When An Annuity Makes Retirement Easier

Episode 124 February 08, 2024 00:17:23
When An Annuity Makes Retirement Easier
Annuity Straight Talk
When An Annuity Makes Retirement Easier

Feb 08 2024 | 00:17:23

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Episode Transcript

[00:00:00] Speaker A: Hello and welcome everyone, to the Annuity Straight Talk podcast, episode number 124. My name is Brian Anderson, founder and creator of AnnuitystraitTalk.com, answering all your retirement questions. I am a planner, I am an advisor, and I try to advise about annuities in the context of all your retirement planning needs. Here to talk about another case study buddy called when an annuity makes retirement easier. I say this to consumers and other advisors alike. A lot of the advisors I talk to maybe don't necessarily like annuities. And I say, well, in a lot of cases, there's people that don't need annuities and there's investment advisors that think they don't need to use them. But damn if it ain't going to make your life a whole lot easier. So here's the case of that would encourage anyone to, like, subscribe or comment about this podcast or any other on your favorite podcast platform or on YouTube. Give me some feedback. Tell me where you'd want to be more specific. Any one of know, in a lot of cases, I write these newsletters and one paragraph could be expanded upon to create an entire podcast. So there's going to be a lot of that in this one because I like to speak in general terms, talk about philosophy and ideas rather than specifics because you can take the thoughts from this episode and if it resonates with you, then you can get a hold of me and we'll talk specific numbers in your situation, something and yours is going to be different than this one, different than everyone. You schedule that call by clicking on the top right corner of any page on annuitystraytalk.com. Schedule a call. Okay, so here we are. Here's the newsletter. Write it out. We're going to talk about philosophy. So income planning is simple, but product selection is tough. Last week I talked about a situation where they didn't necessarily need one, but they probably want one and we'll see what happens. I got a meeting with him again soon. This is a situation where he probably doesn't need one either, but it's going to make it a whole lot better if he does. So institutional managers have always been focused on accumulation of assets, and most would prefer it stay that way. Man, we've covered some really good stuff this year. That's part of it. The demographic shift happening for several years. You guys are all baby boomers, and there's a lot of younger people coming in that are, yeah, it's a pretty viable option in a lot of cases. Now, for younger people, it's even a better deal. But along with that shift in demographics, shift in strategy for managing assets, and that's exactly what I've spent 21 years studying and figuring out outside the academic community, in the services business, there's not anybody that I know that's been doing that specific, although a lot of other guys will say they have been. But I started a case recently. Last few weeks gave me a chance to again illustrate a couple of simple points that need to be covered. So this is a more focused subject than last week's episode where we covered all the option for someone who doesn't really need one has the flexibility to do that. This was a more direct objective we had in this case. So, couple with good savings that can cover their retirement needs, they could use any number of strategies. And if they do use an annuity, it has to be because it gives them a significant advantage over other assets or strategies. Okay, so the major lesson that I'm going to start with, I've mentioned this a lot. You calculate annual income needed as a percentage of total assets, or the multiple of your income needs in total assets. So in the case of these guys, it was 4.2% of their entire portfolio will cover both necessary and discretionary income. They want to retire in two to three years. So buying an annuity now will give them guaranteed increases on cash growth or income for each year they wait. First thing I did was figure out how much guaranteed income they would get for a deferred income annuity based on their age guaranteed lifetime income. Now, they can't use an immediate annuity because they want to defer for more than a year. So we're looking at deferred annuity. It's an index. Annuity paid the highest. The payout was 8.4% of the initial investment as guaranteed income. That eliminates a significant burden from the portfolio. If just 15% of their money went to the income annuity, additional income needed would only amount to 3.4% of the portfolio. I hope everybody understands that's reducing risk required rate of return. All that stuff went from 4.2 to 3.4 just by taking 15% of the money, putting it in guaranteed income. The more they add to the annuity, the easier and less risky it gets. So you understand it makes it easier if it reduces risk. That kind of goes without saying if you ask me, but I'll try to be as specific as possible. We also have to plan for residual value. That's for planning changes, inflation adjustments. So I wouldn't necessarily recommend using the income product for all of their spending needs. If you maintain some level of control, you get to maximize performance for anything else that you might need or want. It turns out, like when talking to this guy a few times, a good portion of the money they want to spend is discretionary spending. Things that don't happen. Almost no one ever spends the same amount of money every year. Sometimes they need extra, sometimes they don't need any. Now, with an income and annuity, this is why you want to usually use them for baseline guaranteed income. Monthly payments are coming no matter what, and it might not be necessary. That's a taxation consideration for taxes. If you're required to take something you don't want, you might be forced into a higher tax bracket and you want to have some control over that as well. Establishing baseline guaranteed income is a good first move, but flexibility with the rest of it is a good idea. So for additional spending, I would recommend a fixed annuity. A mica. Rates now are currently higher than the percentage required. Remember, after the income annuity, spending needs were 3.4% of the remaining portfolio. If a fixed annuity is paying 5% interest, that can be taken each year without invading the principal, and it would further reduce requirements for the rest of the portfolio, withdrawing more than is required from the entire portfolio. Now, I use 5% as a ballpark general number. I'm not rate shopping. Yes, there's a little bit higher now. I don't know what it's going to be in a month or in a week when this comes out, or whenever you decide to call. If you see this in two years, it could be different. We're going to run the calculations a little bit differently. So the best part of the mica is that withdrawals are completely discretionary. They could take them or not take them if they don't want to. Up to 10% of the account value each year, taken or not as they wish, and even more than interest earnings if the desired expenses are high enough. So the residual value of these two different annuities is important to some. And there's a big difference here. The income annuity has very aggressive payouts. You're getting 8.4%, you're paying a 1% fee or so. So you get to maximize cash flow. But do that with a piece of the assets. At average life expectancy, there is no remaining value to pass on to heirs because you paid it all out. Fixed annuity, however, would have the full principal remaining, and it can be passed on to heirs if you wish, or more importantly, used for planning changes if necessary in the future. Once spouse dies, you can maximize income more effectively. Your costs might drop a little bit. If you don't want to leave a legacy, please remember that there are plenty of other reasons to plan to have money left over, and flexibility is the major idea here. It's important to point this out that annuities of either type are more preferable to bonds. Some would try to convince you otherwise. The income annuity pays far more income than would be available with bonds, and the fixed annuity has principal withdrawals that are not subject to fluctuating value via interest rate risk. As interest rates adjust, bond values change. If you want more than the interest, you got to sell principal. You could take a loss on that. You might benefit, but again, there's that risk. And for these reasons, the annuities are far superior, and it will translate to more performance on the portfolio over time. So the majority of other advisors might do in this situation is important as well because they have adequate funds. Most other insurance agents would recommend a little more than half of the assets going into an annuity. I took his income goal and I calculated they have the money to pay for that. But it's a big jump, and that's what a lot of guys are going to go to. Oh, well, the money is here. This is what it's going to cost. I kind of know how you guys work a little bit, and it's an emotional leap and can't always look at it objectively, and it's like there's sticker shock on that, man. It's half of the money. It's not what everybody wants. Some people end up doing it, but I'm not going to work that hard. I work a little harder trying to make sure that's the right way to do it. And we found it a little bit different way. Investment managers, if they recommended an annuity at all, would stop at the baseline guaranteed income because they want to keep as much money under management and pull fees off of that every year. Right. My recommendation. So I tested all sides of this, and I figured out my recommendation was about 30% of the assets, which is far less than most insurance agents, and a little more, actually, a fair bit more than what investment managers might recommend. So I think investment managers probably in this situation, be 2020, 5%. I was 30%, and insurance guys that are just honed in on one deal, say, half the money. So I created that nice spreadsheet. Everybody loves it. Test each scenario to see which offers the best result. And the idea is to be as objective as possible so that we can figure it out the right way. It helps to do this analysis before you spend a bunch of money, so that whatever I recommend is based on the best information we have, but allows for planning changes in the future. So in this case, does an annuity really makes things better? Yes, absolutely, it did. Between the income annuity and the fixed annuity, roughly 30% of their portfolio would be allocated to it. In the worst case scenario, over 20 years, the annuity strategy showed more than two and a half times as much portfolio value in comparison to just leaving it in a blended market portfolio. We did income, we did inflation adjustments, and we compared the remaining balance over that historical period. That recommendation was two and a half times what it created in a blended market portfolio. In a favorable 20 year scenario, the annuity strategy still resulted in a 50% increase to remaining portfolio value after 20 years. So that's a basic idea of how it improves it. Again, we want to have concrete reasoning that it does actually improve. Not only does it help you sleep at night, not only does it make things a whole lot easier, not only does it add a bunch of guarantees, but to show that you actually make more money and accumulate more wealth over time, that's the real power. Then it's not so much, hey, I'm giving this money away. You're not. You're strategically placing it in a spot that's going to give you a significant advantage through retirement. A lot of people are going to want to know. So I decided not to show the numbers. Again, this is a personal situation. The assets are not going to match yours. A lot of people get distracted by the numbers, and we're just talking about the philosophy and why we run through these things. I didn't even talk to this guy about specific products. I just did the basic numbers. He got to see what you get to see. Here's what we're going to do. And I spent time writing this newsletter, but you guys all get to see it. And I'm recording this podcast. You guys all get to see it. Somebody's going to resonate with that. So I can't say I spent a bunch of time on him, but if he decides to go forward, then we'll really dig into the differences in the products, and then he's going to have some preference decisions one way or the other. I don't know where it's going to go, but that's just what we do. I play for the ones I win. I think I'm still in the game, but who knows I didn't just imagine the 30%. I tinkered with the numbers a bunch. I did zero annuity. I did only guaranteed income. I did only the flexible, the mica, whatever. Myga could be substituted for indexed annuity if you wanted to. I like the, especially in these examples, because then we don't have to argue about, well, what if the indexed annuity doesn't do this or whatever. Some people choose to use that. I talked about that last week. But the idea is I don't have an agenda. I'm just trying to solve the problem for you. And if you want somebody who's done it 3000 times to figure out what you have questions about, that's what I'm doing. And then I give you this list of examples and options. And I'm not a product review website for that reason, because that's not what I'm trying to do. I don't want annuity shoppers to come here. I want people that are trying to solve problems. So yeah, no agenda. And in this case it was about a third of the money that did it. So another question a lot of people have is it doesn't require any specific investments for the remaining portfolio. Remember, we want to fix as many variables as we can to solve for the most important one. And in this case, can I retire? And will an annuity make things better? There's two of them, I guess. Well, the second one's kind of, that's a little subjective, it doesn't matter. But can I retire? Yes. We're just trying to evaluate the benefits of using the annuities. The first thing, figure out how to get the income. And again, these are income podcasts. A lot of the reasons to use annuities, this is, isn't the only thing that retirees do. Then you decide to work on how to invest the remaining funds. Some people will call me and say, well, I saw that sheet, it's really cool, but I don't want to have 60% of my assets in the market. I think this guy is probably one of those people. But we fix that variable and just compare it to things you might see or proposals you might see from other people. You go to an investment firm and they're going to probably have you. In this case, they're going to have the guy 75% stocks, bonds, whatever, and 25% in an annuity. Figure out the income first. Okay? That's the biggest problem. If you come with an income question, there's a lot of people that choose to put more in the annuity to get more income, more safety. Others will use less annuity. Some people just look at it and say, hell with it. I'm not going to do anything. I'm going to go buy cds. Go ahead. But ideas? We can customize it to fit individual preferences, but you got to understand the reasons why to use annuities and how they work first. That's why I did the last one. I did this one. It's a little bit more specific. Next time I'm going to get even more specific. You want to run through the options again, the link is in the newsletter or you can go to the newsletter page. You can see episode 123, sleep at night annuities. I cover all the different options and you can hit the scheduling link on the top right corner of this page to get in touch and I'll get more specific with your numbers. Annuitystraytalk.com top right corner get a hold of me. Thank you for joining for me for episode 124. Be back next week with an even more simple but more specific. The more specific you get, the more simple it is because you don't have to evaluate different options, right? So go ahead, subscribe like comment, YouTube, podcast platforms, wherever you want to do it. I'll be back next week. Thank you for joining me. I'm enjoying this and I hope you guys all have a great day. Okay, thanks. Bye. [00:16:26] Speaker B: You have been listening to annuity straight talk. The precision 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 a nerdy 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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