00:00

Hello and welcome back to another episode of the Retire Once show. I'm

your host, Johnathan Rankin, the founder and CEO of Theorem Wealth

Management, and I'm joined, as always, by my lovely cohost.

00:09

Hi, I'm Melissa Rankin. Thank you so much for joining us.

00:12

Thank you for being here. We are so happy you're here today. We have a

great episode. We are going to talk about the one thing that some might

deem as the worst investment for retirement. But before we jump in to any

of that Mel, what do we want people to do?

00:26

We want you to subscribe. We want you to miss never Miss rather, don't

miss. Don't miss these episodes.

00:32

We're not going to add that out. Just don't miss it.

00:35

And we also want you to subscribe to our weekly newsletter every Friday,

get.

00:39

It to your inbox, hot off the presses, as they say. So don't forget to

subscribe to that. And now let's jump into it.

00:47

It's happening.

00:48

We're going to do it. We're going to talk about it. The one, the only

annuities.

00:53

But let's talk about why. We're going to talk about it. June, I guess, is

National Annuity Earnest month.

00:59

Why? I don't know.

01:00

I have no idea.

01:01

I don't know why they do this. I don't know why. Who needs annuity

awareness?

01:05

Well, for a month.

01:06

For a whole month. I mean, that seems it's a long month, too.

01:10

Yeah, I mean, it's one of the.

01:11

Longer ones, I think. I don't know. I don't know how many days are in

June, even though we're in June, but either way, it's kind of like the fact

that we have got, what, five donut days a year and how many pizza days,

but either way, it's national.

01:24

I mean, pizza deserves a month if we're talking about that's.

01:27

True, but pizza deserves a month. Annuities might deserve a day.

01:31

Agreed.

01:31

But today we're talking about annuities. And let's just jump into this first

thing first. This is not a recommendation to buy anything.

01:38

Not by any means.

01:39

We are not going to be talking about any specific product. We don't give

out investment advice on YouTube or podcasting. We just don't do it. So

nothing should ever be taken as specific investment advice. But this

specifically is not a recommendation to go out and buy any annuity. This

isn't saying they're the greatest thing since sliced bread. They're also not

saying that they're the worst thing. We're going to jump into all of that.

02:04

But what we are going to talk about is if and when they make sense.

02:08

That's right. There has been a lot of discussion in the retirement planning

industry about adding annuities as an option in 401 KS to guarantee

income. So it is only fair with it being National Annuity Awareness Month

and this being something that is talked about a lot more often now in four

One K plans, it might be something that you might be hearing about a lot

more as you're planning for your retirement or saving for your retirement.

So it's only fair that we talk about every aspect of it, the good, the bad,

the ugly.

02:37

So let's get into it for anybody who's not familiar, what's annuity? Let's

start there.

02:41

So there are many types of annuities and we're going to get into a good

amount of them. But for the sake of this show, this is a retirement show.

This is a retiree one show. Hopefully you subscribed. We're going to be

talking about annuities to be used for retirement. So that's what we're

going to talk about. And annuities are an insurance contract. It's where a

company will make payments to you either immediately or in the future.

And it will give you a stream of predictable income. So it's the ability to

pay a company for a stream of income. That's what you're doing. Now,

these would either be what's called a deferred annuity or an immediate

annuity. And that is all determined by when the income starts.

03:23

Makes sense.

03:24

So if you are buying an immediate annuity, it's immediate. It's immediate.

So both immediate and deferred annuities can either be what are known

as fixed annuities or variable annuities, or even a hybrid that's often called

an indexed annuity. So those are really the two sides, deferred or

immediate, fixed, variable or indexed. So those are kind of the basics. So

typically if you're buying an immediate annuity, it's likely going to be a

fixed annuity because variable is going to make sense if you're trying to

defer income so that you can allow for some sort of growth.

04:00

Okay, so for example, a fixed annuity, you pay a lump sum, you receive a

guaranteed income right away. Simplest form, payment ends upon death.

Also makes sense.

04:10

Very simple.

04:11

So it's pretty much like purchasing a pension.

04:13

Exactly. This is think about it like that. If you're buying an immediate

annuity, you're typically buying a pension. You're saying, I'm going to put

this lump sum here and for the rest of my life I'm going to collect an

ongoing income and that's going to give you guarantees for the rest of.

04:29

Your life until you're dead.

04:30

Yeah, exactly. Well, sometimes they can go to your beneficiary. They could

be a joint contract. So yes, but until you're done wow. Very morbid. If you

are deferring, you've got a few choices. You can choose a fixed annuity if

you're deferring income, a variable or an indexed. And this is where you

pay a lump sum and you're paying it either that or you're paying yearly

premiums to guarantee income at a future date. So a deferred fixed

annuity is going to give you principal protection. So this is where it's think

of it very similarly to a stated rate of return, like a CD. So you put your

money in, you're going to get a stated rate of return until you turn income

on and then for the rest of your life. It's going to be just like an immediate

fixed annuity. You're going to get lifetime income for the rest of your life.

05:19

Very straightforward.

05:20

Very straightforward. A deferred variable annuity will give you potential

growth from the market and will have a number of riders that you can

also purchase. These can be income riders or death benefit riders. They're

a little bit more complex and there's a lot more, I would say, upside

potential in those. But also complexity, costs, things like that.

05:42

Just variable.

05:43

Exactly.

05:44

And then there's two types of indexed annuities that may or may not have

the income component to them.

05:49

That's right. There are the equity index annuities, and these offer a

guaranteed minimum interest rate, typically between one and 3%, as well

as an additional interest rate that's tied to the performance of some sort

of index. And this is where your principal is guaranteed, but your interest

rate, which includes that market linked component, is not. And then

there's what are called registered index linked annuities. And these are

often referred to as buffer annuities. These are becoming a lot more

prevalent lately. And so these are where you get your investment credited

with an interest rate that's tied to one or more index. So let's just use the S

and P. For example, this is where you can choose a buffer or a floor. So

you could say, I want to buy the S and P 500, but I want to make sure that

I don't lose if the market's down 15%, I want to lose nothing.

06:41

So you have a floor or a buffer of 15%, but that's also going to come with

a cap, meaning that you might have a cap of 8% or 9%. So if the market's

up 15, well, you're up that cap eight or nine. So that's what a buffer

annuity is, where you're limiting your downside and you're also limiting

your upside.

07:02

So a little less straightforward depending on.

07:04

Exactly that's where when you start getting into the index and the variable

side, that's where they're going to get a lot more complex.

07:11

Okay, so let's talk about the bad. Why are annuities hated by so many?

07:15

Yeah, it is a very hot topic. It's a very visceral reaction. When you talk to

someone about annuity, they will either be all in on them and they love

them or don't ever talk to them about that word again.

07:28

Hate them. It's a love or hate relationship for sure.

07:30

I think part of that if we're looking at objectively, it's because annuities

are a product and not a service. I think anytime you're dealing with a

product, you're dealing with sales which deals with commission. So when

you have that, it's insurance. It's like dealing with an insurance salesman.

They're compensated to have people buy an.

07:50

Annuity to sell something to you.

07:52

Yeah. And so there's that part of it where you have bad actors out there

that just happens and then you also have the liquidity factor. If you're

buying annuity, remember, you're buying a stream of income. You need to

expect that whatever you're buying, you're not trying to tap into that. This

isn't like a savings account or something that you could just cash in and

out. Annuities typically have very high surrender fees or liquidity that

you're going to change all the guarantees within that contract if you start

pulling money out. So there's a liquidity factor. That's another reason why

a lot of people just are very anti annuity. They also limit your growth

because no matter what anybody tells you, annuities are not growth

engines. They're not designed to be.

08:36

No, not at all.

08:36

So you could talk all day long about you could be aggressive as you want

in a buffered annuity or a variable annuity. You can turn on all of the

features to try to grow the annuity. It's still annuity.

08:50

Yeah, it doesn't make a difference.

08:52

There's still a cost. And that brings us to the next one cost. They're a lot

more expensive because you're paying for insurance. You're paying for

guarantees. We all know insurance on our car costs money. You would

save money if you didn't have to buy insurance on our cars and houses.

Same thing with the retirement right now. For most people who don't have

annuity, it's kind of like they have a car with no insurance. So it's an

additional cost if you go out and buy that. That's why annuities are not

growth engines, because there's an additional cost there. So what I've

found is that people who end up extremely frustrated with annuities is

because they bought it for the wrong reason. But this goes back to that

first point. They're products and not services. And so when they were

talking to the person who sold it to them, it sounds amazing.

09:38

It does. It sounds amazing if it's done for the right reasons.

09:42

Exactly.

09:42

I mean, where do they fit in?

09:45

So they do have a place, really. That guaranteed income component is very

important. So this is to cover things like living expenses. If you knew that

no matter what happened to the economy, recession not a recession,

politics, republican, Democrat, geopolitical, we go to Cold War with

China. Whatever happens, interest rates, it doesn't matter what happens in

the world if you knew that your food, your shelter, your utilities, your

health care was all covered by guaranteed income, there's a peace of mind

that comes with that.

10:16

A lot of people look for that ease, especially in retirement.

10:19

Absolutely. They fit with a certain investor profile. If you know yourself

and you know that you're worried about the markets and you hate taking

risk and you would rather prefer guarantees overgrowth, and that's where

you realize you're probably never taking on the risk of the S and P 500. So

it's not like you're expecting that rate of return, but you want to give

yourself more guarantees and avoid some of the Hardache that comes

with volatility. That's where annuities come into play. But you're not

buying annuity for growth.

10:50

Again, no. Have to really drill that point home.

10:54

Yeah, that would be like saying you're trying to run the fastest marathon,

but you've got a weighted vest on, probably.

11:00

Not going to win.

11:01

You know that you can run a faster one without it. The annuity is the

weighted vest the same thing? If you want more predictability, that's

where things like those buffered annuities come into play because you

know that the market's down a certain percent, you're not going to lose

anything. And if it's up, you're going to get a certain amount.

11:17

You got to cap both ways.

11:18

You got to cap both ways. And really, if you are scared of spending money

for fear of running out and this is where I see a commonplace where a lot

of people fit in as well, is that they're retired. Even if you ran every single

report showing, look, you're never going to run out of money, you could

spend a little bit more. You could spend more money on things that you

want. A new car, trips, you name it, you have the money to spend it. But

they're so scared that they don't want to. And that's a real fear because

most people, when you leave work and you retire, that salary is gone. It's

not like you could just say, well, I'll just keep saving again, you don't want

to go back to work.

11:58

You don't want to do that.

11:59

No. So if you're nervous about spending money and you find yourself a

little bit more apprehensive, well, then annuity can help at least insulate

all those living.

12:09

Expenses, alleviate some of the fear.

12:11

Yeah, you tie in all of your housing and health care, all those necessity

costs into annuity and your Social Security, and those are all covered.

Now, the rest of the money you could do what you want with. You can go

on a cruise around the world for months, and if that money goes to zero

and you run out of that money, you know that all of your life selling costs

are going to be met.

12:32

So again, peace of mind, comfort. So if you're even thinking about buying

annuity, what should you consider?

12:38

So this first one's a big one. Never. I mean, never ever.

12:44

So never put all of your.

12:47

Money into annuity. Just don't do it. No matter how good it sounds.

Annuities are never meant for 100% of your assets. They're not even

meant for 90% of your assets. They're meant for a portion because of that

liquidity. If something ever comes up where you need to tap into it, you

don't want to be penalized to tap into your own money.

13:07

You don't want to be stuck. You never want to be stuck.

13:09

You got to remember also the next point is that there is no free lunch. And

this goes to those buffered annuities. They're often sold as no fee. There's

no cost, there's no fee associated with these. And you have to remember,

the insurance company is making money somewhere.

13:25

Yes. They are absolutely out for themselves.

13:28

Yes. And that is going to be built into the performance caps because you

have a performance cap on the upside. So when the market's up 10% and

your performance cap is seven or eight, there's a spread there and there

are years where the market is up 20% and you're capped at seven or eight

or nine. So just remember, nothing is ever free, ever. Especially with

insurance. Do not buy annuity without thorough planning.

13:56

That one seems like the most obvious.

13:58

This is the most important. You have to do some thorough planning to

make sure that it is the right fit for you. That is very important. No matter

how in the next point, no matter how aggressive or growth oriented

annuity may sound, it is not meant for growth. I cannot stress that

enough. I'm going to say that again, because this is like the fourth time

I've probably said this episode. We should just title the episode annuities

are not Meant for Growth. But it's not if your goal is growth, look at some

other investment. And then the last point, if you ever talk to a financial

advisor and the first thing that they recommend that you do is buy annuity,

just run.

14:38

Yeah, they're probably not the one for you.

14:40

You don't have to physically run. You could walk, you could briskly. Briskly

a word. No.

14:46

Briskly.

14:47

No, but either way, with walk fast urgency. There we go. Walk fast, go in a

different direction. Because there is no one size fits all investment. Every

single financial advisor, if they ever recommend annuity, needs to

understand your goals, they need to do thorough planning and then truly

understand you as an investor and your behavior, because that's going to

help make sure that it's the right fit. Because they are not a bad thing.

Annuities are not the worst investment for retirement, not by a long shot.

I've met hundreds of people who have them and are very happy that they

do. But it's because they were purchased with the right intent. They were

done and purchased after comprehensive planning and they made sense to

that individual.

15:35

If they make sense, it's completely different.

15:37

Exactly.

15:38

And they can be a great vehicle. Again, not meant for growth. If you take

anything away from this episode, take that.

15:45

Yep. Not meant for growth. So you want to understand the bad things first

about it. Someone's talking about it. Understand the cons first, because

the pros are always going to sound great, of course, but what are you

giving up? What's the catch? What are you giving up? And then if you need

help assessing or planning and you're thinking about annuity but you just

don't know if it fits your individual picture, please reach out. We are here

to help.

16:09

Absolutely.

16:10

It's National Annuity Awareness Month, so we want to make you aware of

all the good, the bad and the ugly with annuities, and we are here to help.

There's a link in the description below to schedule some time with a

member of our team with that. I'm Johnathan Rankin.

16:24

And I'm Melissa Rankin. Thank you so much for joining us.

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