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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
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 talk about it all. That said, please remember, this is just a show.
Mike: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 esteemed colleague, mister David Fransen. David, thanks for joining me. Hey.
David:Yeah. Glad to be here.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting them to 913-363-1234. It's 913-363-1234. Or you can email questions to heymike@howtoretireontime.com. Let's begin.
David:Hey, Mike. How do I know if I have a good annuity or a bad annuity?
Mike:Okay. My my thought immediately goes to CDs. Uh-huh. CDs are probably the easiest investment or product of them all. So right now, you can get a CD, what, for 4a half percent or something like that.
Mike:4.3%, 4.2%, kind of in the the 4% category right now. You can also get a CD, David, for 0.03%. Doesn't that sound like a great deal?
David:Just why is that even exist?
Mike:It's for people that are unaware that there's such a difference in CDs and offerings. It's there to take advantage of, in my opinion, people that aren't doing their due diligence and just assume that wherever they're banking, it's good enough.
David:Right.
Mike:What's a few percent more really gonna do anyway? Well, it makes a huge difference. And so that's where my mind immediately goes to. When you're looking at annuities, it's the same thing. Some companies just offer really uncompetitive annuities.
Mike:And unfortunately, they're cleaning up. They're doing very well for themselves because of and I I I'm gonna say this kind of sarcastically. There's a good story behind the company. Oh. They're just a they're a trusted company.
Mike:They've been around for a while. A story is not gonna make you rich. Well, annuities aren't gonna make you rich, period, but a story isn't gonna get you a better return. And so this is where it really becomes a more complicated situation because annuities are among the more complicated products. And I'm gonna call them products because they're insurance products.
Mike:They're not investments.
David:Good distinction.
Mike:And they're extremely complicated. Now, in my opinion, and I'm gonna upset a lot of people right now. But in my opinion, the insurance license is the easiest license to get in the financial services space. So you've got really 3 things you can do in the financials. You can take a tax license exam and become a CPA or an enrolled agent.
Mike:Those are 2 different designations that are difficult to get. You can be a financial adviser and pass a series 65 exam, or you can go the broker dealer route and get your series 66 or 7. Those are very difficult exams to pass. Very difficult. The tax and the securities, they're difficult.
Mike:Have I said they're difficult, David. Okay?
David:Okay.
Mike:The insurance exam, it's pretty easy.
David:That's hey. Is that a slide against me? I took that exam. Hey.
Mike:But but you you handle our health care. You could you passed your series exam years ago. Yeah. It was
David:a few years ago, but I did do it. It's true.
Mike:But the point being is, look, if someone and not everyone's the same, but if one exam takes people multiple months to study and pass for, and the other one you could study in a week and probably pass, maybe even a weekend, it just it makes me a little bit uncomfortable knowing that the easier exam, in my opinion, is helping people purchase the more complicated products.
David:Yeah.
Mike:So a series exam is gonna help you buy or gives you access. So I could you know, with my series 65 license, if you wanted to buy Tesla or Nvidia or Microsoft, yeah. Here you go. I'll help you buy it. I can make a recommendation against it or for it.
Mike:It's a stock. Fine. Right? You could sell it easily. Annuities are illiquid.
Mike:They're complicated. They have such long contracts. You almost need an attorney to help you understand what's really going on. And then even in there, there's all these black boxes that create this elusive idea that you'll never really understand what's going on. So yeah.
Mike:I mean, do do you wanna go down the rabbit hole follows Alice into Wonderland and explore these very complicated products? Or you can have blind faith into some agent that may be really qualified, may be really experienced, may be really, really good, or maybe not. Every industry has its leaders, its intelligent people, and its people that are just getting started or just never cared to really learn the business. So if you're an insurance agent listening right now, I'm not calling you out saying that you're one or the other. I'm just suggesting that maybe they're very complicated products and people don't fully understand, including some of the professionals.
Mike:I've I've just I've explained to insurance agents as I coach all over the country. I've been on many panels, keynote speakers in the financial services space, and people are not explaining these correctly. Mhmm. That's where my frustration comes into play. So, hopefully, I've explained that well enough without upsetting too many people, because there are insurance agents out there that are very smart and they do good service.
Mike:Okay. With all of that disclaimers, try not to upset too many people here, but letting know how the things are. Here's a system that can help you determine if you have a good annuity or a bad annuity.
David:Yes. This will be good.
Mike:Annuity offerings or their rates and their growth potential is directly correlated with what the Fed is doing. So when interest rates went up, annuities could offer better returns. So if you bought it before 2021, there's a good chance that maybe it's not that competitive anymore. And you could, quote unquote, you know, like in a mortgage, when interest rates drop, you refinance for a better rate.
David:Right. Right.
Mike:When interest rates are up, you could, quote unquote, refinance for a better annuity.
David:Okay.
Mike:So that's one indicator here. But here's how I believe you can start vetting annuities on your own. I want to teach you how to fish here. And please note for everyone listening, my book, How to Retire It on Time, teaches people to not buy an annuity and turn an income stream on. I recognize some people need guaranteed income for life emotionally to get through.
Mike:So let's just try and navigate through this together. Look at the growth potential of the s and p among the different index allocations that it's offered. K. So let me say that differently. When you buy a fixed indexed annuity, not a variable annuity, not a fixed annuity, a fixed index, which seems to be the more popular one these days, usually you're gonna see a bunch of fancy indexes you probably have never heard of.
Mike:But there's usually the S and P 500, just the normal S and P 500 somewhere in there. Look at that first. If the participation rate so the ability for it to grow, the cash value to grow is competitive as in it's maybe 50, 60, 70%, you know, something higher. Maybe it's a good annuity. And this is all dependent on current interest rates and current offers.
Mike:It's relative to the rest of the industry. But if it's higher, it's probably a more competitive annuity. If you're getting a 10 to 20% participation rate on the annual growth, as in if the S and P goes up 10%, you got 2 or 3%, 20 to 30% participation rate. That's how that works. Probably not a good, a good way to to look at this.
Mike:Yeah. If your cap rates on the S and P are higher, let's say they're 8, 9, 10, maybe it's okay. I don't agree with caps altogether, but maybe that's competitive. So you can earn up to a certain point. But if your cap rate for the S and P 500 on your this particular annuity is like 3, 4%, that means you can't make more money than 3, 4% in any given year on the cash value.
Mike:So that's the first starting point on trying to vet these annuities. Now the next thing here is you need to understand the cash bonus. I can't stand this. Okay. Listen up, everyone.
Mike:If you're listening to even considering an annuity or you have one, let me tell you what they're offering and then what's really going on. A cash bonus basically says the insurance companies give you 10, 20% cash upfront and you get to spend the money, you know, because there's penalty free withdrawals. Isn't that great, David? Yeah. Hey.
Mike:You put a 100,000 in. I'm gonna give you $20,000 just for buying my product.
David:Oh, that sounds good.
Mike:Yeah. And you wonder how the insurance companies make all this money. Insurance companies are not evil. They're not devious. They're strategically clever.
Mike:Yeah. And that's not a bad thing. It's just many agents don't fully explain what I'm about to explain to you. When you get a cash bonus, your cash growth potential for the rest of, let's say, the 10 years is significantly less. It goes down.
Mike:And what I have found, if you if you run hypothetical simulations, so let's say you have a cash bonus 20%, and then you run it with the S and P participation rate for the next 10 years and you run the same S and P random numbers with a non bonus product, the non bonus product after 10 years, I have found typically has more cash value. When you compare the 2, and most people don't even know that there's a non bonus option there because it's easier to sell something that basically looks like you're getting free money. There's no such thing as free money. No. There's always a cost to it.
Mike:So if you got a cash bonus, it might not be that competitive annuity, but you might not be able to get out and keep that bonus. The other thing that I think is really deceiving, not by the insurance companies. They disclose it. But maybe it's not properly explained is whenever someone says, no. My annuity is guaranteed to grow by x percent a year at minimum.
Mike:No. It's not. So what many people don't understand is that in an annuity, you've got your cash value and you have whatever the other value is called account value. It's a there's a separate value that is some arbitrary number. Let's call it monopoly money that they can guarantee at whatever they want because they take that arbitrary number, that fake money, divide it by something their actuaries have already predetermined, And then that's how they calculate your income.
Mike:It's fake money. And then you end up getting income. They don't want you to do this. But if you were to take the assumed income that you would get and then consider it with your actual cash value and you look at your return on investment, it's usually not that good. So there are so many tricky ways that insurance companies will work into how to sell these products.
Mike:So it seems like you're you're doing a good deal, helps them retain the products. But at the end of the day, look at the cash value. So here are some hard to ask questions. Don't call the agent that sold you the product. Call the insurance company themselves.
Mike:I love call center people. I do. Because you call them up, they don't really have a sales incentive. They're just friendly people that like to help people out. Yeah.
Mike:So if you're just kind to them and you can have a good time, they'll tell you everything you wanna know. They're not losing money on their paycheck if you decide to leave or not. They're they're just there to help you. So call the insurance company directly, and here's what you you need to do. And by the way, if if you're driving around the car or whatever listening to this, you can just go back find this podcast episode and just listen to this list over and over again.
Mike:But ask them, what's the average growth of the cash value year over year since you've had it? Most people I find that ask this question are pissed when they realize how little they were actually making from a cash value standpoint. And then the emotions come in well, but the income looks really really good. Remember that's monopoly money. You're looking at actual cash value, not the surrender value.
Mike:The actual cash value. If you continued along this path. Look at that. Then ask what fees are you paying? So there's variable annuities that are out there.
Mike:We didn't really talk about those earlier, but variable annuities are riddled with fees. Many, many layers. And people don't realize the layers of fees. The fees associated with the mutual fund. The fees associated with a separate account.
Mike:The fees associated with the annuity itself. Oh. And then the list just goes on and on and on. Ask for all fees associated with the account. Now with fixed indexed annuities, there are typically less fees, but some people will try to add all these benefits and riders.
Mike:That's where really you can get into trouble. Sometimes you can turn them off. Sometimes they're just stuck for life, depending on the product. But you need to know these fees because they're going against you every year. So who cares if you make 8% if you have 3% fees?
Mike:You're really averaging 5%. That's not that competitive. Is it even worth it to keep it? So if you wanted this annuity for income, just ask if I were to turn on the income, how much would I get and how long would that payment be? Was it lifetime income?
Mike:Is it so over 10 years or 5 years or whatever it is? And then compare what else is out there. There's a funny disclosure in most annuities where it says something to the effect of, hey, before you do anything, check what else is out there because this might not be competitive anymore. They say that in their disclosures. And then you need to start understanding, are you sitting on something that maybe the cash value isn't growing as well as it could?
Mike:Sitting on something to avoid a penalty may actually hurt you more than help you because you're kind of delaying something to a future date that if you were sometimes just to take the hit, move it over to something that has more growth potential. If you funded an annuity with IRA money, maybe you do take a small hit, move it over the market because you don't need that much protection. Maybe you don't want the income anymore or your mind's changed. You can do that without paying taxes. If you have a nonqualified annuities who paid after tax cash into this thing, you can do what's called a 10:35 exchange and move it from one annuity to the next and not paying taxes.
Mike:There are many exit strategies here. But if you have an annuity, call the insurance company and ask these hard questions and don't beat yourself up if it's a bad annuity or not. Don't beat yourself up over it. It's all about acceptance and moving forward. Don't go back to the person.
Mike:If it's a bad annuity, don't go back to the person that sold it to you. Find someone else that can do better research. So here at Kedrick, for example, we just don't trust insurance companies, the market material that they sell and what they want us to say. They're not deceitful. It's just it's a story.
Mike:And I don't really care about a story I care about. Is this going to make clients money or not? Annuities aren't going to make you more money than the market over the long term period of time. They're not going to get you rich. They can be used as an income stream or they can be used as a bond or CD alternative.
Mike:So it offers growth potential with protection. But that's the only that's the only way it's going to make sense in my mind. We do internal research for those that want income and what annuities are paid a more competitive income stream and what annuities are more competitive as a bond or CD alternative. And guess what? Those lists are very different.
Mike:The ones that are more competitive on income are typically worse for cash, and the ones that are better for cash are typically worse on the income. There's no such thing as a perfect investment product or strategy, and different annuities offer different things. 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: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. 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.