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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.
Welcome to How to Retire On Time, a show that answers your retirement questions. We're here to move past that oversimplified advice and dive into the nitty gritty. Now remember, this is just a show. It's not financial advice, so please do your due diligence. You got questions?
Mike:Text them to (913) 363-1234, and we can feature them on the show. David, what do we got today?
David:Hey, Mike. When someone pushes an annuity for lifetime income, the comparison is always in favor of the annuity. What are they not sharing?
Mike:We gotta be careful about this because there's no such thing as a perfect investment, product, or strategy. There's no such thing as a riskless retirement. Okay? So let's dive in. Yeah.
Mike:The annuity by definition is transferring longevity risk to an insurance company. It is not that you're gonna get comfortable income for life. It's that you're going to get an income stream for life. So by that definition, a lot of people will buy a flat income stream for life. Let's say you you put money into an annuity fine, and you get, I don't know, put a million dollars in there, you get 80,000 for life.
Mike:Okay. K? Let's do a 100,000 for life. It's it's, again, easy math. So after ten years with a 3% inflation, it's 75,000.
Mike:Right? So is that enough income, or is it not enough income? And what people will say is you buy a couple of annuities, so when you need more income, you just turn on an additional income stream, which is kind of true. That kind of works, except for a couple of caveats. One is in any annuity, they can lower your growth potential.
Mike:So let's say you've got up to 10% growth in any given year, but at any point in the contract, they can lower rates. So maybe the first two years, you've got up to 10% growth, but in year three, now you've got up to 3% growth. Now you can't offset inflation.
David:So that means, like, your original premium or the original money you put in the policy, it could grow at 10%. That Up to 10% growth.
Mike:And I'm using an example. There's caps. Your growth is capped. There's a spread toward the first couple of percentage, basically pays for the mechanisms for all of this, and then you get the rest. Spreads are much less common, and then participation rates were like for an easy concept, let's say you get 50% of the growth.
Mike:That's the idea, and they change all the time.
David:Okay.
Mike:But you gotta understand, those rates can change, and it's not that the insurance companies are greedy trying to screw you over. On the annuity side of it, what's really going on is they're buying option contracts to support the annuity and the promises that were made. Those option contracts are only good as the bond market, the underlying mechanisms can support. So if the bond market rates go down, you've got less to work with, as in the insurance companies have less to work with.
David:So it's not them being evil or greedy. They're just dealing with the realities of the markets. Fair to say?
Mike:Physics doesn't care what you want. It operates because it operates off of certain laws. In finance, there are financial laws you cannot break. They're just there. If interest rates are historically low, you've got less to work with.
Mike:If the Fed drives up interest rates, everything you held just got worse. That's a very complicated bit. I don't really wanna take too much time today. There's we've got other videos on interest rates and all of that or podcast episodes. But if they're getting screwed, so are you.
Mike:Because it's the underlining contractual mechanisms that make these things possible, and you just need to understand that. So when you understand that, it's like they just kind of kick this can down the road. Oh, we'll just buy a couple of them, and when you need more income, just turn on another income stream. Yeah. Well, that other delayed income stream has to keep up with inflation.
Mike:And if it doesn't, then you're kinda screwed. It's more difficult now to keep up because annuities long term should never be expected to keep up with the market. If you look at the growth spectrum, the equities market has more growth potential than the bond market. The bond market might be near the annuity market. They kinda play in this middle ground area.
Mike:K? And then you have the fixed market, like a CD or a treasury, for example.
David:Okay.
Mike:So don't expect you're gonna beat the market year over year, all things being equal, with an annuity and that they could change rates. But that concerns me to put all your money into or a lot of your money into annuities and then just say, well, if you need more money, turn on the income stream. There are so many underlining risks that you need to address with that. Mhmm. So now here's the problem.
Mike:K? So insurance can promise you stuff. They can promise you an 8% payback rate. K? They can promise you certain contractual things, and they've done the math to know that the odds are in their favor.
Mike:What a securities person, someone that sells a stock bond portfolio can't do is promise you growth. Alright. And anyone that would promise you performance should go to jail.
David:Yeah. We can't predict the future of the stock market.
Mike:Right? It's appropriate to say, well, here's what it historically has done. We're gonna shoot for that. We're gonna seek those kinds of growth, but they can't promise that. It's okay to say, like, these are our expectations.
Mike:This is what we're looking for. Yeah. Like, so I wanna be very kind to the industry. But for many financial plans, they'll project maybe a six or 7% return because the retiree doesn't wanna keep all of their assets at risk. They don't wanna put everything in the stock market many of the times and expect it all just to magically work out.
Mike:So you've got a realistic projection long term, which by the way, the S and P, yeah, I know it's grown double digit returns over the past decade or so. But if you go back to February, it's grown like, what, $7.07 and a half, 8% maybe, average annual returns. So a 6% might be more appropriate. But if you run a 6% growth projection, the annuity's probably gonna look better. Even though the securities professional is working hard to beat that metric year over year, even though they may be able to do that year over year, it would be irresponsible for them to put, yeah, we're gonna do 10% year over year returns, in my opinion at least.
Mike:So where one company can contractually promise you a payout that's not gonna grow by inflation, that's not like if you die soon enough, your money is growing at a lower rate, so you're gonna get less for a state plan, that compromises the apples to apples comparison, make it apples to oranges comparison. Because the securities person is growing your wealth. You've got more for legacy. You've got more for health care. You've got more flexibility, but they can't promise you that.
Mike:There's risk associated with it. And so you've gotta take a step back and understand what risks are you comfortable taking, what is the right blend of it. I mean, my book, How to Retire On Time, was written as a debate against the lifetime income. I acknowledge some people want it, and it may make sense for part of your income, but there are so many detriments where things are manipulated to get people to want to buy one without fully understanding the trades and the apples to oranges comparison as best it could be. Am I explaining this well?
David:So it sounds like when you do the comparisons of lifetime income with an annuity contract or just income from your portfolio, they might show it in favor of the annuity because they have this contract they can fall back on, they have to abide by the terms of the contract, whereas the market is more volatile, variable, and you can't promise anything. Right? Is that fair to say?
Mike:Yeah. You've gotta define the differences, and then treat each path as it's intended to be treated, because they're just different. They're different tools. They should not be compared. What is your lifestyle goal?
Mike:What's your legacy goal? How do you best do that? And if it makes sense, blend them together. Yeah. Just don't compare the two, and don't get yourself into a sales situation where it's like, here's my insurance guy.
Mike:He sells me annuities. He wants as much money as you're gonna give him. And then you've got the securities guy who gets paid 1% of your assets. He wants as much money as you're gonna give him. Sure.
Mike:You're compromised. Yeah. It's a crappy situation. So slow down, take a step back, and do comparisons like income, market risk, inflation risk. Yeah.
Mike:Look at tax risk, legacy goals, health care costs. If you have a large expense, what does that look like? If you go to long term care early, if you go to long term care late, run a series of different risks that you want to approach, and then look at how to balance the different options. And income from growth is just one way to go about it. There are so many other ways you can draw income in retirement.
Mike:Look at the various options. Slow down. Slowing down is good for you. Explore your lifestyle and legacy potential. It's worth it.
Mike:Retirement's a big decision. In my opinion, you put the plan together first without any acknowledgment of any sort of investment or product, then you explore the efficiencies. How to move money around between the different tax buckets to get more of your income? When do file for Social Security? Are you subject to IRMAA?
Mike:Is it worth it? Is it not worth it? And so on. And then you start finding the right tools to accomplish your specific goals. That's all the time we've got for the show today.
Mike:If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. 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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.