Which tools are offering what, and what could that mean for the next twenty to thirty years? Welcome to the Tyrone Time q and a podcast. I'm Michael Decker with David Franson here from Kedric Wealth. As always, this this show is really about getting into nitty gritty here of answering your questions, not that oversimplified advice you've heard hundreds of times. Now that said, remember, it's just a show.

It's not financial advice. This is good information. Take it at that. Text your questions to (913) 363-1234, and we'll feature them on the show. David, what's the question we got for today?

Hey, Mike. How come my friends are getting better annuities today? Is there anything I can do to switch my payout? So I wanna just put a

little caveat here for just a second. When he says annuities, that's a very ambiguous term. Okay? So there there could be, like, fixed annuities, like a MIGA, multiyear guaranteed annuity, which is like a CD from an insurance company. And if if you're not getting, like, the good ones

First, just look at what's the credit rating of the agency.

So if they're a lower rated agency or insurance company, they're gonna pay higher rates. Just be careful of the trap of of seeking the highest rates. It's kinda like high yield bonds are really junk bonds.

Oh, okay.

So if that's the case, then you can just expand your search or just find a new agent to be more transparent about what's out there. Now if we're going into the variable annuity space, that space has evolved. It's it's still high fees. My opinion is unless you need to specifically try to shelter your your taxes in a nonqualified account, taking all the risk, trying to have a little bit more growth potential Mhmm. Willing to pay the fees just to avoid some to defer some taxes, and then you're going to you know you're gonna turn that into a lifetime income stream.

Maybe that works. I still have a hard time with that, but that's like the only situation I can feel or see that a variable annuity might make sense. It's just not something that I typically see. So I I doubt it's that one. Mhmm.

So that's, you know, we're like Sherlock Holmes here. Yeah. You could be my Watson. We're just Happy to deducing Yeah. Art of deduction.

So now we're in the fixed index annuity space, which is typically the index annuity space or the equity index annuity space. A lot of names for it. Alright. Nicknames. In this space, there's gonna be really two camps.

You've got growth and you've got not liquidity. Yeah. You've got growth and you've got lifetime payouts.

That's kind of how things work out. So let's do the growth side of things first. Okay? On the on the annuity space, they're offering you the best that they can given their restraints. What are their restraints?

Yeah.

What are they?

What is the economy offering? Okay? So if volatility is up as the markets are going down, it's gonna be get more expensive to offer you these, you know, these S and P 500 caps and so on. It's just it's more expensive. They have to work within their own restrictions.

If interest rates are low, they're gonna have less money to work with because at the end of the day, they also have to put some money. They don't have to, but they usually will put money into it like their general account and a fixed account. So it's growing at a fixed rate. So if if bond funds or not bond funds. If bonds or treasuries, let's say, are just lower rated, not lower rated, they're offering a lower rate.

K? So instead of, like, 4%, it's like 2%. You're probably gonna get a worse off annuity Mhmm. Just because they have less to work with. And if volatility is just going crazy, they've probably got less to work with.

And that's where a lot of these innovative companies will will come out and they'll say, well, we're not gonna give you S and P 500 cap. We're gonna do a risk volatility index. Or we're gonna create our own index that's very cheap to buy options in. Okay? Notice how cheap is the keyword here.

Mhmm. To buy options in and then try to get the most out of it. There's an expression, innovators outrun regulators. Well, these insurance companies aren't trying to outrun regulators. They're trying to figure out how to innovate in a way that outdoes current market conditions.

It's actually quite incredible what they can come up with. Yeah. And I'm not defending the insurance companies at all. What I'm saying is they're trying to produce a competitive product that can easily fall flat on its face if the markets shift. If interest rates go way up or way down.

If volatility goes way up or way down, and and you fill in the blank of these different things. So some people will say, well, I'll I'll kinda do a couple of camps. One is, I bought this annuity two years later. The thing that doesn't have much growth at all. Mhmm.

Okay. Well, maybe and I'm being facetious here. This is not a real situation. We're not quoting any products. But it's like, oh, well, I was gonna get 12 to 15% cap on the S and P, and we had some really, really good years.

It was awesome. And now I can only get, like, 4% cap. And now I can't I can't grow. But my friend over here, he's still got, like, a 9% cap. Well, what the heck?

Mhmm. Why why didn't I get the 9% cap? What's going on? You need to understand that they're pricing these things based on the expectation or the time that what's left in the contract, and they've got to make do. They have to make good with it.

So they'll manipulate things in all sorts of different ways to try to just do the best they can with their methodology.

I don't agree with how a lot of them will do it, but that's kind of what's happening. So that's in the growth or accumulation side of the annuity space, the index annuity specifically. Now you need to be very careful. There are many people out there that will say, oh, this annuity was great. Two years later, it's garbage.

It's almost like they knew that it was going to go down. I can't accuse them of of saying they knew that it was going go down. But if the shoe fits

And you you end up doing the same thing over and over again, you have to kinda wonder. Uh-huh. Right? There are certain carriers that I know typically have a teaser rate, and then will drop in the second, third, or fourth year. I'm not saying it's going to happen all the time.

I'm just saying there seems to be a pattern there.

So we don't sell those. Mhmm. Other people do. And then what bugs me is then that what they'll do is they'll say, hey, you can't get much on this anymore. We're gonna sell you another product, but don't worry, there's a cash bonus because this insurance company is so charitable.

And then you're gonna get you're gonna be made whole again. So even though there's a surrender penalty, the cash bonus will offset it, so you're fine. Mhmm. And then it will continue to grow at a reasonable rate. What they're not telling you is without the cash bonus, you might actually have more growth potential because you're gonna have higher caps or participation rates, but that's beside the point.

And so here, if if all things are being equal, you have a very interesting from a competitive standpoint market for growth and accumulation that someone has to navigate. And if you don't even know this space, it can be overwhelming. Now the answer is not to say, I don't get it. I don't trust people. I'm just not gonna go there.

No. The answer is just to keep asking questions until you do understand it because it could be an important part of your retirement plan. It may not be. We have plenty of clients that don't have any annuities.

Oh, right.

I'm not saying that everyone needs an annuity. What I am saying though is it is better to learn how something works before you then decide if you need it or Mhmm. You might wanna know what a hammer is supposed to do before you say, I don't need a hammer. Or some of that fact. Right.

Okay. So that's the space. Now, there's a very interesting before and after the times. Right? So when I say before and after the times, before the pandemic hit and we printed a lot of money and then we jacked up interest rates really, really fast.

Before that, accumulation annuities were it was difficult to be competitive in that space. They did it. They they found some good ones, but they weren't nearly as competitive as they are today. Why? Because the fixed income side or bonds Mhmm.

Is just much more competitive. It's much more generous today than it was before.

And so they can do more. And I'm gonna use that as kind of a nice transition to the lifetime income. Back in 2015, 2016, 2017 or so, if you wanted lifetime income, you'd put a million dollars in there, you might get like 5 percent back.

And that was kind of considered a good deal at the times. It's guaranteed for life. It's good to go. You know, the 4% rule, you could put a million dollars in there, get the 4% rule, or get the 5% in there, and they would try to innovate different ways to make that competitive. Today, you put a million dollars in one, you get like 7% back.

That's like $70,000. What's the difference? It's the current economic conditions. The insurance companies aren't saying, Hey, we solved it, and now we can offer more. They're saying, If our general account, which is really what's going to make good on all the promises they're making as an insurance company, has a lot of treasury, let's say, that are growing at 2%, 1%, it's much harder for them to make good on those promises than if they filled it up with a bunch of treasuries with 4%, let's You see the difference here?

Yeah. And so what's what's the general account that you mentioned there? Is that how does that work?

Yeah. So when you buy an annuity, they don't actually invest you in the S and P 500.

Oh, okay.

There's there are certain protocols and investments to help honor that, but many times your assets go into a general account that's managed. And then they keep track of the promises that they've made, and then they honor them accordingly.

Okay. For each individual policyholder?

Yeah. So you want to work with a financially smart insurance company. Uh-huh. I mean, I I don't know of an insurance company that went under because of the two thousand eight financial crisis. AIG was hurt, but that was more on the security side of things than the insurance that you would think of in this standpoint.

Okay.

So 02/2022, I don't I don't know of an insurance company that really went under, that was a rated, that was established, and so on. So they're they're considered a pretty good place for your money. They have a ton of restrictions, a ton of regulations. They have to prove they can make do on all their promises. So it's not that it's unsafe to work with an insurance company, it's that you need to understand they're not going to take on additional risk just to try and outsmart the market.

A lot of these decisions are run by actuaries. If you've ever met an actuary, they're not risky people. So when when you look at, oh, well, I bought an annuity in 2015, 2016, '27, and anytime before really when we when we increased interest rates drastically, anytime before that, it probably isn't that competitive of an annuity. If you bought one afterwards, it was probably a pretty reasonable bond fund alternative or a pension alternative or something to that effect. And what I really want to drive home here is things change.

What you need to understand is not what was your opinion five years ago of any investment product or strategy. It's what is the offering today and how does that fit. Because if you buy, let's say, an insurance contract today, they have to honor that contract. So let me give you an example. I like Toyota.

It's a reasonable company. Yeah. You know? I don't see them in the news for being crazy. K?

Yeah. Good rep.

So Toyota, you know? Yeah. Let's say the Toyota Corolla Cross because that's what my wife drives. Great car. I drive it too.

Love it. Very practical car.

All right.

Not paid by Toyota to say this. Just like the car. So let's say that the Corolla Cross today gets, I don't know, 40 miles to the gallon. I actually have no idea what it does, but let's just say it gets 40 miles to the gallon for, you know, road trips. Yeah.

And let's say they have got a breakthrough on engines, and now the Corolla Cross can get you 80 miles to

the gallon.

Yeah. And the price is the same.

You'd feel left out probably.

Yeah. A little bit. Yeah. But but now your vision on how do you buy this or do you not? When you compare the Corolla Cross to the Subaru or the VW Golf or anything that would be considered similar Yeah.

That one change now has to change your opinion on how you're measuring things. It's not just about the car. It's what can the car do for you? And there are going to be some economic times to where if you were to buy an annuity, whether it's for accumulation or for lifetime income, it will be more competitive, kind of like the 80 miles to a gallon season. And then other times, it's gonna be like, oh, sorry.

We only can do the 40 miles to gallon deal. Do you still want it? And it's like, well, I I need a car. It's what I wanted anyway. I just wish I had that, but I can't.

And then you move on. The reason why I bring that up is if Warsh gets in there and he drops interest rates, and let's say that the the credit, so the basically, the higher rated longer term products or bonds versus the shorter ones, that gets lowered. And let's say the ten year treasury or thirty year treasuries, they do those, you know, if that lowers as well, they might not be able to get you as good of an annuity today as they would or they might not be able to get you as good of an annuity in the future as they are today because they're not gonna take unnecessary risk.

And there's an interesting correlation between bond rates and what annuities can offer contractually. And it's kind of like this. How long is your typical mortgage? Yeah. Thirty years.

K. Then why is the mortgage based on the ten year treasury, typically? Because people typically keep their mortgage for ten years, and then they buy the next house. Right. So there's there's a reason for these numbers.

And if you ask enough questions, you start to understand it's not magic. People aren't just leaving themselves exposed to some magical, I hope it works out from the general account situation.

No. It's actually it's quite deliberate. It's quite calculated. And so based on when you retire, you want to take a proper inventory of which tools are offering what, and what could that mean for the next twenty to thirty years. That's that's my take on this.

Yeah. Are they able to change it? The the last part of the question is, is there anything I can do to switch my payout?

Oh, probably not. I mean, if if you have an accumulation annuity and you wanna switch it up, could take a surrender penalty hit if it made sense and maybe move it over. But don't feel FOMO like you have like, the hit is a hit. You wanna make sure you're doing a proper calculation, make sure it's worth for you. Maybe you wait one more year.

Maybe you reallocate something within the portfolio. I mean, there are things you could do to salvage annuity that's not as competitive. If you're in lifetime income, that's a contract. I mean, if if you just turn it on, maybe you could unwind it or take a slight hit to your cash value, turn it off, and then maybe try to work it around. But even then, I don't know if really that would ever really make sense.

Because what you've done is, once you turn on that income stream, you've transferred your longevity risk to an insurance company. The cash value is being drained quickly on purpose because they don't want to pay out when you pass. Oh. And if there's a cash value associated with it, they have to pay out.

They have to pay you the rest of your of your, like, original

cash. Yeah. That's typically what's required. So so they want to drain the cash value, but they'll keep paying you out as long as you're alive. Alright.

The numbers are in their favor. Yeah. But typically, if you're on lifetime income, it's one of those when you when you compare yourself to other people, you almost always lose. So is whatever you're being offered a good deal to you, and are you comfortable with that? That's that's really where it is.

So nothing's perfect. What's that? I always say this, there's nothing perf there's no such thing as a perfect investment product or strategy. Right. You just gotta be okay with enough.

And is what you're being offered enough for you? And it might not be. And if that's the case, then find something else. Yeah. There's so many ways to solve for this.

But that's I think that's the gist of it. And then that's all that's all the time we've got for this question. If if you enjoyed the question, don't forget to like, subscribe, and, leave a rating. Also, go to retireontime.com to grab a copy of the book, the workbook, the resources that are available there. Also, join us for one of our live workshops where I I actually build a retirement plan live and show you every step of the way.

You can go to retireontime.com to catch that and much more. Thank you for spending your time, your most precious asset with us today. We'll see

you in

the next episode.