Retire Eyes Wide Open: Season 1 Episode 6

Introduction:

Welcome to Episode 6 of Retire Eyes Wide Open. I’m Scot Landborg.

On today’s episode, Annuities. Hate them? Love them? Don’t know enough about them? We’ll take a more balanced approach on this episode. Talk the positive and the negative. Who they are for? Who are they not for?

We’ll review the week’s news in the Money Rundown. We’ll talk about the best thing I saw this week. And our Scot Strategy Segment and Listener Questions are all about annuities and when and if they make sense in retirement.

This is Retire Eyes Wide Open!

Money Monologue:

Annuities 101--We’re going to lay the foundation and talk about the basics in our money monologue this week. What is an annuity? When does it fit in a financial plan? When doesn’t it fit? Let me first address the elephant in the room. Some people really hate annuities. Ken Fischer, a frequent TV personality with lots of advertisements says he’d rather go to hell than buy an annuity.

Is he right? It depends. I think you need to be careful of any advisor that makes absolute statements. Or one that takes too definitive of a position. There are some advisors out there, registered as insurance sales people, that only recommend annuities. They advise people to stay out of the stock market. I don’t think they are right either. As with most things in life, a more balanced approach is appropriate.

Are there some terrible annuities out there? Absolutely. Are there some good ones out there? Yes there are. Annuities is such a broad term. It’s often misunderstood. Often not recommended in the right way. Sometimes a good product can be a bad recommendation.

Here is a list of my top mistakes I think people make when evaluating annuities:

Mistake 1 – they come to the issue with their own bias and baggage. When evaluating anything, it’s important to clear your mind and hear out the positives and the negatives before passing judgment. Also understand that if something is not the best fit for you, it might be a good fit for someone else. Some people want to drive a TESLA 3 to work and someone else an SUV. Doesn’t necessarily make one right and another wrong. They are different, with different needs.

Mistake 2 – they take a one size fits all approach to financial planning. If an advisor is making the same recommendation to someone who is 40 and someone who is 60, they are not doing it right. Planning must be customized. And even a good annuity can be inappropriate if done in the wrong way.

Mistake 3 – they ask a popsicle salesman about if they should buy ice cream. Ask a popsicle salesman what the best desert is and you know what they’re going to tell you? It’s a popsicle! It’s not ice cream. It’s not an ice cream sundae. It’s not a banana split. If you ask an annuity salesperson if annuities are good they will tell you YES! They’re good and you should only have annuities. If you ask a money manager that is only licensed to recommend managed accounts. He’s going to tell you managed accounts are the best. And that annuities should be avoided at all cost. Make sure the people in your financial life that are giving you advice are balanced and they have the ability to recommend investments that are going to help you in retirement.

Mistake 4 – not evaluating and comparing enough annuities. Often an annuity sales person will recommend one annuity. But why? Ask questions. Ask to be shown then next couple best options. Annuities are very complicated and depending on your age, when you want to take income and you various needs, the right annuity for you can be very different than for someone else. Did your advisor do the necessary homework? Ask to see the next two other alternative solutions. What other annuities are out there? Are there variable ones? Are there indexed ones? Are there immediate annuities? What are the best options out there and they show you one, ask to see a couple of others. They might not be better, but likely they’re different and you can weigh the positives and the negatives.

Mistake 5 – they think annuities mean you give up the principal or just receive a return of your principal. This is not always the case. There are some annuities, like single premium immediate annuities where you give ownership of the asset away to the insurance company in exchange for an income stream. But this type of annuity is very unpopular. Not many people are doing them anymore. There are many types of annuities out there—variable, indexed. You want to look at how they perform and how performance is going to be calculated. Is it tied to sub accounts? Is it tied to indexes? What are the caps? What are the spreads? What are the restrictions? Can the insurance company make changes? Can they force you into a certain allocation? These are the types of questions you need to be asking about an annuity.

Mistake 6 – confusing account value and benefit value. Some annuities offer principal protection but many do not. If they are offering you a roll-up of income and income in the future, they are not guaranteeing growth, they’re guaranteeing some sort of income right or income benefit value. There is a difference between account value and benefit value. Make sure you understand the difference.

Mistake 7 – looking only at the highest guaranteed income. When you’re comparing one annuity to another, guarantees are only one part of the equation. Do they restrict investment choices? What are the fees? Do they allocation restrictions or risk management allocation programs? How strong and safe is the annuity company itself? It’s not just about the best guarantee, but what is that annuity trying to do in your overall portfolio plan.

Mistake 8 – they don’t keep enough liquidity. Annuities are long term investment vehicles. They are not typically designed as short term vehicles. You need to keep enough liquidity in case something happens—in case your needs change—in case you want to do something different. Make sure you have enough liquidity in your plan. Don’t put all of your money into an annuity.

Mistake 9 – people have misplaced fear and invest too much in annuities. Often people look to annuities if they are afraid of the market. That’s okay. It’s a legitimate fear, but understand there are other things to fear. Not having your money not grow. Not having it be liquid. Not having it be accessible. These are also real fears to consider. Make sure if you are going to have annuities be part of your portfolio that you take your time analyzing them and understanding them. Never rush into a decision about an annuity. They can be a powerful and effective tool if used appropriately. But take your time to analyze the positives and negatives. They’re complex instruments and give them the time they deserve.

And that’s our money monologue for the week.

Money Rundown:

Our Money Rundown segment is where we cover the week’s news. There are a lot of media sources out there that are going to help give you updated information about the economy and the markets. My job is to help summarize and synthesize – help pick out a few stories that are most important for you, as a retiree or investor.

Story #1 – Volatility is back. The market is experiencing some pretty significant volatility. As of the recording of this broadcast, the DOW was down 800 points and over 500 points the following day.

What does that mean for you? Well it should be a wake-up call. We haven’t had a lot of volatility in quite a while. It should be a wake-up call. We’re 10 years in the longest bull market on record. Are you ready if this is the next big drop? It might not be. It probably isn’t. We may have another one or two or three years left before the next big recession. But have you stress tested your portfolio? Have you looked at each one of your positions to make sure you’re ready if things go south? It might be a good wake-up call to look at your holdings and see how much risk that you have.

Story #2 - Unemployment rate hit its lowest rate in 49 years as the jobless rate fell to 3.7%. How does that impact you? How does that impact the economy? Well, I think it speaks to the strength of the overall economy. Labor market numbers are not a leading indicator, they’re a lagging indicator. What that means is it doesn’t tell us what the market is going to do in the next three, six months or a year. It tells us a little bit about how the market and the economy have been doing. It’s been strong and it’s been robust. What’s strong about this labor market is not just where the rate is but labor participation has also been strong. It’s been a great economy for the American worker and continues to improve.

And that’s our Money Rundown for the week.

Best Thing I Saw This Week:

And now for the best thing I saw this week. Of course, you know what I mean—the most thought provoking thing I saw this week.

https://www.youtube.com/watch?v=vzh3FjnHPv4
Drew Brees, quarterback for the New Orleans Saints, broke a record this month, throwing for more yards than any other quarterback in NFL history. It was a big moment. Drew wasn’t a destined superstar. He was short. Many said too short to play the position. But he worked and he worked and he found the right coach and right team to help propel him to the highest levels in the NFL. The best thing I saw this week was not the record being broken, but his words. As he threw a long touchdown pass to get the record, the play was stopped. He went to the sidelines, embraced his kids and his wife and said, “Boys, you’re able to accomplish anything in life you’re willing to work for.” Later in an interview after the game he said, “Nothing is given… everything is earned. “

What an inspirational message. We are all dealt a hand. But how do you deal with it? There are hurdles in life, challenges that we all have to face, but if you are willing to work and persevere, oh the obstacles that can be overcome. The goals that can be reached. What an inspiration to me, to my kids, to my family. Work for what you want in life. How does this apply to retirement? I think some people think they are going to luck their way into a happy retirement. They’ve worked hard their whole life saving and investing and now they want to sit back and enjoy. A noble goal. The happiest people I see in retirement are active. Sometimes the most active. It takes working at a happy retirement to have a happy retirement. You’re not going to luck into it. Just like you succeeded in your career, with sweat, with trying new things, with perseverance. Retirement is a phase of life. You can succeed, you can fail, you can just get by.

And it’s much more than about money. For many of you money is the easy part. Saving is easy, spending is hard. Saving is easy. Making sure it doesn’t run out it is hard. You can have the retirement lifestyle you want if you are willing to work to achieve it. Be active. Try something new. Host a dinner party. Invite your grandkids to the movies. Volunteer for a political organization. Run for city council.

Having a happy retirement means being active. Finding meaning. Finding value. Finding relevance. And sometimes it takes a little work to get there. A little work is also required to make sure the financial numbers in your retirement look good too. It takes effort to interview multiple advisors. It takes time to think through tax strategy. Energy to update your estate plan and evaluate different investment options. If you’re willing to put in the work, you might be surprised at what you can accomplish.

And that’s the best thing I saw this week.

Scot Strategy Segment:

Earlier in the show, we talked about annuities and mistakes people make in analyzing them.

For our Scot Strategy Segment today, let’s talk about when annuities might actually make sense in a portfolio? Here are my top 6 tips for when annuities may fit in your portfolio:

1. You don’t have a pension and have limited guaranteed income sources. An annuity could be a good fit for you. We talk about retirement income being a three-legged stool. Where is your retirement income going to come from? It’s going to come from Social Security, it’s going to come from investments, it’s going to come from your pension. If you don’t have a pension and you have other limited income sources, you may want to have an annuity to supplement your income in retirement. It may be a good fit for you and you want to look at it very closely.
   
2. You want more guaranteed income in retirement. Maybe you already have a pension. Maybe you already have social security but it’s not enough to cover your expenses or it’s not enough to cover what you want in retirement. An annuity could supplement a portion of your retirement plan to make sure that you have the minimum income that you want in retirement.
   
3. You’re looking for bond or CD alternatives. This is a very tough market for bonds. Bonds are down an average of 4% YTD. CD’s are becoming a little more attractive. Yields are coming up, but still a very difficult market for conservative investors. Annuities could be something worth looking at. If you’re willing to increase your risk a little bit with annuities, you may be willing to increase your yield and increase your return over the long run. There are a lot of other positives and negatives to analyze before making that decision, but if you’re a conservative investor, this is definitely a place to look.
   
4. You’re conservative investor or want help with the conservative part of your portfolio. Finding yield these days is very difficult to do. And if you’re willing to take a little bit more risk, you may find a little bit more return.
   
5. You have a negative view of the stock market. This is very common for people who like annuities to be a part of their portfolio. You’re nervous about the next recession. You’re nervous about the next pullback. You’re nervous about running out of money and the stock market not being able to continue at this pace. Annuities could be a part of your solution, a part of your portfolio.
   
6. You don’t have kids or don’t care what you leave the next generation. This could be an interesting fit for annuities to be a part of your portfolio. There’s a lot of diversity in the annuity worlds. Some offer principal protection. Some offer principal guarantees. Some offer death benefit guarantees. But if you don’t have kids, one of the challenges is, on one hand, you don’t want to run out of money and on the second hand, you don’t want to leave too much money. One of the challenges with managed accounts is if you run out of money, you have no income left. One of the interesting things about annuities is being able to provide more income that you can rely on to optimize your benefit while you’re alive and to make sure you’re maximizing your retirement income. Worth looking into if you don’t have kids or if leaving something to the next generation is less important to you.
   That’s 6 reasons why you might be eligible to consider an annuity for your portfolio. Let me say a few additional things. First, you have to look to the strength of the insurance company giving the annuity. Very important to look at their ratings. Second, you want to make sure you understand the fees and the surrender schedule of any annuity that you’re looking at. What are the fees? What are the expenses? And what’s that commitment to that annuity. Don’t put too much money there. Make sure you have enough liquidity. Don’t put too much money in any one annuity. Make sure you have enough set aside in case something happens. Consider other ways to manage risk. There are other ways, other than annuities to manage risk. There are ways to manage risk and volatility in the market, still get performance, but manage the downside. You don’t necessarily have to do an annuity. And finally, understand that there are very different types of annuities. There’s variable, there’s indexed, there’s immediate. Different types of guarantees, living, death, and principal protection. Make sure you really dig into the nuts and bolts. Spend some time in that perspective, understanding the annuity before you move forward.

And that’s our Scot Strategy Segment for the week.

Listener Questions:

If you want your questions answered during the show, shoot us an email. Go to info@RetireEWO.com or you can visit our website RetireEWO.com and click “Ask a Question”. We’d be happy to get your question answered during the show.

Joining us is our producer, Angela. Angela, thanks so much for joining us and what kinds of questions do we have from some of our listeners this week.

[Angela] Thanks so much Scot. We have 3 questions this week. The first one is from Joan in Los Angeles, CA.

Hi Scot, I’m looking at a variable annuity right now that my advisor recommended. The fees are almost 3%. Should I run for the hills?

[Scot] Well, Joan, thank you so much for your question. Not necessarily. You should ask your advisor a whole bunch of questions. 1) Are there any other lower fee options available? That’s the first question you need to ask because there’s a wide range of annuities with different types of fees. If he’s recommending a variable annuity, why a variable annuity? Why not an index annuity? If the fees are high, you want to ask him, “What is the purpose of that annuity?” What’s the purpose of it and is there a second or third best option out there. Sometimes fees, like anything, are all about value. What are you getting for the fee you’re paying? Maybe their recommending that annuity because it has higher income than ones that have lower fees. That could possibly make sense. So make sure you dig into it. The other thing about variable annuities that’s very important is look at how they restrict your investment choices. If the fees are going to be that high, then they better give you good exposure to equities. Find out what their maximum equity exposure is. If you’re going to be willing to pay that high of a fee, you better be invested in something that gives you potential to grow higher than 3%, otherwise it’s a bad deal. Hopefully that helped.

[Angela] Our next question is Mary in Temecula, CA.

I’m looking at an index annuity with very low fees? How does my advisor get paid? How can I make sure I am in the right investment or product? Is he just trying to get a commission?

[Scot] Mary, thank you so much for the question. I think it’s very important to ask your advisor how they’re getting paid and what they’re getting paid. Especially if you’re buying an annuity. Annuities offer salespeople different ways to get compensated. They could be compensated all upfront in the form of commissions. They could be compensated on an ongoing basis through what is called a trail revenue. Anyone that is recommending an annuity, if they’re taking all of their compensation upfront, you need to be very careful about that because the annuity person has no incentive to service your account long term. If they’re being compensated through trail revenue, it’s more likely that they’ll be able to service your account over the long run. One of the biggest complaints that I run into is, someone who bought an annuity from a salesperson and they never talk to them again. Or they talk to them once a year and feel like they’re always bothering them. If you’re going to work with a financial professional, it’s not just about an annuity, it’s not just about your investments, it’s about your entire financial picture. What’s your withdrawal strategy? What’s your tax strategy? What’s your estate planning strategy look like? And that stuff is going to change over time, and you need to have a financial professional you can go to when you have those questions in the future. Someone that’s being paid all upfront may not have that incentive to service you long term and you’ve got to ask those difficult questions to see if they have your best interest at heart.

[Angela] And our last question is Justin in Orange.

I’m super conservative. I have a very big government pension and around $1 million in IRAs. I don’t need growth or income for my goals. I’m growing my money for the next generation. Are annuities conservative enough for me?

[Scot] Justin, I think annuities are something that you should definitely consider being that you’re super conservative. It sounds to me that you don’t need your income from your investments and that you’re doing it for the next generation. So I would argue that annuities could be a decent fit because maybe you could afford to take a little bit more risk to try to get a little bit better long term performance. Especially because you don’t need this income to live off of. If you’re willing to take a little more risk, maybe you’ll get a little more performance in the long run. You also might want to look at annuities that have death benefit guarantees. Those are better positioned for future generations. You’re not looking for income guarantee because you don’t need income. Even principal protection – you may or may not care about principal protection. Look at that very carefully. You may want to consider ones that have death benefit riders attached to them. But Justin, I definitely think looking at them and seeing how they may fit in your portfolio may make sense. If you want to sit down to talk more about your specific questions, specific annuity questions, if they’re right for you, I’d be happy to sit down with you one-on-one. Just go to our website and click on “Schedule A Meeting” or come to one of our live events for more information.

That’s the end of our listener questions for the week. Angela, thanks so much for joining us. Again, if you want your questions answered during the show, go to our website retireEWO.com and click the button “Ask a Question”.

You can also follow us on Facebook, subscribe to our podcast on iTunes. I want to thank all of you so much for listening. Stay tuned next week as I continue to discuss how to retire with your eyes wide open. Don’t go into retirement with your eyes closed. Retire with your eyes wide open! I’m Scot Landborg and we’ll see you next week.