Episode Transcript
[00:00:00] Speaker A: Jeremy Estes is a homo.
Hello and welcome everybody, to the Annuity Straight Talk podcast, episode number 220. My name is Brian Anderson, founder and creator of AnnuityStraightTalk.com here in Tucson, Arizona. Once again, got my buddy Nate. Say hi to everybody, Nate.
[00:00:17] Speaker B: Hey, everybody. How's it going today?
[00:00:19] Speaker A: Yeah, Nate's been helping me out and taking some calls and answering questions for people. So today we're going to talk about one of his specialties that he's got a lot of experience in. So if you're in this situation, he's a great guy to talk to to kind of understand your sit situation. Please, like subscribe or comment on any of your favorite podcast platforms or on YouTube. Schedule a call with us. Want you to go to any page on annuitystraighttalk.com and hit the schedule call button in the top right corner. Pretty easy to do.
Several people seem to be able to figure that out.
And I'm going to share my screen so we can look at the newsletter. And then we're going to run a simulation for you guys. This topic comes up a lot, and I've seen it several times. Variable annuities are the most widely sold annuities on the market by a pretty wide margin. Right. I would say it's like 60% of cases or of annuities. And that's also where like the fees come in. That's where people rag on them a bunch. Right. And so Nate, here you spent a lot of years as a wholesaler, so tell us a little bit about your experience and then in the variable annuity side.
[00:01:18] Speaker B: So, yeah, as some of you probably know, I was a wholesaler for almost 20 years and almost half of that time was as a variable annuity wholesaler. So covered those products, I know them extremely well. It was a very competitive market place from like 2005 probably through what, maybe 2015, as you said. I mean, we're talking hundreds and hundreds of millions of dollars went into these products. And now we see a lot of them that have been in force for 10, 15, even 20 plus years. And we get calls about them. And yeah, people want to know, hey,
[00:01:49] Speaker A: like, here's how it's done. Should we replace it? Should we keep it? Right. Do something else. Today we're going to talk about a case of how it can help some other way in retirement. We get. It's like, oh, well, you got this thing.
Maybe there wasn't a specific purpose for it. Is a good product worked out well. Now how do we make it work? Okay, they are the most complex product on the market because of the securities involved in it. They're variable investments. All the contracts can be issued in a very simple form. It's essentially a tax shelter for market investments and non qualified money. But you can use IRAs to do that as well. The complications come from all the different components. I mean, we need to talk about the riders income. Riders death benefits.
[00:02:26] Speaker B: Well, yeah, and you kind of mentioned this, but you know, one of the things with the variable annuity is it is a securities product, but it comes with a prospectus. And I remember you joking on a podcast like you actually read an entire perspective. We're talking 100, you know, plus 200 plus pages depending on the products. And they can be very complex. But that being said, what most people understand with those is they have fees, but you also can lose value. And people don't like that. We run into that often that, you know, they're sick of paying either high fees from the mortality and expense charges or if it had a writer living back benefit or a death benefit component, those fees we've seen get as high as even 5%. And if those people don't want income as an example or aren't leaving it as a legacy, now they're going, why in the heck am I paying 5% for something I'm never going to use?
[00:03:11] Speaker A: What the hell did they put me into? And I know a lot like my first exposure to it was probably around 2005. They got really popular. And I know a lot of guys that sold them. I never really did, but a lot of guys that sold them to people because of the income guarantee, for instance, and then they get 10 years down the road and they think, I don't need the money, so what are we gonna do? And then they end up rolling it out and doing something else. But fortunately, because the market's done well, they are market based investments. There are people that have highly appreciated annuities. That's what we're going to talk about. And so you really got to analyze your options and it depends on your certain situation, right?
[00:03:42] Speaker B: Absolutely. Yep.
[00:03:43] Speaker A: So it's going to depend on your goals. I've got a couple of cases. So back in like episode 10, you watched that one, I talked about three examples. We'll cover a couple of those.
Like, you know, if you're planning to take income from the contract, there's a couple ways to do it. I ran into a couple years ago who had a lifetime income rider that would pay 20,000, but there's an annuity Option that's different from an income rider. Don't need to get into the details of that. But a little clause in the contract, instead of taking 20, they could annuitize it and get 30,000. So that's a 50% increase. Just knowing how it works will make the difference. But in that situation, no, they don't need to change it. They just need to know how the contract works.
[00:04:22] Speaker B: Right, but you hit the nail on the head there. It's an annuitization bonus, but people need to understand that when you do that, you're getting an income stream, but you've now turned over that asset to the insurance company. It's no longer your money. Right. They'll contractually send you a check as an example for the rest of your life.
[00:04:37] Speaker A: Right, right.
[00:04:38] Speaker B: But I often tell people you do not need to annuitize contracts. We would evaluate that and look at it, because in a few cases it might make sense to do that, but very rarely does it make sense. And we can talk more about that. But because of how good payouts are today on, like, fixed index annuities that have income, it just doesn't usually make sense to annuitize these old contracts.
[00:04:58] Speaker A: Yeah, exactly. Something you got to look at. But anyway, so another case I had was talked about in that podcast a couple. The guy was in his, like, 81 years old, and he said, hey, the market's done well. They were taking a bunch of income off of it, but the market had done well enough that even though pulling the money out, the contract had maintained value, essentially. And so other guys were seeing it, saying, oh, you still got the money. You got a chance to move it. He called me and said, people are trying to sell me an annuity. What should I do? And I looked at it, and you just evaluate the income he was getting and the cash value that he has. It didn't make sense for him to get rid of it. Right. So we're never going to rag on variable annuities because they've done great. Right.
[00:05:34] Speaker B: Well, real quick story. Brian's heard this, but my dad bought a variable annuity back in, I want to say, 2010. And he swears it's the best thing he's ever bought because it's done really well. Just like you said, the performance has been there. And he bought it for the right reason, which was income. He wanted an income stream in retirement for he and my mom. It's worked great. He's taken out money every single year, and he's ahead of the game because of those market values in the performance of the contract. So he's very happy with it. There's been a lot of good variable annuities, but to be fair, there's some really bad ones out there too that we come across.
[00:06:05] Speaker A: Yeah. Met Life. No, whatever. Most of the other people I've seen are just people that bought it years ago, sometimes 20, 30 years ago. And because the market's done well, they got a bunch of money. So later in life maybe don't want to take the risk. They swap to a MYGA or a fixed index annuities, they get rid of the fees, they guarantee the principal. You get old enough, the risk isn't worth the payout. At some point it's done well for you. But another strategy works. Now, if we go to the current case, this is a couple you met a week or two ago, right?
[00:06:31] Speaker B: Yep.
[00:06:32] Speaker A: Bit different from most of the things that we've seen. They're a few years away from being 60, so they're on the younger side for sure.
And now looking at making some retirement moves. So they bought a variable annuity about 10 years ago, $750,000 in it, and it has done really well. It's the current cash is one and a quarter, about 1 million. So they made about $500,000. This is going to immediately bring up the tax issue. Now if this variable annuity is owned in an ira, then you have a lot more options with it. You can roll it to any other ira, any other annuity, you can put it back into managed money, whatever you want because you have that basically tax protection of an IRA transfer. This one is non qualified, meaning that if they do anything besides buying annuity, they're going to have to pay taxes on that $500,000 gain, right?
[00:07:17] Speaker B: Correct, Exactly. Yeah. That's a sizable gain and you want to probably defer that. Right. If you take it out, take possession of those funds, it could be a taxable event on half a million dollars.
[00:07:26] Speaker A: So then you look at, it's like, oh man, we're stuck. But is there a way to get that to augment or help with retirement? Anyway, they came to the website and on their own they found the calculators, which is awesome. You should. Guys all should do it. They are interested in some type of guaranteed income in two, three years, something like that, right?
[00:07:42] Speaker B: Yep.
[00:07:43] Speaker A: They've got a total investment portfolio of around 5 million. So that's about 20 to 25% of their assets. Kind of reminds me of Dave from a few weeks ago. So they ran a quote on this website I saw it when they made the appointment. I knew Nate had it. I was like, oh, variable annuity. This is perfect for you because you know all about them. And I confirmed through the external database that we do have top of the market rates on the calculator right now. Good time to look at it. Plug that, guys. Right.
So if they take the current variable annuity does not have an income guarantee on it, Right?
[00:08:11] Speaker B: Correct.
[00:08:12] Speaker A: Just a base contract. Simple, inexpensive, efficient for growth. And it did what it was supposed to do. If they take it and move it into a guaranteed income contract, it would generate about $93,000 annually on a joint life payment.
[00:08:26] Speaker B: Yes.
[00:08:27] Speaker A: That's when the youngest one, 60 now, because of the tax situation, well advised to keep the money in some sort of annuity. Now, maybe they just stay where they're at and they're not motivated, but we want to see if we can find a justifiable reason. So when you look at that income stream, Nate, it's a good deal, right?
[00:08:43] Speaker B: Absolutely. Yes. Right. I mean, if you've got $1.25 million.
[00:08:46] Speaker A: Yeah.
[00:08:47] Speaker B: And they're going to need income in retirement and they're saying, hey, we want to take this because all the gain. They're smart people, they get it. Oftentimes high net worth individuals, as you said, Brian, like variable annuities because it's a good place to shelter some money and defer the taxes. So they dump that money in there and they know that, hey, I can't take it all out in a lump sum. Turn this into an income stream and leverage it in retirement. And I think that kind of brings you to your next point on what it's going to do for them.
[00:09:11] Speaker A: So what is it going to do for them? And fortunately we have a calculator where we can look at that. So we're not just again, you could say, hey, lived in 90. There's almost 3 million bucks.
[00:09:20] Speaker B: Yeah.
[00:09:20] Speaker A: What the odds of one of them getting there are high. So you can guarantee that in portfolio on its own would create a substantial internal rate return. And the five and a half, 6%. If that's the worst your portfolio does, you're in great shape. But we're going to go to the calculator and we're going to run an example to see what it does. Now here we go. So if we go 5 million in assets.
[00:09:40] Speaker B: Yep.
[00:09:41] Speaker A: And how much they want? Well, they've got an annuity that should stay an annuity in most cases. So we'll say one and a quarter. Now we have to assume Some things very early in the process. We don't know exactly what they're looking for. We know what the payout would be. So let's just say they're shooting for 100,000 in income and if it turns out to be more and they want to do more detailed planning, we can certainly do that. What state are we using?
[00:10:01] Speaker B: Massachusetts.
[00:10:02] Speaker A: Massachusetts doesn't matter.
But people like to see accuracy. We are going to do joint life and the youngest one is 57.
[00:10:13] Speaker B: Yes. We're going to do income at age 60. 60.
[00:10:17] Speaker A: Let's look and see what it does to their portfolio. Is this a good move for them considering they want to save a couple hundred grand in taxes and not pay taxes? So here, when you pay an annuity premium of 1,250,000 annuity provides guaranteed income of 99,616 per year in three years. Wow.
[00:10:33] Speaker B: Not bad.
[00:10:34] Speaker A: Not bad. We said 93, but what we were doing on two years. So in three years it's 99. Yeah. Now if they instead assume maybe kept the variable annuity and left the rest of their portfolio invested in the market after the worst 20 year period in market history, they're at $77.1 million. But by using the annuity to reduce the sequence of returns risk, they've got over $8 million. So that's about $800,000 plus side.
[00:11:02] Speaker B: Absolutely. And then another thing that this isn't going to tell the entire story on, but we can always show you that income stream, as you said, is a joint life payout. It's going to cover both lifetimes. So if that person lives beyond 20 years each year, it's another $99,000 a year in income. So it's pretty easy to extrapolate that and do the math.
[00:11:20] Speaker A: You say the cash value difference, number one. We want to illustrate the annuity does not hurt their situation. Not at all. The guaranteed lifetime income is going to reduce the risk. That's what creates that additional.
So you got 800,000 more plus you still have 100 grand a year from the annuity.
[00:11:35] Speaker B: I want to reinforce that because people oftentimes go, well, if I keep putting more money into the annuity, it's going to hurt my legacy. I'm not going to leave as much behind. And I'm sure you hear that all the time too. Oh yeah. But what this shows, and we can prove it out through the historical performance in these different market cycles is no, actually you're better off. You can highlight that by even putting 25% of their portfolio now what are your numbers showing them?
They went up by $800,000 in account value in the worst 20 year period. And then what about in the last 20?
[00:12:04] Speaker A: The last 20 is about the same. It's still an $800,000 edge. So even in a really good market scenario, market performance, they're sitting at the end of 20 years with the income annuity, they're at 12 million assets. Right.
[00:12:16] Speaker B: More money.
[00:12:17] Speaker A: So more money, more money and income. And what I like to say is like if these numbers don't work out, if you say, oh, Those numbers are B.S. okay, well we just use the S P 500 over a couple like a good and a scenario. Well, what's guaranteed to work out the
[00:12:33] Speaker B: annuity is not going to fall.
[00:12:34] Speaker A: Yeah, yeah.
[00:12:35] Speaker B: It's not.
[00:12:35] Speaker A: Maybe you're not 8 million or 12 million, but if that doesn't work out, it's not going to be the fault of the annuity. Yeah. So what we can do with this is we can also look at details. What you know, if we want to pull up the, the sheet to show what the returns are again to remind everybody we're reducing this income drawn from principal. If there's no annuity or no guaranteed income source, that essentially is telling you that you're selling stocks at a loss. It's reverse dollar cost averaging.
[00:13:01] Speaker B: That sequence returns risk.
[00:13:02] Speaker A: Sequence returns risk. And so when you're selling at a loss again in this year where market lost 8% and you took out 100,000, the next year the market gained 50%. So with that 100,000 out of the market, there was a lost opportunity cost of another 50,000 in growth. That's what creates the difference is when we eliminate the sequence of returns risk, like we did with Dave a few weeks ago, 20% of his portfolio in the annuity. They already have the annuity. It's easy switch to make and wanted
[00:13:31] Speaker B: to mention too is what happens by doing this because we're looking at history, right? Because I always say I don't have a crystal ball. I don't know what the future holds. But we can literally look at these numbers and say this is our best guess. The one thing that Brian and I don't do is show you an illustration of 10, 12%. Oftentimes there's advisors and agents out there that are showing their clients unrealistic returns. We can show guaranteed numbers here that will actually work for them.
[00:13:56] Speaker A: And another cool thing is if we click on the income, it'll show you which company is the top and that's American General's Power select plus right?
[00:14:02] Speaker B: Yep.
[00:14:03] Speaker A: Go a touch lower for an A at North American. Top of the market stuff. I think that's pretty good deal. Nate, thanks for joining me. We're going to do this again. We're here for a couple more days so we're going to get a few things done and enjoy the sun, a little college basketball as well. Thank you guys so much for joining us on Episode number 220. My name is Brian Anderson. Look forward to seeing you for episode 221. Share it with your friends, your other advisors, anybody that has criticism or good feedback. It's just going to sharpen the message. We'll be able to adjust it and get you guys the best advice over time. So thanks for joining us. Thank you Nate and thanks for having me. We will see you guys all next week with episode 221. Have a great day. Okay, bye.
