Discover Different Ways Annuity Income Could Work in Your Plan

Hey Mike, if someone wanted a part of their retirement income guaranteed, what should they know as they shop around? Discover the various ways you can take income from an annuity when you retire.

Text your questions to 913-363-1234.

Request Your Wealth Analysis by going to www.yourwealthanalysis.com.

What is How to Retire on Time?

Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.

This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.

Mike: 00:05

Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much cover it all. So that said, please remember this is just a show.

Mike: 00:35

Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my colleague, mister David Fransen. Thanks for being here today.

David: 00:51

Yes. Glad to be here.

Mike: 00:52

David's job is reading your questions, and I'm gonna do my best to answer them. Now you can send questions in at any time by texting them to 913-363-1234. Again, that's 913-363-1234, or email them to hey [e-mail]. Let's begin.

David: 01:12

Hey, Mike. If someone wanted a part of their retirement income guaranteed, what should they know as they shop around?

Mike: 01:19

Okay. So yeah. Most, this is kinda funny, and this is all over the country. Most dinner seminars you're gonna hear, even a lot of these educational events at libraries, a lot of them are really focused on selling an annuity. That's not wrong, but we also wanna be cautious of the sales pitch or the preference towards selling a single product.

Mike: 01:45

So, David, if you were to build a house, could you do it with just a hammer?

David: 01:48

I would need more than just one hammer. Yes.

Mike: 01:51

Sorry for the leading question. But Alright. An annuity, specifically income from an annuity is just a tool. Admittedly, I wrote an entire book to try and convince people not to do the income annuity, but I still have people that come in every now and then say, I just won't sleep at night unless I guarantee a part of my income. Fine.

Mike: 02:08

As long as people know what they're giving up in return for what they're receiving, I'm okay with that. Would I personally do a guaranteed income stream? Personally, no. But I'm not I'm not you listening right now. I'm not everyone that's out there.

Mike: 02:22

Let's have some fun. This is how you vet based on my experience, based on my opinion, on how to really vet income annuities. So annuities that are intended to provide income. You got 3 options. You've got your variable annuity.

Mike: 02:39

So there are higher fees associated with it. It doesn't have protection. It's just whatever the market does, and you buy into it and and so on. And at some point, you turn on the income. And really, the only place I see that even being relevant is if you have a bunch of after tax funds, you want risk with more growth potential and you want to kind of shelter all the taxes.

Mike: 02:59

But I've just I've never actually sold a variable annuity in my 10 years of doing this. It's just it's such a weird situation. But that's the variable annuities. What everyone talks about, annuities are bad. Look at these variable annuities.

Mike: 03:10

Well, it's not the full representation of the annuity space.

David: 03:14

Maybe they're varying too much and people don't like that.

Mike: 03:16

The thing that gets me is why wouldn't you just put it in the market, have less fees Yeah. Overall? And then when it comes time to draw income, you just buy a different annuity and then turn on the income. But I digress.

David: 03:27

Yeah.

Mike: 03:27

There's probably a reason why I haven't Yeah. Sold one, but and it's funny too. Hopefully, everyone here is gonna smile at this. I'm saying the, the financial swear word right now, annuity. We're talking about it.

Mike: 03:38

Oh. So okay. There's fixed annuities, which grow at a fixed rate, and then there's fixed index annuities, which grows based on the index. So it can go up in value, or if the markets go down, it wouldn't lose anything. So it's principal protected.

Mike: 03:56

Some of them have fees. Some of them don't. There's a lot of very polarizing opinions about this. And almost always when I read them, they're leaving out some key components to their argument to just make their case, which I find is very disturbing. Again, my book, How to Retire on Time, was written to say why you may not want to do this.

Mike: 04:17

But we got the question, so we're gonna try to address it. So why would someone opt in for guaranteed income? What what regardless of the annuity, why would someone do it? Well, there's 2 ways or there's 3 ways you could take income from an annuity. So the first one is if you have a lifetime income rider, that means you are guaranteed income for life.

Mike: 04:39

Not all annuities guarantee income for life. This is a common misconception. K.

David: 04:44

So there's no cap. You could be a 102 and still be getting it.

Mike: 04:48

Yes. Well, I shouldn't say yes. It would like a statement. Look at the details.

David: 04:52

Okay. Sure. Sure.

Mike: 04:53

They can do whatever they want in these contracts. But generally speaking, yeah, the idea is if you can pull enough people together, most people will die off soon enough, but the insurance companies will still be profitable and the few people that live a long time, it's fine. Yeah. That's that's the idea behind it. So you can guarantee income for life.

Mike: 05:10

That's one way to do it. The other way, this is the more technical term is annuitization is not guaranteed for life. It's that you're you're gonna grow your money to a certain point, and then you're going to annuitize it, which means you're gonna get a fixed payment for a certain period of time. So maybe you annuitize it and you have equal payments for 5 years or equal payments for 10 years. K?

Mike: 05:35

K. That was the original kind of annuity setup. As it grows at a certain rate and need to pay us for a certain period of time. So this is very important as you're shopping annuities. You need to understand, is this an annuity that's gonna offer you lifetime income?

Mike: 05:47

And do you want that? Or do you want that guaranteed period of time? Or some people will just say, you know, I just want protection with some growth potential. And they take out 10%, which in many annuities, you can take out 10% penalty free. But that's kinda nice because it can grow.

Mike: 06:02

It can't go backwards. So you're kind of preserving assets in that sense.

David: 06:06

Sure.

Mike: 06:06

The problem though is if you're taking out 10%, well, if you if it's growing by 6% on average, let's say, and you're taking out 10%, the amount you can take out each year is gonna go down. So you gotta be cautious of that. Devil's in the details. Yeah. So, okay.

Mike: 06:21

We've talked about kind of different ways you could do income. A few other things that are out there for the lifetime income side of things, you have flat income. So flat income, by definition, is you're gonna get a certain amount for the rest of your life. It does not change. So it it looks great for the 1st couple of years.

Mike: 06:39

But as inflation continues, the buying power of that income stream goes down.

David: 06:45

So

Mike: 06:45

you can be very careful to not just go all in on flat income and expect everything to work out, because you might end up being that older person in your late nineties that's living off a fixed income. And it's just really hard to make ends meet because 30 years of inflation can really do some damage. Then you've got your guaranteed COLA or cost of living adjustments. So let's say you buy one that is gonna pay out x amount of money, and every year it's guaranteed to increase by 3%.

David: 07:13

Okay.

Mike: 07:14

That sounds nice.

David: 07:15

Right. It does sounds really nice right now. But

Mike: 07:17

That yeah.

David: 07:18

But Is there a detriment here?

Mike: 07:20

The benefit's going to go away once the cash value that it is associated with is gone. So an annuity is gonna grow or increase based on the cash value. K? So as long as it's growing, the benefit stays. But a few bad markets and it just the cash wasn't able to grow enough, maybe after 20 years, that guaranteed, quote unquote, guaranteed COLA would in theory go away.

David: 07:43

Then it would transition to, like, a flat income or

Mike: 07:45

Yeah. Very close to flat. Okay. I mean, it might go up just a little bit. Very, insignificant.

Mike: 07:51

And this is a very broad statement. There is always exceptions. Look at the details. Right? This is kind of how you're shopping it, though.

Mike: 07:57

And then an option that I don't think is discussed enough is and I I actually asked someone this. I said, why don't people talk about this one? The answer I keep getting is, well, it's more confusing. So people just kinda shy away from that. Yeah.

Mike: 08:08

That's anecdotal evidence, but that kind of kinda shocked me a little bit. Yeah. So index income. So your income starts at a certain rate, and it's tied to an index. So if the index goes up in value, your income goes up.

Mike: 08:26

If the index goes down, it stays the same. So just for easy math, let's say you buy an annuity and it it's gonna pay out 50,000 a year. Just easy math. K? And the markets go up.

Mike: 08:36

And so in year 2, it's now it goes up 53,000, let's just say. And it's now got 53,000. And then in year 2, the markets just tank. So the next year, you get 53,000. You don't go backwards.

Mike: 08:49

So the reason why this, I think, is kinda nice is it gets rid of less risk to an insurance company in some sense because it's not guaranteeing an increase each year. It's more of if the markets go up, you have some up. If it doesn't go down, it just stays the same. But just like the other option is if the cash value goes away, this index increase would also go away. So nothing's perfect forever.

David: 09:11

Yeah.

Mike: 09:12

Right? Now regardless of those three options, flat, guaranteed, or indexed income, you can, and this is often not understood. You can take IRA funds, an individual retirement account, pretax, or you can do the Roth, and still make it as, quote unquote, joint income. So, you know, David, you're married. Yep.

Mike: 09:30

Let's say you take your IRA, you buy an annuity, and you were to pass first. Even though the IRA was in your name, the payments could continue to your wife's name.

David: 09:41

Okay.

Mike: 09:42

You can set that up. But if you do joint income, your overall income would be less than if you just did single because whenever you do joint survivorship or 100% survivorship, there's just more risk to the pension, the insurance company, whoever it is. Mhmm. And that's pretty common. Now here's where it gets a little bit more technical.

Mike: 10:01

You've got riders and benefits. You can do all sorts of things with annuities, but just like a car, if you want a nicer, more luxurious car or experience Yeah. You're gonna pay for more features. If you want a quote unquote higher quality or a better experience with annuity, you probably would be paying for some features. Nothing wrong with that.

Mike: 10:21

It's just know what you're paying for and why the fees would be there. So here's just a couple of things that people may not realize. There there are certain things out there like some annuities will offer you I'll use the 50,000. Let's say you buy an annuity, you turn it on, 50,000, it's flat for the rest of your life. But if you were to get sick, maybe you can't do 2 of these 6, activities of daily living, then your income would double for a certain period of time.

Mike: 10:46

That's kind of nice. Yeah. You don't have to qualify for health care or anything like that or any sort of health exam for stuff like that. But many times you're either paying for it or it's baked into the overall illustration or product itself. Nothing's free.

Mike: 10:59

Insurance companies aren't charitable. They're running a business. Yeah. They just operate within the insurance space.

David: 11:04

Right.

Mike: 11:05

So there's all sorts of benefits there, but you're going to pay for it. You just gotta understand that. And then the thing about annuities and the income streams is if they're gonna guarantee the income and some sort of benefit, the insurance company and this is kind of speculative. I don't mean it to be. It's not defamatory.

Mike: 11:25

It's just let's just realize what it is economically. They don't really want the cash value to grow for a long time. They want the cash value to go down because if the cash value associated with your income hits 0, then guess what? They don't have to pay your beneficiaries anything. So a lot of these indexes don't have necessarily high growth potential because they're built for higher income, lower cash value, and they hope you die soon enough that they don't have to give out any money.

Mike: 11:53

Now when I say you need to live within your emotional and economic limits, an annuity may make more sense from your emotional limits. Maybe not economic limits, but emotional limits. And if that's the case, I'm okay with that. And I wanna say this because this is cliche and probably not politically correct to say, but whatever. Females tend to gravitate more towards guaranteed income for life because they know that they're gonna probably live longer than their spouse

David: 12:19

Right.

Mike: 12:20

In the traditional marriage sense. And most I kinda cringe when I say this because I don't agree with it, but many females in a traditional marriage were not involved with the finances. They had the husband just do it. I I I would hope that all marriages, both parties are actively engaged in, you know, the finances, the decisions, and the strategies being used. But that the reality is that's just how it is.

Mike: 12:45

Okay? So many females will gravitate towards, I want guarantee because when you're gone, I won't know what to do.

David: 12:52

Sure.

Mike: 12:52

Many males are more willing to take risk because they've been doing it so long. Yeah. So there's also a blend of couples therapy

David: 13:03

here. Yeah. Right. Well In

Mike: 13:04

that sense that you have to really navigate. Again, I wanna reiterate, would I personally buy an annuity and turn on the income stream? As of right now, based on the current offerings, no, I wouldn't. But I'm willing to take more risk. I'm willing to use the reservoir strategy to have a portion of my assets in principal protected accounts.

Mike: 13:23

So the markets go down. I just take income from there because I have faith in my models. I have faith in the market that it will recover, and I'll be fine. I have faith in that strategy, but I know not everyone's in that boat. So, hopefully, this is a more candid conversation of, look.

Mike: 13:35

Here are the options. It's out there. It's just a tool. Yeah. Doesn't make it good or bad.

Mike: 13:41

It just when I when I, when I go to a restaurant, I buy something different than my wife. We look at them, and we buy 2 different things. Let's not disparage or condescend on people that are buying one product over another. Let's just accept that we all have different preferences and have an open conversation that supports whatever that preference is.

David: 14:02

Yeah. Sounds fair.

Mike: 14:03

Could could I say that more clearly?

David: 14:05

Well, you gotta.

Mike: 14:06

The hard part is when you talk to someone that has a preference of putting you in the market or putting you into an annuity or that's the hard part. You gotta find someone like Kendrick. Shameless plug.

David: 14:16

There you go.

Mike: 14:16

That that really tries to take an indifference in the matter, explains the benefits and detriments, and then just lets you make the decision based on what is right for you. That's really the goal. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time.

Mike: 14:36

Discover if your portfolio is built to weather flat market cycles cycles or if you're missing tax minimization opportunities that

David: 14:42

you may not even know exist. Explore strategies that

Mike: 14:43

may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.