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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, as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for being here today.
David:Happy to be here. Thank you.
Mike:David's gonna be reading your questions that you've submitted, and I'll do my best to answer them. You can send those questions in right now or anytime during the week to, and save this number, 913-363-1234. That's 913363 1234, or email them at hey mike at how to retire on time. That's hey mike at how to retire on time. Let's begin.
David:Hey, Mike. I've had an annuity for years, and it hasn't grown much. What are my options, and can I get out of it without paying taxes or a surrender penalty?
Mike:Okay. So you never wanna get into something unless you have an exit strategy to get out because there's no such thing as
Mike:a perfect investment product or strategy.
Mike:I mean, nothing does everything well, and so you've got to be prepared for the worst. Right? Annuities, this is not talked about enough, but annuities can change. It's called participation caps or spreads. They can change it mid contract while it's still illiquid.
Mike:And what I have noticed is a lot
Mike:of the annuities that have recently become very uncompetitive. I mean, things like I've seen I've seen people not be able to get more than 2% a year, which is extremely frustrating when your money market is getting 5%.
David:Mhmm.
Mike:And that's totally liquid. I believe that this these debacles often come because either the person selling it doesn't fully understand what they're selling or how to actually vet them. All they understand is the story and the commission, and they're doing their best. But I would not get upset with a brain surgeon who screwed up a heart surgery because they didn't have enough understanding. Right?
Mike:I would also never ask a brain surgeon to operate on a heart. And I would never ask a
Mike:heart surgeon to operate on the brain. Yeah. Those are two different specialties. Selling an annuity is one thing, and I'm not against annuities. They're a tool to be used in
Mike:certain situations. But unless you understand the intricacies of the underlining contract, you may be buying something off of Blind Hope.
Mike:And And
Mike:this is where I think a lot of people get into trouble. So let's break down what we're really talking about. This person is probably talking about a fixed indexed annuity. Why is that important? Well, there are 3 types of annuities.
Mike:There are variable annuities. Variable annuities are annuities that were which are basically, you're buying a mutual fund portfolio, often with high fees. So be very careful about the annuity and the mutual funds that are associated with it. There's this thing called a 12b1 fee. A 12b1 fee is a marketing expense that you're gonna pay every single year that you own that fund.
Mike:And then you've got your variable annuity fees associated with it. I can't think off the top of my head everything, but there's a mortality cost, there's administrative cost, there's all sorts of costs associated with variable annuities, which is why those who sell mutual fund portfolios often say things like, I don't like annuities, and you shouldn't like them either. I'm being facetious because it's very close to the actual marketing. Uh-huh. And then they educate you on the fees associated with variable annuities.
Mike:And, in my opinion, I think a lot of that material is accurate. If you want it, have all of your assets at risk
Mike:in the market. Be in the market. If you want income, be in
Mike:the market until you want the income, and then start exploring other options. But nothing does everything well. And one of the big detriments of the variable annuity is it kinda tries to be everything at the same time. So when does a variable annuity makes sense? We'll listen to the episode where I I talk about it.
Mike:It's just we don't have time to dive into that, but that's that's that's one of them. Fixed annuities are actually guaranteed a certain rate for the contract. They're basically a
Mike:CD from an insurance company. It's just when you
Mike:pull it out, you've gotta be 59a half, or do a 10:35 exchange and do another annuity, and then just shop whatever the rates are at that time. But this person, if they're saying it hasn't grown much, is probably talking about a fixed indexed annuity. A fixed indexed annuity grows by either the cap, so it can grow up to a certain point. So let's say that's, based on the s and p, and it has a cap of, I don't know, 8%. I'm just making this up.
Mike:I'm I'm not quoting what's actually out there in the market. K? That means you could make up to 8%, and then if the market did more than 8%, that's that's how much you get. But if the market loses money, you don't lose anything. So it's meant to be this kind of a
Mike:hedge against, losing money. A spread means that you're going to get everything above
Mike:a certain point. So let's say, again, you've bought an annuity, so your your growth is based, let's say, in this example, in the S and P, and the spread is, let's say, 4%. Again, I'm just making it up. So you would get everything after 4%. If the S and P grows more than 4%, you get whatever the S and P did minus 4%.
Mike:That's a spread. And then you've got participation. Let's say it's 5050.
Mike:You get 50% of of whatever the S and P does, and that's what
Mike:they would credit to your policy. You're not actually investing in these indexes. It's a very complicated conversation behind the scenes, which if we have a 1 on 1 conversation, I'm happy to explain how this all works. It's funny. I actually explain it to insurance agents that I coach how it works because many of them don't understand this as well.
Mike:So you'd be getting a professional training that you don't need a financial background to understand. Kind of fun. But you're not actually investing these indexes. You're you're buying an insurance product that will credit based on certain parameters. And what happens I'll use an example here.
Mike:There's one annuity that I have just despised for almost it's almost been 8 years. I have just loathed this annuity and why? Yeah. David, would you like to know why I've loathed the annuity?
David:I I'm done. I'm on the edge of my seat here.
Mike:Yeah. Thank you for placating me a little bit. So this annuity was built around a bond index. Okay. During a time where bonds were, in my opinion, risky.
Mike:Why were they risky? They were risky because, and
Mike:this is my opinion, when interest rates are low and they really can't go much lower, bonds are not competitive. If bonds are not competitive, then what do you expect to happen when interest rates go up and and bonds lose money? It was just a a a fiasco waiting to happen. Okay?
Mike:Sure.
Mike:So this annuity was built brilliantly to make a bond fund look really good with how it was structured and how it could credit the policy. Well, magically, when interest rates started to increase and bond funds were losing money, how they were structured wasn't sustainable. They could not continue to offer the rates that they originally had promised in the contract. This is why they put in the contract that they can lower rates.
David:Okay. Yep.
Mike:So this part actually, there's 2 annuities I'm thinking of specifically. No. 3. 3 that were among the top sold annuities in the 2010 decade. So 2010 to 2020 or so.
Mike:1 of the top sold annuities of all time that I that I've I'm aware of
Mike:Uh-huh.
Mike:Just by hearsay,
Mike:are now offering basically nothing. And here's my qualm. It's because very few people looked
Mike:at the index thinking, this isn't sustainable, because they don't really understand how it works. So there's a lot of people right now that can't make more than 2, 3, 4 percent a year when your money market is making more. That's a problem. And here's the other problem. Many people are now replacing their annuities, which is fine, but they're replacing their annuity with another product that had no due diligence either.
David:It says, hey, this thing's going doing really well right now. Let's just kind of, here's a story about
Mike:it, and and, well, you'll pay a penalty, but, you know, it's better more growth potential and blah blah blah.
Mike:Yeah. Can't stand it.
Mike:If we're a professional, we ought to be held to a very professional standard. We ought to be doing our own due diligence and not just deferring the responsibility up to someone else
Mike:and saying that it's good. I mean
David:Yeah. So Sounds reasonable.
Mike:There are many good people out there. I think most all financial advisers and insurance agents are good people trying to do good. Yeah. I'm not disparaging them or being critical of them based on their abilities. K?
Mike:I wanna very clearly state my frustration is the lack of education
Mike:and the explanation of how these things work. I think I we'll leave it at that.
David:Okay.
Mike:Is that good? Yeah. I don't wanna get myself in trouble here.
David:Yeah. That
Mike:works. So here here is what for this person who who you've got a crappy annuity. You're not able to make much money. Do you pay the taxes, pay the certain penalty? So let's break it down.
Mike:First off, if you have a qualified annuity, so it's an annuity that was funded with IRA assets or Roth assets, there's a good chance you could just pull out 10% penalty free each year and not pay the taxes, but each year you do a rollover into an IRA and invest in the market. And that could help offset maybe some potential loss.
David:K.
Mike:K? So you could do things like that without paying
Mike:the penalty. You could you you could also if it's a nonqualified annuity, then maybe you want to pull out the 10%
Mike:and use that as income if you're already retired,
Mike:and then just not take income from other sources. That's kind of the other option that could be available. But here's if you want to move assets and you
Mike:don't wanna pay the taxes and it's nonqualified, you'd wanna do a 10.35 exchange that allows you to move from a an annuity that maybe isn't competitive into another annuity without paying taxes. You're deferring that. So it's tax efficient. But all in all, that the basis of this is, do you pay a surrender penalty and try and move it into a product that has more growth potential or more opportunity or not? That's really the basis of this question.
Mike:And in my opinion, it depends on where you're moving, what you're making currently from an average standpoint, and what the surrender penalty is. You've got to break it down from an analytical standpoint and not take some sort
Mike:of absolute everyone should x y z. Remember, this show is
Mike:not financial advice. It's informational. But but here's the rule of thumb is, if you were to stay
Mike:in the annuity now, what would you expect to get? If you were to move
Mike:it, what would you expect to get? What due diligence has been done on the new potential annuity? And this is so counterintuitive, but many people are being lured in to annuities with a bonus, with a cash bonus. Here's how that works. Hey, David.
Mike:If if you move your funds in now, you might get a 5% penalty. But we'll give you a 10% cash bonus. So really, you'll actually be ahead. The annuity itself that offers a bonus has less growth potential over the long term than the annuity that does not have
Mike:a bonus. And many people miss this. I was actually talking with
Mike:a a a dear friend who's been in the industry for years, trained her up in the industry, And and we were just chatting about how people don't do these comparisons. It's just nuts.
Mike:When it
Mike:comes to the growth of your cash value, you'd think this stuff matters. It's not being talked about.
David:Uh-huh.
Mike:So is it good to surrender an annuity? It depends on your situation. But if you go into another annuity, you need to be breaking it down based on what the bonus could offer with the potential afterwards, and no bonus and the potential afterwards. You need to break it down. Are you gonna use it as income, or are you gonna use it as a bond or CD alternative?
Mike:You need to break down when do you need the funds, and what duration do you need it to go into a 3, 5, 7, or 10 year annuity. So all of this matters, and then what I think is the most important is, do you understand how the underlining index works? If the underlining index is cheap from an options and derivatives, standpoint. Like, it's easy for the insurance company to buy into future performance, and that's a very complicated rabbit hole we could go down, but we won't right now. But if it's cheap for them to buy based on market conditions, and the index isn't stuck in a in a corner, whether it's just only on bonds or only on a certain class, they can dynamically balance.
Mike:You've got better potential to keep those renewal rates, to make sure that you're you're able to maintain those rates. As a better potential, anything's possible. We have a proprietary process in our own internal spreadsheets to vet these annuities. I have yet to see anyone else do something like this that goes to the level that we have. Are annuities bad?
Mike:No. Are annuities good? No. That's the wrong way to think about it. They are a tool to help you either get guaranteed income for life, which, ironically, the whole book, How to Retire on Time, suggests that you don't do this, but some people want it and they need it to live within their emotional limits.
Mike:That's okay. Many people use them for bond or CD alternatives because once the annuity matures, it maintains its liquidity and you can use it very dynamically from that point on. People don't realize this. So if you want to explore how to use fixed index annuities, how to fix your, maybe, not so competitive annuities, what options are out there, and really see proper due diligence done in exploring all of these different companies that are out there. Here's what you're gonna do.
Mike:You're gonna text annuity right now, annuity, to 913-363-1234. Look at your annuity statements. This is so important. Look at your annuity statements. See the growth potential.
Mike:In my opinion, if you're not growing at least 5%, what you're getting at a money market rate, then there's a good chance you need to run an analysis on your that annuity and look at what else is out there. Text annuity right now to 913-363-1234, or go to your annuity analysis today. We're talking about opportunity cost here. We've got to keep growing our assets because we got to grow to offset inflation and to have future lifestyle flexibility. Text annuity right now to 913-363-1234 or go to your annuity analysis today to request your annuity analysis.
Mike:The difference could be significant. 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. 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.
Mike: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.