Weighing the Risks: Lifetime Annuity Vs. Short-Term Solution

Episode 81 April 13, 2023 00:21:52
Weighing the Risks: Lifetime Annuity Vs. Short-Term Solution
Annuity Straight Talk
Weighing the Risks: Lifetime Annuity Vs. Short-Term Solution

Apr 13 2023 | 00:21:52

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Show Notes

Annuities are financial products commonly used in retirement planning. They are insurance contracts that are designed to provide a regular stream of income during retirement or for a predetermined period. Annuities can be purchased from insurance companies and are often used to supplement retirement savings.

There are several types of annuities, including fixed pensions, variable annuities, indexed annuities, and immediate annuities. Each type of annuity has its unique features and benefits. In today's episode, Bryan will help you understand how they work before incorporating them into your retirement plan.

What You’ll Learn from This Episode:

[2:34] Annuity Income: Asset Value

[6:37] Laying Out Annuity Options

[8:08] Joint Payments vs. Single Payments

[14:59] There's a value to having the income

[15:53] Cash Flow is a calculation to see which one is more valuable

[17:54] We can project better results with an index annuity, but it's not guaranteed

[19:38] Difference between guaranteed income and discretionary income

Key Quotes

[9:49] "It's effortless to find the highest level of guaranteed income."

Resources:

Annuity Newsletter

Call Annuity Straight Talk at 800-438-5121 or schedule a call at AnnuityStraightTalk.com 

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 00:00:48 Hello and welcome everyone to the Annuity Straight Talk podcast, episode number 83. I am your host. My name is Brian Anderson, founder and creator of Annuity straight talk.com. Been in business for 20 years, went online 15 years ago or so, learned a lot. Wanna share it with you to help you out and make things easy. I took a week off last week. A lot of you guys know that I'm on the road. I'm in Arizona right now, getting a lot of sunshine, enjoying it, seeing some uh, lifelong friends, which I enjoy doing. And I get outta the winter weather. Things are getting nice back home. So shortly here I will be headed back that direction. We'll see. Continue to work. Some people have said, Hey, you're on vacation. No, no, no, I'm not on vacation. I got my junkie little camper that I bought. Uh, you guys have seen it before. Speaker 2 00:01:36 It's not the first time it's been featured, right? Old upholstery, nothing fancy. You just wanna see if I like the lifestyle. I do may upgrade at some point, but now that I got this, it's like eh, you know, I'll roll with this for a while. Anyway, so it's the Junkiest camper at the K O A in Tucson, Arizona. So one RV park in Arizona. I'm not gonna mention them by name cuz they have their standards, but my camper was not nice enough to stay there. <laugh>, I thought it was really funny. Look, you kidding me? Oh I guess I'm too much of a hillbilly but I do know a lot about annuities and retirement planning and I guess that's what we should focus on today. So I'm gonna share this newsletter. I do not necessarily have a title for it yet to be decided, but here we go. Speaker 2 00:02:19 So I settled on annuity income or asset value cuz a lot of people think about, eh, I'm buying an annuity and I'm not gonna have the money anymore. You do have the money still or you're trading it for a different asset. I'm gonna flesh this out as far as the newsletter goes. Hopefully I can make a point here. We wanna talk about. You know, it's interesting, I just think about all of this all the time I work and a lot of the work I do is just thinking and considering and writing. And that goes on top of meeting with people and servicing clients, doing updates and figuring out helping people. I mean, heck we do power of attorney. We do require minimum distributions. I've got some clients who are in their fifties. I've got a few clients that are in their eighties, different considerations all the way through. Speaker 2 00:02:59 I'm well schooled, well versed, I've been through the fire, I can handle just about anything. Gimme a shot if you need some help. So for what I do for most people on a daily basis, it's pretty simple. I use what I learned throughout my career. So 20 years I try to put myself in your shoes and decide what I would do if it were my retirement. If like if I were you, what would I do? So I know the products, I know the rules. Frozen cons of the strategies, the ins and outs, the ups and downs, all that stuff. Well that doesn't do me any good if I can't apply it to your goals and every single person. A different different set of variables, different set of wants and needs, goals, all that stuff. If you ask why my own retirement and I've talked about it a little bit, but I also don't share my own personal information. Speaker 2 00:03:42 Like I don't share yours. I don't go into great detail with few people I get really close to. They know more about me than than others. You're certainly welcome to ask and I'm happy to share things with you, but I'm not gonna post it publicly. Doesn't do any good for me to talk about what I would do for retirement. Yes, I will buy annuities. I think I'm too young to do it yet for the other things I have going on different variables. So I'm 44, a lot of you guys are retiring. I've got clients that are probably early fifties. You know, most people that contact me are probably 60 to 65 years old. I'm always away from that. So from what I know in the business, obviously what I'm doing now is different than what you should be doing. And then a lot of people will come, Hey this is really good. Speaker 2 00:04:20 I like the advice you gave me. What should my son or daughter do? Okay, that's very different. And I can talk then I can talk more closely about hey what I do may make sense for them. But it all comes down to personal preferences. So I can't hit anyone a hundred percent. I can't nail any one person like oh, I know exactly what they should do. So typically we're narrowing things down to a couple of options. You know, one or two or three ideally. And we're talking about annuities, we're not talking about all the different ways. If you wanna talk about all the different ways you can retire, you can buy rental real estate, you can have bonds, you can ladder CDs if you want to. I've seen all of that stuff. You know, real estate depends on where you live. You know, real estate's not hot everywhere. Speaker 2 00:04:59 Sometimes the purchase value is not supported by the rental income. Sometimes the rental income's really good. Those deals are, it's not like if everybody was buying real estate, you couldn't get real estate, right? It would be even more expensive. So bonds, I don't wanna talk about the stock market stuff and brokerage crap, it's garbage annuities or bonds with insurance company guaranteeing the bond value. So it's the same stupid thing. I just get buy an annuity for crying out loud anyway. But the final details are up to you and that's the way it should be. It's your choice. So my job is to educate you so that you say, okay, I got these few options, this is how they compare. And yes I will compare them to bonds, I'll compare them to stocks. We talk about the stock market a lot. I'll compare it to all that. Speaker 2 00:05:42 And you get to decide whether first, whether you use an annuity and if you do, which one you're gonna use. Okay? The point is to compress time for you. Make it easy. So you don't need a doctorate in retirement planning to figure it out. May as well put my 20 years of experience to good use. Trust is the only thing missing. I cannot say trust me, anybody who says Oh you can trust me, you can't trust that person. Right? So that's something we work on and we build over year. Take it one small step at a time. Let's see, so new case popped up last week. Gives me an opportunity to clarify some details. Pretty popular podcast that I did on March 11th, 2023. Annuity income options, I wanted to call it all of the annuity, all of the income options because it does sum up everything you could do with an annuity. Speaker 2 00:06:23 But because of search algorithms and tabs, if I don't put annuity in the title, nobody's gonna watch it or read it. I don't know why. And then they also say, why do you always to just talk about annuities? I'm like, well sometimes I don't. But anyway, so it works for search volume, right? There's different inputs in this case and if you want to go back and read that, there's a link on the newsletter, you can go back and read that. And that's all I'm sharing is just the newsletter I wrote about this. You can go check it out if you haven't seen that. Uh, if you're new, that's a good starting point. I've actually referred a lot of the new people I talked to. Hey, go back and watch this from a few weeks ago cuz this was really good. Different income pay or different inputs. Speaker 2 00:06:59 Uh, the one I'm talking about today is a joint payments instead of single. I'd had a few people on that one say Hey what's it for? Like for a joint couple it's the same considerations, except you're talking about different dollar amounts, different values. One life instead of two. I could do a podcast if many wants to just say, uh, I could do a joint versus single life podcast. You know? And sometimes like to me that seems like it'd be pretty dry, but sometimes it's those little questions that really help you nail it down, hammer it home. So let's see, there's no plug and play solution for everyone. That's why the guys who sell only a couple of products are no better than the circuses or clowns in a circus <laugh>, yeah clown show cuz it takes a ton of different stuff. I mean even in this case, I p popped up a brand new company. Speaker 2 00:07:40 I've actually done business with 'em in the past, but it's one that hasn't been on my list. But for this parameter, they ended up at the top. So details are gonna be really basic. Anonymity is important in the financial business. Your details are different anyway. So there's no need for you to understand every last piece of it. Couple's gonna retire in two years. They're almost exactly the same age as each other. They're like two months apart. Makes it easy. Mathematically it's just different. If there's three or four or five years, there's break points for payouts and all sorts of different things. It is different. Everything's different. All the variables, right? They've got 400,000 to set aside to generate income. It's not all of their assets. That is a big part of this. Cash flow needs market uncertainty. Make an annuity a pretty good choice. I've said this a thousand times, it's incredibly easy to find the highest level of guaranteed income. Speaker 2 00:08:27 Now if everybody knew what they're shooting for, they're just looking for guaranteed income. I'd make a pile of money and you wouldn't have to take that much time doing it right? I'd pay for access to the database. So you don't have to, if your goals are clear, then we can find the best product in a matter of minutes. It's easy. Okay? So that's what we did to start this when I told this gentleman when I talked to him and that we use that as a benchmark. This is what the insurance company's gonna guarantee. Okay? So that's essentially the maximum you can afford without risk, right? And that's just a, a pretty easy way to look. So we set that benchmark and we say, okay, if the insurance comes to a guarantee X amount, then what does it look like trying to produce that in other ways, whether it be real estate or bonds or stocks or whatever. Speaker 2 00:09:11 And then you deal with market volatility and rental cycles and all that stuff. If you want to, you can, right? If you look at the previous podcast from last month, uh, there are four general ways to use annuities to generate income or retirement. Your personal situation is likely to eliminate at least one of those. So you know, when you retire, how much money you got, how much money you need, all those little things factored in, you could eliminate one or two of them, right? And then your goals obviously. So a lot of times it's pretty quickly, easily off the top. You take one or two of 'em like all right those are gone. That's kind of the situation. In this case, this couple's waiting more than a year to retire. So single premium media annuity will not work because those contracts require payments to start within one year. Speaker 2 00:09:51 It covered it in that podcast. I've only had one meeting with these guys. So I'm gonna kinda summarize all considerations that need to be made before the right choice is decided upon. Easy way to do this is a maximize cash flow with a guaranteed income contract. In this case 400 K would produce roughly 30,000 annually if they waited two years to take income. The top a plus company has protective life. Haven't seen 'em in a while. They just popped in, okay you look in a month that could be different. I didn't even know if these guys were gonna buy anything. I talked to 'em one time, right? And then I ran these numbers and sent 'em an email. It's an index annuity with all the other supposed benefits with the residual cash value and and potential death benefits. There's a fee for the income rider, that's part of it. Speaker 2 00:10:31 But the purpose of the post is not to talk about that product in particular. So I'll le I'll leave it at that with these guys being they're fairly young, the payout is healthy enough that they will recover all money spent in the, in the insurance company's pocket. So $30,000 after they take income, it's gonna be about 11 and a third years. It's gonna be less than 12 years after they take income, before they get all the money back, they're gonna be in the insurance company's pocket. And for them it's well before they are basically well before life expectancy fee expectancy for even one of them. Okay? So with both of them there's a, it's conceivable that they would, you know, take income for quite a bit longer, right? And mid late eighties, something like that. In which case this would turn out to be a fantastic investment, right? Speaker 2 00:11:16 You can think better interest rates for that because a year and a half ago, two for sure like a year and three months ago, four months ago, we wouldn't be able to do that. It wasn't even close. So this is the point where most people look at it like they're sending money away and we'll never see it again. That's a big mistake, okay? To the contrary, the money is just in a different place and then it ensures a completely different type of asset. A good segue on this, which I didn't write in the newsletter. This is like my dad and my dad was a public school administrator for 42 years. He did it in Montana and Wyoming. He's got a pension from each and while he was working they skimmed money off his paycheck and they put it in to shore up their pension system. Speaker 2 00:11:56 Both pension systems are very solvent and very healthy right now. Wyoming's is actually the, probably the best in the country. I think they're the only state. Maybe there's another one or two, they're close. But Wyoming's the financially healthiest state in the country, one of the only ones, if not the only one that projects a long-term budget surplus truth and accounting.org. I thank them for that cuz I watched their stuff. Uh, look at federal and corporate spending. Truth and accounting is a really good website. What he says, so my dad would say, he asked me before he retired a few years ago, he was like, Hey well they say you need a million bucks to retire. I mean that's silly because a million dollars, there's some people that need 500 a month and there's some people that need 5,000, there's some people that need 50,000. So those three people need a very different amount of money. Speaker 2 00:12:45 And what he didn't understand, he said, I said Dad, you have a pension. So there's a value to that. There's a value to having the income, right? And a lot of, I said a lot of what I do is people that don't have pensions are coming and they're buying, they're taking money they saved but you saved it a different way cuz they skimmed your paycheck for years, right? You know, so your asset is the income you receive and now he's lives easy. Well he works his butt off raising steers and pigs and stuff, but he doesn't have to worry about money cause he is got the pension and it was every bit as good as him having a million or 2 million bucks. Now he is got some money saved and he's perfectly comfortable but he feels bad cause he doesn't have a pile of assets. Speaker 2 00:13:26 But he also has very healthy pensions and a strong income stream, right? Cash flow is every bit as if not more valuable than money sitting in the bank. It's a calculation to see which is more valuable, right? Like that's what kind of what we're doing here. Is it more valuable to give up that cash to receive income? Cause that income is also an asset, it's a different type of asset and I think a lot of people, maybe I don't even call it ego, but you like to see the big balance in your brokerage account or whatever it is. But while you're working you take money outta your paycheck so you can take money and buy a paycheck when you no longer get one. That's the Tom Hegna stuff. If anybody knows who he is, paychecks and paychecks, right? When you retire you don't get a paycheck anymore. Speaker 2 00:14:05 Anyway, so that's however you wanna think about it. That's the reason why I spent so much time figuring out different ways of doing it because a lot of people have hangups so I don't wanna get rid of the money but then they're left on their own. So it's like you either transfer the risk to an insurance company or carry it yourself or you put it in the stock market or in the real estate or the bonds or whatever you do, right? So the alternative to taking the guaranteed income, that's what I called the flex strategy. I didn't write it that way in the newsletter but that's kind of what I started talking about a long time ago. You take the same amount of money and you try to match the highest annuity payout payout by doing something else. Now we're talking about annuities, you could do it with other assets, okay, you wanna buy real estate then you got, you know, property taxes and maintenance and all that stuff. Speaker 2 00:14:44 And a lot of people, I get a lot of people that are getting outta real estate and buying annuities cause they don't deal with it anymore. So probably not an ideal asset for for retirement because these guys are nervous about the market along with every other reason you can think of. Annuity is also the best choice for this. It allows a couple to maintain more control over the asset by using a deferred annuity and simply taking the same amount of cash flow using the annual free withdrawal provision. 10% free withdrawal is available annually and the 30 K ind well within that. So first year 40,000, they're gonna wait two years, they're gonna interest growth. It's 10% of the account value. Very good, right? Uh, to keep it simple and as guaranteed as possible, we're gonna use a multi-year fixed annuity for comparison. We could project better results with an indexed annuity but it's not guaranteed. Speaker 2 00:15:28 And in this case I do not feel an index annuity's appropriate if the couple doesn't wanna lock up the paycheck for life. If they don't wanna go the guaranteed income, I'd say lock it in as guaranteed as possible cuz they wanna maximize income index annuity returns. Your principle's not at risk but the outcome is variable. So you might have to adjust that. So index annuities are great for upside potential and for what I call discretionary income. These guys are setting a baseline of income. This is a piece of their assets. So that's another reason why I really, really think that the guaranteed would be great because that just sets it in place and the guy called it, he's like, I like the idea of mailbox money. That's what it is. Okay? So we're not gonna use an index annuity here. Same 400 K goes into, let's see, yeah, so I use the fixed annuity, 400 K goes in and they wait two years. Speaker 2 00:16:14 Retirement comes in two years and it's a little bit different, but I simplified it for the purposes of this. So they start taking monthly payments equal to 30 K annually. That's 2,500 bucks a month. A five year fixed annuity pays about five and a quarter percent. It could be a little bit different. I'm quoting a touch below, just being general. Okay? So when it comes surrender free five years down the road they would've covered three years of retirement income. There would still be $419,000 left in the account. They maintain the asset but after figuring out how to keep doing the same thing in five years, okay, the wait two years take three years of income, they're surrender free. They got a chance to go do something else again, right now there's a big difference between guaranteed income and discretionary income. Discretionary income. I mean I'm in Arizona, I found a big monster truck, a 95 Ford F 3 57 0.3 liter diesel, right? Speaker 2 00:17:07 60,000 miles on the motor. That thing is a gym. I bought it, I'm not gonna do that every year, right? That was discretionary income. That's the same thing with you in retirement. Big vacations, new car home maintenance, whatever it is. Emergency medical expenses, the things that don't happen all the time, it's called discretionary. They've got in five years, they've gotta figure out how to recreate $30,000. All right? That is the risk. Will rates be good enough to continue going down the same path with control over the asset throughout retirement? My opinion is that it's not worth taking the risk. I have to explain both sides of it so that they can decide what they think is best. We haven't seen rates this high in almost 15 years and the global economy carries a lot of risk right now. Don't need to go into that. I think everybody knows I wouldn't bank on it, not for a piece of your assets. Speaker 2 00:17:53 You can do that with some other assets but you could put take a little risk. I mean it is small compared to what you have in the market, right? The five-year annuity was his idea because he wants to be as flexible as possible. But in this case, if you did it that way, I would recommend doing a seven or a 10 year fixed annuity if that's the path you want to take. And it's not about higher rates as much as it's about locking in the guarantee for a longer period. Remember you're trading a lifetime guarantee for only five years. If rates aren't as high in five years, you're farther down to actuarial scale. You have higher payout rates. But if rates are even a little bit lower, it's gonna equal it out and you might not be able to get as much. So the guaranteed income we calculated for these guys was based on a two year deferrals. Speaker 2 00:18:37 There are two step ups to that. Now. They're gonna get five years, they're gonna be in retirement, they're gonna be into immediate income territory and that's not guaranteed to be the same, right? That's risk. If they chose a five year annuity instead of a lifetime guarantee, then they're choosing to carry the risk. They're gonna carry the risk rather than transferring it to an insurance company. Again for a piece of the assets. I don't recommend it. I think having a guarantee in there is incredibly beneficial and creates a worry-free retirement. You can do it any anyway you want, but I'm gonna document the analysis. What better way to do that with than with something published and recorded from my little camper in Arizona. So hope you guys understand the difference in choices here. You can do whatever you want. If you want me to run your numbers, I'd be happy to do it. Speaker 2 00:19:22 Again, every input is different. Your husband wife is gonna be, you know, 64 and 61 is gonna be different than 62 and 62. It just is. That's the way it goes. So um, if you wanna look at this like this is the kind of thing I go through, I think about it, a lot of the options and I get to this point where I say I can't say what I think they would do. I think they should take the guaranteed income, but they may want to do something else. So I've gotta provide all the different angles. So anyway, I appreciate you joining me for episode 83. Please like, subscribe to the podcast or the YouTube channel. You get notified when everything comes out of loved comments. Uh, good or bad. I don't care if you don't like it. If you think I'm ugly, go ahead and tell me whatever it is. Speaker 2 00:20:04 I can take it. I've had worse, right? Like I said, I just went through a divorce, it's worse thing ever happening in my life. And aside from that, I can take just about anything if, because nothing else is gonna be that bad. So anyway, I'm ready for you. You can gimme a call at (800) 438-5121 or schedule a call on the top right corner of any page on annuity straight talk.com. Again, episode 83, annuity income value or asset. I think that's gonna be the title. We'll see what everybody else says, but you know, who knows. So when it comes out, I guess that's what the title's gonna be. Anyway, thank you again for joining me. I'll see you back next week for episode number 84. Thank you so much. Have a great day. Goodbye. Speaker 1 00:20:55 You have been listening to annuity straight Talk. The proceeding information is for informational and educational purposes only and does not represent tax, legal or investment advice. The views expressed by guests on this program are their own and do not necessarily reflect the views of annuity. Its partners. No information presented today should be acted upon meeting qualified professional. It's important that you read all insurance contract disclosures carefully before making a purchase. Decision guarantees are based on the financial and claims paying ability of the insurance company.

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