Opinions can be pretty split when it comes to annuities. Some people love them and some people see them in a less favorable light. Especially with the onset of the pandemic, we’ve seen a lot of people with insecurities about their retirement. Having too much faith in one product or one type of investment can be dangerous. We want to help you put perspective on this vehicle and investment tool.
There’s a place for everything when investing, but balance is important. Annuities can be used to meet specific needs. However, we need to look at it from an honest point of view. For example, they don’t always keep up well with the pace of inflation. On today’s episode, we will discuss fixed index annuities, their features, and what role they can play in your retirement plan.
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Review the Transcript: Ron Stutz:
Welcome to Retirement Talk, the redefining wealth show. Your source for financial information for fee retirees and retirees. We’re here to help you better navigate during these financial times. We’re here to discuss thoughts and ideas in the field of finance and retirement, as well as discuss trending topics and the impact of major legislation that can impact your retirement. We will break it all down. These discussions can help you make better informed decisions so you can live the lifestyle you imagine and make better financial choices. Laura Stover is a registered financial consultant and CEO of LS Wealth management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC, and The Wall Street Journal. I’m Ron Stutz. Our topic for today is the case for fixed index annuities.
Laura Stover:
Hello. Hello. Hello, Michael. And how are you today?
Michael Wallin :
If I got any better, it’d have be two of us, Laura. I am super stoked. 2021 is coming to a close and we are looking forward to 2022 and helping the clients. So, and those for that are listening onto the show. Super excited.
Laura Stover:
Well, this topic is one that I will say I feel we’re pretty well versed on. And I believe it will provide amazing insight for a lot of our clients that have questions about annuities, annuities, annuities, annuities. It’s a bad word in some people’s vocabulary. In other people’s vocabulary, they can’t get enough of them like Oreo cookies. And I think we want to put perspective on this vehicle. It’s a tool, one of many different investment vehicles. We can talk about options on a show. We can talk about cryptocurrency. We’ve highlighted discussions on gold. We talk about managed money and we do speak with a lot of clients that have had a lot of annuities in their portfolio, and there’s a place for everything. But when you see an imbalance, which we’ve often seen in a lot of the analysis’s that we’ve done with clients, that imbalance is what concerns me the most.
When you have five or six annuities or a million of your portfolio lopsidedly invested in an annuity with no income plan, then it can become a little concerning or where an advisor wants to chip away at what little money’s left when you have five annuities and try to tell you to buy yet another annuity. So we want to make sure that that’s not happening to you, and that you’re equipped to make smart choices. And if you haven’t updated your annuity or you really don’t understand how it works, you can reach out to us and we can do our best to help you as Michael says, unpack all of the details around what your situation may entail. Just go to redefiningwealth.info. So the case for fixed index annuities, it comes from an article from thinkadvisor.com. And smart retirement portfolios Michael, is going to include a proper mix of different investments and products, but the whole idea is that everything needs to work together.
That’s why we have our redefining wealth process. What are we trying to accomplish with the overall portfolio? We have to understand our cashflow. We have to understand our growth buckets. We have to understand the need for healthcare and the things that we’re trying to protect and what’s our purpose with everything that we’re doing. That’s really simplized verbiage, but so many people really work so emotionally, I have found in most cases when the market seems unstable or we have a global pandemic, and we see some volatility then right away, some of those bad actors are out there knocking on the door. You need to buy another annuity. So let’s put it into perspective. There’s a strategic need. There’s a strategic need and we’re going to kind of focus on what’s called the fixed indexed annuity, most specifically the tax deferred fixed indexed annuity. So let’s hop right in. COVID definitely highlighted some insecurities and concerns a lot of Americans have about their retirement. So go ahead, Mike, what say you about the strategic need for FIAs?
Michael Wallin :
It’s the same thing I say to our clients all the time. There is no such thing as a bad product. There is bad actors that wait a product or use a product in the wrong time, under the wrong situations, but there’s not a bad product out there. Products are designed to meet a specific need. And if we were out there and we were on a job site, Laura and I go over and I get a shovel and you say, I want to dig a hole to put my swimming pool in the backyard. And I go grab a shovel. I probably don’t have the most effective tool. The backhoe is probably going to be a much better tool to use at that time. But it’s the same thing. If I was just going to put a post in the ground, I’m not going to use a backhoe.
That’s where I’m going to use the shovel. And it’s the same thing in our industry, that individuals try to take a product and make it be the use for something it shouldn’t. We’re in a high level of inflation right now with the uncertainty about the duration of what inflation’s going to be. Many indexed annuities, when you’re starting to look at how those are paid out, or if it’s a annuitization out of an annuity, many times those do not have inflation adjustment. They become a baseline of income. And unfortunately many insurance agents will go out and really highlight the one dimension of how fixed index annuities really protect against any principle loss. And that is a great feature of the product, but they also talk about those products being used for income planning. And if you don’t truly consider the erosion power of what inflation’s going to do against that income stream, then two years, three years, five years, 10 years down the road during retirement, the consumer finds the burden of where inflation has out driven the cost to what their daily income or cashflow needs are.
And they realize I shouldn’t of have had all of my money sitting in an annuity that gave me a static income stream without truly considering the inflationary adjustment I needed on my cash flow down the road. And I think that’s one of the biggest issues. And that’s why people need to go through the LS Wealth platform that we’ve laid out there, looking at those five pillars. Truly understanding how every single element that can affect your retirement is going to impact you. And then now how best to align your dollars so that you’re properly structured against inflation, against expenses, against corrections in the market. All of it has to be a balancing act.
Laura Stover:
And that’s the key because many times I see, and you do as well, there’s such an imbalance. Those annuities, all those annuities that some clients have, and there was never a plan. None of those things were addressed. And incidentally COVID-19 has highlighted the insecurities and concerns really that Americans feel about their retirement because an interesting survey included, it was from the Indexed Annuity Leadership Council. Their latest report found that 30% of US workers who plan to retire at some point delayed their retirement plans because of the pandemic. And this number rises to 33% among those planning to retire in the next five years.
In addition, 45% say that post pandemic saving for the future is more of a concern. And 42% are more worried about running out of money in retirement. So we have the economic ebbs and flows and research from the Brookings Institution found that millennials face an economic future with projections of lower rates of return and economic growth than in the past. This means they’re going to have a harder time than previous generations accumulating sufficient funds for retirement. So the data is clear, Micheal. Americans are stressed about their financial futures.
Michael Wallin :
And this is kind of the climactic point in our society. That since we went away from the pensions, individuals have been seeking ways to create that same effective pensions that we had from corporations and businesses for many years. And we all know from the studies, the happiest people are the people that have guaranteed structured income, and there’s plenty of reports and we have those available. Anybody that would like to have a copy of that information, go to redefining wealth. Send us a message and we’ll be happy to send that out to you. And because there are ways that you can create your own personal pension, but also still have the ability to make your overall plan work. And the problem is when there is that imbalance, individuals that come along and if one dose of something is good, Laura, there’s some people out there that says, well, if one dose is good, three doses is even better.
Well, sometimes it’s really not. One dose is all you need. And now you may need a dose of something else to go along with it. But sometimes it’s the imbalance that comes in and really causes the problem. And what is the consumer really trying to accomplish? The consumer is trying to say, I want to make sure I don’t make a mistake and that what I have saved over my accumulation period, is going to be sufficient to take me throughout my retirement years. I don’t want to have more life at the end of my dollars. I want to have more dollars at the end of my life. That’s what they’re looking for.
Laura Stover:
So the case for the fixed index annuity, the FIA in particular, we’re not talking about variable, or SPIAs, or MYGAs. There’s a whole family. They’re like cousins with different types and they’re all very, very different. There’s longevity annuities, all types. We’re talking specifically about fixed index annuities on today’s show and really the synopsis. Then clients may have to take some risk to earn better returns, but that doesn’t mean when we are segmenting portfolios out, we’re blending tactical and strategic management and segregating this for monies you’re not dependent upon right now that needs to be there for the growth that you need for a variety of reasons. And then maybe guaranteeing the income using something like a good uncapped, maybe it even has a living benefit rider on it. That can be very valuable in terms of how that increases the income opportunity down the road.
So the guarantee side, but used in conjunction with the overall plan and like you said, not taking three pills because three is better than one. Although, three doses of the vaccine is recommended to be fully vaccinated Michael, just so I’m getting my little plug in there, because I know we think a little different on some things even though we’re very, like-minded on many things. So that’s good to have that in perspective and how it should be part of an overall well drafted and crafted plan. We’re going to break down what you need to know in terms of how these products work, some of the features, and a little bit more on of the structure. And how to know if you have too many annuities or if you need one at all when we come back.
Ron Stutz:
Thanks for listening to this episode of the Retirement Talk podcast. To learn more about how we can help you redefine your wealth and make sure you’re on the right track, go to redefiningwealth.info and schedule a review. To talk about your unique situation, schedule a 15 minute strategy session with Laura and Michael. Speak to our host directly. Go to redefiningwealth.info. You’ll also be able to get access to today’s show notes, redefiningwealth.info/podcasts. That’s redefiningwealth.info/podcasts. Now back to this episode on the case for fixed index annuities. Once again, here are your hosts, Laura Stover and Michael Wallin.
Laura Stover:
Features of a fixed index annuity. So Michael there’s a lot of annuity carriers. A lot of them have actually been paying a high price for some income riders that they had on maybe even five or 10 years ago with roll ups and now no one would’ve anticipated a pandemic and zero interest rates. So now some of the products offered today maybe are a little less attractive. It just really depends. I think you really have to search, but some of the basic characteristics, let’s just break it down for those that really don’t know what a fixed index annuity is. Typically, in most states it’s a 10 year surrender charge. So just like if you have a CD, there’s a length of time that you have to stay in the product. In most cases, you get a free, typically 10% free withdrawal. That’s one of the characteristics.
So the idea is to go into this for income, letting that also guarantee the recipients principle. So the attraction that most people have is they like the idea that is contractually guaranteed by in this case, the insurance carrier or company, issuing company. So principle protected, it’s guaranteed from any market loss, but then that means it’s going to be linked to a various index. So you have a participation rate. So depending on how the market goes through the year, you can receive any number I suppose, depending on how you’ve allocated. Typically, it’s a lower number. It’s not designed to be competitive with market returns, but if the market is bad and it averages out where the market actually, or the index had a loss, you could receive a zero in a bumpy year, zero is your hero. You didn’t lose any principle, but you received a zero interest credit.
We have seen that in fact, several times. Or you have a participation rate, depending if you’re in a monthly average or an annual. Let’s unpack that in a way where they can understand how is interest credited. And this does allow you though to earn a little more than what the bank CD’s going to offer. And that’s some of the attraction depended upon how you’re going to use it inside your portfolio, to try to have a little better rate of returns. We’re looking for base hits, not home runs as I’ve heard it described before in the past.
Michael Wallin :
When you’re looking at those strategy options that most of the insurance companies will come out and they’ll share with you a variety of different strategy allocations that you can set the plan up. It could be a as you said, a monthly point to point. It could be taking on the monthiversary of every month, it takes whatever the value is and takes it, adds it up and then divides by 12. And then you get the average for your return. Or it could be an annual point to point. So you look at the date the contract was issued and let’s say it was on the 21st of the month. Well that month a year from now, it’s going to look at that 21st and it’s going to say, did the market go up or did it go down? And if it went down, like you said, you’d get a zero.
But if it went up, you’re going to get a participation in the performance of the market. The problem that you run into and the reason why having too much of this can be a really bad thing, is for a lot of these products are sold with an income rider. It’s an additional rider, separate feature added to it. And those riders are around 1%. And then let’s say that your cap rate on your performance is 3%. So you net those together and really the most you can make on the return on your money is 2%. But what if the market yielded 12% that year? We’ve just came out of a huge bull run for the last decade. And so a lot of people have seen the 10%, 12%, 17, 20% returns.
And what if you had a 2% or a 3% cap? What was the real cost of that product to you? And that could be anywhere from 15 to 17%, that that consumer actually lost for the benefit of having downside protection. And that’s why when we’re meeting with clients, we look at those type of products for one element, and that becomes distribution, not for accumulation and long term planning. We’re going to use investment strategies for that because the investment world, if you’re going to participate in the investment world, you want to get the benefit, but not have the situation where the carrier has at their discretion, the ability to raise or lower that cap rate on an annual basis.
Laura Stover:
And that was the balance portion that we’re really talking about. So there’s a pros and cons, but when things are out of balance, that can be problematic. That can be an added risk. And so I know you and I both, we like those annuities. If tax deferral is going to be beneficial to the client, that’s potentially a good thing that you wouldn’t get with a CD or a bank type of product because you get the 1099 every year, but it’s taxable. But the income, you really want to solve for the income that you’re going to need. So some of the strengths that we’ve seen on these annuities is if you need X amount of income at a specified period of time, three years from now, five years from now, immediately, the income is the strength typically of the value, in my opinion, of having an annuity for guaranteed income purposes so that it’s not at risk.
Then it doesn’t really matter so much what the market returns are year in and year out. And if your income’s covered, then you can segment the rest of the assets and have it invested in a variety of other types of vehicles. So it’s an asset class, having the index there for a portion of the portfolio, but not too broad base. Be diversified. Don’t have all the eggs in one basket. The income writers today also can provide home healthcare doublers. So this could be considered an advantage on an income writer. Not all of the income writers and not all the carriers offer that. So you have to make sure that you are analyzing that and asking your advisor questions. Does this have a home healthcare rider? That essentially means whatever the income amount would be at a future specified time based on the annuitant of the contract.
Well, if you can’t perform two of the six activities, a daily living, then whatever that payment is allotted to be, it would essentially double in most cases for maybe up to four years, roughly every contract might be different. So that’s a way to leverage your money at a time of need. Maybe you have a health condition where you’re not going to qualify for a traditional or hybrid long term care policy. So that could be a favorable, still doesn’t mean you put 20 annuities necessarily in your portfolio, but an income rider with a home healthcare doubler can be a very positive attribute.
Michael Wallin :
Well, and for those individuals that throughout the years have went out and purchased annuities on those non-qualified and so if they liquidate them, they’re going to have a lot of capital gains inside of it. There is an opportunity to do a 1035 exchange. If you’re not getting the return on those annuities that you want, there are annuities that are on the investment side, they sit on a custodial platform and you can do a 1035 exchange and move those funds over out of that insurance product you’re in now into the same structure. You eliminate the taxation. Currently you continue to have tax deferral, and those can be very effective too. If you’re not getting the return you need and you’ve seen those cap rates continue to shrink, and shrink, and shrink, but you still need to have performance greater than what those are, you may want to give our office a call. And let us sit down and show you a solution about being able to move those over without creating taxation, keeping it into the annuity wrapper, but also giving you better links to better performance.
Laura Stover:
Yes. And so don’t do anything without complete researching it, have an evaluation of your unique and specific situation. You can reach out to info@lswealthmanagement.com, info, I-N-F-O@lswealthmanagement.com or go to redefiningwealth.info. Click schedule, review, or click on the 15 minute strategy session. We can evaluate what you have, help you sort it all out, and understand what you have better. And remember no changes should occur until you have fully researched all of your options and make sure that you understand every aspect of what you’re invested in. What is the purpose? What is the reason? What is the outcome that you are hoping to achieve? And is it within the scope of balance that you need to be successful to and through your retirement? Thank you for listening to Retirement Talk. I’m Laura Stover and with Michael Wallin. We’ll talk to you again next week.
Ron Stutz:
Redefining Wealth is a registered trademark of LS Wealth Management. Take advantage of a complimentary plan. Know where you stand regardless of the market. Walk through the redefining wealth process and have a clear picture, the key risks you likely will face and achieve a deeper understanding of how to properly plan for these risks with the redefining wealth framework. Schedule a strategy session now, by going to redefiningwealth.info and click schedule.
Redefining Wealth is a registered trademark of LS Wealth Management. Investing involves risk, including the potential loss of principle. Any references to protection, safety, or lifetime income generally referred to fixed insurance products, never securities or investments. Insurance guaranteed are backed by the financial strength and claims paying abilities of the issuing carrier. This show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation. LS Wealth Management LLC is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management, LLC. Investment advisory services offered through optimize advisory services and sec registered investment advisor. LS Wealth Management is a separate entity.
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