Subscribe
Share
Share
Embed
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 retirement questions. Say goodbye to that oversimplified advice you've heard hundreds of times. This show is all about getting into the nitty gritty. Now that said, remember this is just a show, not financial advice, so do your research. As always, you can text your questions to (913) 363-1234, and we'll feature them on the show.
Mike:David, what do we got today?
David:Hey, Mike. My index annuity didn't grow this past year when the markets were up. Should I just get rid of it?
Mike:This is one of those questions where people wanna hate on annuities. That's like hating on a hammer because you missed the nail. I'm not saying this person missed the nail per se. I'm not saying the agent missed the nail. I just wanna define things as they are.
David:Okay.
Mike:Okay. So couple of layers here. So first off, what are you in? What I mean by that is what index are you in? Okay.
Mike:So the way I'm assuming this is a fixed indexed annuity. Because a fixed annuity, they wouldn't ask this question. It grows at a fixed rate. Yeah. In a variable annuity, we are tracking the market for better or for worse.
Mike:So this has to be a fixed indexed annuity. That's usually where the questions come in. These are complicated products.
David:Yeah. A fixed annuity, you would know when you signed, oh, well, gonna get 5%.
Mike:Yeah. It's a CD from an insurance company.
David:Okay.
Mike:That's kind of it. Alright. So this is probably a fixed indexed annuity, and what probably happened, and this is a well intended thing that people do, is they will look for something with like a risk volatility or dynamic index. Why? Because when you put your money into a fixed index annuity, it's there for a year, maybe two, and you can only change the allocation on those anniversaries.
Mike:So you want something typically that can be dynamic to adjust based on the market conditions, how things are shifting, and just try to get consistent returns. Are you with me so far on that?
David:I think so. So the fixed index, it's fixed to some kind of index that's tracking?
Mike:No. Fixed index means there's a fixed component and an index component to it.
David:Oh, okay.
Mike:So you could put it in a fixed growth category. Think of like a high yield savings or a modest CD kind of rate.
David:Okay.
Mike:Or an index, you've got index options available.
David:And which is better?
Mike:It depends. Did the index go up or down? But this is where the the interesting part comes in.
David:Okay.
Mike:So people will say, oh, well, I've got some sort of S and P. No. You've got an S and P with a risk volatility. Well, what does that mean? Yeah.
Mike:Risk volatility is where the portfolio typically, what I see is it will shift from the S and P 500, so stocks, to bonds based on volatility or the VIX or just the roller coaster going on from a day to day basis. Alright. Now the benefit of it is if markets are kind of wild, but not too wild, but, like, they're going up and then they start trending down, you can kind of buffer out some of these things, not like a buffered ETF. Mhmm. But you can you can smooth things out a little bit with a risk volatility index because if the markets are trending up, then maybe the risk volatility is risk on.
Mike:It's growing with the equity side. And then if the market start to slowly turn down, you maybe can move over to the bond side of things. So instead of, like, a sixty forty stock bond split, it can shift based on the market trends. It's a very simple explanation
David:Okay.
Mike:A very complicated mechanism here. Yeah. But that's the idea. Now the problem with risk volatility indexes is something called whipsaw.
David:Alright. Tell us what that is.
Mike:Yeah. Whipsaw is you know, like when you ride a roller coaster Uh-huh. And it has that one turn and like it hurts your neck, assuming you're like not a teenager? Yeah. For all of us older people.
Mike:Yes. Yes. Gosh.
David:That's what happens.
Mike:I I'm embarrassed to say that I'm in that category where if the roller coaster whips too quickly, I could hurt myself. Right. That's whips on the market. If the markets are on a tear going up and then they fall off a cliff, it just sharply turns down, that's whipsaw.
David:Okay.
Mike:If markets are a nose dyed, and then boom in two days, it just grows like crazy, that's whipsaw. It's when it turns on a dime. Well, what happened this year? This guy, you may have heard of him. You may not.
Mike:His name is Donald J. Trump.
David:Oh, yeah. That guy.
Mike:He got elected. Mhmm. And he's done a few things. He's changed the landscape of politics.
David:Mhmm.
Mike:And the markets didn't know what to do with it. Alright. And so in the markets, there there I know people that had indicators on his x feed or his truth social feed. If he tweeted something, it was like, how do you adjust the portfolio based on the type of post he would have? That's how quickly the markets could shift.
David:Okay.
Mike:It's not like, oh, well, you know, so and so's earnings are coming out. We kind of think we know what's going on because of these other metrics, so we kind of priced it a little bit. And, yeah, there was maybe a little surprise here or there, but overall, like, we could predict a lot of these. We could anticipate some of the movements. Not this guy.
Mike:Now I'm not saying I'm for or against him from this position. What I'm saying is when you go on the lawn of the White House and you announce tariffs for every single person, the market might not do well. Uh-huh. And then when you get rid of some of the tariffs or make quick adjustments to it, the market might react quickly. The market's very fast.
Mike:So things shifted this year. So risk volatility indexes were basically set to fail, and that's not like anyone that bought any of these fixed index annuities a year ago probably had no idea how volatile or how many whipsaw moments there would be in the market this year. Just no idea.
David:Right.
Mike:It was a special situation. Let's just leave it there.
David:Sure.
Mike:So if you're in a fixed index annuity, and it's based on the S and P with a risk volatility, you probably underperformed. And then you're not buying the index itself. Your money isn't even in the index. It's based on a part of the performance of the index, and then there's a crediting methodology with it. Yeah.
Mike:So that's a whole bunch of blah blah blah that basically says, if it's not actually invested in the index and you get some of the growth, there are very complicated mechanisms, really contracts or fixed rate or different ways they're growing the money so that if the markets go up, they can exercise the right to participate and so on. These are extremely complicated instruments.
David:Right.
Mike:Okay? But the point is, if you didn't just have the S and P pure or some index, and a lot of these fixed index annuities are based on proprietary risk volatility things, kind of black boxes, they may have underperformed. Now does that mean they're good or bad? No. This is what I wanna address.
Mike:Should I just get rid of it? No.
David:Okay.
Mike:So the way they work, most of them, is let's say the index underperformed or was negative even though the SP was up. Yeah. That's a really good spot to be in. Oh. A lot of these risk volatility or proprietary indexes are crediting based on what's called a participation rate, not a cap.
Mike:A participation rate. You get 50% or a 100% or 200%, whatever the crediting method is. And, yes, you could do 200% because when you understand how the mechanisms work internally, they're not leveraging it. It's just how they structure the product. It's a boring index.
Mike:They can get more exposure to it, so they can give you better potential returns. Okay? Okay. It's not magic. It's just very complicated stuff.
David:Yeah. It sounds like it.
Mike:We could spend a whole episode breaking down the option contracts, the derivatives, and how they're structuring it in a way with the baskets, and the different ways that they can buy into it at cheaper rate to get more growth. We'll leave that for another time. Alright. Fair enough. The point being is if you're low and you have a participation rate, then you've locked in at a new part of that index.
Mike:You didn't lose money, but you're starting now at a lower position. It's just you're now starting out wherever the index is at a lower dollar amount or index rate So that the next year, as long as the markets continue to go and smooth out, it could be a gangbuster year for an annuity like growth. So I'm not saying it's, like, 30%, but it might be pretty competitive. Like, it could be double digit returns for some of these things that I've seen.
David:Okay.
Mike:K? Depends on the index, depends on the annuity, depends on the participation rate. There's a lot of things out there. But the point being is this is not enough information that we've been given to give a proper analysis of if you should or shouldn't keep it. But just because you got a bad year when the markets were up, you weren't invested in the markets, or else you wouldn't have lost money or had zero returns.
Mike:You're in something else. And it could be that that's actually better positioned to have better growth for the second year. So give it a chance. Okay. Ask questions so that you can understand how it works, so that you're a more informed buyer or investor or manager of insurance products.
Mike:Here's the other part though, is let's say you were in the S and P, pure S and P.
David:In one of these annuities? Mhmm. Okay.
Mike:You need to understand that they are gonna have that 100% protection, but they could lower the caps.
David:So, yeah, what does that mean? There there's a cap on how much of a credit you would get or
Mike:a return? So remember, they're not actually investing in the S and P 500.
David:Okay.
Mike:You're gonna have growth based on the S and P 500 or whatever the index is, but you're capped. This is a different way that they could credit your policy. So if you wanted maximum income, your cap might be lowered to, like, 3% upside potential. You might say, well, that's a crappy deal. Well, what did you expect?
Mike:They're giving you more income upfront. They're taking on the risk, hoping that you die soon. Mean, I they're not, like, you know, sending the hitman to you or anything, but, like, this is actuarial predictable math. Right. You don't buy a fixed indexed annuity for lifetime income, for maximum income, and expect that the cash value is great for legacy planning.
David:Okay. Yeah. You're not getting rich off this. Is that what we're saying?
Mike:No. But on the other side, you might have some lower growth or lower income potential with higher cap growth. But if something shifts, the caps could go down. If the caps go down and you don't have competitive income, then you might consider something else. So just understand there's more at play here than just, oh, well, my annuity didn't make money.
Mike:What are you invested in? Because just because the S and P made money doesn't mean you made money. Mhmm. Because you're not actually investing in the S and P. You're in some sort of alternative index or proprietary index or sophisticated risk volatility index or whatever it might be.
Mike:Mhmm. And here, let me prove my point. A lot of people will buy an annuity as a bond fund alternative. No problem with that. You know what bond funds have done last year or so?
David:You tell me.
Mike:About zero to 1%. Oh. So it's not like you've missed out on an opportunity.
David:Okay. Had you put your money in either of these, you'd be in kind of the same situation, same But
Mike:you could lose money in a bond fund. You can't lose money in a fixed index annuity. Most of them, I should say.
David:Okay.
Mike:Are you really up that upset? Oh, well, the insurance company made money off me and blah blah blah. There's always a reason you can get upset with someone, but why did you buy it? And what is a comparable asset class to compare the performance to.
David:Oh, yeah.
Mike:As in it would be more appropriate to compare a fixed index annuity to a bond fund on overall performance as opposed to the stock market. It's not a fair comparison. That's like saying, hey, Mike and Mike Phelps, you both wanna go swimming? Uh-huh. Let's see who's faster.
Mike:Not a chance. Right. Not a chance I'm gonna keep up with him.
David:Yeah. He's got a lot of gold medals.
Mike:But does that make sense? You have to think of it as a different asset class just because the S and P 500 made money doesn't mean all indexes, doesn't mean all strategies within the index or whatever Mhmm. Made money.
David:Okay. Yeah. So you just have to know you have to understand going in, hey. These are the potential outcomes, so then you're not setting yourself up for disappointment. So just don't act too quickly.
David:Don't get too emotional about it. Especially with the surrender penalties. Because if you did, just sort of say, heck with this, and you'd pull it out or exchange it.
Mike:Then you do you see weird stuff like, oh, well, sorry, you know, this thing sucks, and we didn't know. And that's probably all true. And they'll say, well, we have this other annuity we could give you. It's better, and it'll give you a 20% bonus on your cash. Okay.
Mike:Well, it's gonna give you 20 bonus, but you're gonna lower your growth potential for the next ten years. It's not free money. Yeah. No insurance company has given you free money. So you need to understand how you're paying for it.
Mike:Right. So that's the gist of this. The big point of the story is take a breath, ask questions, look at what could happen the next year, and make informed decisions.
David:That sounds like a good plan. That is my opinion.
Mike:Alright. And so it is written, and so it is said.
David:Yeah. It's now out
Mike:there in the world. And what did they say in Moses? Do you remember the old Moses and so it is written?
David:Was this in the The 10 commandments. Oh, like the Charlton Heston one? Yeah. I see that in bits and pieces.
Mike:Oh, alright. Forget about it. That's my opinion. Done. Ask questions.
Mike:That can only help you make a better decision. 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 ww.yourwealthanalysis.com today to learn more and get started.