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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 retirement, income, taxes, social security, health care, and more. This show is an extension of the book, how how to retire on time, which you can grab today on Amazon or 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 cover it all.
Mike:Now that said, please remember this is just a show. Everything you hear should be considered informational only as in this is not financial advice. If you want financial advice, then request your wealth analysis by going to www.yourwealthanalysis.com. That's www.yourwealthanalysis dotcom. Doesn't cost you a dime to start exploring your lifestyle and legacy potential with someone from my team here at Kedric.
Mike:Now with me today, a part of my team, one of my colleagues, mister David Fransen is joining me. David, thanks for being here today.
David:Yeah. Glad to be here.
Mike:Now David's gonna be representing you. He's gonna be reading your questions, and I'm gonna do my best to answer them. So you can send those questions in right now or really anytime, but right now especially. Just text them in 913-363-1234. That's 913-363-1234, or you can email them in hey mike at how to retire on time dot com.
Mike:That's hey mike at how to retire on time dot com. Let's begin.
David:Hey, Mike. My adviser is telling me I should take the annuity he sold me 2 years ago and replace it with a new one even though there's a 10% penalty. He says I have more growth potential with a new one even when you consider the early surrender fees because the current annuity lowered their rates. He also says that the hit will be made up with a bonus from the new annuity. Something is not right.
David:What should I do?
Mike:Okay. So first off, I I I haven't seen the contract. I don't know what we're comparing, but I'm happy to address this from a, kind of a strategic standpoint. So there are multiple layers here that need to be addressed. First off is what was the original annuity?
Mike:Why did you get in there? And do you need it? I found a lot of people are getting into annuities almost too soon. I I don't see a reason why a 40 year old or even an early 50 year old should be into annuities. So is the age appropriate?
Mike:Does it make sense? Do you need the protection? Are there other assets that would make sense from a protection standpoint? But once you're in the annuity, what can you do? The next part of the question is, okay, he sold it to you 2 years ago.
Mike:Did I get that right, David?
David:Yeah. That's correct.
Mike:Okay. That means there's a pretty steep surrender penalty, assuming this is a 10 year annuity and most annuities I find are typically 10 year annuities that are sold so that's probably an 8 to 10% hit, probably more on the 10% hit, which is pretty substantial. Especially when you get towards retirement, you don't want to be going backwards. So that's another problem. And then the the last problem that I'm seeing here is why are you going to an annuity?
Mike:Is it because of the bonus, or is it because it's a good product? Let's start there.
David:Okay. Yeah. And tell us too, like, what what does an annuity, like, invest in? What is it? When who should get one?
Mike:So there's no such thing as a perfect investment product or strategy. Doesn't exist. Everything has benefits and detriments and you need to understand them. So when you look at a portfolio, it's not one portfolio of all the same investment that's intended to just solve everything. Nothing does everything well.
Mike:And so there are two reasons why I believe someone would buy an annuity. The first is to have guaranteed income for life. Now that sounds nice. Let's make sure we address the detriments. If you buy an annuity and you turn on the income stream, there's a good chance that it would be flat, which means you are at risk of inflation.
Mike:So inflation can slowly erode your retirement. I mean, think of your needs in 20 years. So it might seem good today, but it may not keep up with inflation in 10, 20 years or so. And that's that's a lifestyle squeeze that you may not want. Was that acknowledged?
Mike:And then the other one is people will use annuities as bond alternatives or CD alternatives because an annuity, a fixed index annuity can grow with an index that it's associated with. So upside potential but can't go backwards. Some people will use them as a growth vehicle. I I can't see an annuity outpacing the market, but it builds in that that stability. So and what's interesting about annuities and this is my anecdotal response, is, if you want an annuity with great income, the cash growth is probably terrible.
Mike:If you want good cash growth, the income potential is probably terrible. These things are structured very deliberately, and and you can't have your cake and eat it too. So I'm wondering, okay. This annuity was purchased. 2 years later, they're being recommended to grow.
Mike:Why What happened? Was it a teaser rate? Was it a company that often changes their rates? Something that I hope everyone hears that's listening right now and really comprehend this, insurance companies are able to change their rates mid contract even while it is illiquid. You might be, buying an annuity.
Mike:It's associated with a certain index, and everything looks great 2 years in like what this person was probably experiencing. I'm I'm willing to bet I know which product this is. I've been seeing a lot of these. The rates drop off. They now can't really grow their assets more than 4% or so, so worse than a savings account, and they're stuck in that situation for the next 8 years.
Mike:That's a hard spot to be, and I get it. The problem though is then making an emotional decision. It seems calculated, but making a an emotional decision, we need to get out of this and put it into something else. There's no such thing as free money, and here's what you need to know about the bonuses. If you're getting a bonus, there's a good chance that you have less upside potential after that bonus is given to you.
Mike:Let me break this down real quick. So let's say you have one annuity, one fixed index annuity. It's the same product. One offers a bonus. Let's say 10% is just given to you.
Mike:The cash value increases by 10% while the other one does not. Which one would you choose?
David:Oh, but I'd I'd want the bonus. Right? Yeah. That's the free money.
Mike:Yeah. Yeah. If you qualify, whatever that means. You know, it's the same qualification for both annuities, really. If you qualify, then why wouldn't you want the free money?
Mike:That's how it's being marketed. Yeah. The reality is the one with the bonus typically has less this is a technical term. I'm gonna say less growth potential but it's cap spreads and participation rates that's the technical term of how the annuity can grow a cap you can receive growth up to a certain point spread is you receive everything after a certain point and participation rate that's like a 5050 split. You get 50%.
Mike:The insurance company gets 50%, whatever it is. So they will lower those, they could do it mid contract. And so anyway, going back to the bonus, let's say it's the s and p 500, and there's a participation rate between these these the same annuity. The annuity with the bonus might offer a 30% or 40% participation rate, whereas the one without the bonus might offer a 50% participation rate. But unless you know to look at them both and compare the growth potential, it's really difficult to do a calculation.
Mike:The ones I've examined have shown that after 10 years, which it's illiquid anyway, so you have keep it in there for 10 years, you would have, depending on market performance, 20 to 30% more cash value if you chose the non bonus route. But it seems like, oh, you get a bonus, you get a head start. The devil's in the details. So, yes, it may make sense to get out of an annuity and take the surrender penalty. It may not make sense.
Mike:Sometimes you can reallocate it and then just kind of deal with it and take the 10% penalty for your withdrawal and either take it as income. If you're not retired and beyond the age of 59 and a half, you can take the 10%. And let's say it's an IRA annuity, so it's pretax. You can do a like kind transfer and just transfer the 10% each year to a an another IRA assets, invest that in the market or somewhere else. There are so many things you can do to slowly drain an annuity that's not good anymore.
Mike:Lot of exit strategies there, but going to a bonus product, I just I have a lot of heartburn. Whenever I see bonus, I go, okay. What's the catch?
David:Uh-huh. Yeah.
Mike:And you've got to calculate the catch. So for this person, I just I first off, I would say if they're offering you a bonus product, there's either 2 things going on, and this is just my opinion. The first one is the agent you're working with may not understand the downside detriment or the long term effects of the lesser growth potential of that one versus the other one. It may be situation to where they sold you the original one and saying, oh, it changed, and and then they're recommending this, and the bonus can get them past suitability. So that's something that I don't think is addressed enough.
Mike:Bonus cash bonuses are a way that you can take one annuity and transfer it over to another company and get past suitability, quote, unquote. Is it really suitable or is it a way to rationalize suitability? So, you know, it's a CYA situation. But there's a lot of nuance with this. There are probably more exit strategies than you may realize in this situation than just saying, oh, it sucks, but, you know, we'll we'll put into a better one.
Mike:That's often a reactive approach. Many times, you can just reallocate it. Many times, you can use the 10% out. I would say slow down. Ask more questions.
Mike:Say what else is out there. Ask, is this product exists without the bonus? Run a comparative analysis with it. Look at the indexes. Really start asking extremely detailed questions.
Mike:And if they're having a hard time answering your questions, find someone else. Any insurance agent would be happy to work with you and explore options because they're gonna get 5 to 7% upfront commission when you move those assets to another annuity. So find one that's going to work for that money. Really work for it And just not passively say, well, this is my opinion or this is what you should do. Trust me.
Mike:Blind trust is a sign of an unhealthy relationship.
David:Bottom line, it sounds like just ask questions.
Mike:Slow down. Ask questions. See what else is out there. Call the insurance company themself and ask questions, and see if you're getting the same answers. The insurance companies, they work for you too.
David:Yeah. Makes sense.
Mike:And so it's surprising what you can find when you slow down and start asking more questions if you want to ask us the questions if you want a second opinion you can always go to your wealth analysis dot com That's yourwealthanalysis.com, and just request us to look at your annuity for you. It won't cost you a dime, but you'd be surprised at the options that are available to you even with illiquid assets, like an annuity. It's not that annuities are bad. You may want the protection. You may want protected growth.
Mike:We talk often about the reservoir, a part of your portfolio that can't lose money that has growth potential. There's nothing wrong with annuities. It's just making sure you have the right annuities. You're using them in an appropriate way, and that the due diligence has been done. That that's my opinion.
Mike:So yeah, for this person, we'll we'll send you that link and for anyone else listening, go to yourwealthanalysis.com and request that analysis or you can also text us for questions. You can text us at 913-363-1234. If you text analysis to 913-363-1234, we'll send you a link as well, that way to to request your wealth analysis. Yeah. Annuities are tough.
Mike:They're really tough. You gotta work correctly with them. You gotta almost have a good BS meter and just keep digging. It's not that they're bad or good. They're just a tool.
Mike:I'll finish with this.
David:Okay.
Mike:Today, you can get a CD for roughly 5% or 0.5%. Yeah. Does that make CDs good or bad? No. It just means you need to know how to shop for them.
Mike:And there's a lot of people that are not shopping, and I'm I'm calling out agents as well. They're not doing enough due diligence in shopping for good products. People are getting left with too quick of a shopping experience without the due diligence. I mean, how much time do we put into buying a car? More should be put into buying an annuity if that's right for you and if it makes sense to be a part of your portfolio.
Mike:Now that's all the time we have for today. If you want more tips about retirement, income, tax, social security, health care, and more, make sure you subscribe to this show wherever you get your podcast. Just search for how to retire on time. Also, you can catch this show via our 247 digital broadcast by going to www.retireontimeradio dotcom. You can stream various episodes on your phone while you're on the go, in the car, or wherever you are on a run.
Mike:Just go to www dot retire on time radio dot com. From everyone here at Kedrick Studios, thank you for spending your time, your most precious asset, with us today.