Well, we’re going to go ahead and get started. I have no, so we’ll get going. My name is Malcolm Horn and Kim Kennedy was unable to join us today, but we’re both financial consultants with Allian Credit Union. And a common question that gets that we get is, “Are you employed by the credit union?” And yes, we are. We’re both part of the retirement and investment services division of the credit union. We’ve both been with the credit union for over 10 years. And today’s topic is going to be very educational. We’re we’re going to be talking about annuities. You know, people say, “Oh, annuities are bad. You shouldn’t do it.” But really, it does they do make a lot of sense for certain people. I’m not saying everybody should own an annuity, but it it’s it’s important to know what it is and how it can be beneficial for your situation. So again, today’s going to be very educational. We’re not going to be talking about any specific products, just kind of the high level of what annuities are, the good, the bad, and ugly. Over the next week, we are going to call everybody just to kind of touch base, see if there’s any additional questions you might have had for us. Both me and Kim are located in Denver, Colorado with offices in DTC and Lakewood. For anybody joining from out of state, we are happy to do virtual meetings. Anybody that lives in Colorado, if you’d rather do a virtual meeting, we’re happy to do so. I will answer questions at the end of today’s webinar, make sure there’s a Q&A box or a chat box that you can put in there to say, “Hey, I have a question regarding this.” And happy to answer that at the end. Um, we do have some upcoming webinars that I want to make you aware of. We’re going to be talking about Roth conversions on Tuesday, September 1st. Roth conversions is when you’re moving money from a traditional IRA to a Roth IRA, you pay the taxes on that conversion. Doesn’t make sense when it comes to your situation. We’re going to go through the pros and cons of doing Roth conversions. And then we’ll do social security on Tuesday, September 22nd. Um, what you need to know before you apply for social security. And then, of course, we’re the we’re we’re not the only ones that perform webinars. There are other financial advisors that are doing webinars. You can go online and look at those specific webinars and feel free to attend any of those. We do produce a podcast on various financial topics that you can listen to. And then our website has a lot of financial information if there’s a specific topic you’re looking for. So browse around when it comes to our website. Um there might be some information that you’re interested in finding more about. Also I want to make sure that you’re aware of for any existing clients of uh we do we did add a trusted will feature that that’s available to you. So, if you still need to get your will, trust, power of attorney, living will, HIPPA authorization forms completed, please make sure to reach out to your current financial adviser that you’re working with, financial consultant, because this is a service that you’re able to utilize now uh at no cost. So, with that, I’m going to jump into the good, the bad, and the ugly when it comes to annuities. So, I’m going to go off video and we’ll go from there. So, And [clears throat] so this is our agenda today. This is what we’re going to be covering. You we’re going to first talk about, well, what is an annuity? What are the different types? But I heard they’re bad. Are they really bad? How does taxes work when it comes to purchase an annuity? What’s in it for them? You know, there are financial advisors that all they do is sell the annuities. And what is why are they doing that? What’s in it for them? You know, but I get a free meal. Like you might be for anybody that’s over 65, you’re probably getting quite a bit of advertisements in the mail like, “Hey, come get a dinner and let’s talk to you about annuities. Um, you know, if you have an existing annuity, is it good? How can what can I get out of my existing annuity? And who can benefit from it?” This is today’s agenda. This is what we’re going to be covering. So, we are going to be covering quite a bit. So let’s first talk with let’s first start with what is an annuity. An annuity is simply a contract between you and an insurance company where you contribute money upfront and then receive payments over a period of time. You can receive payments in variety of ways including a lump sum or inventory. So when annuities were created this is what the annuity was kind of what was there for. You put money in, you get an income stream you can’t outlive. Now, annuities have changed quite a bit over over the last 60 years. But some of the reasons why people buy annuities is they want to protect their principal. They want a fixed rate of return. They want long-term growth with some downside protection. Maybe they do want income for life. And also maybe they want some tax deferred growth. So when it comes to what is annuity, yes, annuities were gen created originally to create income, but they’ve evolved so much over the last 50 years. And now when it comes to different types of annuities, you have immediate annuities and deferred annuities. Immediate annuities is when you’re coming in and saying, “Hey, I’m going to go to an insurance company. I’m going to give them a lump sum. They’re going to give me a monthly income for the [snorts] rest of my rest of my life. So, your income now, you choose how you want that income. You want that income to be paid out over your lifetime. Do you want that income to be paid out over a 10-year period or 15-ear period? That’s really your choice. You can use money from money they have in savings or you can even use IRA assets to do this type of immediate annuity. There’s also even something called a qualified longevity annuity contract, a QAC. What the QAC does is it comes in and says, “Hey, I’m going to put money into this QAC and this money that I put into it, I get to defer my RMDs until I turn 85.” So, it’s a way to say, “Hey, I don’t want to take my required minimum distribution. I’m going to delay until 85.” And then at 85, you have to turn on an income. So, that’s another form of immediate annuity where you’re coming in and say, “Hey, yeah, give me an income, but I want to defer that income till a later date.” But most immediate annuities, you’re coming in and getting a specific amount of income for the rest of your life. Think of as a personal pension. Another type of annuity which we see more and more of that we’re using for our clients is deferred annuities. This is more of an an accumulation investment vehicle where you’re coming in and saying, “Hey, I want to invest in a certain way, but at the end of that term, I want my money back.” So, there’s different types of annuities. There’s a fixed annuity, there’s a fixed index annuity, a variable annuity, and a structured annuity. and we’ll go through each of these types. Let’s start with a fixed annuity. [clears throat] Fixed annuity is almost kind of like a CD where it’s a term um you have a specific term. The insurance company comes in and says, “Hey, we’re going to give you a specific interest rate for a specific term and then at the end of that term, you take your money and do whatever you want.” Just like a CD, you buy a CD, they’re going to give you a specific interest rate. And once that term is done, you decide, hey, do I want to renew it for another term or move somewhere else? And the terms right now that you choose from are three, three, five, seven, and 10ear terms. Meaning that this is the term that you’re going to get that interest rate for. Kim and I usually use a 5year term. Right now, you can pick up a 5year term and get a guaranteed rate of 5.6%. 6% over that time. Your principal’s protected. If you’re using money that you have in your savings account, that interest is deferred until you withdraw the money. It is a little bit different than CDs because with CDs, you might buy a CD and let’s say you get 4% interest. Well, at the end of the year, you’re going to get a 1099 that says, “Hey, you earned this amount of interest and you have to pay taxes on it.” With fixed annuities, that interest is deferred until you take it out. With fixed annuities, there’s no annual fee. You can use IRA money or nonIRRA money to put money in. Um, and also most fixed annuities come in and say, “Hey, you can take up to 10% out without any penalty.” Yeah, interest is the first to come out. So you you would have to pay taxes on that interest, but you’re usually able to take 10% of your account value out within that first, let’s say 5year term. If you’re choosing a 5-year term, you can take up to 10% out within that first 5 years. Now, the thing to watch out for when it comes to fixed annuities is if you purchase this before 59 12, let’s say you’re 50 and you buy a fixed annuity, you’re not going to get be able to access your money until 59 and a half really. Because if you take money out, that interesting that’s been deferring, you’re going to have to pay taxes not only on the interest, but because there’s something called a early withdrawal penalty before 59 and a half that the IRS imposes that says, “Hey, you took money out before 59 12. We’re going to penalize you for early withdrawal penalty.” So, just be aware of that. But like you once you’re over 59 and a half, like let’s say you’re 60 years old, purchase a 5-year term. At 65, you take all your money out. Yeah, you’re going to be paying taxes on the the interest you’ve earned, but that’s it. So, this is a fixed annuity. It’s just, you know, it’s a specific interest rate to a specific term. So, you can see on this chart, like, let’s say you purchase a 3-year fixed annuity, earns 4%. Well, you know how much interest you’re going to earn at the end of that term. Now, there’s something called a fixed index annuity and you time horizon usually is 5, seven or 10 years. We like the five years, you know, 5, seven years is kind of the the term that we like, but your principal’s protected, meaning well, one, your principal’s protected. You earn interest based on what the market does. So, the biggest index out there is the S&P 500 index. So, it’s a way for you to invest in the market and have your principal protected because if you come in and say, “Hey, I don’t know what the market’s going to do.” If the market goes up, great. You’re going to earn interest. If the market goes down, well, you’re not going to lose anything. You’re not going to earn any interest, but we’re protecting your principal. So, you earn interest based on the return of the market. There’s no annual fee. Also, you can use money in IAS or nonIRAS to purchase this and knowing if a yeah, every year your interest is going to be based on whatever that indexes you choose. So again, if you choose a S&P 500 index, it it’s always a one-year look back. Here’s a good example of this. Let’s say in year one, the market was up, you earn interest. Year two, the market was up, you earn interest. Year three, the market goes down. Well, the market was down. You don’t lose anything. Your principal is protected, but now we get to restart at that lower point. So, as long as the market goes back up, we’re going to earn interest. We don’t have to wait for it to get back to its previous high water mark. So that is one benefit of the FIA, the fixed index annuity is that again you’re earning interest when the market’s up, market goes down, you’re not losing anything. Yeah, you don’t earn any interest, but you don’t lose anything. And there’s no annual fee for this type of contract either. So it’s another way to invest in the market, but protect it. So if the market goes down 30%, again, who cares? You’re not losing a penny. There’s also something called variable annuities. Variable annuities, you can usually choose between a 3 to 10year time horizon. You have the ability to invest in the market. Um, your risk to principal is based on the performance of the market. So, if the market goes down, well, you’re going to see your account go down. With variable annuities though, what you’re paying for is something called a mortality and expense fee. and this expense is saying coming in and say, “Hey, if I put $100,000 in and the market goes down 40%.” And I die that same day, the 100,000 you put into it is fully protected. So there’s a death benefit. The death benefit with variable annuities is whatever you usually put in. So you put 100,000 in, you know, your beneficiaries are going to receive 100,000 regardless of whatever happens with the market. Um, with variable annuities, the fees can range. I’ve seen variable annuities from anywhere from 2 and a half all the way up to 4 and a.5%. Because it all depends on what you’re purchasing for that variable variable annuity because the investments usually have a 1% fee. The emin usually is 1%. Maybe you’re purchasing a another type of rider that’s another 1%. I mean all that starts to add up and that’s where it comes into a very expensive contract. So we don’t like expensive contracts. But anyways, you can also purchase variable annuities with IAS and nonirra assets.
The next type of annuity that’s out there that’s become a little bit more common over the last 10 years is something called a structure annuity. A structure annuity usually time frame of 6 years but you have the ability to invest in an index just like the variable variable annuity but now you have the ability to invest in an index like the S&P 500 but you might get better rate returns than investing in a fixed index annuity and you have some downside protection. What that means is oh so let me let me again gains are tax deferred there’s no annual fee money can be used with IAS and non nonirra assets with the structured annuities again kind of how this works is that you invest in the S&P 500 and you have bigger cap rates than the fixed index annuity. So for example like with the fixed index annuity like cap rates are around 9%. meaning that’s the most you could earn. But with structured annuities, they’ll come in and say, “Hey, you can earn up to 16% interest.” So again, you’re tied to the S&P 500, no fee, and depending on what the S&P 500 does, you’re going to earn all the way up to 16%. So if the market does say 12%, you’re going to get 12%. If the market does 30% per se, well, you’re going to be capped at 16%. Now, on the flip side of it, there’s some downside protection. With the fixed index annuity, they come in and say, “Hey, you’re going to be capped at 9, but we’re going to protect your principal.” With structured annuities, they’re coming in and saying, “Hey, look, we’ll give you a higher upside, say 16%.” But you’re still have the ability to lose money if the market goes down more than 10%. So you come in and say, “Hey, I want the 10% protection bucket.” Meaning that if the market goes down more than 10%, that’s what you could possibly lose. So in an example, let’s say the market goes down 15%. The first 10% you do you do not participate in, you only participate above that 10. So you’d be down five. So that’s how they’re structured annuities. You can come in and choose a 10, 20, or even a 30% protection, meaning that you choose how much protection you want to have in place. So, if I chose the 20%, you know, they’re happy to give you 20% protection, but your cap rate might go down. It might go down to 12%. They’ll come in and say, “Hey, on the upside, we’ll give you up to 12%.” And of whatever the market does, but then downside, you’re only going to lose money if the market goes down more than 20%. So, with these structured annuities, they’re they’re interesting vehicle where it’s like, “Hey, let’s invest in the market, but I want more than 9%.” But you have to go with, you know, the ability, you go with the option of, well, if the market goes down more than that, you could still lose money. [gasps] There’s also with these structured annuities something called a particip participation rate where you come in and say hey I want a participation rate meaning that if I invest in the S&P 500 and the market does 20% they might come in and say okay the market did 20% and we’re going to give you 130% of whatever that index did. So that means that hey the S&P like I can go out and buy a Vanguard S&P 500 index and if the that index does 20% well my participation will actually outperform that by 30%. So my return would be 26%. So that’s what a participation uh rate is. You come in and say hey participation could range anywhere from 80 down to 130%. depending on what index you choose, but that’s what a participation rate is when it comes to these structured annuities. Now, remember with the risk of the risk of the market, you know, think about it. If I’m down 20%, I have for for the market to break even, I need the market to go do 25% the next year. So you can see where these structured products or even fixed annuities can be beneficial because it’s think about it this way. If I chose the 15% if I chose the 10% protection in place and the market’s down 15%. Well, no, let’s do let’s do it a different way. Let’s say I chose the 10% protection and the market’s down 20%. verse someone that just bought the S&P 500 index. [clears throat] They’re down 20%, I’m down 20%. But remember, the first 10%, I don’t participate. I only participate if the market’s down more than 10. So, I’m down 10. So, that means the next year for me to break even, I only need 11.2% rate of return where versus that other person that invested in the S&P 500 index needs a 25% rate of return just to break even. So, it’s a different way to kind of think about investing in the market where you have protection. Remember, if you’re down 50, if the market’s down 50%. The market has to do 100% rate of return for you to break even. So, having some downside protection is sometimes important. Now, there’s all types of different annuities and all types of different kind of ways you can invest. And you can see from this chart like the lowest risk like you can just put your money in savings cash you have no risk besides inflation risk. And then the highest risk is going out there and buying individual stocks. So when you think about fixed annuities, they’re just right in line with like CDs. Fixed index annuities are a step above that because there is a possibility that you couldn’t earn no interest for the year. And then variable annuities structured products are kind of well structured products are even before variable annuities on this kind of risk line in regards to how much of my principle is at risk. Okay, the good, the bad, and the ugly annuities are bad. We hear it all the time. Annuities are bad. Well, why? Why are they bad? Well, one probably because of the fees, the holding period, and they keep all my money. Those are common things that we hear. Well, let’s talk about variable annuities because we hate variable annuities because of the amount of fees that you pay. Again, as I mentioned, mortality expense fee 125, sub account failures, which is the investment fees are one, writer charges, you know, maybe you’re buying a a lifetime income 125. So your total fees is 3.5%. On that variable annuity. So again, you know, 15 20 years ago, variable annuities are very, you know, very popular and they’re very expensive. And so this rationale like, hey, they’re bad. Annuities are all annuities are bad. Well, it depends on what type of annuity it is. a variable annuity that has a very high fee, you can categorize as yeah, it’s bad because you nowadays you can buy an annuity at no fee or even much cheaper fees and get the same type of benefits. Well, what about the holding period? I never get my money. Well, again, you choose how long your money is with them. As with fixed annuities, you can choose a 3, five, 7, or 10 year time horizon. Just like CDs, I’m going to choose a four-year CD. That’s how long your money is going to be there. Now, during that time, if you needed to access your money, you can pull up to 10% out without any penalties. But if you pull more than that out, you’re going to be penalized. And again, with a holding period surrender charges, they can range anywhere from 3 to 15. I’ve seen some annuities that have 20-year surrender charges that it’s ridiculous. So ridiculous to have that long of surrender charges on annuities. But you you just have to watch out for like when you purchase annuity, how long is the surrender period? You know, there’s annuities that I’ve come across where they they give you a bonus. They’re going to give you a 30% bonus, but even though it’s a 10year surrender charge, with you getting a bonus, they add another 5 years on the back end. So when you are purchasing an annuity, just watch out for the holding period, the surrender charges. You know, that’s where people come in and well, I don’t want to hold my money there for 10 years. Yeah, I don’t blame you. So it’s really important to kind of understand like, hey, depending where you go into, what type of annuity you go into, look to see what is holding period, and if I need to access money, how do I access access it? Because sometimes you can access your money if you have terminal illness, nursing home or even, you know, death. This money goes to the beneficiaries and they get to do whatever they want with it.
But they keep all my money, deferred annuities, walk away value. Well, that’s not the case. You know, maybe 30 years ago, 40 years ago, you purchase an annuity and a lot of times people would come in like, I’m just going to choose a single life. So, well, single life annuity, you put your money in, you’re getting income, and in 2 years, you die. That insurance company that set up that single life comes in and keeps all your money because you chose a single life. Nowadays, I have I mean, I’ve been doing this for over 20 years. I don’t think I’ve had one client annuize their contract. But nowadays, if you’re coming in and saying, “Hey, I want lifetime income.” That’s great. you put your money in will create a lifetime income. But if something would happen to you, let’s say, you know, something happened to you within two years. Whatever you put into that, there’s this benefit this there’s this there’s this value that your beneficiaries are going to receive. So nowadays, these annuities you put money in, even though you create income, your beneficiary is going to receive something if you haven’t lived kind of a this long life expectancy. So yeah, people might come in and say, “Well, they’re just going to keep your money.” That’s not the case. Unless you unless you chose a single lifetime option, which most time nobody ever does anymore. Okay, let’s talk about taxes. And this really has to do where if you’re taking money out of your savings account or non-retirement and putting money into this. So let’s say you have money in savings. You take money into savings and put into a fixed annuity. That fixed annuity earns interest and that interest is compounded. And when you take that out, that’s when you pay the taxes. So again, the earnings compound, the principal compounds, and you don’t pay taxes until you take the money out. Now, if you purchase a fixed annuity with an IRA, it’s still an IRA. whatever you put into it when it comes out, you have to pay taxes on it. So, also there’s something called a 1035 exchange. If you have a fixed annuity, you’re like, “Hey, I don’t want to pay the taxes on this. I want to continue deferring the taxes.” You can do a 1031 and move that money to a new annuity and still have that interest deferred. I’m working with an individual owner right now. He’s working. He’s in a 24% tax liability and he had this money in CDs and it continued to add to his tax liability each year. We’re able to put this money into a fixed annuity. He’s going to retire in 3 years. When he retires, he’s going to be in a 12% tax bracket. So, we’re saving almost 10% 12% in taxes on deferring this interest until he retires and takes it out. So, there is this tax planning angle when it comes to you know these annuities. If you’re trying to defer taxes to a later point, especially if you’re in a 32% tax bracket and you know you’re going to be in a lower tax bracket of retirement, it might make sense to go down this path. Okay, what’s the name for the insurance companies? Well, just like a bank, if you purchase a CD with a bank, they might come in and say, “Hey, we’re going to give you 4%.” They turn around and lend that money out and get 6%. So that 2% difference is the profit that they’re making. Same with these insurance companies. They might come in and say, “Hey, we’re going to invest give you 5.6% for a 5year term, but we’re going to turn around and invest it in very high quality individual bonds. Maybe we’ll invest in lend it out or invest in stocks. Our goal is to get more than a 5.6%.” And that’s the profit that they get. So if they’re able to get, let’s say, 7% on your money, their profit is 1.4%. 4%. There’s other ways to to there’s other ways that the insurance companies make the money. For example, with variable annuities, the me fee, the rider fees, the investment fees, all of those are part of their profit. I used to work for a company called Valick. Valick primarily dealt with variable annuities. And there’s a lot of times I’d see, okay, you put 100,000 in it and it’s worth $400,000. You’re paying an M& fee for nothing because at the end of the day, your beneficiaries will get $400,000 unless the market drast.
There’s never going to be a situation where the 100,000 that account is is going to go below $100,000 because it’s worth 400. So, you know, these are other ways that these insurance companies make profit on investing with the annuities.
Ultimately, you know, there’s no free lunch. You know, when you talk about these, there are these advisors out there and all they do is sell annuities and they do these expensive dinners and they do these demoners and they talk about annuities and a lot of times those annuities they’re they’re getting anywhere from 10 to 12% commissions on those annuities that they’re selling. You’re also buying an annuity that has anywhere from 10 to 15 year time horizon. Meaning your money is locked up for 10 to 15 years, but that’s how they’re paying for that dinner. That dinner is not cheap. That dinner could be $1,000. But if they’re able to come in and sell one annuity that pays for the dinner. So, and sometimes there’s annuities out there that are just too good to be true. You and it’s how it’s presented. Oh, I will give you a 30% bonus, but that 30% bonus that you’re get, the only way that you get that money out is you have to create a lifetime income. So, it’s understanding the details of that specific annuity. And sometimes those annuities have very high fees, long surrender charges. So, when it comes to this no free lunch, just know like if you go to a dinner seminar and you’re like, “Oh, this this annuity sounds great.” We’re happy to review and show you what’s the good, the bad regarding that. Now, at the end of the day, there are people that have annuities. I mean, if you currently have annuity and you’re like, “Well, I really don’t understand this annuity that I have. I want to know more about it.” Kim and I are happy to review it with you. No obligation review. Kind of show you what’s good, what’s bad, you know, would you turn on the income? you know, if you want to try to unwind it, we can unwind it. You know, is there a way to reduce costs, you know, increase some of the benefits, you know, whatever the case is, we can look at everything when it comes to that annuity and see show you what’s good, what’s bad with it, if you have one. So, who can benefit from these types of products? Well, if you’re looking for tax deferral, maybe you are in a high tax bracket, but you know you’re going to be in retirement in a low tax bracket. Maybe tax deferral would be beneficial. Maybe you’re looking for a higher fixed rate. Right now, a 5-year CD is paying around 4.1 4.5 where we know with fixed annuities we can pick up 5.6. Maybe you want growth potential, but you want to protect your principal. You’re concerned about what the market’s going to do. Well, if we’re wrong and the market does really well, you’re capizing capitalizing on it. If you’re right and the market goes down, well, your principal was protected. Maybe you need guaranteed income. You know, maybe you’re single, no kids, and you’re looking, hey, when I want to retire, I want to get the most income possible. So maybe creating more of a guaranteed income or personal pension is important to you. Maybe a death benefit is important. You’re coming in and saying, “Hey, look, I want to invest in the market and I believe in the market, but if anything happens and something happens to you, I want to at least have this principle protected for my beneficiaries.” And also, annuities can avoid probate. Again, with annuities, you list the beneficiary. You list who you want this money to go to. So if you want this money to go to your son, you can indicate, yeah, this money will go to my son. And if something would happen to you, this money goes to your son. And then your son decides if he wants to pull it all out or kind of stretch it over his life expectancy. So is an annuity right for me? Annuities aren’t right for everyone. At the end of the day, they’re not. There’s been times when I I look at an annuity I’m like that does not make sense. What’s the point to do so
if annuity might be a good choice if you’re looking at creating more lifetime income for yourself and also a way to say hey I don’t know how long you’re going to live. It’s a longevity contract. You’re going to get this income for the rest of your life. No matter how long you live, you lived 105, you’re going to get this income. So that could be right for you if you want to reduce your risk when it comes to your portfolio. Maybe it makes sense for you. But again, it’s what what is your specific goals? And that’s kind of the questions you have to ask. Facts versus fiction. They’re too expensive. Well, some annuities are very expensive. Some h have no fees at all. They have hidden fees. Well, I by federal and state rules, they’re required the fees to be transparent. Now, I can tell you with variable annuities, you may not see all the fees cuz when it comes to the investment fees or maybe even the mortality and expense fee, you necessarily don’t see it, but there’s fees there. And we can happily show you what those fees are. They have high commissions. Yeah, there are there are annuities out there where the advisor that sold it to you gets a very high commission, but most of the time it doesn’t come out of your pocket. Meaning that if you put 100,000 in, that’s 100,000 that’s invested. That insurance company comes in and says, “Well, you just signed up for a 15-year time horizon on that annuity. So, we’re going to give this advisor, whoever sold it to you, a very high commission for doing so.” So, just watch out. Again, it’s all tied to the surrender charges. Um, but most, if not all, annuities, the commission does not come out of your money. Meaning, like, let’s go back to that 5.6%. 5.6 is what you’re going to get. You put 100,000 in, 100,000 is invested, that’s what’s earning the interest. that the FX annuity does pay a commission to the adviser whoever sold that to it, but it’s not coming out of your money. I can’t touch the money. Well, nearly all annuities have some kind of withdrawal feature. Meaning, if you needed to withdraw some money, there’s a certain amount that you can withdraw without any penalties. But if you do withdraw more than that, then that’s possibly when you could lose some of your principal or lose most of the interest you make. They’re too confusing. Well, sometimes they are. Some of the availabilities are very expensive, but that has to do with maybe the riders you’re signing up for or what you’re trying to accomplish with them. But we try to make them as simple as possible when it comes to what what makes the most sense for your situation. Now, let’s talk about some of the planning that Kim and I do for our members when it comes to does annuities make sense or not. So, Richard and Deborah came and saw us. Richard’s going to retire at 67. Deborah’s going to retire at 65. Richard has some health issues, so he’s going to we’re using a shorter life expectancy for him. They’re both contributing to the 401k. They’re maxing that out. receiving a match. We have their income coming in. We know what their social security benefit looks like. And Rich is going to receive a PBGC. They want to live on about $90,000 a year. Their healthcare is about 6,000 per person and they’re going to travel spend about $12,000 a year for travel. And we’re looking at federal and state taxes. So when we start putting these pieces together, you know, the first thing we want to look at is, hey, based on your assets, are you able to replace your income? And so you see the blue, that’s the income that they have coming in from working. The dark blue is social security they’re going to be receiving. And then the teal is the PBGC. Yellow is them taking money out of their investments. And the red is required minimum distribution. So when we look at this, it tells us that when it comes to kind of 49% of their expenses are covered with guaranteed income.
Well, if they if they wanted to consider some of the assets, if they wanted to look at an annuity to increase their guaranteed income to pay more of their expenses, we can consider that and say, okay, if we came in and purchased an annuity that’s going to provide you a lifetime income, does that increase your covered expenses? So by buying an annuity actually increases 60 now 68% of their expenses are completely covered with guaranteed income. Meaning that you have guaranteed income coming in for the rest of your life and it’s covering 68 to 80% of the expenses that you have. So retirement is about climbing a mountain at times. You might climb the mountain. You work save work save. Once you get to the top of the mountain you’re like yeah I did it. But sometimes going down the mountain is the most dangerous. And in retirement that is true too because there are certain things in retirement that you don’t really think about while you’re working. You don’t really think about longevity. You know, you don’t really care about sequence of returns because you’re contributing to the 401k. If the market goes down, you’re just buying more shares. But in retirement, it’s really important because you don’t want to be selling those shares at a loss. you know, housing might change, more volatility in retirement. I don’t know. These all these different types of risk that you have to face be faced with and these are things that we can help you with when it comes to your situation. So, I know there’s more information that we be could be covering regarding annuities, but I think this is a good 101 class on annuities. Um, again, I’m going to answer any questions. Let’s see if we have any questions to answer when it comes to annuities. I will put a poll out there in the poll. If you’d like to schedule a meeting with us, please indicate that on the poll. So, I’m going to get that out now and let’s see what questions that we might have. All right.
See where? Give me a minute. This way. Oh, first question. While discussing deferred annuities, fixed and fixed index, you mentioned liking the 5-year terms. Is there a reason that you and Kim like the 5year terms verse the other options?
There’s not necessarily Well, think about this. We things change with it. 5 years is always a good time horizon because quite a bit of things change within that 5year time horizon. Um, so it’s just we like that that horizon verse a 7-year. Now, I’ve definitely provided 7-year terms to clients because with where the caps are right now, like in the 5 years, those caps are going to drop and we’re going to have to move the money and do something else. With going with a 7-year, you at least know for 7 years, you’re going to have those higher caps. So at times it’s just kind of a preference in regards to which one you want. So there’s not really a um a reason just because I think 5 years 5 years is a good time horizon to say hey we’re going down this path for 5 years 5 years we’re going to reassess what’s happening within the the economy. um fixed annuity withdrawals 10% total one or per year. It’s 10% per anniversary year. So for example, going back to that 5year term, you put 100,000 in first [clears throat] year, you can take 10% out. You you have 10% of the account value each year that you pull out without any penalties. Um can a trust be the beneficiary? Absolutely. The trust can be the beneficiary. So if you set up the annuity, you can name the trust as beneficiary. So if something would happen, this money goes into the trust. Uh trust. Absolutely. The beneficiary can be in the trust. Let’s see
what other questions you have. It looks like those are the questions I have for right now.
Give it a couple more minute. I’ll give it a minute if no additional questions, I guess. [gasps] Again, t thank you for taking the time to to do this. Oh, here it is. I’m considering a bridge strategy to refrain from taking social security till age 70, but what product or annuity would be good to retire at 65 and provide income only for 5 years versus lifetime income? or is there another way to do it? Oh, that’s kind of interesting. Um, so yeah, you could bridge it. You So you could ladder it. So when I say like maybe put some money into a money market that you access in a year, you can put some additional money into you just ladder it out. I mean, you could purchase a three-year and a 5year annuity. And then uh in between those you could ladder it with just money markets. So or even like a 4 year you could come in and say okay for the first two years I’m going to use a money market that’s going to pay about 3.4. Then you could do a three-year term and then a 4-year term and a 5year term to kind of get you the income that you need during those 5 years to bridge you until age 70. It’s just a matter of kind of how much risk you want to take. if you don’t want to take any risk at all. I mean, it’s just a combination of those two and building a laddered approach out and getting a higher interest rate for those 5year term for that those 5 years for an IRA annuity. Should I should a trust be beneficiary? Should should a trust be beneficiary? How does the death affect withdrawal requirements for beneficiary? Okay. So if you name the beneficiary, if you name the trust as the beneficiary, it it’s you have to it’s important to understand how does the trust interact? Meaning that if you put money into the trust, is the trust there specifically to to kind of hold on to money and disperse it out over a certain amount of period of time? or is the trust there just to say, “Hey, it’s bypassing probate.” When it comes to an IRA, you know, I guess it just depends on how how you want this money to be passed on beneficiaries. If you if you’re concerned how the beneficiary [clears throat] will receive this money, how they will spend it, a trust is important. But if you’re coming in and say, “Hey, my kids are responsible when they inherit it, they they’re going to know what to do.” you you may not necessarily want to name a trust, but I know there’s other ways to why you would name a trust and maybe name a trust to make sure that the money stays within the kind of the the family. So, it just depends on what that trust is there specifically to do. Are annuities FDIC insured? So, annuities are not FDIC insured. Annuities are insured by the state. So every state has their own insurance insurance. So for example, I can speak on Colorado. Colorado insures up to $250,000. California will come in and insure up to $250,000 also, but it’s 80% of whatever that account value is. So if you have an insurance company that fails, the state steps in and says, “Hey, we will insure up to 250,000.” So every state is a little bit different when it comes to that bunny being insured with that that annuity is an espia among the type of annuities you describe. Yes. So subsia is an immediate annuity where you’re coming in putting money in you’re going to get this lifetime income. Is a QAC required to start at age 85 or can it begin payouts earlier? I believe you can. That’s a good question. I believe you can pay it out earlier, but most of the time you delay till 85. I personally do not like the QAC. And the reason I say this, every time I’ve looked into QAC, so for example, if you’re 70, put money into a QAC, like the the point of it is to delay till age 85 and then turn on the income at that time. But if something would happen to you, let’s say something happens to you at age 80, the beneficiaries, yes, get the money you put into it, but for 10 years that money’s been sitting there, they earn no interest at all. So, it’s really hard to come in and say, “Hey, let’s put money in the QAC.” Yeah, it’s going to help you reduce some of your RMDs, but in regards to the earning power that you lose, it doesn’t make sense. What are other questions that are generally asked during these seminars that we often that we haven’t thought of? I think at the end of the day we covered a lot of ground when it comes to annuities and annuities are a you know it’s a individual by individual basis. It’s not like everybody should own this type ofity. No, it it just depends on what you’re trying to accomplish when it comes to this. Bonds, for example, have been a fixed annuities have been a great alternative of bonds. If you look at bonds today, year to date through the end of July, they’re at 0%. Meaning they’re down or or basically zero. So, and when you start looking at the the capital assumptions of what bonds are going to do for the next 5 years, it’s like under 4%. So, it’s kind of like, well, if I can pick up something that’s going to pay me 5.6% over the next 5 years, why would I invest in bonds? And again, kind of, you know, investing in bonds like year to date, like they’re at zero. Well, you might as well just put your money in savings. So there is some questions when it comes to bonds and how they’re performing and is there a better alternative to invest to get you the same kind of the diversification diversification when it comes to bonds is a way to protect principle and offset when the market’s going down. But where where interest rates are I mean the Fed’s talking about raising interest rates at the end of the year and then they’re look looking at maybe cutting it next year. So, we’re still going to see interest rates, a little bit of volatility with interest rates through the end of the year, meaning that bonds are probably going to do nothing for the year. So, it’s just another way to kind of provide a diversification from a traditional asset class. That was a lot. I apologize. [laughter] Does each annuity insured up to 250 are total annuities? Uh so again annuities are issued by different uh companies. So again um nationwide is let’s use nationwide as an example. So if well let me let me back up. So the state insurance up to $250,000. So you would have to be in the boat of seeing multiple insurance companies fail for you not to get your money insured. Now, what happens with all these insurance companies? If an insurance company kind of fails, the state steps in and says, “Hey, look, we’re going to go to Nationwide. Nationwide, if you want to continue doing business in the state, you need to buy the assets of this insurance company.” It happens all the time. It happens with banks, too. You they come in and say, “Hey, this credit union is failing,” which Alliance has had. It’s happened to us. not necessarily failing, but like the NCUA coming to us and say, “Hey, this bank is failing. We want you to purchase it.” Now, we’re going to review it and say, “Hey, we we’re going to do it or not.” But that’s what happens usually with insurance companies when they start to fail is this state steps in. He says, “Hey, if you want to stay, you know, it’s kind of like a if you want to stay, if you continue want to do business in the state, you really need to look at purchasing these assets.” So there have been insurance companies that have failed in the past, but when it comes to our platform and the insurance companies that we’re able to offer, we’re only a rated or better. So you have to watch out for those insurance companies that are A or below or B and below cuz those are the insurance companies that could fail. Uh
would you suggest an annuity versus high savings account? You know, it depends on what you’re trying to accomplish. With high interest savings, you have access to the money at any time. Any annuity you purchase, you’re looking at a certain time frame, 3, 5 years down the road. Yes, you have access to 10%. But that’s the downside. you know, you should always have money in savings for you to access if you need it. But if you have this other layer of money that you’re like, I don’t see myself needing to use it, that’s when you can kind of add a little bit more duration on uh that type of investment. So, [sighs] all right, I think I answered all the questions. Um, what are the main or primary insurance we offer for annuities? We have access to pretty much anybody and anybody in the marketplace as long as they’re A-rated or better. So lately, Nationwide, um, there’s a company that we’ve been working with quite a bit. Nationwide, Athen Global Atlantic, Pack Life, you name it. Some of these big insurance players, we have access to their their platform. So, it’s not it’s not going with one company. It’s saying who has the best rate or what a reach. It’s a case- by case basis. It’s who in regards to this client who has the best opportunity and going to that specific company. So, I don’t necessarily have one company that I go to for all my needs. No, I go to what makes the best sense for my client. Do what’s in the client’s best best interest. So, all right. Well, again, thank you for taking the time. Um, I think we’ve hit our hit our hour almost and uh again we’ll reach out to everybody and uh go from there. So again, thank you very much. Bye.