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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, healthcare and more. This show is an extension of the book, 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 advisor, a licensed insurance agent, and a tax professional. In other words, I could actually do your taxes.
Mike:And when it comes to financial topics on the show, pretty much talk about anything, and that's really important. We wanna be able to talk about anything. Now that said, please remember this is just a show. Everything you hear should be considered informational, as in not financial advice. I don't know you.
Mike:You don't know me. If you want personal financial advice, then request your wealth analysis from my team today, my team of fiduciaries. You can do that by going to www dot yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for being here today.
David:Good morning.
Mike:David's job, his mission is to be the voice of the people. He's gonna be reading off your questions, and I'm gonna do my best to answer them. You can send your questions in at any time by either texting them to 913-363-1234. That's 913-363-1234. Or email them to hey mike at how to retire on time.com.
Mike:Let's begin.
David:Hey, Mike. You talk about fixed annuities and fixed indexed annuities. What about a variable annuity? When would you use it?
Mike:Okay. This is a touchy one. This is a touchy one. Yeah. There are certain companies out there.
Mike:I won't say who that have spent 1,000,000 of dollars using variable annuities as the poster child of all annuities in a somewhat manipulative way to convince people to not buy annuities and to buy a stock bond fund portfolio. I won't say who but it doesn't take you long to think of anyone that's marketing in such a way that says I hate annuities, and you should too.
David:Yeah. Uh-huh.
Mike:And that's not a criticism to their business by any means. They sell stock bond fund portfolios. They have a successful business. I, in the 10 years I've done this, have never personally sold a variable annuity. I'm gonna explain why in just a minute.
David:Oh, tell us.
Mike:However, I can at least articulate the situation in where it may make sense. This is why this is so important. You know, like long term care insurance. I've never actually sold a policy. I'm licensed to sell them.
Mike:I talk about it with clients. I have never sold one, but I can articulate when it makes sense. Here's why that's important. There's no such thing as a perfect investment product or strategy. Nothing does everything well.
Mike:You've heard me say that multiple times. However, every investment or product has a place. It has a purpose. The question is if the financial professional understands that or not. Too often, we take a small sample size and blow out of proportion and assume everything is like it.
Mike:So for example, I don't know anyone today that would recommend a CD if all they knew were CDs offering 0.5%. And they did no due diligence knowing that a CD could offer 5%, which is significantly more than a 0.5%. I love that in the example. It's a very simple example. Variable annuities are tough because they're one of the more complicated insurance products out there.
Mike:So let me define it in multiple layers. Okay? And I'm I'm not this is so ironic because I literally wrote the book how to retire on time to argue against annuity income.
David:Okay.
Mike:I'm I'm almost I'm almost giving the thing that I preach against a day in court.
David:Okay. Alright. So Tell us why.
Mike:Hopefully, we can have some fun with this. Yeah. But an annuity is an insurance product that is intended to provide guaranteed income for life. Another way to say that is its purpose is to transfer longevity risk to an insurance company. That is the simplest definition.
Mike:Now, because it is an insurance product for retirement, if you put non qualified assets into it, you defer taxes. So as it grows, you can you can reallocate, you can make adjustments to the the allocation options, the the funds that are in there, and you're not paying capital gains tax. You don't have to worry about it. However, when you take income out of it, whether it's through an income stream or just a one time distribution, you're gonna pay income tax on the gains. It almost changes the tax environment altogether.
Mike:With variable annuities specifically, and this is often missed, variable annuities have multiple layers of fees that you do not find in fixed or fixed indexed annuities. Let me break that down. So with variable annuities, you've got, first off, the mortality. There there's there's some basic insurance fees that are just with the policy that you're just you're just gonna pay. They're pretty well documented.
Mike:They're pretty well clearly stated in there of what these things are if you ask for them. You should be able to find it rather quickly. Then you've got more hidden layers of fees. So with the funds that are in the annuity itself, you've got the variable annuity specifically. You may find a separate account fee.
Mike:So it's a fee to just have basically think of it as like a management fee in some sense of just having the the assets that are there. If you wanna place trades, you can place trades to kind of to have handle that administrative work. And then you also have other more hidden fees, like 12 b one fees, which are back end fees for marketing purposes for a mutual fund when there's really no marketing purposes to that because it's you only have limited options within the variable annuity itself.
David:Okay. Yeah.
Mike:So what I'm getting at is there are more layers of fees with a variable annuity than the other options that are out there. Also, there's more risk. Variable annuities can lose money. Now the income is often based on the high watermark, but still, a variable annuity, it it can grow, has it has technically has more growth potential than a fixed or fixed indexed annuity, but it has downside risk. It can lose money from the especially the cash value standpoint.
Mike:And so you ask yourself, when in the world would this make sense? I have found, in a theoretical standpoint, because I've never actually had the situation where I would sell 1, is that if you were gonna bump into a potential tax issue, capital gains and and all that and trading the assets, you wanted to grow the assets, and you were 100% sure that you wanted income, you could take the nonqualified assets, put it into a variable annuity, shelter it from the tax to growth, and then when you turn on the income stream, which is something you've decided you wanted to do, you wanted to transfer longevity risk to an insurance company, even though it may not be as financially prudent for your legacy plan, but it's it's an emotional limit that you want to solve for, that you could put it in there, have more growth potential, turn on the income, and then the income itself would be more tax efficient because a part of the income you receive each month would be of the gain, and then part of the income would be the basis because they split the 2. It's a very complicated thing I just said.
Mike:Yeah. Basically, it's a it would be a way that you could have more growth potential if you wanted to be more aggressive with risk. You already knew you wanted to have income, and you wanted to put a portion of your assets and not create potential tax issues in the future. That's kind of the only way I would see it really being used in a productive way. Again, I've never seen a situation that made sense because usually people have assets in pretax accounts like IRAs.
Mike:Hey. I see that people have assets in after tax qualified accounts like Roth IRA. And then the non qualified assets, you can do a lot more than just put into a variable annuity. I just I don't see it making sense, but I wanna give it a benefit. The benefit of the doubt as they say.
Mike:So here here's hopefully, the big takeaway for this this person asked the question is every investment product or strategy has its place. The red flag here is talking to someone who deals with absolutes and says that is never a situation that could ever make sense. I would suggest they don't actually know what they're talking about. And if you're dealing with that, if you're working with a financial professional who's saying all annuities are bad or the markets at risk and don't don't you dare risk your retirement, Be cautious of absolutes. People that come into our offices here are often pleasantly surprised at how neutral we are in explaining the the options and the benefits and detriments associated with each option so they can pick what's right for them.
Mike:Once the lifestyle plan once the legacy plan's put together, once we've explored the efficiencies, mostly the tax efficiencies, social security optimization, health care planning, and so on, and then we start with the portfolio, the pieces just fall into place. It's a very easy conversation at that point. But, yeah, that's, you know, this is a bit of a Star Wars, nerd thing to say. I'm not a Star Wars nerd, but I heard it once. I loved it.
Mike:Only a Sith, you know, the Sith, like Darth Vader
David:Yeah.
Mike:Darth Maul, whatever those the bad guys are.
David:Bad guys.
Mike:Yeah. Only they deal with absolutes. There's balance with everything, and then the same is true with investments. So that's that's my takeaway. If you wanna see what a more balanced portfolio could look like, if you wanna really dive into potential tax problems.
Mike:I'm not saying that a variable annuity is right for you. Again, I've never actually sold one. But if you wanna really explore what's out there from a balanced and neutral position, go to www.yourwealthanalysis.com. Request that. It doesn't cost you a dime.
Mike:Just a little bit of your time to really explore your lifestyle and legacy potential. Again, that's www.yourwealthanalysis.com or text keyword analysis to 913-363-1234. That's keyword analysis to 913-363-1234. 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.
Mike: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. 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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.