How Annuities Could Cost You – Episode 105

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, have our founder and our bestselling financial author and co-host, Kim Butler, with us. Hello Todd, happy to be here today. Super. Well, today we’re going to kind of dive into annuities. This is one of those products that is super, super safe, but unfortunately in the environment that they’re in, that we are currently in, make you make a super, super, super

[00:51] long commitment that I think could super, super, super cost you in the long run. How do you super, super think about that? I didn’t know thinking could be done superbly. But actually, I’m glad that it probably can. All right, well, let’s just start with some facts. Of course, our listeners will know that facts coming from Kim is kind of a laughable concept, but we’ll start with one fact that I absolutely superbly know for sure and that is that we at Partners for Prosperity have no annuities on the books, meaning none of our clients through us have ever bought one. Now, I do want to separate out tax deferred annuities from single premium immediate annuities because I do believe that later in life, I’m talking eighties and nineties, single

[01:48] premium immediate annuities, and I’ll explain the difference here briefly for those that don’t know, could play a role. An immediate annuity is pretty much what it sounds like. You put a lump of money in and an insurance company pays you immediately cash flow, typically on a monthly basis, for the rest of your life or for a period of time or whatever the agreement on the annuity is. What you and I are talking about today is not that. What you and I are talking about is what’s typically called a deferred annuity, which, again, is exactly what it sounds like. You put money in and you wait. And right there is part of the problem I believe that annuities have, and that is that it’s a waiting game.

[02:31] Not only do annuities have law around them that suggests that the dollars have to be locked up until you’re 59 and a half. So this is regardless of whether your money is an IRA style dollar or not. In other words, non IRA money in an annuity is locked up till 59 and a half. And of course, IRA money is locked up until 59 and a half, not only because it’s IRA money, but because it’s in the annuity. And so this environment is a complete loss of control of your money by you. It’s completely turning it over to the laws that surround annuities. Annuities being a product that life insurance companies have, and yet it’s not a life insurance product. And annuity is a completely different ball game. And there are several different types of annuities,

[03:28] and we won’t go into a whole lot of detail here, but the original annuity was a fixed annuity. And basically that just decided that you were going to get a fixed rate of return on your money. You put your money in, that money is allowed to grow. And then at a certain period in your life, preferably after age 59 and a half, you kind of reverse that flow, where maybe you’ve been putting in monthly payments or annual payments all these years. You get to the point where you need those monthly or annual payments back. Now, that is a very easy product to understand. The problem is, is that the interest rates are so low on those products that the money that you put in is actually worth less next year than it is now.

[04:15] And that creates a huge opportunity cost. The next that we would have is we would have what would be called a variable annuity, which really was created in the 70s as a way for annuity players to invest in the stock market. And again, you are putting all of your money just as much at risk inside a variable annuity product as if you were buying stocks or buying, what do you call those, ETFs? Mutual funds. ETFs. Right, or gain traded funds, exactly. You’ve pretty much got the same gain. So you’re trading stock, but you’re paying a third person a fee to call it an annuity. So your returns are always going to be lower because you’ve got that additional drain of fees. Now, the third category is fixed indexed annuities.

[05:09] And this is where it really confused me for a long time because it looks like it’s a product that participates with the stock market. And then when the stock market goes up, you’re allowed to grab a piece of that and ratchet it in and hold it and then say, well, that’s my new floor. You can’t ever take that away from me. And on the surface and in most sales people’s, when they explain it to you, that’s the way they will make you feel. Well, there’s several factors that have been put in there. Number one, if the stock market goes up 50 percent, you may have a cap that says you can only participate in half of that. So through caps, they’re limiting their exposures. The fees are absolutely enormous.

[05:57] I mean, there’s fees going in, there’s fees going out, and there’s annual and monthly fees that are being charged to that account that are constantly bleeding this account down. So at one time I was a fixed indexed annuity salesman, and I really thought we were doing a good thing until you actually try to get the money back. Now, let’s just say you put your money in and you want, you know, five years down the road you decide that you want to move to a different company or whatever. Most of these products have a 10 to 20 year surrender charge, meaning that you’re going to pay back everything that was earned and in some cases in excess of what was earned. So if your cash is sitting there and you have to walk away with less money

[06:45] because an emergency came up, which is why you save for the money in the first place, these can be some pretty scary things. Absolutely. And I love your description. It’s been very simple and clear about the various types of annuities. And then I think there’s one other one that gets brought up a lot, and that’s the equity indexed annuity, which I don’t even know the difference, frankly, between a fixed indexed and an equity indexed. Maybe you do. But what I want everybody to realize is that the reason annuities have so much appeal to financial advisors. So obviously our audience here is our clients. But let’s understand why annuities have appeal to financial advisors. And it’s because many financial advisors don’t have and don’t want to have

[07:34] the necessary securities licenses to sell the mutual funds stocks bond realm or the series 65 license to sell the managed money realm. They also don’t have knowledge or access to what we would call alternative investments, things that are not in the stock market at all, things like life settlements, like bridge loans or hard money loans, things like real estate deals and other environments that are investments, but not stock market or mutual fund related. And so what that leaves them is the annuity environment. And when somebody comes to them, especially with an IRA rollover, they don’t have anything else to offer. And you cannot put an IRA rollover in regular life insurance. And so they’re forced to turn to an annuity.

[08:29] And I’m absolutely certain that these advisors, like you, when you were selling them, were doing the best that they could with the knowledge that they had and the licenses and the products that they had available. But just like when anything new opens our eyes to potential, once you become aware of alternative investments that are better places for IRA rollovers, that again being an oversimplification, but just that one particular asset, then it opens your eyes to see that there are so many better alternatives than annuities. And I also want to just acknowledge that from an advisory standpoint, somebody that has figured out all the rules around annuities has done an amazing job because I’ve looked at them and I can’t figure them out.

[09:18] And consequently, I’m not comfortable with them. I don’t want my money in there personally and I don’t want our clients’ money in there because if I can’t figure it out and explain it simply, then I don’t want to be involved with it. So those advisors that have figured it out have done an amazing thing. But I so desperately want them to realize, and obviously this is what we want our clients to realize, is that there are alternatives. There are alternatives, that’s not an easy thing to say. There are alternatives, not only to the stock market, but to annuities that can get the clients what they’re seeking and what clients are seeking in my mind when they turn to annuities is safety of principle

[10:00] while at the same time some investment-oriented growth, meaning low double digits, maybe even high single digits, but that 8, 9, 10, 11, 12% growth is what people are hoping for and they’re looking for it in annuities and I don’t think that’s the right place. Absolutely not. I think Partners for Prosperity has done a fantastic job of saying, hey, we can get you that 5% to 7% range income on your money that is short-term, that you need back within the next 12 months while at the same time, if we can look out into the horizon a little bit, we can get you that 10 to 12% that we want to keep growing your funds at so that 20 years from now you’re still able to live the lifestyle that you have today.

[10:55] I think another critical thing to realize is that annuities are put in place in an attempt to do a whole bunch of different things. And believe me, I’m a big fan of $1 doing lots of jobs. That’s a concept that we share with our clients. It’s something that we talk about. I’ll admit it’s an ephemeral concept. It’s kind of an out there concept. It’s one that’s hard to reach our arms around. So I’m all for $1 doing lots of jobs, and we’ve shared examples. In real estate, $1 does lots of jobs. In life insurance, $1 does lots of jobs. What I’m not a fan of is when things try to sit on a fence and be all things to all people. And that’s what an annuity does. It tries to create a place where money can grow,

[11:43] while at the same time it tries to create a place where money can create income. And even worse, at the same time, it tries to kind of sort of maybe halfway create a little bit of liquidity by the rule that you can take 10% of your annuity money out in a year without a penalty. So here you have this product that’s trying to do three completely different things. Grow the money, create income from the money, and have a little bit of liquidity. And it’s so much better if you identify those three separate things, and you use three separate and very specific products to do those three separate things. And because they are separate and specific, they do those three jobs, again, growth, income, and liquidity, or cash, very, very well.

[12:36] And just so that we can put our money where our mouth is, so to speak, I’ll go over those three things again. And what we prefer to use instead, which our listeners have heard much about, and that is the growth should be something in the life settlement realm where the dollars can grow and the principles protected. And then the income should be something that literally creates monthly income that’s often real estate based. And then the cash is typically the whole life insurance, where all of the money is liquid, not a 10%. And I should say 95% of the money is liquid on the life insurance. So that’s a much better environment than trying to sit on the fence and be kind of growth-oriented, but kind of income-oriented,

[13:20] like an annuity is and does, and yet consequently does neither job very well. And then as we’re wrapping up here, I do want to restate that this is a completely different ballgame if we’re talking about single premium immediate annuities. They’re abbreviated as SPIAs, S-P-I-A for single premium immediate annuity. That’s fine. That’s an income strategy. That’s a great strategy to use when you’re in your 80s and 90s. But what are you going to do in your 40s, 50s, 60s, and 70s? And that’s where the bulk of our client base reside. And they need a place if they want income to create it very specifically, and then if they want growth to create that very specifically, and then, of course, if they want liquidity,

[14:07] that’s a completely different discussion. Cool. And, Kim, I believe there’s a gift. You usually leave our listeners, and we’ll wrap up. Always. Partners for Prosperity dot com slash eBook is Financial Planning Has Failed, 60-page book. There’s an audio edition available as well. And we do address, though briefly, the annuity issue in the Financial Planning Has Failed booklet. Again, that’s Partners number four, Prosperity dot com slash eBook. All right, everybody. This is No BS Money Guy for the Prosperity Podcast. Take care, and we’ll see you all in the next show. 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.

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