Annuities – Episode 351

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. So today on the Prosperity Podcast, we’re going to be talking about annuities. We’re going to explain what they are, how they work, and how you can actually prosper with them with the right prosperity mindset. How about that? First, before we jump into it, Kim, we want to get a quick alpaca update. Alpacas? They’re my second favorite subject next to personal finance. Yes. So give us a quick update. Tell us what’s going on with them. Well, maybe second and a half because there are a few other animals on the farm, but we’ll just go with the alpacas for now. It’s going to be shearing time, which means in about three weeks, we have a crew from Ohio that will come to our farm. In two hours,

[00:50] they will shear. I think we have 17 animals right now. You would think it’s a rodeo, but it’s really not because they’re so crazy organized. They’re these young boys and they work super hard. What is so awesome afterwards is then I get all these bags of fiber that I get to decide, am I going to make rugs with them or have them made into yarn so I can crochet them or have them made into felt so I can make alpaca balls with them. Look at that. So right now, you’re the farmer that is getting ready to harvest their crop. Yeah, that’s true. And it’s a once a year deal. Wonderful. I think that segue is perfect for the conversation that we’re talking about now, which is annuities, which honestly is farming when you’ve got a product in the ground or

[01:41] you’ve got these alpacas. It’s not too exciting until you actually need it and use it. So it’s the annuity conversation. Let’s jump into that one. Well, it is a really disgustingly perfect segue because annuities as a product are very, very much like fiber still on the animal or seeds of some sort in the ground because of the way the law reads around annuities, it locks up money. And so when people typically hear about annuities, and we’ve done podcasts on this type of annuity in the past, they think of what’s called a deferred annuity. And so deferred means you put the money in, you can’t get at it until you’re 59 and a half. And furthermore, even once you pass that age, an annuity is a very restrictive product. And so I actually was just meeting with some

[02:42] attorneys recently and they were so frustrated because so many financial advisors were putting clients’ money in annuities and then it wasn’t available for that client to use like for healthcare or even nursing home costs. And so there’s a huge like two schools of thought around annuities. And so I’ll try to be the objective person first and share the two schools of thought. Does that work? Sure, that totally works. Let’s jump into that. Okay, so the one school of thought is yes, lock up the money because then it is protected from a nursing home as an example, coming to get your money or any other thing, but then it is locked up. And so that can be a benefit or a detriment. And the other school of thought says keep your

[03:32] freedom, keep your flexibility, pay a little tax because back to the other side of the table, one of the reasons a lot of people do this is to avoid some attacks on the growth. So back to the first side, sorry, the second side, now I’m confusing myself. The second side says go ahead and pay some tax and keep that money free and flexible. So again, this is all for the deferred type of annuity, which as a general rule of thumb, my thought has been to stay away from. As a general rule of thumb, the deferred annuity that locks up the money is not the best place for people. And I get why other financial advisors turn to it. And it’s because either they don’t have a stock bond and mutual fund license,

[04:16] so they can’t really put people in the stock market. And by the way, in this deferred annuity space, there are both stock market related deferred annuities and fixed account related deferred annuities. But the financial advisor that works with them does not have to have the stock bond and mutual fund license to work with what’s called a variable deferred annuity or an indexed deferred annuity. You don’t have to have that extra license to do it. On the other side of the table, so now we’ve got like four sides going here, yikes, is what’s called an immediate annuity. And these are typically in the fixed space. I don’t think you’re going to see, I’m trying to think through the products that I’m aware of,

[05:04] I don’t think you’re going to see a variable or stock market related immediate annuity. But I do want our listeners to know that there is a lot of benefit to an immediate annuity. In other words, not a deferred annuity. What that means is that you would put the money in and literally start to get a paycheck the next month. And it lasts for your lifetime. So this is something that would likely be done only when you’re in your late 70s, ideally even more like mid to late 80s. Because an immediate annuity is life expectancy based, very similar to like a reverse mortgage. In other words, the older you are, the more income you’re going to get from a reverse mortgage or an immediate annuity. And that is valuable because that payment lasts for lifetime. Now, a reverse mortgage,

[06:04] of course, you have to still stay in your home. So it’s a little bit different issue. But immediate annuities are absolutely something that I think a lot of our clients should look at when they’re in their mid 80s. A big, big when, right? W-H-E-N. Definitely not something because it’s an irrevocable decision. Definitely not something that you want to do in your 65s and 70s. And that’s unfortunately, when some people are recommending them, I say, no, keep your investments in things that you can control until you’re in your mid to late 80s. Yeah. And I think that keyword that you just used is control, being able to do that when you still have that earning power, correct? Yes, yes. And as we know, but cannot be emphasized enough, please, please keep working

[06:52] until you are in your late 70s and early 80s. I’ve got parents on both sides, my in-laws and my own parents that are still working in their early 80s. And that is absolutely the way of the world. It must be that way. Of course, there are some families where that’s an exception, but for most of us, if you’re healthy, you’re going to live to 100 plus, 110, 120, 130 is going to become normal in time. And it’s so, so important that people keep working in some format and keep control of their assets and keep flexibility of their assets along the way, which again, is why I don’t like the deferred annuity. You’re giving up control, you’re giving up flexibility. Perfect. So going back, I think the majority of people,

[07:38] and I’m going to speak for a lot of the Gen X, probably not Baby Boomer, they understand annuities from the perspective of their grandparents, because it used to be a profitable or I should say probable product for most people. And then it kind of has petered out over time. So why is that? And then why is it that you’re looking at this through a different lens than most other people would? Well, if you go back to our seven principles of prosperity, control is one of them. And I think in addition to that, because of our experience with the alternative investments and having a place to have money grow that is not in the stock market and is not tied up with an insurance company in an annuity enables me to have that different perspective right or wrong. So I’m firmly

[08:28] putting myself in the camp that says keep control of your money, even if that means you pay a little tax, even if that means that yes, a nursing home could come get that money. That’s what it’s for. It’s to be used. And I believe that that’s a more efficient, effective way for people to work with their money. Now, I absolutely want to admit that I am not an annuity expert. I should have said this at the beginning probably. I am admittedly saying I’m not in the camp that recommends them very often. I don’t have a lot of clients that are in their late 80s. So I talk about immediate annuities all the time, especially as it relates to what people will do with their life insurance policies, which we can come back

[09:11] to that in a minute. But I will readily admit that if somebody already has one, they should keep it. And if somebody has questions about one, I am not the person to seek out. They need to go back to their provider or I do have some advisor friends that are experts in this space. Again, because the annuities don’t match with the seven principles of prosperity. Not only do you not have control, you can’t move money through them and they cannot have a multiplier effect. They do one job. That’s it. Yeah, that totally makes sense. And because it hasn’t changed, you’re looking at it in the same category, if I’m correct, as like a reverse mortgage is simply a tool for the in time of life, correct? Correct. You got it.

[09:55] Okay. All right. That makes sense. And I think for our listeners, depending on the financial situation that you’re in, or maybe your parents are in, you’re also looking at this from a cash flow perspective, because it’s again, you said you set that up month to you’re having a check come to you, correct? Yes. And that can be super, super valuable, especially a check that you know that will last as long as you do, no matter how long that is a single premium media nudity. And so let’s just add in the life insurance real quick. You can convert your life insurance policy to a SPIA, Single Premium Immediate Annuity, SPIA. Again, you would want to do that in your late 80s. And it’s a fabulous strategy, you are going to lose the death

[10:42] benefit. But that cash value can now become a paycheck that will last you the rest of your life, even if you live to 120, 130 years old. So you can see the value of that. Plus, when you’re 85, you’re probably done with the alternative investment game, you’re probably done worrying about anything you would like just to have the paycheck come in. And so right now, listeners, this is the conversation for 70s and 80s. Let’s jump to the conversation just for a moment of the people in 40s, 50s. And you mentioned alternative investment, and that’s a way to get a hold of some cash flow. Touch on that just before we end. Absolutely. So it could be a real estate deal that you find on your own. It could be a bridge

[11:22] loan that you get involved with if you’re an accredited investor. It could be peer-to-peer lending that you do at Prosper or Lending Club or whatever. But cash flow being the name of the game, if that’s what you’re seeking, annuities do not provide that until way later. For IRA money, for lump sums of money that you have that you want to be implementing the multiplier effect, i.e. while the movement effect, $1 moving through an asset and then that dollar having a multiplier effect because it got to move through the asset, which are principles 6 and 7, then you’ll want to seek out those other types of places to put money, call them alternative investments or real estate deals or whatever you want to call them, where there is

[12:12] cash flow. And I get it. That’s hard. In 2020, when we’re recording this, this is one of the most difficult things in personal finance because our interest rates are so crazy low and real estate is very high right now. So it’s very difficult for people to find this type of thing. And yet this is what they should be seeking. So here’s what I want to lay out there for our listeners. If you are below the age of 70 and you’re looking for those cash flow types of vehicles, then send an email to Kim, hello at partnersforprosperity.com. And then if you’re in that age range or maybe you have parents relative, someone’s in the 70s, 80s and they need that cash flow vehicle and they happen to be involved with annuities,

[12:54] then send an email. And as you mentioned, Kim, you’d be able to point them in the direction they need, correct? Absolutely. Happy to refer some advisors that I know are experienced in this space. Listeners, thanks for tuning in for this conversation today. And this is one of these that you may use and find extremely helpful. If not, this is maybe an episode that you send to a family member or a relative, friend, someone like that, that can benefit from this as they are trying to navigate and understand what to do in a different stage of their finances. So we’re going to be sharing some more incredible episodes coming up. Make sure you’re subscribed to the podcast so you get the latest episode as it comes out.

[13:37] Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.