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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 by going to www.howtoretireontime.com, or if you wanna buy a physical copy, go to Amazon and search for the book, How to Retire On Time, and you can buy a copy there. 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 cover it all. Now that said, please remember this is just a show.
Mike:It's not financial advice. But if you want personalized financial advice, you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here today.
David:Yep. Glad to be here.
Mike:Now David's gonna be reading your questions, and I'm gonna do my best to answer them. You can always submit your questions by texting them either to (913) 363-1234. Again, that's (913) 363-1234, or you can email them to hey Mike at How to Retire On Time dot com. Let's begin. Hey, Mike.
David:How do
David:you get
David:out of a bad annuity? I need more liquidity, but don't want to pay the penalty.
Mike:K. So the first question I'm gonna ask is, is this a retirement account annuity? So is it was it funded by IRA assets or Roth assets? Uh-huh. Because we're gonna handle this differently than if it were funded with nonqualified assets, and then the exit strategies are gonna be different.
Mike:So why is there a difference? If you funded it with pretax dollars, then you can basically take out usually there's a 10% or a 5% penalty free amount that you can take out each year Uh-huh. And do a like kind transfer. So let's say you have an annuity, k, You can take out 10% penalty free, and you can do a transfer without paying taxes into your IRA at Schwab or Vanguard or Fidelity, wherever it is, and then you can kind of snowball out of it. K?
Mike:And you're not paying income tax on it because you're moving it from one IRA to the other. A lot of people don't know you can do that. And the reason why is, let's say your annuity is now capped at 3%. This is unfortunately very common right now. Oh.
Mike:So you can't make more than 3%. Yeah. If you don't know your annuity making, call the insurance company, not the agent that sold it to you, and figure out what your earning potential is, what your growth potential is. Okay? That's going to make a difference in this conversation.
Mike:So you can in year one, take out 10%, move it over, let's say to an IRA at a brokerage custodian count like Schwab or Fidelity. Then in the next year, you can move another 10% out. So in the third year, 20% has moved to a brokerage account, and then in the third year you have the additional 10% penalty. You've got now 30% liquidity. You've got some wiggle room.
Mike:Okay? And you could roll it over and Schwab or wherever, and buy let's say buffered ETFs. So let's say you've got 7%, ten % upside potential, you've got some downside protection, whether it's a % protection or half the protection or 20%, whatever the situation is, but you're basically creating more liquidity while maintaining the initial purpose, which is usually to protect principal. K? And you've got each year 30% liquidity, so you're opening up that liquidity issue with more wiggle room.
Mike:That's very, very important. Why is that? A lot of advisers will sell ten year annuities, and say, yeah, we're just going to take out 10% each year, and call it good. Look, I don't have a calculator in my head, but let's just do some simple math. Let's say you put a million dollars into an annuity.
David:Okay.
Mike:A ten year annuity, and you're going to take out income each year. Alright. So the annuity grows by 5%. Okay? So it's a million dollars 50,000.
David:Alright.
Mike:You take out 10% penalty free, so you take out a hundred thousand dollars, that's your income. Hundred thousand 50, whatever the number is. Grows by 5%. You're not at a hundred thousand again. You're at 900,000 in change, roughly 900,000.
Mike:Then the next time you take out, let's say, 90,000, there's a little bit of growth in there. The next year, now it's like 80,000. So your income is actually going down each year Oh. Because the growth is not great enough to offset the 10% penalty free withdrawal you have, so you're getting more suffocated. I find this as a fundamental issue.
Mike:Now I'm not gonna sit here and say this is why people do it. Ten year fixed indexed annuities have more growth potential than a five year annuity, let's say.
David:Okay.
Mike:So that's just how the products are made. You also get paid less if you were to sell a five year fixed indexed annuity, but I think there's a fundamental issue. You need more liquidity in retirement. So laddering out the liquidity schedules, I think, is more appropriate than just selling someone a bunch of ten year annuities. You get paid more if you do the ten year annuity.
Mike:You do have more growth potential if you sell the ten year annuity. So I wanna give the benefit of the doubt here, but there's a liquidity issue. And so that's why if you have a bunch of annuities, especially if they're bad annuities, trying to snowball out of it and create more liquidity can be a very beneficial thing. The second thing with this is if you have nonqualified assets, then if you take 10% out, you're gonna pay income tax on the growth.
David:And nonqualified meaning it it's not like in a retirement account. Just like after tax
Mike:You can't really money. Yeah. I mean, you could do what's called a ten thirty five exchange and move assets over to another annuity.
David:Okay.
Mike:It needs to be a growth focused annuity, and there's a couple of them out there that have a reasonable growth potential. But you could move assets slowly each year by each year into a flexible premium annuity. There are ways around it. You could maybe take half the annuity and just liquidate it in one year, so 10% penalty free, 40% subject to that early surrender, and you do that over two years to kinda break things up. There are some ways to get out of it.
Mike:It gets complicated. You want to plan around when it's liquid, when the anniversary is, how much is penalty free, what type of account it is, but there are ways to work with it. Most people, frankly, that come in, they say, I've got a fixed index annuity. I'm not happy with it. What we typically do, which is not very common, have found in this industry, based on my anecdotal experience.
Mike:Okay. This was actually a call, or a meeting we had earlier this last week. The annuity wasn't very competitive. We could have surrendered it, put it into annuity, and got a great commission. Yeah.
Mike:The right thing to do was we could just adjust some of the allocations, and then it should be able to beat bond funds, or keep up with bond funds.
David:Okay.
Mike:Is it the best fixed index annuity that we've seen? No. But is it good enough? Yes. We're not drumming up some surrender penalties, which hurts the client, and the clients need to come first.
Mike:And we can work with it as a part of the plan, and use it appropriately, slowly snowball out of it, and so on and so forth. So again, breaking down to what is right for the client, those things matter, and there's a lot that you could do with it. But just a quick, yep, let's just surrender it, move it on to something else, and put it into another ten year annuity. I have a hard time with that, especially if you're late sixties or early seventies.
David:Sure.
Mike:I don't understand why people would wanna put a ten year annuity or why people in their seventies would wanna put assets into a ten year annuity. Because? It's illiquid for ten years.
David:And so then you're going beyond, like, the average life expectancy of a lot of people.
Mike:Yeah. The limited liquidity is an issue. Yeah. What if you get sick when you're 75? Yeah.
Mike:I know that there are some legal terms in there that say if you get sick and can qualify, there's, but it's really difficult to qualify for that stuff Mhmm. When you really get down to the nitty gritty of the actual contract and how it's written.
David:Sure.
Mike:So I think people are putting on rosy glasses by doing sorts of things like that. Liquidity is your friend. Protection is your friend. It's a tricky tightrope to walk. That's all the time we've got for the show today.
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David:your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what
Mike:it could do for you regardless of your age, asset or target retirement date. Go to www.yourwealthanalysis.com
David:today to learn more and get started.