Annuities – Episode 422

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[00:01] This episode is all about annuities, so if you’ve been wanting to know when you should get an annuity, what age, and a myriad of questions, this is what you want to be listening to. Kim Butler, I’m excited to ask you a bunch of questions because this is from a listener. We love our listeners’ questions. Thank you so much. Always, always happy to answer them. Isn’t it wonderful? They ask the best questions and not all are suited for the podcast, but this one certainly is. So should we just start rolling with it? I’m ready. Excellent. So the first part of the question about annuities is when is it a good idea in life to consider annuities? When you’re 80. How’s that for an answer? Okay. Well, for all you geriatric listeners, here you go.

[00:51] Why is that? Well, that’s the more important question for sure, but it does start with the first half, right? So the reason that I talk about age 80, and there’s not magic to that. It could be 79 or 78 or 82 or something like that, is because annuities need to be separated into two categories. And the typical annuity that everybody else talks about out there is known as a deferred annuity, and they’re not always called that. They’re fixed annuities or fixed index annuities or index fixed annuities or variable annuities or all of the words typically that go along with the word annuity are for deferred annuities. And a deferred annuity is something that you put money in, and then basically it stays there until 59 and a half, and it doesn’t matter where there’s retirement

[01:39] money or not retirement money. It stays there until you’re 59 and a half. And that is a limitation that I do not like. It goes against our seven principles of prosperity. It is not something that I’m comfortable with. And as a general rule, if people already own a deferred annuity, they should stay put. And this is one of the problems with them. Like once you’re in, you’re in. And yet there is another kind of annuity that’s called an immediate annuity. And it is absolutely awesome and incredible for people in their late 70s and 80s. It seems like most of the conversations, they’re not even willing to break it down into the different categories and products like you’re doing right now. Is it because they don’t know?

[02:33] Or is it simply because it’s just easier for an advisor to take the single approach that they normally do? That’s a good question. I don’t know that I know the answer. Not hanging out with annuity advisors very often. We definitely have some advisors in our community that work with annuities on a fairly consistent basis. I just think it’s the black sheep of the family, I guess, you know, the redheaded stepchild, which why am I attracted to stuff like that? I don’t know, but it has been a way of life for me forever. So fine. I just embrace it. I think it is also really a challenge right now for people to look at this type of annuities because they are somewhat interest-rate connected, however, so I’m talking about immediate annuities

[03:28] now and why they’re not being talked about. They are an actuarial science product. In other words, the real reason that they do what they do is because of life expectancy. I guess just not a lot of people go there or talk about them, partially because of the lower interest rates right now, partially because they’re just maybe not as popular. I don’t have a good answer to that. Yeah. So here’s what’s kind of strange. You know, I’m thinking the first answer to the question was, when should you consider it? And it was about 80 years old. Well, if we take a listener and say they’re 50 years old right now, and we think about what’s going to happen in 30 years from now, that world does not look anything like our

[04:17] world now, meaning rewind the clock. We didn’t have the internet 30 years ago. We weren’t dealing with that. So life expectancy, everything else is going to change. So what a follow-up question would be is, what should people be aware of, aware of now when they’re in their 50s? Sounds like they shouldn’t be considering annuities, but if they’re older, they should. So help us kind of navigate that a bit. Well, it is interesting because the benefit of when they’re older is literally the use of other people’s money. And so there is just a mindset around that that I think is so helpful. You said it well in terms of the idea. And this is why I have such a hang up with financial planning. The idea that we know anything about our lives 30 years from now is ludicrous.

[05:15] 20 years from now is silly. Ten years from now is still insane. Maybe five years. How about lunch tomorrow? I mean, that’s really about all we got. And so I love, however, what knowing about an immediate annuity, and they’re often called single premium immediate annuities, and I’ll unpack that in a minute. I love knowing about what they do because it gives me such peace of mind for my life 30 years from now, which I will be 85. And it gives me such knowledge about what I can do out there in the future that I can then bring into my experience today. And that’s the real value. And that’s for all of our listeners that are between the ages of literally 20 and 80, which is 99 percent of our listeners.

[06:10] That is the advantage of what the knowledge of this product can do. And adopting the use of actuarial science, which is based on longevity, life expectancy, and getting two sides of the same coin, so life insurance, just regular whole life insurance and term insurance even, is one side of the actuarial science coin. And then the other side of that coin is a single premium immediate annuity that provides a guaranteed income for life. And the reason you don’t want to do it in your 80s, just in case we haven’t made this clear, is because it is life expectancy based. And if you try to do it in your 60s, you’ll find that the interest rates are on the lower side. And we’re talking about six percent, depending on whether you’re male or female.

[07:00] And nobody’s going to get excited about six percent, but we probably should, but we don’t. And you wouldn’t want to do something irrevocable. And a single premium immediate annuity is an irrevocable decision in your 60s anyway, for the same reason that we just got done talking about, which is a 60 year old, even a 69 year old, still has probably about 30 years to live. A part of that, which you’re talking about age and what’s happening, there were a couple follow up questions from this listener and they were asking about the long term care provisions in the annuity contracts. And I think there’s a lot of association of saying, OK, well, Medicare, Medicaid is going to be involved or long term care.

[07:44] So can you expound on that a bit? Not very well. I’ll do the best I can, but I will also readily admit that this is not an area of expertise for me at all, especially the Medicare, Medicaid space. What I can help with, though, is the long term care space. And that is that there are specific products that are possibly more appropriate for somebody in the 50s, 60s that are long basically long term care annuities. And I don’t also have a lot of experience in these. But I do know a particular company that does a very good job of, say, taking two hundred thousand dollars and essentially creating for you an annuity with a long term care writer. Or I’m not sure that’s the right term exactly. But long term care provision that would enable you to have money

[08:37] available if you lived and you were healthy and have money available if you lived and you are not healthy, essentially needing long term care. Very similar to the long term care writers that the life insurance policies are offering again, because the life insurance writers are a little more flexible. They’re my favorite of the two. Nevertheless, there’s some legitimacy to the other one because it’s a single premium. And there’s definitely a desire for us human beings to be done with things like I want to pay for it and be done. And a life insurance with a long term care writer requires at least 10 years of premium payments and annuity with a long term care provision is can be anyway, just single pay.

[09:22] I can provide that information in terms of the other. I wish I even had a resource and I don’t. I do happen to know one advisor friend that I would happily reach out to if somebody had specific questions on the Medicare Medicaid side of things. So, Jodi, reach out to me if you want me to get those questions answered specifically, or if these were just more curiosity questions. Yeah, those are great questions. And I think if we even zoom out from that and we just look at the principles and we understand that it does make sense in certain situations, just like long term care may or an annuity may. And it’s just like whole life may or term at certain times. And so seeing listeners ask these questions through email

[10:13] is one of the greatest ways that we can one, communicate with the audience and to help other people, because you as a listener may have had this question. So it benefits everyone. Absolutely. We’re super grateful for them. And you want to share the special email that we’ve dedicated, although I think we may have a couple more questions to answer. I forget. Yeah, we have a couple more. And the the one that I’ll wrap with is about converting an IRA to an annuity. What are your thoughts on that? Yes, you can actually buy an annuity inside an IRA. So there’s a lot of talk going on right now about converting IRAs to Roths because everybody believes tax rates are going to go up. And so if you wanted to, quote, convert an IRA to an annuity,

[11:04] you basically if you don’t want to buy the annuity in the IRA, you basically pay the taxes and then buy the annuity. And I’m not sure that there would be any benefit to that. You know, it’s interesting. Back to the conversations about converting IRAs to Roths. I find a lot of people talk about them, but then they don’t actually do the conversion because nobody wants to write that check like we might intellectually understand that it could be cheaper to write the check today than tomorrow. But it’s just a tough check to write. So I think in most cases, I would say don’t convert the IRA to an annuity by the annuity inside the IRA. And then, yes, it will. If it’s an immediate annuity, it will do what immediate annuities do,

[11:53] which is turn around and start to send you income immediately. Of course, that’s going to be IRA income. So it’s going to be taxed entirely, which all IRA money is, no matter what you do to it, unless you switch it to a Roth and then you pay taxes to switch it to a Roth. So the annuity, just so that people are aware, an immediate annuity that is not an IRA is still partially taxed. And it’s also partially not taxed because some of the return of the money is your own principle that’s already been taxed. And there is a special formula that the IRS applies to annuities based on how much is growth versus how much is your own principle being returned. So the annuity is going to take on the character

[12:40] of whatever kind of money it is. If it’s after tax money, then it’ll be income will be partially taxed. And if it’s pre-tax money, then income will be fully taxed, just like it would in any IRA. You know, it’s I’m not going to say on a level of one to ten, the ten being the most complex. This isn’t a ten, but we certainly are climbing the ladder on this one. And, you know, so the best thing to do, if you happen to be in a situation where you’re looking at your Roth or you’re looking at other things that you have set up and you’re questioning if you need to change it around or maybe even thinking of the annuity is to send an email in to hello at partners for prosperity dot com. And that email is specifically watched

[13:29] and it’s special for the podcast. So, again, it’s hello at partners for prosperity dot com. And so if you have something that’s extremely complex or even if you just want to lay out your special situation, that’s the place to do it. I will share one funny story as we wrap up here. And that is when Todd Langford, my husband, created the annuity section of his truth concepts calculators and had to make all the buttons cooperate for all the rules that were associated with deferred annuities. So this is not about the immediate kind that we’ve been talking about, but the deferred kind. He would constantly get up from two or three hours of programming and just be so frustrated. And that’s part of the reason that I don’t like the deferred annuities.

[14:17] They just have so many rules associated with them. And it’s they’re tricky. You know, your scale of one to 10, they’re they’re a nine without a doubt. It is absolutely. So, you know, thank you for helping navigate that, Kim. You know, you made it simple and easy for us to at least have a jumping off point. We’ll put that email address inside of the description of this episode so that you can easily click on it and then ask your question to Kim and the team. Thank you for listening to another episode of the Prosperity podcast. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you. Visit us at partners for Prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.