They're gonna build the policy so that the odds are in their favor. The house has to win. That's how insurance works. Welcome to the Retire On Time podcast. I'll show all about your retirement questions.

This is not about the oversimplified advice you've heard hundreds of times. We wanna get into the nitty gritty. Now that said, remember, this is just a show. It's not financial advice, so keep doing your research. As always, text your questions to (913) 363-1234, and we'll feature them on the show.

David, what do we got today?

Hey, Mike. If an annuity can offer me 7% or more as guaranteed lifetime income, why wouldn't I take it? Inflation,

life risk. There's always a benefit and a detriment to anything. So let's acknowledge the the benefits here.

Alright. If

you buy an annuity, turn on lifetime income, and I don't know if seven percent's the actual rate here. Maybe it's more, maybe it's less. The offers will continue to change and evolve over time. So that's why you shop for a good deal. Okay?

But you could you could argue that you've got your normal portfolio 4%, or you could put money in here and get 7%. So if you put part of your money in an annuity like this, fixed income annuity, let's say, that's typically what people are talking about with a product like this, and get 7%, you could argue that the first five to ten years of your plan, you're getting a better deal. In that, you're getting more income than you would with the 4% rule. And that is a true statement. 7% of a certain amount of dollars is more than 4% of a certain amount of dollars.

Sure. The and the problem though is you've got inflation risk. So if inflation increases by 3% every year, let's say as a nice average, then you lose 25% of your buying power in the in by ten years. So you might start right, but it's going to erode over time. Now an argument you could make, and I'm giving the benefits before we talk about the detriments.

You gotta know the debt detriments. And for what it's worth, I wrote the book, How to Retire On Time, as an argument against this. But let's at least acknowledge it. Sure. If you were to buy one and the majority of your income then started with the annuity that this let's say 7% rate, then you would take less income from your portfolio in theory, which would then give it more room or more space to grow.

And that could offset the differences. Okay?

Okay.

If you were to buy an annuity like this and then, I don't know, die in the first or second year of after turning it on, and let's say there's no spouse to pass it to, and if you at the spousal bit, by the way, you have to declare that when you turn on the income. So make sure you do the right paperwork, do the right due diligence, and all that. But let's let's just say that's not an issue here. The estate would get whatever the the leftover cash value is.

Okay.

So you you could get some of your money back. Mhmm. And that's not that unreasonable if you were to die soon enough. Mhmm. In most policies, I I can't speak for every policy and give blanket statement claims.

So do your research. Yeah. Do your research. I'm I'm talking to everyone watching on YouTube right now. Please pump the brakes and ask more questions.

But generally speaking, you'd get the premiums you put in there back minus the money you've you've spent as income. Alright. The catch though is that your the cash value doesn't increase like the market's gonna increase. It's gonna have like let's say, in this example, let's say if the market goes up 10%, you get up to 3%, but there's no downside risk. But you're kind of barely eking along the cash value and the intention of the cash value is gonna basically just drain in a very quick period of time.

Okay.

So 7% with very little growth, you're hitting zero in in twelve to fifteen years. And that's kind of like, okay. Well, that's maybe the worst time to die. So if you think about it in different phases, if you buy an annuity, if you buy one and you die really really soon, you're gonna get some of your cash back assuming that's the policies I'm thinking about. That's not that bad of a deal.

If you live a very, very long life, let's say thirty years, you're taking income from the annuity, maybe it's not that bad of a deal either. Maybe you would have gotten your money back. But if you die right before life expectancy, that's kind of this corridor or this special spot where it may not be as financially beneficial.

Okay.

And insurance companies will plan for that. Not that they're malicious. It's that when you take a large pool of people together, they're gonna build the policy so that the odds are in their favor. They can't afford what they offer unless the odds are in their favor. The house has to win.

That's how insurance works. So you don't buy lifetime income and call it an investment. It's not an investment. It's an insurance product that transfers longevity risk to an insurance company. That's

it. And

if you live a long enough period of time, then great. And you have to ask yourself, you know, what's the purpose of it? Life goals? Do you want a certain amount of life? Or so yeah.

What's most important to you? The stability as opposed to growing your assets, having flexibility for legacy planning or other purposes, that's a lot of conversation to be had. But anyway, that's that's the benefit of it. The detriments though is it's not flexible. So there might be some benefits of like, well, if you go into a long term care facility or you have special needs at a certain point, your health goes down, that your income doubles for five years.

That's a that's becoming a more popular selling point to buy an annuity. But the cash value has to be positive for that benefit to work. So after twelve years, let's say, there's no cash value, now you're entering the phase of life where you're probably gonna want that, but you probably won't get it. So you have to be very careful about these sorts of things. The detriments, it's inflation risk.

It's it's if there's a significant event, you're not gonna pull out a large withdrawal, at least not very easily. And if you do, it's gonna have a significant impact on the lifetime income. So it's think of it as really it's a life commitment for a certain income stream that's gonna be advantageous if you live a very, very long life. Not an investment. It's just it's a tool to be used for certain people in certain situations.

Okay. Yeah. It's not like a

Now, what was the question again?

Yeah. So they have an annuity that can offer them seven percent or more as guaranteed lifetime income, so why wouldn't they take that? Sounds great.

Yeah. So we'll go back to the 4% rule. Your basic portfolio is growing at 67% average annual growth, and you take out 4%. Well, means you're advancing by 3% each year. See, people forget the additional growth from the portfolio that's built into there.

So that's 4% or so that adjust for inflation each year. This is boom, and it does not adjust for inflation. Now there are some annuities that will adjust for inflation, but they're gonna start at a lower rate. Let's say, like, 4% or four and a half percent, maybe 5% if you're pushing it. Mhmm.

But those adjustments will probably happen as long as there's cash value. Once the cash value is gone, that cost of living adjustment will probably go away. And people don't look at the contract details to understand those nuances. Yeah. So is it a good or bad tool?

That's the wrong way to look at it. It's a tool that could be used for some people. I argue against it often, but I do have clients that say, look, here's our Social Security needs. We don't have a pension. We just wanna guarantee this baseline, and we'll be able to sleep well at night.

And everything else, we wanna use your strategy for. I said, no problem. Yeah. Other people, no guaranteed income. I want all the the dynamic stuff that you do.

Great. No problem. Everyone needs to be treated differently. So that's why wouldn't you do it? Inflations and then tax risks as well.

If you if you fund an annuity, you pay income tax on it because you funded it with your IRA assets. It's a very common thing. Yeah. Taxes go up, your income goes down.

Yeah. So Those are the detriments.

Those those are the simple detriments. And we talk more about that too in the workbook. So for all those that buy the workbook, buy the book and you get the workbook, you'll learn more about that. But yeah. Now that's all the time we've got for today's show.

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