Navigating Annuities: Your Guide to a Secure Financial Future

Episode 17: Audio automatically transcribed by Sonix

Episode 17: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Any examples used are for illustrative purposes only, and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment, and is not a solicitation or recommendation of any investment strategy.

Speaker2:
Welcome to All Things Financial, the show that helps upgrade your financial literacy. Trey Peterson and Yellows Coots are retirement planning specialists here to provide a unique and conservative approach to managing your money. Now here are your hosts, Trey Peterson and Yellow say coots.

Speaker3:
All right. Hello everyone. Welcome to the All Things Financial Podcast. Uh, my name is Ryan Moffitt and with me is yellow say cuts. Uh, we've got a great topic again today. This is episode 17. Uh, time is flying by on these things and the episodes are racking up. It doesn't feel like we've done 17 yellow, uh, episodes. Yellow say.

Speaker4:
Yeah, well, that's because you haven't. Um.

Speaker3:
That's a fair point. You have, like.

Speaker4:
Episode five for you. Maybe we're not a great job, people. Um, we've had a lot of positive feedback. So you're doing. Yeah, right.

Speaker3:
I don't know if this is 5 or 6 or whatever it is, but regardless, uh, 17 episodes, uh, for, for the combination, some combination of the three of us. Is that fair to say? Perfect. Well, welcome, listeners. Uh, we've got a great show today, a lot of good information. Um, some similar topics. Uh, not surprisingly, finances and retirement. Uh, surprise, surprise. Talking to, uh, the all things financial team. So, uh, if you've listened to previous podcasts, if you're listening today, um, and you say, hey, some of this information makes sense and it resonates with me, feel free to reach out to us. We'd be happy to talk to you about your retirement plan. Uh, you can check us out on our website. Um, uh, for previous podcasts, all ATF podcast.com. Or you can always give us a call, ask some questions, email us. Uh, phone number here is (612) 286-0580 at (612) 286-0580. Um, and let's dive in today. So yellow. Say, what are we talking about today?

Speaker4:
Well, I typically like it when you introduce the topics. Uh, you know what? I can do that today. So today we're going to talk about a couple of things. Uh, June is annuity awareness month. So we're actually going to detail a few of the things that we think are important to consider. Uh, there's obviously different types of annuities. We're not going to spend time on all of them, but we will spend a little bit of time on fixed, indexed annuities, uh, talking about how, uh, returns are calculated, a few of the, um, misconceptions about annuities and what they might be used for and how they could be used in your specific plan. Um, we'll talk about a few stats that concern financial professionals. Uh, we'll mention Social Security briefly and a few strategies, and I think we'll close things out if we have time to discuss a little bit on inflation. Yeah.

Speaker3:
But I do have a quick question. Before I even declared it a declaration, who declared it an annuity awareness month?

Speaker4:
Well, um, I don't know who declared it. Uh, but it turns out that if you want to draw awareness to just about any topic, uh, just pick a month, pick a month, and, uh, pick a month. Yeah. And so, so someone, I'm sure, in the insurance industry decided that it'd be great to, to make June Annuity Awareness Month. I'm just simply taking advantage of it in a very self-serving way. That's funny.

Speaker3:
You know, it is actually.

Speaker4:
And then I would say annuities are a small part of what we do. But and they can be used and when used correctly, they can be a powerful tool, especially absolutely get to discussing longevity risk and that sort of thing. Um, but we do want to talk about that. And, and since it is Annuity Awareness month why not.

Speaker3:
Couldn't couldn't agree more on your your last two points. It is kind of kind of funny though. There's a month for everything. There's a day for everything. Uh, one of the local radio stations here, we're located uh, southern Minneapolis suburbs, uh, Burnsville, Minnesota, and one of our local radio stations. I swear they just Google whatever today is the the day, and they talk about it every day. And I swear National Donut Day comes up at least three times a year, if not more. So it's kind of comical when you say, who came up with these things.

Speaker4:
Well, that's one that for sure deserves some recognition. So, um, I'm with National Donut Day. I can I can celebrate that.

Speaker3:
My local baker, uh, I think they just do it on their own. Right? Like, uh, business is a little slow. Let's make it National Donut Day tomorrow. So. Very good.

Speaker5:
And now for some financial wisdom. It's time for the quote of the week.

Speaker3:
Well, we can we can dive in. Uh, we've got, uh, financial wisdom quote of the week from Steven Levitt, uh, who says people who buy annuities, it turns out, live longer than people who don't. Uh, not because the people who buy annuities are healthier to start with. But the evidence evidence suggests that an annuities steady payout lifetime. Payout provides a little extra incentive to keep chugging along. I think that's pretty good.

Speaker4:
Yeah, I think it is really good actually. And I don't know where that additional incentive is or how much that quote is based in fact. Right. I don't think that there's a study that that actually can support that. But I do get the get the sense that, you know, people who have annuitized or have turned on an income stream from the annuities that they have. Now, remember, annuities, they don't all function in this way. But traditionally, the reason why you would buy an annuity is you would hope to mitigate the risk of longevity, risk outweighing your assets, your resources, living longer and not having enough resources towards the end. Uh, so eventually, you know, you'd give your money to an insurance company and in return, they'd give you an income stream. And that's just traditionally how annuities have been viewed and how they and how they functioned in the marketplace. Right. So, uh, you know, the idea is the longer you live, the more you could potentially get into the insurance company's pocketbook. And if you end up dying early, well, potentially the insurance company ends up winning. So maybe that's the incentive to keep chugging along. Nobody wants the insurance company to win, right?

Speaker3:
Right, right. Well, and the interesting thing, you know, is when you look at this, uh, you said, you know, traditionally you're looking at kind of beating out that longevity risk. Well, a lot of times people are looking to come up with a either a second pension or come up with a pension because their employer didn't have a pension. Right. And that's one of the ways that annuities can fit into people's retirement plans. And quite frankly, uh, you know, there's so many different types out there and products, uh, there are a few main types that will we'll uncover here in a little bit, but there's a few kind of, uh, dare I say, you know, silver bullet ways to to accomplish things, you know, and if the idea is, hey, I just want a steady paycheck in retirement, I want to make it easy. That's one of the ways that you can do that, that people traditionally would look at getting into some type of annuity is creating that second or first pension for themselves.

Speaker4:
Yeah, definitely. And and actually I like Steven Levitt a lot. He, um, he wrote, uh, Freakonomics. Right. That right.

Speaker3:
That's right.

Speaker4:
Yeah. In college, actually, I think one of my professors, I don't know if it was required reading or maybe the book just came out and and I happened to have read it, but it's a it's a fascinating book. And I think Steven does a really good job. Steven. Like I know him. Right? Steven Levitt does a great job. Um, you know, he talks about like, uh, the hidden side of everything through economics. And I don't know if this is an example from the book. I do have one that I do remember from the book that I'll share just a second. But, um, at any at any rate, we, uh, we had a class, I think, where we discussed, like, the dangers of, um, you know, like as an example, like if you were to graph certain items and the reason why maybe you want to graph two random items is you want to show how they might be correlated with each other. And like if you were to graph ice cream sales, for instance, and also crime, if you had those two graphs on top, you know, right next to each other side by side, you would look at that and you might determine, hey, there's some correlation here. But really the problem is people draw conclusions from something like that without digging a little bit deeper. Like some people might even be tempted to draw a conclusion and say, hey, you know, the ice cream is causing more crime, or vice versa.

Speaker4:
But what you're looking for is called the spurious data. The data that is not so obvious. And Steven Levitt talks about that as the hidden side of everything through economic theory. And really what you're looking for is the fact that both ice cream sales and crime, what they're actually correlated to is weather. When it's warmer outside, both of those tend to increase. But if you're missing that one piece, if you don't have that one piece of data and you just have two graphs side by side that are correlated with each other, you could end up with some faulty conclusions. And yeah, very interesting. And, uh, obviously he gives a million examples that are, uh, much more, uh, sophisticated and elaborate in his book. But, uh, that's just one example of how, you know, sometimes we look at data and it's really important that you have it's not, you know, it's it's really easy to lie with statistics. And that's something that I want people to be aware of, because a lot of times, you know, especially in this day and age where everything is available at your fingertips, you can Google anything. You can get information on anything. Be careful to draw conclusions in areas where maybe you're not a subject matter expert. Be careful to to, uh, just receive information from just anybody, right? People sometimes have an agenda, sometimes it's not obvious to you, and sometimes it can be very misleading.

Speaker3:
Yeah. So I do have to ask the question, uh, on Steven Levitt talking about the weather and how that's related to both. I don't know if that.

Speaker4:
Was his example, by the way, but it just came to mind.

Speaker3:
It just sounds like a very Minnesotan example. I guess that's the point I'm getting at, right? In the winter, it's just too darn cold to do anything, including crime, I guess.

Speaker6:
So, right?

Speaker4:
Yeah. Well, you know, I actually I don't know if that's even a real example. Maybe crime is just as high in certain places, uh, regardless of weather. So there's probably other variables that go into that.

Speaker6:
No, it makes.

Speaker3:
Perfect sense to. Me. I mean, my father in law always said that because he was up in northern Minnesota, way up, way up there in northern Minnesota, he would always say that, hey, it may be cold, but it keeps the riff raff out. So and by golly, he was right.

Speaker4:
Uh, one example, though, from, uh, from Freakonomics that I, that I really that I liked and I remember is, uh, he was talking about like, there's like a daycare facility and I don't know if Ryan, if your kids ever go to daycare, but my my two year old, he, uh, we've we've gone through a few different daycares, and now we finally found one that we absolutely like, and, uh, and, and by the way, I've been part of this problem. So in his book, he writes about a daycare that had a problem with parents consistently bringing picking up their kids late. And the daycare was at its wit's end. They had they'd sent letters to all the parents reminding them, hey, our staff, the people who work here like they want to go home to please pick up your children on time and.

Speaker6:
Come get your.

Speaker4:
Kids. Yeah, come get your kids. Right. We're closing. Get your kids. Please get out. And unfortunately, nothing changed. Parents continued to consistently, uh, pick up their kids late. Right. So eventually the daycare decided. You know what? We're tired of this. We're sending a new message to the parents. Uh, from now on, if you pick up your kids late, you are going to be, uh, assessed a penalty. There's going to be a fine for doing that. We're tired of you guys not picking up your kids on time. So what do you think happened?

Speaker3:
Well, I mean, people typically want to avoid penalties. I mean, is that the general gist of this? Yeah.

Speaker4:
Well, actually, it actually got worse, right? Late pickups, they ended up increasing exponentially. Uh, and the question is why? Why? Yeah. Right. I mean, a lot of times when we're talking about this, we're talking about incentive structures. What ended up happening is the guilt that the parents experienced, uh, was removed, right? The guilt of of what they were causing for the staff and the workers that were forcing them to come home late. They ended up removing that entirely, and instead they looked at the pickup fee, the late fee, the penalty that's being assessed as a feature. Right? That's a perk. Now I get to paid to to be a few minutes late. Right. And it actually because it was more of a, uh, the daycare served a lot of affluent families. Um, they just looked at it as something they could pay for.

Speaker6:
So. So, uh.

Speaker3:
I'm removing my guilt by the new a la carte feature of paying to be late.

Speaker4:
Right. And and really, the whole the whole, uh, lesson here is incentives work. They're just not always going to work the way we intend for them to work. Uh, you know, so Steven does a great job about talking about all kinds of examples like this. Um, so I'd highly recommend the book. It's a very interesting read, but he talks about these unintended consequences, uh, within our incentive structures.

Speaker3:
Yeah. Very interesting, very interesting. Well, so let's let's, uh, really dive into the, the meat and potatoes of this, but, uh, tell me a little bit about some of the basics of annuities, like what are the top 2 or 3. Just basic things that people need to know. Maybe there's 3 to 5. Yeah.

Speaker4:
Well, I think we'll maybe we'll start and not to spend too much time on on Steven's quote. Yeah. Steven. Steven Levitt's quote, uh, but you know, him saying that people who buy annuities end up living longer. I mean, it's it's ironically, annuities, as I mentioned traditionally, are designed to be a tool that solves for longevity risk. Um, the possibility that your retirement funds won't be there won't be enough to cover your entire life. Uh, and that's where people actually have sought out insurance companies to help solve for that risk. Um, so, I don't know, I think it's, you know, obviously there's a lot that can be said there. Um, but one of the things that I'm going to start with, let me see here, I had a couple of notes. Um, so there's, there's an infinite number of annuities out there today, and I don't want to spend too much time on all of them. I'm just going to go through it quickly. So like just fixed annuities. Fixed annuities are simple. They think of like CDs. There's going to be a stated rate of return.

Speaker4:
Um, you don't have to worry about it. There's going to be a term. By the way, all annuities are through insurance companies. That's where you can get an annuity, every single one of them through insurance companies. Obviously they function differently, but they're all through insurance companies. So a fixed annuity would be the most basic of the annuities. I would say you're you're going to have a rate of return. It's not going to change. There's going to be a term three years, five years, seven years, whatever it is, every year you're going to be credited that rate of return. So that's a fixed annuity. Uh variable annuities. Um, there's there's a lot that can be said here. I'm just going to sum it up briefly. Uh, unfortunately, I would say most people end up having a variable annuity. And it's not that it's misrepresented, but it's it's oftentimes the reason why they have it is because maybe that their advisor, whoever's helping them with their investments, that might be the only tool that they can offer in terms of the type of vehicle.

Speaker6:
Hold that they're looking for.

Speaker4:
And the conversation typically goes like this. Somebody's getting ready to retire. Maybe they have a 401 K, 403 B. They're accustomed to having some type of investment where they're contributing. They're putting money into their retirement savings, and now they're getting ready to retire. And they want a little bit more safety. They know that the market is volatile. Maybe they remember what it was like going through 2008, maybe 2001, maybe that's just, you know, they look at that and they say, hey, I'm no longer contributing. I'm no longer working. I'm not making contributions. My employer is no longer matching. Now I have to start taking distributions. I'm going to be pulling on these investments and I'm in retirement. If there's something catastrophic that happens, if the market retracts and all of a sudden we see a huge correction, I might be out of luck here, right? I don't want to have that type of risk anymore. So one thing you can do is you can adjust your risk profile rather than having 60% equities and 40% bonds. Maybe you bring it back a little bit, maybe you do 50 over 50, or maybe you do 40% equities and I'm sorry, and 60% bonds. Or you pursue an entirely different strategy. And that's where sometimes people get um, I don't I don't want to say it's, it's, it's that the person is not acting in their best interest, but a lot of times it's the only tool they have available, as I mentioned. So that's where somebody is maybe introduced to a variable annuity. And a lot of times variable annuities are sold on the promise of safety. And unfortunately it's that's a little bit misleading.

Speaker4:
So there's a couple of things that could be safe. Right. If if that annuity is eventually used to to create an income stream like a self pension that Ryan talked about, then. Yes. Uh, more than likely there's going to be a guaranteed roll up rate. The roll up rate determines like it's a percentage. Let's say it's 5%. It just means that the income value, which is different from the the actual cash value, the income value will grow at a guaranteed rate, a predetermined rate for a period of time. And if you elect to turn on income, that's the value you're going to be using. They're going to be basing it off of the income value. However, your investment is still at risk in the market, and I can't tell you how many times when somebody comes in and they have a variable annuity and they're convinced that their variable annuity grows at a guaranteed 5%. And then when we peel back the layers and we show them that their income value on their variable annuity grows at 5%, but the cash value is exposed to just as much risk as when they had it in the market within their 401 K. And people see there seems to be a disconnect on this conversation. Um, so those are two very different things, your cash value versus your income value. And by the way, everything that I'm saying about cash value and income value that can also be applied to indexed annuities as well, which we're going to talk about here in just a second. But anything to add on that? Ryan.

Speaker3:
Yeah. Well, what I wanted to comment on is that I think that's one of the biggest misconceptions on the variable annuity side is that there'll they'll be sold with a slight of, um, you know, safety to them saying, hey, you're protected from the market, but you're not protected from that market. There are two different values, and it's kind of like having two different accounts. And oftentimes the growth or the protection that you may receive, you're not talking about the same account. You might get growth on one account but then not the other account. Or you might get protection on one account but not the other account. And it's really, really easy without knowing exactly how these work and without having some insight information. And I don't mean, you know, like secretive information, I just mean that you have you happen to be I think Elsie said subject matter expert, right. Without having enough information to make the decision and understand how they operate. Uh, the fact that there's multiple accounts within them can be really confusing for people. And I think that's one of the things that we oftentimes see. Uh, not only is the, the thought that they have is, you know, protection or safety on it, but then also we'll talk more about this. But just also the fee side of things as well. Yeah.

Speaker4:
And I know I've mentioned this on a previous podcast, but the fees are maybe my biggest gripe with variable annuities for sure. And I know there's a million ways you can explain those fees away. Um, but at the end of the day, what we see is there's a large disparity between the income feature, the income benefit value and the cash value. And that's okay. Right? That's not necessarily the worst thing that can happen. But why is there a disparity between these two? In fact, without mentioning any names, uh, we recently came across a variable annuity that, that that really it's not just the income value. And I wanted to talk about this a little later, but I might as well just jump in. So it's not just the income value that you have that determines the payment you're going to receive. The other thing, and the more critical item to know is what are the payout rates. So you might have a giant income value. But what if the annuity company is only guaranteeing a 5% payout rate. And the market rate today might be.

Speaker6:
A little bit higher. What if it's.

Speaker4:
6% or 7%? So your large income value doesn't mean very much if the payout rates aren't competitive. So one of the annuities, as I mentioned, that we recently saw, was that if there was more than a certain disparity between the cash value and the income value, uh, then the payout rate would be reduced. So in other words, the the investment hasn't performed. So the insurance company is mitigating their own risk by saying, hey, the investments that we have, the underlying investments that you've chosen, right? The investments within the annuity, they're not performing. So we're going to pay you a reduced payout rate. So it almost in some in some ways like it's a two step problem. You have to know okay what is my income value. Did I get this because I wanted an income stream eventually. Or did I get this because I wanted a little bit of safety. Safety that maybe traditionally wasn't provided for within a 401 K or within the market or maybe within bonds themselves. Right, right. So you have to be aware of why you got it to begin with. And then of course, the fees themselves. That's maybe the biggest concern with variable annuities. Uh, we see fees on average I would say between 3 and 5%. And those fees are made up of a couple of things. Uh, you have, um, you have your M.A., your mortality and expense fee that I mean, that could range. I've seen it as low as probably 0.2% to maybe just a little over 1%.

Speaker4:
Um, you might have a rider fee on the product. Make sure that that rider fee is something that you actually need. A lot of times your needs might change, right? When maybe when you initially got it, there's nobody who's doing, you know, something that's not in your best interest. But, you know, as I talked about recently, the family who had an income rider where not only did they not, um, need the income rider income was a problem for them, not in the sense that they didn't have enough. They had too much. Right. And they did too much taxable income already relative to their expenses. So making sure that you actually need the rider that you have and and a lot of times you can turn off the rider, you can stop paying that rider fee if it's something you no longer need, if your situation has changed. But also, um, you know, you have the investments within variable annuities and typically those average about 1% in additional fees. So, you know, all in a lot of times between 3 and 5%. And uh, that's expensive. That's expensive, especially if the cash value is not performing. Uh, sometimes you're stuck with an income product because the cash feature that the actual investment itself is underperforming. Sometimes you're stuck with the death benefit. There might not be anything you can do because of how high the death benefit and the and the income value is relative to the cash or accumulation value.

Speaker6:
Yeah.

Speaker3:
I want to just quick pause on this, because I know we just covered a ton of information, but it's worth saying that you know, myself Yellis Trey, we're diving into this with people all the time to find out, hey, what are you actually paying? What is your actual benefit? What was this annuity designed for? And are you getting what you thought you were? We dive into this with people, uh, pretty frequently because a number of the people that we meet with, uh, do have some type of variable annuity or other annuity and oftentimes aren't 100% sure on what exactly it is or how it operates. And if that's you and you're listening and you're thinking, you know, I guess I maybe don't know all about this or maybe I don't know how much I pay on this, etc.. Please, we're happy to help. Um, you know, feel free to give us a call, email us, whatever it may be, because we're happy to dive into this with you and help provide some clarification. If you're a little unclear on what type of variable, annuity or otherwise that you actually have and how it works, but, um, I just want to give a quick, you know, don't don't hesitate. Our phone number is (612) 286-0580. Or you can email us either jealousy, Trey or myself. And our email address is our first name at G wealth.com the letter G, the word wealth.com. So, uh, with that we can kind of keep going here, but at Yale. So I just thought it'd be worth, uh, saying that because it is a lot of information.

Speaker4:
Yeah, it is a lot of information. And I certainly don't want to be compared to your professor, uh, Ryan, who you mentioned earlier. But what did you say about him?

Speaker3:
Oh, my gosh. So, uh, Yale and I were talking a little bit before the show here, and, um, we're talking about both of us taking economics in college. And, uh, while Yale's loved it, I, I was a bit of the opposite, but it really was driven by the teacher. My goodness. Uh, my wonderful, wonderful, uh, economics teacher. Two days in and they're talking about supply and demand and talking about trying to be relevant. I think, you know, we're talking about like, well, uh, if if you only have three tacos at your taco store, but there's demand and people want 4 or 5 tacos, that's an example of how demand is high and just very monotone. Talked about tacos and Pepsi for supply and demand. And it was just really, really hard to buy into that.

Speaker6:
Yeah.

Speaker4:
I'm not I'm not sure where that comparison.

Speaker6:
Um, you know.

Speaker4:
It doesn't seem to work.

Speaker6:
You know what?

Speaker3:
I probably probably great saying, like, hey, they're college students. They probably like tacos and Pepsis and things like that, you know? But I don't know, you got a professor talking about, you know, Freakonomics and Steven Levitt, uh, really diving into the heart of things and how things work. And we got to talk about tacos and Pepsi.

Speaker4:
I thought. I thought you were saying that I reminded you of your professor because of, uh, of how much I enjoy these topics.

Speaker3:
And only sometimes y'all say. No, of course. Just all in good fun. Uh, all in good fun, but.

Speaker4:
Well, let me let me jump into, uh, fixed indexed annuities. Yeah.

Speaker3:
Let's dive in there.

Speaker4:
And I always say, you know, whether you're getting information from us or somebody else, take things with a grain of salt. Um, I've said this a million times. There is no one glove that fits. All right? But if I were to make a case for a fixed indexed annuity, um, here's what I would say. Number one, the biggest reason why people look to an annuity, look to an insurance company, to, to buy an annuity, to invest that way is, as we mentioned, that conversation that you have is you're getting closer to retirement. And the fixed indexed annuity does provide for the type of safety that people are looking for. And what we mean by that is, um, principal protection, right. Market risk reduction.

Speaker6:
Right.

Speaker4:
The principal is guaranteed. So, uh, one of the there's a variety of different types and even even I think lately in the last five years, there's been even other, um, thing, other ways that these products have been modified. Um, so, so this isn't this isn't across the board, but just in general, a fixed index annuity. It's the the amount that you give the insurance company. Typically that's how much you have. And no matter what happens in the market, no matter what happens to the investments, the allocation or indexing credit, uh, strategies that you've chosen, you're not going to lose anything on that value. So that value is guaranteed. And people like that part. They like the idea that they can't lose anything. But certainly if you can't lose anything, what's the trade off.

Speaker6:
Ryan?

Speaker3:
Well, I you know, the funny thing is, as you're explaining this, I keep thinking about like, okay, so if I have ten tacos and I don't.

Speaker6:
Know, back to the timing, right? I'll still have ten tacos in the future. Yeah.

Speaker4:
So what I'm trying to get at is you're giving up some of the upside.

Speaker3:
Correct. Sorry, I couldn't help it.

Speaker4:
So when the tacos do eventually make their way to the store, uh, rather than getting all ten of the brand new tacos, you only get a portion. You get seven, right? Right. So you give up some of the upside, uh, for in exchange for downside protection and.

Speaker6:
Upside in this.

Speaker4:
I'm sorry. Go ahead.

Speaker3:
Upside. In this example, what we're talking about really is typically speaking the growth the rates of return. Yes etc..

Speaker4:
Yeah. So in exchange for for no downside risk, you get a percentage or a portion of the upside. And I hesitate to spend a whole lot of time on this. But I think I'm going to take a risk here and actually, uh, dive in a little bit deeper to tell you how they calculate the upside. That's it. So the first thing I'll mention is there's really they're called indexing strategies or allocations if you will. And one of those allocations and you'll see this a lot on many fixed indexed annuities. And one of those is called an annual point to point cap. So remember an annual point to point cap. So basically what happens is you've selected an index. You've selected an allocation one of the investments available to you in a fixed index annuity. Now remember whenever you have a fixed index annuity they actually don't invest in the index. They just have basically um they track the index for you and that determines your rate of return. But the the money doesn't actually go in that index. So um, what they do is generally there's a cap. So the insurance company will set a cap and they'll say, hey, the most you can earn is 5%. But what they do is they took it. They take a look at that index and they look at it over the basically over a 12 month period, whenever you're effective date is on your contract from, let's say, 2024 to 2025. And they compare where the index is at the beginning of the year compared to at the end of the year, or I should say, at the end of the 12 month period.

Speaker4:
Uh, if the index value is higher than what it was in the beginning, uh, than the beginning value, then they're going to credit a percentage increase. But remember, it's always going to be up to the cap. And I say that because, um, caps are an interesting thing, right. Annuities are interest rate driven. So those caps have come up quite a bit. I want to say a couple of years ago, if we saw a 4% cap on an S&P 500, uh, allocation, that was pretty impressive. Uh. Today, a lot of those caps are much higher five, six, 7% caps on an even higher than 7%, actually, recently we've seen. Um, so that's basically the insurance company saying, uh, that's how we're going to limit the upside through a cap, and we're going to do it on an annual point to point allocation. Not all allocations are annual point to point. But if you do see that, just think they're measuring the index from the from, uh, your effective date in from one year. And then 12 months later they're looking at it again. And if there's any growth that's the rate of return you have. But it's limited by the cap. So right. I don't know if I did a good job explaining that I've probably lost half the half of the five listeners that we have.

Speaker6:
You might have heard me.

Speaker3:
No, I'm just just teasing.

Speaker6:
Would you say? I mean, I think that's.

Speaker3:
Great, really. Uh, I think reiterating that is, you know, it's the whole adage of, okay, hey, I'm giving you total principal protection as the annuity provider and what's in it for me, right? What I get out of it is that if your account earns X percentage, I get to keep a portion of that. And the cap strategy is saying, hey, no matter what, you're going to get up to this cap amount, an amount is capped off. So if it does way, way, way more than that, then I end up doing better. Uh, if it doesn't do way more than that, it does at that, then you actually do really well compared to what the market's doing. Right? So there's a little bit of a give and take on that. And the give really is your principal protection. And it's for whatever the contract period is, whether it's five years or seven years or ten years. And that's a huge, huge give quite frankly.

Speaker6:
Yep. Yep.

Speaker4:
So another one that that I want to mention is the monthly point to point. So whereas the annual point to point looks at the index value, uh, over a 12 month period, the monthly point to point to point is a little bit different. So they look at, let's say, your effective date, the date that the contract was initiated, let's say it was June 15th, for instance. Well, on the 15th of each month they're actually going to record the index value. So every month on your effective date anniversary, your monthly anniversary, they're going to record that, that uh, the value. And here's the tricky thing here. Usually the monthly point to point comes by way of a monthly sum. It's also referred to oftentimes as a monthly sum. So they do something a little bit different. So they look at that and they say hey well the difference between each monthly anniversary, they're going to put a cap on it as well. They're going to say every month you can earn up to let's say 2%. And it all seems kind of low. But here's how they calculate it. Uh, every month you can earn up to 2%. That's your cap. But they don't limit the downside. So if you have one bad month where let's say the index went down 20%, that could wipe out all of your returns, because at the end of a 12 month period, they add up all of the gains, all of the monthly returns, and they subtract all of the monthly losses. And that's your return. They just simply that's why they call it the monthly sum. They add it all up together. And uh, where the upside is capped, the downside is not. So you really could have one bad month and that could take away all of your returns.

Speaker4:
So where where this is important is sometimes people make these decisions, they choose a specific allocation. And then they wonder why they didn't get a return when the market's up right. On average over the course of 12 months, the market might be way up and you might say, hey, the allocation strategy I chose is is supposedly tracking the S&P 500. But what if there was one month during that 12 month period where the S&P didn't perform? And that's where the monthly strategy it's not a bad strategy. In fact, sometimes it provides for the highest returns. Um, you know, compared to the annual point to point, uh, but you just need to be aware of how those two function. And I realize for most people, most people aren't going to be making these decisions. Most people unfortunately, sadly, uh, we find that most people don't even reallocate. I would say I think a few, a few companies that we've reached out to, they said that like less than 5% of people make, uh, annual, um, allocation changes where they update those strategies. So and then the other thing is, I would say most people rely on their financial professional, whoever's helping them with their investments to make these decisions on their behalf. What we're trying to do is, you know, as you look at those, maybe you consider talking through those investment allocations with your financial professional, whoever's helping you, rather than simply having them make those decisions, and then also revisiting those, because you can make these changes annually, annually as the market changes. But also what I'll mention a little bit as renewal rates may also change and affect the performance of your account.

Speaker3:
Right. Well, that's it's kind of a shocking that 5% or less actually make these changes or updates, you know, and. I understand you know that if it's if they feel like it's on them to to try and figure out what is the best option and what they should be checking for their renewals, etc. I can see why people might kind of ignore that topic and press the easy button, right? But ultimately you have a representative that set you up with this account, and really, it should be something that you guys are working on together to make sure that you're getting the best out of that account as possible.

Speaker6:
Yeah.

Speaker4:
The last thing I'll mention, there's there's more than just these three, but I would say these three actually, I'll mention two more. Um, there's more than just these, two more that I'm going to mention, but it's I think these are maybe, you know, at least if you had an understanding of these four, uh, allocation strategies, if you will, that I think you're going to be further ahead than most people. In fact, I think many advisors don't even know how they work. Um, so the last the last couple, uh, we'll start with a spread. So you'll see this a lot of times, um, on the list of available allocations, where maybe one of the strategies has a spread. And a lot of times I feel like people don't. Um, it's just not obvious what that means, what that means. Think of it like this. Think of if there is a spread, that means that you have to cover that spread first. So if you got a 10% rate of return, but there's a 7% spread on the account, that means that you need to pay the insurance company 7% first and you get what's left over. So it's kind of the other way around compared to the cap where the cap you get the first. Let's say if there's a 7% cap, you get the first 7%. The insurance company gets everything else. After that with a spread, the insurance company gets paid first and you get the remaining amount if there is anything left over. So that kind of makes sense. Ryan, do you think?

Speaker6:
Yeah.

Speaker3:
It's a it's a, um, an inverse, uh, version of kind of what the cap is, right? I mean, ultimately you're looking at it from a slightly different strategy, and sometimes it's it's worth having a little bit of both of those within the same account. Would you agree?

Speaker4:
Yeah, I think I think it's there's nothing wrong with the spread. It's not typically my favorite strategy. Um, you know, the other thing that I would caution people against sometimes you see both, um, both a cap and a spread. And I really don't like that at all. I can't tell you, you know, I, I don't know of a better way to say this, but think of think of the the product to begin with. Right. The insurance company is guaranteeing you're not going to experience any losses, but in exchange, you get a part a portion of the gain, you get a part of the upside. And the insurance company is trying to mitigate, uh, you know, their own risk, too. So I would say, don't give the insurance company more than one way to screw you. Yeah, there might be a better way to say that. But what I see a strategy that has both a cap and a spread, that would mean that first you got to cover the spread. The insurance company gets paid first, but then if there is any upside remaining for you, they're going to cap that as well. And I don't like that. And unfortunately, some of our some of the best companies in the industry, they they have that as an allocation option within the available allocations. And I think sometimes that I don't know, I just I feel like even though you can still get a return, it might be a great strategy. I generally would, would uh, would try to avoid that if possible.

Speaker3:
Yeah. Yeah. On the, on the same industry I agree. So I mean ultimately what we're looking at on uh, just a few of the different types of annuities out there and there's no blanket recommendations and there's no, uh, like you said, you'll say, uh, there's no one glove that fits all. Uh, but ultimately what we're what we're looking at is saying, okay, there's certain types that are fixed and they're really pretty simple. They're pretty basic. Uh, you get good protection out of it, but also probably the smallest rates of return in the long run. Uh, you have variable annuities, which, uh, I mean, the name kind of, uh, says it. All right. There are a lot of variables to it, and the values can also vary. Uh, we typically, uh, you know, in all things financial, we typically ultimately are staying away from those, uh, if for no other purpose, just because there's not a lot of certainty and because they have really high fees in comparison to others. Uh, and then lastly, what we just spent a good amount of time on are fixed index annuities, where you do get that total principal protection, you get to participate in the returns. Um, so it's a good balance between the two. And one of the things that's, uh, you know, we find is typically best about the fixed index is that they're very, very low fee or no fee, uh, meaning that if you're comparing and saying, okay, uh, in a traditional investment model, we would say, you know, great, I want stocks for growth and I want bonds for some some protection, some safety.

Speaker3:
Uh, well, bonds have fees, uh, fixed index annuities, oftentimes you can find them without fees. So right there you're, you're, uh, gaining more just by saving some, some dollars on what you're paying on the funds themselves. So there's a lot of different ways to look at these, uh, in different capacities. Um, and again, we're happy to dive into that with you whether you are looking. For just something. Where? Hey, I need some place where I can get some returns. Um, but I also know that I want it to be totally safe. Or whether you're looking at it and saying, hey, I do want that additional pension. You know, I do want that longevity income. Uh, so that way I've got an additional paycheck coming in for the rest of my life. Or if you're somebody that has one of these products and you're not 100% sure on how it works, we're happy to dive in with you. Uh, give us a call. Phone number is (612) 286-0580. Uh, you know, say a couple of quick tips on how to choose. Or if somebody is looking at an annuity, how to choose what company or how to know what to look for.

Speaker4:
So this one's tough because and it doesn't have to be tough. But there's something to be said for your experience with the company. And what I mean is from a consumer standpoint, yeah. Um, you know, if somebody's looking for income and we run, we run the numbers, we look to see, hey, which company is going to guarantee the highest payout? Which company has? Um, you know, sometimes it comes down to that income value that we discussed and the guaranteed roll up rate. Um, some companies are fantastic in the short term where, like, if you plan on turning on income within the first 5 to 7 years, we know exactly who to point you to. But what if that's a little bit more uncertain for you? What if, uh, your plan to turn on income is more dependent on what happens in the market, what happens on your assets that have more market risk exposure? And maybe you don't intend to turn on income at all, uh, for the first 5 to 7 years, but you certainly will. Maybe eventually, maybe when you hit, I don't know, RMD, for instance. So there's other you know, there's a lot of considerations there. Yeah. Um, you know, a big one recently has been the enhanced benefits that annuities provide in terms of long term care features and long term care benefits. Um, that's been a big one for people. That's more just an additional benefit. Obviously, there's no certainty.

Speaker4:
We don't know that you're going to use that feature. But for a lot of people, knowing that they have that additional coverage gives them a lot of peace of mind. So they're they're basing it off of not maybe the highest income payout, but who's going to give me the strongest, uh, long term care benefit? Should I have a triggering event? As we discussed, uh, I think in the last podcast or two podcasts ago where, you know, some of them are based on confinement, that's the only way you get the long term care benefit. Other annuities are based on two ADLs, two activities of daily living. If you can't complete those for 90 days without assistance from somebody, then you now have access to the long term care feature. Some of the long term care features, uh, they pay out, uh, twice what the income benefit would be. Others are, are one and a half times. Uh, so it just really depends. You know, there's a give and take on a lot of these different features and variables that these companies have. But what what makes it even more challenging is, as I mentioned, the consumer experience, some companies are absolutely known for answering the phone within a few minutes when you call, some companies are very easy to deal with. Uh, some companies are very corporate, and they really don't make any allowances for certain things that are maybe just a little bit out of the ordinary.

Speaker4:
Um, a lot of that really comes down to trusting the person who you're working with. And, you know, we've established good relationships over the years with many of these companies, and there's a few while they might come out with a great product or a great feature, or maybe they're very competitive in one area, like if I can avoid it, I might I might direct you to a different company, right? If it's competitive, it's if it's within a couple of bucks, if that's what we're talking about in terms of, you know, so let's say you're not even looking at an income feature, but you just want growth with the added protection of principle. And we're comparing the indexing strategies that I just discussed. And the caps are pretty competitive. Uh, the spreads you know, maybe those are low. Um, you know, the participation rates, maybe those are pretty high and they're pretty pretty even. Right. Or maybe one company has a slight edge. Yeah. I'm always going to direct you to the company that's going to provide for the best experience, because ultimately that matters too. And it's just really difficult to attach like an actual, uh, quantitative value to what that, that might provide for you down the road when you actually, when maybe you have an incident or maybe you need to turn on income, or maybe there's something unusual that you have to go, right?

Speaker3:
No, I think that's really valuable information and good for people to consider. And these annuity companies, insurance companies, they do have ratings. Um, right, A, A+, A minus B plus, etc.. So they do have ratings. And to to your point, Yellis is that, you know, when you're comparing and saying, hey, I'm looking at two different products that both suit my needs. How do I choose this one? It's kind of like getting your car taken care of, getting an oil change done. And you know, I'm oversimplifying it, looking for just kind of a basic metaphor here. But, you know, the the place with the lowest price for your car may not have some of the other, other things that really are what you're looking for or what are better for you from a customer service, um, that are hard to put a dollar sign to. You know, maybe you pay a few bucks more at another place, but the service is much better. Uh. Or the facilities better or whatever. The case is just kind of a, you know, I don't know if that metaphor is a good one or not, but, you know, trying to put it into something that that makes sense, that we all have to do on a daily basis. You know, uh, we.

Speaker6:
We such as. What's that?

Speaker4:
It's such a simple way to put it. The service is much better. I think that's the word I was looking for as I went on on my giant rant, uh, regarding the experience you might have with one company versus another.

Speaker3:
But ultimately you're completely correct, right? Because really, when you look at it, you can say, hey, if I'm looking for an income product, this one, maybe it's an A minus or a B plus company. And we only use A-rated companies. Uh, but if it's like an A minus company, let's say, and hey, it's going to give me an extra 100 bucks a month or an extra 50 bucks a month. You might say that's real money that that I want, man, if you can never get a hold of the people or if their customer service line, the teleprompter is not good and you're on hold forever, etc. versus maybe I didn't get as much income. I'm, you know, 50 bucks short of the other product, but it's an A plus rated company and I get a hold of somebody every time and I can talk with them. And they're very kind and polite and helpful. Like that's absolutely worth something.

Speaker4:
Yeah. At the end of the day, like you can't spend, uh, you know, kind and polite and, uh, all those types of things at the grocery store, right? You spend real dollars, right? I know that for most people, it's going to come down to potentially, uh, guaranteed payouts or some of the other actual substantive features that that we're talking about. I would say that the biggest way that why it matters to, to to use an A-rated company, though, is based on renewal rates. So all of those strategies that I mentioned, all those strategies, the insurance company has the ability to increase those or to decrease those. So imagine, you know, you're you're signing up for a ten year contract, ten year annuity. It's a very common term for an annuity. Sometimes it's five year seven years. But a lot of them are ten years, ten year products. Right. Where there's a surrender schedule and you have to pay something to get out of the contract. So imagine it's very competitive in the first year, right? That's what got you to buy in. That's why you decided, hey, you know, I think I think I should, you know, peel off 15 or 20 or 30% of my, my nest egg and hand it over to an insurance company because they're providing me all these amazing benefits and features.

Speaker4:
But imagine if in the second year, they downgrade their indexing strategies where their caps used to be 7%, but now they're 3 or 4%. Or maybe the spreads are so high that those are that it's impossible for you to get a rate of return. So companies who do that, companies who downgrade those renewal rates, are typically companies who end up suffering in terms of, uh, the, the actual rating that they have. So they're no longer they may no longer be an A rated company, or they might be downgraded to an A minus or a B plus. And obviously insurance companies don't want that. So they're incentivized to maintain their renewal rates. And there's companies this is actually tracked. You can look to see hey what's the renewal rate history that this company has on this specific product. And I would say that's where those those ratings, whether it's Moody's or Am best, where they really come into play. And it's important to look to see, hey, what's the rating that this insurance company has before I make a ten year commitment to handing them over a chunk of my retirement savings?

Speaker6:
Yeah, yeah, absolutely, absolutely.

Speaker3:
Things worth considering. Uh, as we wrap up here, yellow, say any any final thoughts? Otherwise, I think, uh, just for something fun, I'll spend 1 to 2 minutes as we close on our retiree.

Speaker6:
Of the week. I think we need.

Speaker4:
Something fun, Ryan.

Speaker6:
Something fun?

Speaker3:
Uh, no more economics and tacos and number of Pepsi's and supply and demand, right? Yeah.

Speaker4:
I really hope that the editing editing team can get rid of the tacos and everything that was said about your economics professor. That did not go over as well as I hoped it would.

Speaker6:
Well, you know, what I will.

Speaker3:
Say is that, uh, you know, here many, many years later, I still remember that lesson on supply and demand. So it must have worked to some capacity.

Speaker6:
Right.

Speaker3:
But. Well, so our retiree of the week is Madonna Buiter. She is age 93. She lives out in Spokane, Washington. Uh, really interesting. Uh, and I think this is kind of a neat story. So she actually, in her early 20s, became a nut. So not a high paying career, by the way. Uh, but interestingly enough, uh, in her 50s, uh, and her, she started getting into running and she started getting into competitive running. Uh, and then she expanded beyond that, and she started doing triathlons. And at age 55, she did her first, uh, triathlon. And, uh, she kept doing them over and over and over again to the point where she earned the nickname The Iron Nun, which I think is great. And, uh, even into her 80s, well, into her 80s, she was still competing in triathlon. She's done over. You want to take any guesses on how many, uh, Iron mans this woman has participated in? Yes. Just take a guess. 4325.

Speaker6:
Oh, my goodness, 300. And 25.

Speaker3:
Ironman competitions. And I think it's a great story when you talk about, hey, what do I do in retirement? And also, uh, very, very, uh, tied into our conversation on protecting the possibility for longevity. Right? So, uh, our retiree of the week, Madonna Buder the Iron Nun. Uh, with that, we will close out. Thank you so much for listening. If you've got questions, if you want to take a look at an existing annuity or you just want more information on what that might look like for you, uh, give us a call. Phone number is (612) 286-0580. My name is Ryan. That's yellow. Say, uh, trays out of the office today. Thank you so much for listening, and have a great day.

Speaker2:
Thanks for listening to all things financial. You deserve to work with retirement planning specialists who care about your money, and take a unique approach to your financial and retirement needs. Visit all things financial.com and set an appointment today.

Sonix is the world’s most advanced automated transcription, translation, and subtitling platform. Fast, accurate, and affordable.

Automatically convert your mp3 files to text (txt file), Microsoft Word (docx file), and SubRip Subtitle (srt file) in minutes.

Sonix has many features that you'd love including enterprise-grade admin tools, upload many different filetypes, share transcripts, collaboration tools, and easily transcribe your Zoom meetings. Try Sonix for free today.