Troy: First and foremost I want to say thank you very much for commenting and putting these questions in. It gives me more content to put out here on the channel. If you’re thinking about commenting or you have a question, write it in there. I may not get back to you immediately but I try to respond in writing to as many as possible, and also try to do these videos by finding the questions that I think most people would benefit from by doing a video about them.
Okay. we’re two videos deep into the guaranteed lifetime income series, which is part of a longer series about the annuities here. We have some comments I want to address. We have some questions to tie in that I want to answer, so we’re going to jump right into it.
Mike P. “Decent video and good attempt to explain a complicated product. This is the single reason I stay away from annuities. I feel I understand personal finances very well, but annuities are clearly stacked in the insurance company’s favor with too many ifs and buts. When insurance companies come out with a product that only takes a couple of pages, I might consider it. A couple of pages to understand.”
Now, before I answer and address it, a similar comment down here. “Have you ever seen anything more confusing? If you can’t explain it in five minutes, do you really think you should invest in it? Try explaining it to someone. It is written by lawyers and would take a lawyer to understand all the paperwork. I do have an annuity but I may regret it. Not sure.” Similar themes here. That the videos or the products themselves are complex, very difficult to explain, and because of that you shouldn’t invest in them.
I’m going to start with a simple explanation of what I actually spent about an hour going through in those videos. The lifetime income, pretty straightforward here. You make a deposit, your principal earns interest, it’s 100% safe, your gains lock in. Whatever it grows to minus the withdrawals, that’s your death benefit. You never lose your death benefit unless you take so much money out that it’s exhausted. In addition to your principal you have a pension account that grows at a guaranteed rate, or could grow based on the performance of the principal over here.
Whenever you decide to take income, the insurance company is going to look at which one of these accounts is higher. This account is always going to be higher. This one could average 4% or 5%, but the way these contracts are structured, even if it averages 6%, this side is always going to be higher. Whichever one is higher, they simply multiply it by a guaranteed distribution factor, so 4% or 5% or 6% depending on how old you are, or if you want your lifetime income guaranteed for your life only or you and your spouse. Then you’ll receive that income for as long as you are alive. Pretty simple.
Your principal minus any withdrawals from lifetime income, or if you go in there and take income out just randomly, minus any fee plus any interest is your death benefit. Now, to make it even more simple, if you just simply tell me your age, how much money you want to invest, and how long before you want lifetime income guaranteed for your life or you and your spouse’s life, I can simply tell you what the marketplace is offering. It’s really that simple. That’s all some people want to know because if it is fully guaranteed, no if, ands, or buts, then this is all that matters. How old are you? How long are you going to defer? How much do you want to put in?
We could reverse engineer that. How old are you? When do you want income? How much income do you want and I’ll tell you how much to invest? That’s it. That’s really as simple as it needs to be. The reason why I go into depth is because I know hundreds of thousands of people in this country are going to buy an annuity over the coming years. I can’t help all of them. Our firm can’t help all of them. Now, many of you will reach out to us and we’ll be able to help you. My promise to you is we go through that process with 100% integrity. We use that annuity as part of an overall plan.
Those of you who will never reach out to us or just come across this video in passing and you have an advisor or someone else that you trust, I want you to understand how these products work because there are bad people out there that can misrepresent or can mislead or don’t tell you the whole truth. If you come armed with information you have the power to ask really good questions. One, you might catch that person in a lie, or two, you might put them on their heels, and then they’ll be more transparent with you.
Millions of people over the next 10 years will buy these annuities. If you remember back to the first video in the series, I believe the number was 240 or 250 billion of annuities were sold in this country in 2021. My job is not to help everyone because we can’t. My job is to help empower to educate so those of you who are interested in safety of principal, reasonable growth, guaranteed lifetime income, if you don’t reach out to us you’re empowered with the information to ask good questions.
Now, to address a valid point within both of those comments, a similar theme, that annuities are contracts that are written by lawyers, and they can have complex terms and terminology and definitions. It’s essentially like learning a new language. If you don’t have experience then a lot of what we talk about is going to be a new term. It’s going to be confusing to you, but it doesn’t negate the value that those tools bring to the table.
Mortgages, for example. Most people just want to know if I put 20% down, the value of the home, and the interest rate to get the payment. Well, very similar to the annuity. It can be that simple. What’s your age, how much are you going to invest, and when do you want income? This is what it is. Now, if you went in and actually read all the clauses inside the mortgage and everything the bank can do or will do and your responsibilities and the terminology and the legal lease, yes it would get pretty complex and you would never buy a home.
Same thing with mutual funds. The hidden fees, the 12b-1 fees, the administrative fees, how mutual funds are taxed. Not to mention that prospectus that you receive once a year that I’m sure you read page by page, cover to cover. Nobody does that. Mutual fund prospectuses – prospecti maybe – either way, written by attorneys.
REITs, real estate investment trusts. You have private REITs, you have public REITs. It doesn’t mean they’re bad investments, but those are some of the most complex agreements that you can get into. Still tremendously popular and can be a very good investment. We use REITs, publicly-traded REITs, for our clients in their portfolios. As a side note, I typically recommend people in retirement stay away from private REITs – those are ones that aren’t publicly traded – because I’ve seen a lot of bad stuff over the years where people have lost all their money, maybe only got half of it back, and some of them I’ve seen have performed very, very well just as stated.
A lot of risk in private REITs, but again written by lawyers, very complex and no one would understand it if they actually went through page by page.
The bond market. Derivatives like options, Medicare – confusing, health insurance, your car insurance. All of these things are complex. All of these contracts are written by attorneys. I just want to be sincere here, is that yes, annuities are a new terminology, and they’d have different features and benefits. Some of them are good and some of them are bad. Just because they’re written by attorneys or they can be confusing doesn’t mean, in my opinion, that that completely negates the financial tool as an asset class because they have benefits. They can improve your security, your income, and also help you sleep better at night from my experience.
Next one we have is about a lump sum or pension. Jdgolf499 says, “For a fixed immediate annuity, what is the driver of payout? Do long-term, say 10-year, bonds determine what the monthly payout will be?” He’s considering taking a lump sum from an old pension and see various payout amounts weekly. Meaning he’s getting new payout amounts in his paperwork I would imagine. “Since a 20-year certain annuity starting in January would pay slightly more than the 55% survivor pension that one of us would get it if we’re still alive–” and he goes on here.
The big question is what is the driver of the payouts? I’m pretty certain here, Jd, that you’re talking about the lump sum from an old company or the pension option. The rate or what drives the payout of the annuity, the pension payment, is typically formula-based. It’s going to be usually on years of service and also age because life expectancy, it’s across a mortality table, and these pensions are simply based on a similar life expectancy based on your age. Again, you’ll typically have some type of kicker in there for years of service.
The payout of the annuity is not impacted by interest rates, but the lump sum absolutely is. Now, this is called the GATT rate, G-A-T-T, and it stands for the General Agreement on Trade and Tariffs, I believe. The GATT rate is published monthly and it is increasing. As that rate increases your lump sum will go down. If you’re thinking about taking a lump sum I encourage you to talk to a CPA or your financial advisor, but it’s probably going to make sense to take that lump sum sooner rather than later. Because as interest rates go up your lump sum will go down, but your pension amount will not change.
Missouri here says, “This was an excellent presentation and confirms my decision to have two fixed indexed annuities both around 250K.” I’m going to skip down here. He says, “They perform, just like Sean said, between 4% to 6% per year.” Missouri, my name’s Troy, not Sean. No big deal, I forgive you, but he said, “I’m sure we’ll get zero this year,” but that’s a lot better than 30% drop that his mutual funds have received.
One thing additionally I want to point out is fixed indexed annuities are not a replacement for stocks. You still should own stocks in a long-term investment strategy. They can be a replacement for bonds. What I want to point out is most bonds this year so far are down anywhere from 10% to 20%. Bonds have struggled significantly this year, but you’re absolutely right. Your fixed indexed annuity, even though the market is down, you’re probably going to have a zero return this year. Your principal’s 100% protected. That is your worst-case scenario, is zero loss.
Relatively speaking or comparatively, you have lost more than or less than your stocks but they’ve also performed better than your bonds almost certainly. Keep that in mind. They’re not stock market replacements. They can be bond replacements, CD replacements, but that is the number one purpose. When we have a down year like this, that money that you have in those tools, it’s 100% protected from loss, and that’s what helps many people sleep better at night.
I’m answering comments and questions about this annuity series that we’ve been doing. If you have questions or comments, make sure to put them down below because that helps us generate content. If you’re thinking it, somebody else probably is too. Make sure to watch this annuity series in sequence from front to back so you understand, you’re learning, you’re becoming more empowered, and you can help separate truth from fiction when it comes to fixed indexed annuities in your retirement.