Annuity Pros, Cons, and What Are They Anyway?

Speaker 1 (00:00):

<silence> Welcome to the Retirement Power Hour. My name is Joe Allaria, and this is episode 19. Today, I'm gonna be joined in just a bit by fellow partner and wealth advisor here at Carson Allaria Wealth Management Mark Allaria. And Mark and I are gonna talk about annuities, the good, the bad, the pros, the cons, all the different types, and what you should know about annuities if you own annuities, or maybe you're thinking about owning annuities in the future. So stay tuned for that. But before that, we have a listener question on the US debt ceiling issue that is transpiring right now. And before that, I wanna remind everyone go to retirement power hour podcast.com. If you have a question that you would like to submit, you can go there to our, to our website, click submit your question, fill us in, give us the details, we'll respond to you, and we may share it on a future show as well.

Speaker 1 (00:53):

And you can also get a free retirement analysis by clicking work with me. Just go to retirement power hour podcast.com, retirement power hour podcast.com. Click work with me. You know, the first step is just gonna be having a conversation and I'll ask you a few questions. I'll see if we could potentially be a good fit for you. And if so, we'll, we're happy to take you through a complimentary financial analysis so that you can see where you stand, can you retire? Are you paying too much in taxes? Are you invested properly? We'll answer all those questions for you. If you just go to the website, click work with me and we'll get started there. So our listener question today comes from Mike. Mike says, hello. I'm concerned about the debt ceiling issue that's coming up in the past. I recall that the market was extremely volatile when we have not come to an agreement on the US debt ceiling, and I'm worried on top of the bank struggles that we've seen in the economy, what this might do to the market, please help.

Speaker 1 (01:53):

Well, thank you for that, Mike. Here's my response on this. The, the debt ceiling, uh, even the bank failures, these are all things that we really don't know how they will play out. But a couple things to, to keep in mind. I think that when you invest, you always wanna invest and plan for the worst, hope for the best. Now, I guess that's a, that's a loose definition because when I say plan for the worst, I just mean understand how much volatility you may have when you are investing in the market, in stocks, in bonds. Understand how much volatility you, you may have given your stock to bond ratio. And, and just be aware of that. So we don't want to to panic when we see volatility present. But on this issue, you know, we have had this several times and basically the issue is, um, if we don't raise our debt ceiling, then the US would begin to default on some of its debt.

Speaker 1 (02:48):

And of course, some of it's debt is owned by you investors that are out there listing that own US treasury. So what needs to happen so that we don't default is that shocker, Democrats and Republicans have to come together and agree to raise the debt ceiling Democrats wanna do. So Republicans only want to do so with certain restrictions on future spending so that we don't keep increasing our level of debt like we have over the past few years. What could happen if an agreement is not made in a timely manner is, like I said, we could start to see the US default on debt. Now what has happened in the past? Ha has that happened? Well, in 2011, we were very far away on getting to an agreement between the two sides. And so we saw that there was volatility in the market around this time and, and a decent amount of it.

Speaker 1 (03:40):

And that also in that year, the s and p standard imports cut the, the US' triple a credit rating to double A plus where it, it remains today. And that was just a mid concerns about the budget deficit that we have in our country, which was, is a growing long-term debt burden. And, and then there's potential conflicts over again, like we said, raising the debt limit. So that's where we stand. And what should you do as an investor, Mike? I think number one, you control what you can control. So whether it's the debt ceiling, whether it's bank failures, control, what you can control, how are you invested? Because we may have some volatility. Am I saying to go sell all your treasuries? I'm not saying that I, I'm not giving any advice, I'm just sharing my thoughts on this. I think the chances that, that we see a true default where investors don't get their money back, I think is, is very, very low.

Speaker 1 (04:37):

And I don't think anyone thinks that's gonna happen, but there would be some unintended consequences if we don't get to an agreement. And then we could have something called a, a technical default, or let's just say a delayed payment to investors, uh, that, that do own treasuries. What are the chances of a technical default? According to Tom Hollenberg of the capital group, who's a fixed income portfolio manager there, Tom thinks that the chances of a technical default would be about five to 10%. So it's certainly not his base case, but it's not something that we can just completely ignore either. So as with many things, we hope that the two sides can get to an agreement, but at the same time, you know, understand how much risk you're taking, understand the exposure that you have in, in that area of the market. And then know, another thing is just like that alongside is these bank failures that are happening in the, uh, in the world that we've seen.

Speaker 1 (05:29):

So what can you do to protect against that? Don't go above the FDIC insurance limit at your bank, you know, which is up to 250,000. If you have less than 250,000, then you are covered by FDIC insurance. Most likely. You can make sure your bank participates. I'm pretty sure just about everyone I've ever seen does. And at the end of the day, I would say, don't worry about things that are out of your control. Control what you can control and don't worry about things outside of your control. You can do it if you want, but there are an endless list of things that you could start worrying about financial, non-financial things that are out of your control. And so why do it? It's not in your control. So let me be a, lemme be an encourager to you on that. And this is a, this is not financial advice, but just advice for life and a better quality of life.

Speaker 1 (06:16):

Don't worry about what's out of your control. It won't help you, it won't put you in a better position. Control what you can control and move forward. I hope that helps. And you know, these are trying times. I know this is just like one more thing on top of everything we've dealt with over the last couple of years, but you just stick with it. Get a plan. If you don't have a plan, you need to get one, go to retirement power hour podcast.com, click work with me, start working on getting a plan and talking to me will be the very first step. We'll have a 1520 minute phone call and we'll get you started on the path to getting a retirement plan. Well, with that, I'm excited about going into an interview with Mark Allaria, who is a partner and wealth advisor here at Carson Allaria Wealth Management to talk a little bit about annuities. So I hope you enjoy this interview with Mark. Enjoy Mark, thanks for joining us today on the show.

Speaker 2 (07:08):

Oh, Joe, happy to be here. Thanks for asking me. This is a topic that's been more and more discussed with me and my clients here as of late, so I'm happy to, uh, to get on and have good dialogue about it.

Speaker 1 (07:19):

Yeah, and I know both you and I have seen lots of different kinds of annuities and, and both, uh, I don't know, when you say you're an expert in this, but seeing so many different kinds, either one of us could give a presentation, but you know, I just figured I'll have you pretend to be a consumer, an investor and ask some questions that many of those that are out there who get sold annuities or pitch annuities, a lot of the questions that, that they're asking and they're asking to you and they're asking to me. Yeah, I

Speaker 2 (07:47):

Think the, the most common one I get is I've heard about 'em, I, I know what they are, I think, but just gimme an overview of really what an annuity is.

Speaker 1 (07:55):

Yeah. So using the word annuity is a very broad term and I compare it to using the word investment. That's a very, very broad term. Investments a little bit more broad, but there's a couple things about annuities. I think that when you, when you google search it, you'll see some reoccurring themes. And one of those themes is that they are financial products where you can invest your money. They are also contracts between you and an insurance company. So there's rules that you have to maybe abide by. There's restrictions, there's benefits. And another theme that we see is that they can provide guaranteed income for either a period of time or for life. And that's one reason they're used. They're not always used for that reason, but that's just one. So there are contract, it's, they're a place you can invest your money and a lot of times they're used for income benefits.

Speaker 2 (08:50):

When you talk about that, Joe, explain maybe some different types of annuities. 'cause there there are different types, you know, fixed and variable and fixed index. Maybe just give an overview of the, of that.

Speaker 1 (09:00):

Yeah. Just to first talk about this negative connotation where people say annuities are bad. That's like saying investments are bad or mutual funds are bad. Are there bad ones out there? Yeah, but they're not, they're not all bad. And I think it's also important to first understand what's unique about annuities. You know, there's different types, sure. But what's unique about them? What can they do that regular investments maybe can't do or don't do? And, and I just try to make really, really simple. It's, you know, it comes down to guarantees and longevity risk. And like I said, when you talk about providing a lifetime income, like a, almost like a pension, meaning it doesn't matter how long you live, you can just keep getting a certain amount of income. An annuity can provide that well, stock and bond portfolio. It may be able to provide that, but might not because your stock and bond portfolio can go to zero, whereas an annuity lifetime income benefit cannot.

Speaker 1 (09:57):

So there's other guarantees like minimum interest rate guarantees or just a, a fixed rate guarantee. And so the guarantees the ability to address living a long time. Those are a couple things that are unique, unique mark. But the first one, the most simple one that I'll say, and is this single premium, um, immediate annuity. And that's one where you just like, it sounds, you put money in one time, single premium immediate annuity, and it just immediately starts paying you some sort of benefit once you purchase a single premium immediate annuity. It's like you went out and purchased a pension in a way in that you don't have a lump sum anymore, you have an income stream. So you, you purchased an in, let me lemme pause there. Any

Speaker 2 (10:41):

Questions? I think that's a great agree. It's a great point, Joe. We often run into clients who's fewer and far between these days, but clients still will have a pension. They worked a job a long period of time, they never necessarily had an account balance that they were building, but they were funneling money them and their company into a pool of money. And when they retire it becomes annuitized. They get a pension stream for the rest of their lives. So that's almost identical to what you're speaking about in a single premium annuity of annuitizing. At a certain point, taking that money guaranteed the rest of your life, losing your liquidity or lump sum value.

Speaker 1 (11:16):

Yeah, and like social security too, you don't, you have social security benefits as an income stream, but you, you don't have a balance out there. There's no account balance that you can go and take extra from or pull from or you get when you pass away. It just, it is what it's, now we're talking about lifetime benefits and, and of, and I should say too, there's, there's five types of annuities I'm gonna talk about. So the first type is the single premium immediate annuity. You, you don't have to get paid out for life, but you can. And then if you're married, you could get paid out for your life and the life of your spouse, just like a 100% joint and survivor pension. Unlike a pension, maybe you, you could also go shorter than your lifetime. So you could go a 10 year period certain, a 20 year period certain, and that just means that that thing pays out for if it's the 20 year period certain it's gonna pay out for 20 years.

Speaker 1 (12:07):

And then after that it's done. And so you, you, you play through the, the different possibilities because people kind of ask like, well what's the downside to this? Well, if you get a, uh, a lifetime benefit, you know, if you start, go back there at the start, a single life benefit and let's just say I'm married Mark and I start collecting benefits for two years and then I pass away. Well what happens after that? My, my spouse doesn't get anything. So that's why a lot of people do joint life. So now it goes for the, for the life of both of us. So what if me and my wife, God forbid something happens to us both, you know, after two, two to three years of starting this annuity and we just have a joint life payout. Well, it goes away again. It's, it's a lot like that pension in a single premium in me. So you could, you could do joint life with 10 years certain meaning it's gonna pay out for both your lives, but it will guarantee you to pay out for 10 years. You can combine 'em or you could just do 10 years. You could just do 20 a lot of options. The more flexibility you give yourself, the less money you get in that payment. Does that

Speaker 2 (13:07):

Make sense? Well, it just all comes down to the annuity company. Um, the actuaries behind it. You know, the biggest challenge in all of this, if, if we all knew when we were going to stop needing the money right, and we were going to pass away, or when our spouse was gonna pass away, it'd be an easy decision. But that's the one factor we, we don't know. Uh, annuity carrier side, they have actuaries and they're basically all going off life expectancy. So that's the biggest challenge with selection. So that's why analyzing the annuity always comes with looking at the whole financial picture that we're dealing with with every client, right? Yeah.

Speaker 1 (13:42):

Oh yeah, definitely. When, when we start talking about one type, I wanna encourage all listeners out there, don't start putting all annuities in this category. Sure, there's still four other types we didn't talk about yet. The next one is a lot like it's just a deferred income annuity. So a single premium immediate, the big part immediate. So I want income start right now. A deferred income annuity is something it's works very similar except I'm gonna not start income right now. I'm gonna defer it for a set amount of time. So I'm gonna defer it for three years. Again, it's a contract and I set it and I'm starting income in three years. And those big thing about those first two types, they're usually irrevocable. So you set those contracts in place, they, it, it's done. You can't undo it. So immediate annuity starts today, deferred annuity, deferred income annuity starts whenever you say you want it to start, but you have the same payout options, single life, joint life period, certain, you got all those, those same options.

Speaker 1 (14:46):

You might have a cost of living rider or a return of premium, something like that. But those are all, those are all kind of add-ons that, that you, you could look at for a single premium immediate annuity or a deferred income annuity. 'cause sometimes, you know, people are concerned that, well what if I don't live long enough to at least even get out what I put in. I want my family to at least get what I put into this. So those are the first, the first two types. The next type, I compare them to CDs. Now they are different than CDs, but it's a fixed annuity or a multi-year guarantee annuity because it looks similar in the, in its components. You have a term, you have an interest rate, you put your money in it earns that in, you know, that interest rate for that term.

Speaker 1 (15:32):

So a a five year CD at 5%, and that's not a quote, rates change all the time, so you have to go out and shop that. But for example, 5%, five years, you put your money in there, it's not in the market. It's, it's just gonna earn that interest rate for that amount of time. And generally with these annuities and the, the, the, the next three are, you know, that I'm gonna talk about this one and the next two you do have an account balance. The first two, your account balance goes away. These next three you're gonna have an account balance and that means you can withdraw potentially. But they also come, you have an account balance, but you also have a surrender schedule. So, so

Speaker 2 (16:16):

Gimme gimme an example of a maybe an age or a time period. Somebody would look at something like, like a demographic that would fit this

Speaker 1 (16:23):

Type. Most annuities are purchased closer to retirement. But one main component for anyone who's looking at an annuity, whether young or old, is you gotta be aware of this 59 and a half rule because whether it's an IRA or not, you know, IRAs have that 59 and a half rule where you, you can't really take money out until you hit 59 and a half without a penalty. Well, annuities have that same restriction or limitation even when it's not an IRA. So you gotta be 59 and a half to take your money out of the annuity without paying any penalties. So that's something to be aware of and that's why I say most people purchasing are closer to retirement. Maybe 60, 65. So a fixed annuity is for someone that says, I want a safe investment. That's not gonna fluctuate at all. I just wanna know what I'm gonna earn a fixed annuity or a multi-year guarantee annuity can do that.

Speaker 1 (17:15):

Now you're probably not gonna get what you maybe could get in the market, but you know exactly what you're gonna get. Um, now with a, with that type and with most types or all types of annuities, you can annuitize. So I can turn that, that type where I have an account balance, I put my, my 500,000 in, I'm earning my 5% at some point, let's just say at the end of my five years I wanna start taking income from that. You can annuitize is what that's called, annuitize that and turn that into an income stream. And now you're back to the same joint life, single life certain, you know, period, certain, all those different options for payout. But that's one type of annuity where people use that to, to grow their money, not only just to take money out. The the next one, uh, similar mark is fixed indexed annuities. So we had fixed annuities. Number four is fixed indexed,

Speaker 2 (18:11):

Sorry to cut you off here, but that's fine. You turn on the radio right and you, you'll hear these commercials or you know, there's people talking about, you know, doomsday of the market coming and you can participate in market highs and not deal with market lows. What which type is, is that, is this what you're getting ready to talk about?

Speaker 1 (18:28):

Yeah, so a lot of times those are indexed annuity commercials and you do hear that you get all of the upside, none of the downside risk or, or maybe not all of the upside, but they'll, they'll say you get the upside of the s and p with no downside risk and that it's just, just not true. And I do see these sold way more often than they're bought and people are out there, you know, they're going to, to get a free dinner at a nice local restaurant and someone is putting on a seminar and they're trying to sell these types of annuities or they're doing a radio show and they're just really stoking fear mark. I mean, you've seen it, right? You've heard it on the radio. Oh sure. I'm sure. Absolutely. How easy is it to get someone to panic about the market?

Speaker 2 (19:10):

And as you talk about that, not, not that these are all bad. I think that they can be placed in a, in a position in some way's portfolio that does make sense on unfortunately. I think that sometimes they're just, they're like you said, they're oversold and they're sold, sold based on some fear.

Speaker 1 (19:26):

I don't think anyone should ever say that every kind of whatever investment is bad and every kind is good or vice versa. Because you have to be able to understand and discern the benefits, the costs. And there are lots of these annuities out there, there are lots of mutual funds out there, there are lots of stocks out there. You have to be able to evaluate each one. So what I see though is I just like, I, my point is it's so easy to, to try and influence someone, to fear about what's gonna happen in the market. Oh

Speaker 2 (19:54):

Sure.

Speaker 1 (19:55):

That's incredibly easy. And it's incredibly difficult to help people remain calm when you have the media, the financial media, you know, just turn on the news. It'll only take about two minutes to start feeling really, really terribly about what's going on and, and maybe what might happen in the future. Yep. But that's what I see on these, you know, and these things, like you said, it's a fixed index annuity. You have a fixed rate that you could still invest in, just like the last type that we talked about, the third type. Um, so okay, I'm gonna, you're gonna get 3% in your fixed rate per year, but you also have these other index options. Uh, the s and p 500 is an index. The, the NASDAQ is an index, the Dow Jones is an index. So these different, these products will have different index options and here's what they'll say is, is really common.

Speaker 1 (20:48):

They'll say, we'll give you, here's an s and p 500 index where you can earn up to a cap of fill in the blank because these cap rates will change. But let's just say it's 7% up to a cap rate of 7%. So if the s and p mark or the SP 500, the market goes up 25%, you're only gonna get seven. So you don't get anything above that. But if the market goes down 25%, your worst case is zero. That's, so that's what they'll say. But here, the problem with that is when you evaluate historical returns, one thing you don't always realize is when the market goes up 20%, 30% in a year, you need those years to get an average mm-hmm, <affirmative> of seven or 8%. You need all of that upside and the market goes up more frequently than it goes down. So you need all the ups to, to get that average.

Speaker 1 (21:42):

So what happens when you start capping yourself at what you feel is a good average return? Well now you're not gonna get that every year. So you're probably gonna get some, somewhere in between what you would've received in the market and zero, you know, it certainly does narrow your outcomes, but that's what I see with, with those types, those four out of five. How about the last one? So the last one's variable annuities, and that's where you can, you can invest in sub-accounts inside of these annuities that act a lot like mutual funds. And so you do have the upside of the market, the true upside. You do have the downside of the market as, as a possibility as well. Variable annuities are kind of known for are higher fees a lot of times now they don't all have higher fees, but generally they're gonna have higher fees and fixed index products, they're gonna have probably higher fees than fixed annuities because there's more things baked in.

Speaker 1 (22:35):

So you have a fee for, usually there's some type of death benefit in a variable annuity, typically it's baked in. Then you've got fees for the mutual funds or the sub-accounts I'm calling, they're not mutual funds, but they're sub-accounts that operate like mutual funds. And then you, you might have a writer fee on that, you know, an income writer or different types of rider that might be available. And then lastly it, some administrative fees could apply to now variable annuities, index annuities, fixed annuities, all of those could have income riders that are added on to those as well. Like I said, I, as we start to get through all these types, mark, it's like I thought I'm understanding, but the more I learn, the less I feel like I know about annuities because you can throw the, you can throw an income writer on an indexed annuity and use it for lifetime income.

Speaker 1 (23:24):

And, and so if you're considering this, it's really hard to find someone who is unbiased to give you an unbiased opinion on, on these things because usually the person that's telling you about 'em is wanting to sell you one. And we're not saying that that's automatically a bad thing. It's just a little bit hard to take their word for it and as, as if it's an unbiased opinion. <laugh>. So we're here to answer questions. If you have annuities out there, maybe you have, maybe you purchased an annuity and you're wondering if you can get out of it because you don't think it's good, give us a call, go to retirement power hour podcast.com and click work with me or click submit a question. You can do that right through the show and then we'll answer it. Uh, either we'll respond to you, but we'll potentially also share it on a future episode just to help others that are out there and listening. So let's, let's mark, I mean, some of these people are, are being pitched annuities. It might help to talk about what to look for and why you might wanna buy 'em. Right? So a couple easy things. What's the surrender schedule? Meaning if I put my money in, can I get it back out? Usually the answer is no. At least for a period of time. So when could I get all my money back out? If you wanna take your money out sooner, a lot of times these annuities carry really steep surrender charges.

Speaker 2 (24:40):

Why explain why there's such high surrender charges in these annuities.

Speaker 1 (24:44):

I guess because they can. But the annuity companies are trying to provide these unique benefits, you know, guarantees on interest rates, uh, to many people using these for income. They're providing lifetime income. So how are they able to, to provide these benefits? Well, one way is they make these pretty restrictive. If, if, if you're gonna give them money and they're gonna start issuing guarantees to you and other people based on the money that you gave them, they're probably gonna need to hold onto that money for at least a little bit to invest and to make, make some money off of that themselves. So I think that's probably why is that they, they need to have your money because they've already made guarantees on it. 'cause they were planning on having it. So,

Speaker 2 (25:26):

So I think a good question for you Joe would be, and and I've had it as well, you have clients that use, currently use an annuities. Yeah, I've

Speaker 1 (25:32):

Recommended annuities. Yeah. Why have

Speaker 2 (25:33):

You recommended annuities to a specific client or group of clients? What do I need to be thinking about of, okay, maybe I am a potential fit or this person's a potential fit for this reason?

Speaker 1 (25:44):

Um, well it was really the next thing that I had on here was just benefits, uh, the benefits of the things that we talked about. What can it, what can it provide that maybe a regular portfolio can't provide? And when you start talking about insurance, any type of insurance really, you're talking about big risks and you pay an insurance company to help you protect against that. And in the financial world, when you, if you live a long time, that's actually a risk. If you live a really long time longer than you think you might, because now you have to fund more years of your retirement, you know, you have to pay more years of expenses. So that's actually a risk. It's great to live a long life and have a great quality of life, but how do you fund that? So for people that maybe have a history of longevity or maybe they do have a risk of running outta money, that's one profile That's good because maybe, maybe we're a little bit concerned that if if they live too long, they're gonna run outta money.

Speaker 1 (26:44):

Well, what they can do is instead of just when you run out of portfolio assets, you just gotta live off social security. You can add to social security to say, well, when I run out of assets, I'll at least have social security and I'll have this income from this annuity that's coming in. You can change your, your floor to include and add onto. And some people have pensions, like we said, you might have social security pension and you want to add some annuity income, but some people don't have any pensions and they're pulling out all of their income and retirement from these non-guaranteed risky assets or assets that can fluctuate, can, can go to zero. Meaning if you're taking money out, they can go to zero. And so it's just about diversifying a little bit. And the other one, mark is just con people that are more conservative.

Speaker 1 (27:32):

This is a more conservative thing. Yep. And it, it ha it actually has, uh, been shown through different studies to increase retirement satisfaction. And I'm sure you've seen that whenever, whenever folks come in, whether they have annuities or a strong pension when they have monthly income coming in and it's guaranteed and it's guaranteed for life and it's not tied to the market. So they really don't have to worry about the market as much. They are way happier than the folks that you know, are pulling all their money out of the market typically. Yep. Do do you see that? Have you ever

Speaker 2 (28:04):

Found that? A hundred percent. I think as we talk all the time, behavior is a key component to having good investment experience. And those clients who have a fixed income coming in and they don't have to worry about the ups and downs of the market for maybe their fixed expenses, tends to relieve a lot of stress. And they tend to look at the volatility of their other assets under just a different lens as opposed to having all their money in the market. So certain types of clients with certain, uh, behaviors, they can be, annuities can be a really, really good fit and compliment to their other assets.

Speaker 1 (28:41):

So it's, it's just do I want, um, a probability, pla probability based plan or do I value safety more? Because when we do retirement plans and use stock funds and bond funds and all that sort of stuff, we, we try to do that in a way that gives clients the highest probability of success. But we can never use the the G word guaranteed, right? Because it's just not guaranteed. Now we've got a really long track record and a lot of historical market returns that makes us feel very, very confident in that approach and that's why we use it. And it gives us the most upside we feel too. But we can never use the G word. So if you're someone that just, that needs more safety, that could be, um, a good, a good use of, of some of your portfolio. Nothing is ever like, I'm gonna go a hundred percent into annuities. I don't even, you really can't even do that. Annuity companies wouldn't let you do that. But you can put a portion of what you have in, in there too. Maybe like you said, just pay my fixed bills. Yep. So I know that as long as this insurance company stays in business, um, as long as they stay in business, I'm, I'm good. I don't have to worry about the market and, you know, the fed and uh, wars and things like that that are going on that are affecting the market.

Speaker 2 (29:59):

I got two more questions and you just hit on one of 'em I think. But the first one, before I get to that, explain to us how annuities are taxed.

Speaker 1 (30:07):

Well, you can have annuities in IRAs and then they'd be taxed just like IRAs and annuities outside of IRAs are gonna be taxed a little bit differently. Where any earnings that that happen in the annuity, those will come out first. It's called on a li o basis. They're, they're taxed as ordinary income if you, unless you annuitize. So because you, you do get tax deferral on, on the growth of your annuities. And then when you pull, if you annuitize or use an immediate annuity, then you get to pull out your money pro rata. So your earnings, if your earnings represent 10% of the total value and and your cost basis is 90%, then the income you pull out would be 90% basis and 10% earnings.

Speaker 2 (30:51):

Most commonly I think we see qualified annuities, so as yeah,

Speaker 1 (30:54):

A lot of times, yeah,

Speaker 2 (30:56):

Old IRA money or an old 401k somebody rolled into an annuity and in that case it gets taxed just like an IRA would. Last question, Joe, you brought up the, the comment about the fed. So the fed's been raising interest rates lately. How does that affect annuities or does it have an effect on annuities?

Speaker 1 (31:13):

Yeah, it does because in annuities are interest rate driven. You have to realize, understand that when we give money to these insurance companies to purchase an annuity, they have to go invest it. But they're, they're most likely gonna be using a lot of safe or more predictable investments. And so whenever rates are going up, it's improving annuity benefits and improving annuity offers, income benefits. You can get more income for less today than you could get even a year ago or, or two years ago. Certainly two years ago when interest rates were, were very, very, very low. So rates do change and fluctuate, but right now we're, we're doing this, it's May of 2023. So you know, rates have have been going up and they're at a, as about as high as we've seen in recent history. So it looks good for annuity offers right now.

Speaker 1 (32:08):

But like I said, just things to keep in mind. What's the surrender schedule? What are the benefits, what are the fees? What's the strength of the insurance company? Do I have an account balance? Do I have a death benefit? What happens if I pass away or my spouse and I both pass away? What happens? You have to understand all those questions and you shouldn't ever get pressured into doing, uh, something like an annuity and purchasing it because they can be hard to unwrap. They're not known for being flexible, which is a con and a and a a pro for doing it. The old fashioned way of a stock and bond portfolio is, there's more flexibility there. You know, you're, it's not set in stone. You've, you've got more flexibility, you can take more money now, maybe put it on pause for a while, take more later. Annuities are just so rigid that they're, they're pretty much set in stone. Whatever type you use, a lot of times they're pretty much set in stone, not a ton of flexibility. So if you value that flexibility more than safety, then you gotta be real sure before you do an annuity that it's, it's the right thing for you. So

Speaker 2 (33:09):

I'm not necessarily hearing you say annuities are all good and I'm not hearing you say annuities are all bad. I guess what I'm hearing you say is that they couldn't be good in the right situation. You just need to make sure you're analyzing everything.

Speaker 1 (33:20):

Yeah, absolutely. Anyone who says any different, they're just, they're not being honest. If they say all annuities are bad, I, I think what my opinion on this is that there, there's this group of people out there that are pushing annuities really hard. And to be honest, they're insurance salesmen. So they're pushing annuities because that's how they get paid. They get commissions. And by the way, I don't think there's anything wrong with the commission, but they're not fiduciaries and they're pushing products and selling them to people that maybe don't need them or selling more of them than they need. And that has caused annuities to have a bad name. And then you have some people on the other end of the spectrum who grew up in the investment world, investment purists who say, oh, all annuities are terrible because look at all those guys slinging those annuity products and look at, they make those high commissions, they're just all terrible.

Speaker 1 (34:12):

Well, you're not really being honest either. And the guy that's slinging 'em who says annuities are the best thing since sliced bread, everyone should have one. They're not being honest either. So we gotta, I think we gotta come somewhere in the middle. 'cause there, there's actually a lot of academic research out there that talks about how annuities can be beneficial in the right product, in the right amount at the right time, providing the right benefits. There's, there's research out there from the academic world, you know, they're not selling anything, right? Uh, my, my good friend, I've had him on the podcast, David Blanche has done a ton of research around retirement retire for retirees and, and the benefits of using annuities at times for some people and how that can help. And, and we're talking all financial stuff, but I mentioned before retirement satisfaction. Yep.

Speaker 1 (35:02):

That's a real thing too. You know, mark, I don't know what's more important. I have more money at H 100 or your retirement satisfaction level for the next 30 years is being higher and the these are non-financial things that really should be considered and thought out and at the end, annuities can play a role in that. That's right. More than the, more than stocks and bonds can, I would say if anyone out there again is listening and has questions, maybe you have an annuity and you don't like it, you wanna get out of it, don't make any rash decisions, reach out, uh, tell us what you have, let us evaluate it. Maybe you're thinking about one, maybe someone you know has one and you're thinking about one, reach out to us. We are happy to, to uh, help you answer some questions. And you can do that at retirement power hour podcast.com.

Speaker 1 (35:48):

Again, retirement power hour podcast.com. Submit your question, if you wanna get a free retirement analysis from us, you're looking for an advisor, you can click work with me. There's a, a process on that page that, that tells you how that works. But the first step is just having a simple phone call with me and, uh, again, allowing me to ask you some questions about where you're at and what you're looking for to see if we're a good fit. If so, we'll take you through a complimentary analysis process and tell you where you stand and give you an idea of, of what it would be like to work with us. So Mark, thanks for joining me on this episode. Um, annuities, it's kind of like no one loves the word <laugh>. Um, I don't think, but it's an interesting topic, but it, it is much more prevalent. So I think it was good timing and it's good to have someone to kind of bounce these things off of. Absolutely. Alright, with everyone else, don't forget to join us on the next episode of The Retirement Power Hour, where we help people invest wiser and retire better. With that, take care. We'll see you next time.

Speaker 3 (36:47):

Thank you for listening to the Retirement Power Hour podcast. All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal or investment advice. Investing involves risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an investment advisor representative of Carson Allaria Wealth Management, a registered investment advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but caral a wealth management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.