So the other thing people need to understand is, and I am going to share my screen. I'm going to look at a couple, well, first and foremost, I'm going to look at the S and P 500, okay. For the past year. And I'm not sure you can see this, all that well, but it's an attempt. So again, I typically look at Bloomberg, but for the S and P indexes, they've got really nice charts. And what we're seeing here is in the past year, this is as, as of February 3rd. Now this is right after it, you know, dumped almost 2% yesterday. So you guys are going to see this till the 10th. Speaker 2 00:15:14 It doesn't really matter because it's going to go up. I think it's, we're going to see that up and down. You know, yesterday you got short selling yet Facebook took huge drop. I mean, it wasn't that crazy. Oh, it set a record for market capitalization wiped off the market. 252 billion in equity value disappeared from Facebook in one day. Crazy, crazy amounts of money out there. So after that, it's 16.9% over the year. So this is kind of our benchmark. So this is where you're looking at. So right now you can get an index annuity with about 30% participation. You might on the S and P and you might see one at 35 or 40. It's probably a teaser. They're going to pull it back. That for the, you know, after that first year, here's our benchmark. Now this is a difference. People are looking for a drop in the S and P 500 now is down about 10% or close to it, but that's only one of those minor options that's available in a contract. Speaker 2 00:16:10 So let's look at another one that is available. Okay. This is called the S and P 500 risk control, 10%. Okay. The S and P 500 was, let's go back there real quick. And from the top, it was at 47 93. It's down to 44, 77 now. Okay. So it's probably down, it's down, not quite eight, 9% or something like that. You look at the daily risk control 10, and it's top was here at 1253. And it's low as here at 1203. So that represents about maybe a 4% drop. Okay. So you had the S and P 500 is down nine. This is down four. And the reason is because there's a risk control mechanism in it. So this is purely based on the S and P 500, but when the volatility index is high, they shift a lot of those assets to cash. Now, if you go look at, if you watch Bloomberg or anything like that on the right side of the page or of the screen will be, you know, the Dow, the S and P the NASDAQ, whatever else. Speaker 2 00:17:20 And in the bottom, it'll say VIX V I X that's the volatility index and its average last year at average, somewhere around 25%, I think. But in the past couple of weeks, when I look at it, it's been right around 30. So if the volatility in the market is 30 and you've got a 10% risk control, it's likely they've only got 10% of those funds exposed to the S and P at any given time. What you can see in comparison to the S and P 500 is it's a much smoother yield curve. Okay. So what you also will see is you'll have the SMP risk control. 10 could indeed end up positive, even if the S and P 500 is negative, because they're not, they don't have the same exposure, uh, volatility calms down, and you get a slow climb back in their more equity focus, and then it goes up from there. Speaker 2 00:18:10 So the idea behind this is to produce steadier returns and have a higher likelihood of a positive yield. Now, if you buy, so the insurance companies, and this is the subject of maybe an even different episode, if the insurance companies are buying an option on the S and P 500, that is heavily traded, and because of the volatility associated with it, the prices fluctuate wildly. So what you see in the contract is you see a variability in the participation rates or cap rates on the S and P 500 that you don't see in some of the risk control contracts. This is how it was explained to me from an internal person at one of the insurance companies, is that with the risk control contracts, they can have better assurance of long-term pricing with those index options. So you don't see as much variability in the overall contract or in, in the rates, because nobody likes to see, oh, my rates went down. Speaker 2 00:19:06 So there's a great story is, so this one, SNP risk control, 10 there's risk control, five there's, eight there's. I think even somebody who's got a 12, which is going to lead to more volatility, but maybe higher yields, but somebody about five years ago said, I want the highest participation rate on the S and P 500. And I showed him this index, which had a higher participation rate than the S and P 500 from another contract he was looking at. And he was looking at it from a company that didn't any, they were starting him at a 50% participation rate on the S and P 500, pretty good at the time, but it was 10, 15 basis points, higher, or percentage points higher than the average in the market. So I thought I was skeptical about it. He came back the next year and said, well, they took him from 50 to 32. Speaker 2 00:20:00 And then the next year they took him from 32 to 18, who knows where it's, I want to say, even told me that it was as low as 11% at one point in time. So because of the volatility and the cost of the option, that rate came down, down, down, down, down. That's why I say it's a teaser rate. All the contracts that I sold on this one have the same exact rate as they started with, because they have more consistent pricing projections with these indexes. Again, this is, I guess, off the topic, but you know, the difference being that you've got a good index that can move. This is not inverse to the market, but I'll show you one of those in just a second, but you need to understand that the indexes you're following don't necessarily mirror the market. They'll, they'll kind of shadow it a little bit, but it's not going to have the same correction in the index as you do in the market itself. Speaker 2 00:20:50 So that's something you have to keep in mind. And when you say, well, I want the market to drop, but what you really need to look at is if you're trying to time a low purchase point, you need to look at the indexes you're going to be using, okay. That's all there is to it. So next example, this is S and P multi-asset risk control index. Now, both of these to have, I mean, there, there are hundreds of indexes used. I could look at all of them. I just thought it was easy enough to pull the two S and P indexes. All right. So what you'll see here is what did I have on this one? I had a one-year on that one. So the multi-asset risk control. This can move inversely to the stock market. And I'm going to give you an example of that. Speaker 2 00:21:33 This is made up of one third gold one-third us treasuries, and one third S and P 500, they're targeting a 5% volatility index. So if the VIX is 30, then 5% of that, about a sixth of it, then they're going to shift only a sixth of the assets are going to be in the S and P 500. And that's it's moves around all day. They actually have a really cool chart that shows, you know, 24 hours of the blending of the three assets. And it moves around all the time based on it's algorithmically controlled through the index, all that stuff. I mean, it's very interesting. So, because it has golden because it has fixed interest, you know, 2020 was an excellent example of this, but you had, I remember in March, 2020, that's when we got the 35% drop in the S and P and the Dow just a nightmare scenario. Speaker 2 00:22:28 Well, because interest rates, jaw dropped and gold shot up, the volatility was high. So the S and P exposure in this index was not that high. They got an increase in yield from the rates dropping and an increase in yield because gold shot up a lot. And that's part of the reason both, you know, rates rose and gold settled as well. Part of the reason why you can see it's down 1% in the last year, but that index was when the market was down 30, this was up 15%, 70, 80% participation rate on that. And you could have had 10 to 12% yield when the market was in the toilet. Right. And it doesn't, it's not even just the fact that you make money when everybody else loses money. Like, but you didn't have that had to be heart-wrenching for people to lose 30% after that whole run-up and all that stuff. Speaker 2 00:23:25 I had one client who had 70, he had one contract with the inverse option in this option. He had 75% of it in the SMP, mark five, he had 25% of her. No, it was 80% of the and he had 20% in the inverse option. So for a time period, he was on both sides of the trade. It was amazing. And I was crossing my fingers. I think it was contract, I think, was set up in like in June, early June. And so I was watching it every day and, you know, I look at everybody's stuff and I want to make sure I have a good handle on what everybody has, but I remember watching his specifically and thinking, man, he's going to win on both sides of this thing. And about a week before he reset of the SMP, climbed back to go just above where he started the previous year. Speaker 2 00:24:13 But, uh, very interesting. And again, so this isn't going to move as much. If you see the top to bottom of this one in the past year, the range is 360 8 to probably the top here, 3 89. And again, this one is a, it's a great index. It can move, it can easily move in virtually to the market because there's just, there's a lot of value in it. And there's a lot of different, there's a few different levers in the way they work. It has worked really well for people in the past. So, but it's only got about what is it, maybe a 5% difference between top and bottom. And so you're not going to see the volatility in this, and you could look at it. And even if everything's flat, there've been a lot of people that have come through. And just in the past few days before a reset, this thing will pop up three, 4%. Speaker 2 00:24:54 You get a drop in rates and then gold shoots through the roof. Bam, and all of a sudden, oh yeah, I still got three, three or 4%. So pretty good. That's another thing again, watch the index. You're going to be tracking. Do not just watch them. Are you gonna watch the market, but you gotta pay attention to the index as well. So if you're trying to buy at a low point, that's the point being that these don't necessarily move exactly like the market does. And there are a lot of indexes available that move inversely to the market. So hopefully I kind of gave you something to think about. And I, again, I just want everybody to understand what it means. So you set your goals, I'm going to try to work with you and your goals. The best I can. You know, my objective is to help you get what you want. Speaker 2 00:25:35 My objective is not to tell you what you need. And I hope everybody understands that because I put a tremendous amount of information out there. And I got a whole lot of people like trying to jump on and say, oh, Hey, come work with us. Come do this, come do that. No, because I don't want anybody telling me what to do. And as long as I stay independent, then I can be the most realistic voice for you and give you the best information and the straightest scoop. And that's what annuity straight talk is about. So I want to say thank you to everyone for joining me on this podcast. Check out the newsletter. If you want to see it in written form, let's see if you want to get notified of the podcast. I've got a special guest coming back next week. Everybody's going to be excited, but I'll leave that. Speaker 2 00:26:21 That's going to be a surprise. So another guest next week. And, but if you want to subscribe to the podcast, go to youtube.com, search annuity, straight talk, hit the channel, hit subscribe, go to your favorite podcast platform. This one you could probably listen to it. There's not a whole lot of visual aid, but there's some in there. And that's what YouTube is good for. If you want to chat with me, you call 804 3 8 5 1 2 1 or hit the schedule, a call button top right corner of any page on a Nudie straight talk.com. Anyway, thank you guys for joining me. I look forward to speaking with you next week with my special guest and you guys enjoy do your best and I'm here. If you need anything, have a great day. Goodbye. Speaker 1 00:27:13 You've been listening to annuity straight talk. The proceeding information is for informational and educational purposes only, and does not represent tax legal investment. And 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 before making a purchase decision guarantees are based on the financial strength and claims paying ability of the insurance company.

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