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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 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 you can go 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 discuss whatever's on your mind. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational, not financial advice. With me in the studio today is my colleague, mister David Frandsen. David, thank you for being here.
David:Hello. Thank you.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. Now you can send your questions in two ways. One way is by texting us to 913-363-1234. That's 913-363-1234, or email us your questions to hey mike at how to retire on time.com. Let's begin.
David:Hey, Mike. How can you make the claim that annuities have more growth potential than CDs or treasuries? I bought an annuity and got an average return of 2% each year.
Mike:Okay the yeah this is this is a classic example of cherry picked data so first off you need to understand there are 3 types of annuities the first one is a variable annuity the variable annuity it basically has all the risks the ups and the downside So you're gonna get the whatever you're invested in the market, ups and the downs, you're gonna have multiple layers of fees. So you have a fee to the insurance company. You have a fee for the the mutual funds that are typically held in there. There's, there's often a a pretty hefty 12 b one fee, and it's just it's riddled with fees. Variable annuities only make sense in my opinion if you know the markets are only gonna go up and you want guaranteed lifetime income in some sense.
Mike:Very rarely do I find I've I've actually never sold a variable annuity. I try to treat every investment or product equally. Variable annuities are often what are discussed in the, oh, I hate annuities and you should too conversation.
David:Alright.
Mike:K? So that's one. I've never actually sold 1. I see what they're trying to do. I just have never found someone where it fit.
Mike:The second one is a fixed annuity. A fixed annuity is like a CD from an insurance company. It's a guaranteed rate for a certain period of time. Got it. Okay?
Mike:You sign up. You know what you're signing up for if you go into one of those.
David:Okay. Yeah.
Mike:It's very, very simple, very black and white. You get it, and then you do something with it at the end. Okay? And then the last one here is a fixed indexed annuity. Now a fixed indexed annuity basically says that if the markets go up, then you are credited interest or basically the cash value would grow.
Mike:And then if the markets go down, you don't lose any money. That's the gist of it. And so how can I make the claim that annuities have more growth potential than CDs or treasuries? It's because of how it works. So let me break down an oversimplified explanation because we're, you know, through the radio waves.
Mike:Right? The the audio streams of the interweb. I don't wanna overwhelm anyone here in getting too technical, but here's here's just a simple breakdown. So fixed index news are basically a more complicated way to have growth potential with protection through an insurance company. It's all associated within a benchmark index.
Mike:The benchmark index, if it grows, credits you money to your policy. And then if the benchmark index goes down, you don't lose anything. Okay? Everyone with me so far, hopefully?
David:What what would it what would be an example of a benchmark index?
Mike:S & p 500.
David:Okay.
Mike:There's the Nasdaq, FC. Bank of America has, one that's in there. I mean, there are so many different indexes that could be out there.
David:Alright.
Mike:And that's that can be a bit of a black box too. You gotta understand the index that it is associated with and what the index can do. Some indexes are basically designed, and this is based on my opinion embedding them, that they're not supposed to grow much at all. They're kind of supposed to just be steady Eddie, making 2, 3, 4 percent at best. There's some fantastic story behind it, and that's how they sell a bunch of them.
Mike:So that's the first thing you need to understand. Now all annuities can be used, fixed index annuities can be used in one of 2 ways. So you can use it as a lifetime income benefit where you transfer longevity risk to an insurance company, and that's its own conversation. That's not what I wanna talk about. I wanna talk about if you were to use a fixed index annuity as a bond alternative, which means you are putting it in your portfolio knowing that it is illiquid for a certain period of time, but it cannot lose money.
Mike:So a bond fund can lose money. A fixed indexed annuity cannot go backwards. That assumes that you have not added on the rider's fees and extra benefits that have costs associated with it. K? So there's no fee if you get the right annuity, one that has no fees associated with it.
Mike:Yeah. Now to understand why I believe they have more growth potential over the long term versus a CD or treasury, let's restate again. A CD, fixed rate for a certain period of time. A treasury, a fixed rate for a certain period of time. An annuity, kind of.
Mike:So here's a really oversimplified explanation of how an annuity could work, a fixed index annuity. So let's say you can get a CD or treasury for 1 year at 5.3%. Okay? Roughly what interest rates would be. Interest rates affect fixed indexed annuities significantly.
Mike:So let's say that's the going rate and you've got a $100,000 that you're gonna put into a fixed index annuity. So let's say then you put in 95% of it or $95,000 in a fixed portfolio, fixed product like a treasury earning around 5.3%. In 1 year, that 95% of this alleged portfolio at 5.3% would become 100%.
David:Okay.
Mike:Okay. So you take $95,000 at a rate of 5.3% should grow to a $100,000 and change after 1 year of time. Are you with me so far?
David:Sure. Yeah. Yep.
Mike:Okay. So then you have around $5,000 to do something else with it. At that point, you then can go and invest in more sophisticated ways to make money whether it's options, derivatives, contracts. I mean, you can get more complicated and because their insurance companies are dealing in larger masses, they can do more things with the money. I don't want to say that's always what they do.
Mike:This is an example of how it could work. I'm trying to explain the concept here, but if you took your assets and you you spent, let's say, 5% in options and derivatives, so if the markets go up, you can exercise that contract and make money. But if the markets go down, you just let it expire knowing that the 95% becomes 100%. You now have a principal protected system that has more growth potential than the fixed rate itself assuming that the index that it the options and drifts were based on would have exceeded the assumed rate of a Treasury are you with me so far
David:so if if the index doesn't perform as well as it should the the insurance company is still saying you won't lose any money though right Yeah.
Mike:The 95% becomes a 100%, and they let the contracts basically expire.
David:Okay.
Mike:Now remember, this is an oversimplified explanation of how it kind of works. But do you see how you're taking it strategically a part of the portfolio based on interest rates guaranteeing the principal in some sense
David:k.
Mike:Because you have fixed rates from things like treasuries that become a 100% within a year's time, and the rest is is focused on upside potential, more upside potential through very sophisticated instruments.
David:Okay.
Mike:So what that means is the higher interest rates are, the less you would need in fixed investments. So if interest rates were higher, you could maybe allocate 94, 93, 92% to that and have more money to buy more contracts or options in the future to then grow your assets. If interest rates are lower, then it's harder to make as much money. But you always have that greater upside potential if it's structured correctly, if it's based on a reasonable index. I mean, there's a lot of ifs in that statement.
Mike:Right. And that's where the product research comes into play. Some fixed index annuities, really, in my opinion, aren't built to make much money. And in that situation, yeah, like the person that's saying, oh, I only earned 2%. Yeah.
Mike:You probably bought a crappy annuity. Sorry to say, that's that's probably what happened. I wonder how much due diligence was really done in the annuity, in the index that it's associated with, in the reputation, the renewal rates of the insurance company. Do they promise you, oh, you know, hey, it's gonna be, you know, x amount of growth potential. And then in year 2, they just drop the rates.
Mike:Some companies have a reputation of doing that. Drives me crazy. It goes back to the CD analogy. You can buy a CD at 5% or 0.5% roughly with today's rates. You can buy a fixed index annuity that has more growth potential or less growth potential.
Mike:It just are you doing the due diligence or is your financial professional, the insurance agent in this situation, doing their due diligence? But because the way a fixed index annuity works as a bond alternative offering principal protection and more growth potential because it's it's utilizing options and derivatives and other sophisticated contracts for greater growth potential over the long term period of time, based on my research and observations, anecdotal and also research, to me, I'm seeing there's more growth potential over the long term than you would get through CDs or treasuries. Be just because the very foundation of it is they're all they're all tied together. A CD rate, a treasury rate, and an annuity are all tied to interest rates.
David:Got it.
Mike:And so that that's where my argument comes in to play. They're not all made the same. The research is important. But let's say let's say CDs were offering you 5% right now. Yeah.
Mike:But you don't know what the rates will be in a year from now, so you're taking risk of if the fed drops rates, you then have a renewal of a CD let's say at 2 or 3 percent that's a risk you're going to take if you go down the CD route if you buy treasuries let's say you buy treasury for 5 years at 4 to 4 and a half percent Okay? If you hold that, that's what you're gonna get. If rates go up, then you could either hold it or you could sell it. If rates go down, you could hold it. You could sell it.
Mike:There's some risk associated with it if you sell it earlier, But you still at least have that locked in through the debt security or the debt obligation with the United States Treasury in this situation that they're gonna be keep paying those rates assuming that the government doesn't default. And then you have a fixed index annuity, which let's say it it it could offer you instead of 5 or 4 a half percent. Let's say it could offer you 6 or 7% year over year. That's a couple of percent more growth potential year over year than the other options.
David:Yeah. I'd take that.
Mike:And increasing your growth potential by a couple percent can make a significant difference when it comes to your lifestyle and legacy plan. Should you just do fixed index annuities? No. No. It it may be appropriate for a part of your portfolio.
Mike:I usually see a blend of CDs, treasuries, and fixed or fixed index annuities to support the plan and the strategies, the efficiency of that plan, but it's not always appropriate. Yeah. It just depends on on what you are. But I I get people who make claims, well, All annuities are bad. Anytime you hear an absolute, be skeptical.
Mike:There's no such thing as a perfect investment product or strategy. They all have their own individual benefits and detriments. They all offer something unique, and it's understanding how to blend those benefits in a portfolio so that the detriments almost offset themselves. Here's just a simple fact. Next year, the markets are gonna go up or they're gonna go down.
Mike:If they go up, you can draw income pretty much anywhere in retirement, and you'll probably be okay. But if the markets go down and you draw income from an account that's lost money, you're accentuating those losses. That's how you go backwards in retirement. That's how you really hurt your ability to stay retired. Having a portion of assets in what I call the reservoir, principal guaranteed accounts, allows you, if structured correctly, to draw income from a principal guaranteed source, allowing your other accounts to recover.
Mike:That's the basis of really what's going on here. And then when you understand that principle, that rule, it's how do you follow that rule and focus on the maximum growth potential throughout the rest of your life. And if you wanna learn more about that, text us your questions. We can have a conversation, text or email. So you can text me at 913-363-1234, or email me at hey mike@howto retire on time.com.
Mike:If you wanna see what fixed index annuities could look like in your portfolio, Just go to yourwealthanalysis.com. That's yourwealthanalysis.com or text keyword analysis to 913-363-1234. Look. The reality is I take a neutral position as a fiduciary to do what is best for clients. I'm legally bound to put your interest out of my own.
Mike:Whether a fixed index annuity is right for you or not, whether it's a CD, whether it's a treasury, I'm indifferent about it. It just has to be what is right, and the portfolio must support the plan, and there must be a logical reason for every investment. In a portfolio, ambiguity is a real thing, and it happens more often than I think people realize. So request your wealth analysis today. See what it could look like.
Mike:Just imagine for a moment, you've got roughly the same or potentially more growth potential with less risk. Wouldn't that be kind of nice?
David:That that sounds good to me.
Mike:There's no investment that can offer that. These are the only way to achieve an outcome like that is by blending multiple investments in products and strategies together and being very deliberate about the planning. Learn more. See what it's like at yourwealthanalysis.com. Doesn't cost you a dime, but really could open your eyes to your lifestyle and legacy potential moving forward.
Mike:That's yourwealthanalysis.com. Check it out today. 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 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.