Variable Annuity Nonsense

Episode 96 July 13, 2023 00:17:26
Variable Annuity Nonsense
Annuity Straight Talk
Variable Annuity Nonsense

Jul 13 2023 | 00:17:26

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Show Notes

Welcome to episode 96 of the Annuity Straight Talk Podcast! In this episode, Bryan Anderson, the founder of annuitystraighttalk.com, dives into the topic of variable annuities. While Brian doesn't sell variable annuities, he provides valuable insights and information about them. He emphasizes the importance of understanding the product and the person selling it to you. Brian shares a case study where a client was presented with a variable annuity illustration projecting high income, but he advises caution and highlights the need to consider the guaranteed income and potential risks involved. Tune in to this episode to learn more about variable annuities and alternative options. Don't forget to like, subscribe, and comment to join the discussion!

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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 00:00:47 Hello and welcome everyone to the Annuity Straight Talk podcast episode number 96. My name is Brian Anderson, I'm the founder and creator of Annuity straight talk.com. Everything on the website was written, researched, thought about by me for a long time. And today's another a new topic. Like I said, everything comes from you guys and just the questions going into detail in different topics, different perspectives, the way people understand them. This one came to me just last week and I've talked about variable annuities a lot and I'm gonna share the newsletter, uh, on my screen and then follow along. So anybody who uh, can see this will notice the variable or uh, newsletters, a three minute read, 700 some words. So think I explain everything they need to say. And I'd like to go into a little more detail here for anybody else who's specifically interested in the topic. Speaker 2 00:01:40 I call it variable annuity nonsense. I've talked to you guys a lot about how I don't sell variable annuities, but I still have given you a lot of information about it. There's a simple guide to variable annuities. I don't dislike them, I just think there's a better way to do things. And then I did, I said, what would you do with an old variable annuity? There's a lot of people that call me. What should I do with this contract? I gave you three examples of people who had owned a variable annuity for a long time. Two of them I said they should keep it and only one of 'em, I think I said, should do something different. So they're not bad products, just all depends on what you are looking for. It's the most commonly sold type of annuity variable. Annuities has more to do with the distribution process for financial products than it does the viability of the product itself. Speaker 2 00:02:27 Let's not forget that variable annuities were created as a way to shield market investments from taxes. They come with some death benefit that inherently comes with death benefit to protect your, the inheritance value of a contract from market volatility. So there's a kind of a little benefit for anyone who says, yeah, I'm gonna chase top line growth, but I wanna make sure my family still inherits all the money, maybe even more if the market does well. But then about oh, close to 20 years ago, the guaranteed lifetime income riders were added to it. And that's really what got me interested in researching annuity and looking for different ways of doing stuff. I found a lot of different ways to do it. It's not to say if you like a variable annuity, you shouldn't get one. You should if you do. But most of these are sold by the big brokerage firms, the asset managers, broker dealers and stuff like that. Speaker 2 00:03:20 So it's, it allows them to keep management assets on their books. They don't like see things leave management. I think there's better ways to do it. And so this website's more for those people. But I've had a lot of people call and say, what do you think of this variable annuity? I like to make sure they understand it and goes back to last week's podcast and the second opinion, if you understand it, you believe it suits your purpose and you like the guy that's selling it to you, go for it. It's not something that I'm gonna represent. I dropped the licenses to do so several years ago and I don't miss them. So last week I was having my second conversation with uh, a guy who is, he's one of those guys. He's happy to meet with as many people as he can. I like to tell people I compress everything down to make it easy for one-stop shop. Speaker 2 00:04:03 I show you, uh, full disclosure on how I find the contracts, how I'm shopping the entire market. But that doesn't mean that somebody might have a different opinion than me and maybe something's not the best. So yeah, he's seen a lot of stuff and getting a bunch of different recommendations. So I think he met with two or three before me and then between our first and second meetings met with one or two others and everybody else to talk to he, they were just putting an annuity in front of him. They knew he is gonna retire. Oh yeah, you gotta have this, you want guaranteed income? Sure go buy this. And so I first and foremost number one meeting, Hey, define a goal first and then it's define the goal, decide whether an annuity is the right fit, then decide which annuity is, gives you the best when he line up all your benefits. Speaker 2 00:04:48 Anyway, so he came back to the second meeting. He said, you know what? We've decided that $5,000 per month in retirement income, boy, that would just be, we'd be happy and comfortable and everything. It would be great. And so I'm not gonna go into the specific spec. And of course he had told this to a couple of the people who offered an immediate solution. Now, one thing you guys need to know, if you didn't, if it's safe to assume I know about how much guaranteed income costs, so age of all covered, covered annuitants, that's husband and wife or single annuitant. If it's single and when you want income to start right off the top of my head, I can give you a pretty close estimate about how much it's gonna cost to reach an income goal or how much a certain amount of money will provide. Speaker 2 00:05:30 When he said $5,000, I knew it was gonna be well north of 600,000 depending on when he started. So the longer he defers the let's, it's gonna cost to hit 5,000 a month. But when he told me somebody showed him something from 4,460 7,000, uh, big red flag popped up, I needed to know more. Okay, how's that possible? Now that's where kind of my experience comes into play. If we're 20% less than what I know the market to be, if I, if my estimate's that far off, then there's something going on. Either it's a really long deferral period or maybe it's a BS annuity illustration. This fits in that category. It made sense though. He told me it was a variable annuity from Nationwide. I'm like, oh, okay. Now variable annuities, because of the variable nature of the account directly invested in the stock market, their baseline guarantee is gonna be a lot lower than what your highest guaranteed payment is gonna be. Speaker 2 00:06:27 But that's because with fixed annuities or fixed index annuities, the insurance company knows they've got a stable asset base. They can afford to guarantee a more robust income stream. But people like the variable annuities cuz you have a much better chance of the market enhancing those income payments for all the years of deferral. So there's a lot of potential upside and I've seen them in the past where people had very good performance inside the variable annuity. So their income income base, their income payments just shot up and they turned out to be very good guaranteed contracts. So it's once I realized the variable annuity knew this guy was like, he's looking at projection, not a guarantee. So the contract quote of $57,000 annual income after four years of deferral retire in a couple of years, maybe some deferred comp fits in there. A couple other details of the plan. Speaker 2 00:07:17 They were looking at a four year run. And this is again where a lot of guys will just say, okay, this is what it's gonna take. Maybe he doesn't wanna wait four years. You gotta do something a little bit different. Let me explain a little bit more about how projections are created for variable annuities. Because the investment is tied directly to the stock market. Variable annuities can legally backdate an illustration for up to 30 years with index annuities, it's 10 now they're doing 15. I've seen one company that's doing 18 so they've loosened the restrictions a little bit for the longest time index annuities, you could only go back 10 years to test performance. Variable annuities have already always been 30 years because they're just dealing with straight up market numbers. And I believe a lot of contracts give an agent the discretion to choose the illustrated time period within those parameters like within 30 years. Speaker 2 00:08:03 That's my assumption. Either way we either way it projects income based off of the best market returns in history if we go back 30 years, that's 1994 is the beginning of that or 93 to 2022 cuz nobody's using 2023 yet not till it's over. So for him to hit the 57,000 this contract would've to repeat four years in the nineties in order to reach the expected income amount. Now I looked at it what those years were, so this co illustration started in 1996, so 96, 97, 98, 99, it was 22%, 31%, 20% four years in a row. Now I burst a lot of bubbles in this business but I feel it's a lot better to reduce expectations from the beginning than to to apologize for poor performance later. If he doesn't repeat the.com run up in the market, then he's not gonna get anywhere near that $57,000. But we gotta learn about the product too and we gotta do as much research as possible so that I make a recommendation based on fact. Speaker 2 00:09:05 My opinion is that it's probably built on some over optimistic numbers, right? If you had gone two or three years earlier, you had a seven, eight or nine and a 1%, like comparatively smaller, much smaller numbers. If you would've gone back all the way to 94, there was a good year and then there was an okay year and then there was a pretty poor year, not a negative one, but that would've changed the 57,000 dramatically. So nationwide, good company, I don't love all their products. I've done some business with them. Again, not a knock on the company. I think it's just funny to say the best thing about Nationwide is the Peyton Manning commercials. I'm a big Peyton Manning fan, like the guy but no nationwide is on your side, right? So on their website they had all the information, the brochures, the specs, the mutual fund allocations, everything. Speaker 2 00:09:51 I was gonna show that to you, but uh, it's not even that big a deal. Anybody wants to know what annuity I was looking at? You can leave it in the comments and ask me or you can reach out via email, gimme a call. Whatever you wanna do. If you want to go do your own sleuthing on it, you can. So I wanted to find the guaranteed income amount. 57,000 a year was projected based on market returns from the late nineties, but it's not what the company guarantees. Everything was available on the website directly from the company. So it didn't take long to find the minimum guaranteed income was just over 31,000 per year. That is a big difference. The projection was almost double that, which is not surprising cause because the stock market basically doubled this, like the s and p 500 was just shy of doubling in that four year period. Speaker 2 00:10:33 That's pretty astronomical. It assumes about a 20% average, right? That's where fees on the variable annuity. I'm not like pulling apart very, this had 3.6% fees, all all in. That's what's gonna keep the payment from doubling along with the market. That's first question. Do you think that the stock market's gonna double in the next four years? I don't know. It's a big bet to take. So he's gotta essentially decide whether they're taking the risk to get 57,000 is worth maybe only receiving 31,000 per year. Now $31,000 is not out of the question. We've had a flat market basically for two years. You add variable annuity fees into that, you're gonna have an account value that's going down. So you're not gonna go higher than that 31 then you only got two years left. The next two years if you have a a substantially negative year that's gonna really drag performance. Speaker 2 00:11:22 So there's a huge difference between four very robust growth years in the stock market and three with one really negative one. But that's what a variable annuity with guaranteed income is supposed to do. It's a direct market investment with the guaranteed income backstop and the people that I see use them and are happy with them are the ones who are using, they like the opportunity, the upside and the fallback position of some guaranteed income. Okay? I don't usually recommend it for those who need the income or those who spend with these guys. I think that was gonna be be something like 60% of their assets maybe more. And in the appropriate situations, even the broker dealers who aggressively sell variable annuities, I think a lot of times they're doing 10 to 20% of some assets to put in there. Again, it's just a market position with oops, at least we got guaranteed income. Speaker 2 00:12:10 A full guarantee is better in this situation. This is where I probably will never sell the annuity cuz the guy's kind of holding onto that 57,000. But if you take, if you go to the database and you look it up, what's the highest guarantee? Same parameters four year deferral, 467,000. It's actually a little over 44,000 per year that you could get just guaranteed. If you figure out what the variable annuity would have to do or what the stock market would have to do to get to 44,000, it'd be somewhere between 10 and 12% per year to achieve 44,000 a year from the variable annuity. That's a pretty solid, i i if the market we're gonna go up 10 to 12% every year for the next four years, I'd be pretty happy. I think most of you guys would be pretty happy too. Index annuities would do well, the market would do well and the people that don't care and bought fixed annuities would be just perfectly happy cuz they'd get their guaranteed rate. Speaker 2 00:12:58 So I'd say that full guarantee and that's a plus. I forget who it was, I'm not even looking at it, but whoever came to the top, it was Prudential or North American or something like that. So pretty nice deal. So is this variable annuity nonsense? Is it a BS annuity illustration? I will never really know for sure because I can't tell how the higher income figure is presented. When the potential buyer came to me, he said we've got one that's 57,000 per year. It means that, and and a lot of people will do this, their eyes will fixate on the best outcome and they might not hear everything the guy says. So maybe he did present it the right way. I still think it's way too aggressive for the amount of owner they have and the risk they'd be taking to try to get that. Speaker 2 00:13:42 That's my opinion. There is a good chance it was explained, it wasn't explained properly, it's just the world we live in. So as advisors we're actually required to give consumers some options. It's possibly a mistake that wa the one mistake that was made, again, I don't know, maybe he did say here's one, here's two, here's three and the guy picked the highest one. So I can't, I'm not making a claim against this agent by any means. Let's assume he did his job and there was just a little misunderstanding how the information was presented. So either way you gotta make sure you understand all details of a potential contract. You could be missing something very important and you sure don't wanna be disappointed because unrealistic numbers didn't work out. You get four years down the road. Oh boy, this isn't anywhere close. Ah, scratching my head. Speaker 2 00:14:29 What happened? I ran into it. Yeah, well I'm day, I'm recording this. I ran into, another lady called me, put all of her money into one of annuity that didn't go anywhere in two years, maximized the free withdrawal to pay bills, nothing extravagant. And the guy that sold her was in his eighties and unfortunately he passed away, but he's not there to help or answer questions or defend his position. So you have to be able to do it on your own. I'm a lot younger than you guys, so I should be here unless the grizzly bear kills me, which it didn't. It's probably not going to. Anyway, do your research. That's why resources like this are important. And it's obvious because there are a lot of advisors out there copying me and running with my ideas and presenting 'em as their own, which is fine. Speaker 2 00:15:14 Go ahead and use it guys. The truth will come out at the end. So anyway, so if you've got, if you're dealing with something similar, feel free to reach out. I'll help figure out whether you're seeing something legitimate or complete nonsense in this case, more variable annuity nonsense, uh, because very unlikely it's gonna happen. It's not something you wanna bank in a very important retirement on. Okay, I wanna thank you guys for joining me for episode 96 about variable annuities. One more piece of information I can give you. There's a lot out there in the newsletter and the podcast. Go, go search for it. It's there like, subscribe, comment, or otherwise on your favorite podcast platform or on YouTube. There's comments on the newsletter page on the website as well. If you wanna schedule the call with me, top right corner of any page on annuity straight talk.com, schedule a call or you can give me a ring. Eighty eight five one two one rings to my cell phone. It's right here. It's on mute right now. Uh, nobody called me while, while I was recording this. So anyway, thank you again for joining me for episode 96. Enjoy what I'm doing and I appreciate the ideas you guys bring. So let me have, bring them on and I'm here to answer questions. You guys have a great day. I'll see you next week and thank you again. Okay, bye. Speaker 1 00:16:29 You have been listening to Annuity Stray Talk. The proceeding information is for informational and educational purposes only and does not represent tax, legal or investment advice. Reviews 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 a qualified and licensed professional. 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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