Josh and cohost Michelle discuss different types of annuities, including Deferred Income Annuities, Immediate Income Annuities, Fixed Annuities, Multi-year Guaranteed Annuities, Fixed Index Annuities and Variable Annuities.
Good afternoon everyone and welcome to Coasting in Retirement! I am your host, Josh Null, and I’m joined by my co-host, Michelle Lee Melton. Michelle, how are you doing? I’m doing great – I’m very pumped up! We’ve got a great show today! For those new to the show, I am the owner of Gulf Coast Financial Advisors, an independent financial planning firm based out of downtown Fairhope, Alabama. Michelle and I are here today to discuss financial topics relevant to those in or near retirement living their best life along our part of the Gulf Coast. Let’s start with our topic of the day – annuities. Michelle, as someone that is not in the financial services industry, what pops into your mind first when you hear the word annuities?
Very good. So not to pick on you Michelle, but that’s a fairly common response when someone mentions annuities. And probably for good reason, the financial industry I serve has done a solid job of giving themselves a black eye when it comes to annuities, especially with how annuities are explained and sold. In fact, publicly discussing annuities can raise so many red flags that I feel compelled to offer a brief disclosure before we get started!
Annuity sales are up 27% over this time last year because people flee stock market volatility.
This show is not intended to convince you to buy an annuity, in fact, we’re going to hit the subject right on the head and be as open and honest as possible – one would even say skeptical – because there is so much dis-information out there about annuities, both good and bad. It is 100% a cats vs dogs / Republican vs Democrat / type of arguments being made about annuities. And I can see why - heck, in doing my show research, I ran a cross a banner ad on one of my investment websites that makes me and any other fee-based advisor want to throw up in our mouths just a little bit: From AnnuityAlliance.com: “Today's highest annuity returns. Earn 8.5% annual return and grow your savings risk-free.” Later in the show we’ll circle back as to why that ad is both mathematically accurate AND misleading all at the same time.
But first we need to layout that many investors don’t realize that there are several different types of annuities, and that labeling them with one big broad brush – whether bad or good – is nearly impossible. All annuities have a couple of common attributes – they’re supplied by insurance companies, there’s surrender periods and all involve at least some element of loss of control of your principal, or “premium” in the insurance world. There are a lot of commonalities across the different types of annuities. But there are several differences that need to be discussed, so that any of you looking at the purchase of an annuity will be armed with relevant information for your purchase.
Let’s list the different types of annuities, then we’ll break each down individually: Deferred income annuities
Immediate income annuities, or Single Premium Immediate Annuities (SPIAs), Fixed annuities, or Multi-Year Guaranteed Annuity (MYGAs), Fixed Index Annuities and Variable Annuities.
- Deferred income annuities – think of this as the most “pension” like of annuity options. In fact many pension payouts are facilitated thru an insurance company. Sometimes you can ask an investor if they would like to have a pension? Most people say yes. Ask that same investor if he wants an annuity? Sometimes they say no, but a lot of people don’t realize the similarities. You make a contributions or multiple contributions to the annuity over a certain time period, with the income start date “deferred” until either some pre-determined time in the future or when you decide to start taking income out of the annuity. You don’t have much control is this situation – when you turn your premium over to the insurance company, by contract it is to be used in the income calculation, and typically the amount of income, once set, stays the same. It’s because of this fact that you have to be careful with inflation
- Immediate income annuities, or Single Premium Immediate Annuities (SPIAs). Similar to deferred income annuities except it typically involves paying a single premium, usually a decent amount of money, and the income can start pretty much instantly. You definitely lose control of your premium, and just as with deferred income annuities, you have to be careful of inflation.
- Fixed annuities, or Multi-Year Guaranteed Annuity (MYGAs). Think of these as the insurance companies equivalent to CD’s. You typically see 3 – 7 year terms on these, with a fixed interest rate for a set number of years. For example, we recently did a 3 year MYGA at 4.5%, which was higher than what the client’s bank was offering her. Do remember that annuities are not backed by the FDIC like bank CD’s would be, but by the ability of the insurance company to make good on their promises.
- Fixed Index Annuities – this is the most popular annuity among insurance companies and producers right now. Describe how it works – tracks an index, with a cap rate in exchange for a 0% floor. Zero is your hero stuff. Often have long surrender periods and high fees and high commissions so they need to be looked at carefully. Most have some type of attractive income rider – remember the 8.5% “return” ad we mentioned earlier? – and the selling feature is basically that you get to participate in some market upside without having the bottom drop out.
- Variable Annuities – I’m an SEC registered fee-based investment advisor rep, not a broker/dealer Finra registered rep, so I don’t offer VA’s, so I’ll be brief. Similar to a FIA except there is a sub account that is actually invested in the market vs just tracking it, and at least with the VA’s I’ve seen, you absolutely can lose money if the value of your subaccount goes down. There are death benefits, premium protection riders and income riders that are appealing to some folks, and you aren’t limited on the upside like you would be with a FIA.
The bottom line is this: if you are looking to incorporate annuities into your financial plan, then it needs to be done with appropriate education and with your eyes wide open as to what you getting into. We do use annuities in our practice, but it’s done with a specific purpose every time. And we’re also more than happy to help you dissect and understand an annuity that you are considering buying. If you have questions about annuities or any other part of your wealth management plan, give us a call at 251-333-5151 to set up an no obligation, no cost appointment, or you find our contact info on our website, gulfcoastfa.com.
- First we figure out how much you’ll need for the retirement you’ve been dreaming about
- Next we uncover the main risks posing a threat to your retirement, including inflation, stock market volatility, potential tax increases, skyrocketing health care costs, etc
- Then we discuss options for generating income in retirement and putting your investment portfolio to work doing specific jobs, such as battling inflation
- Finally we discuss how to keep your current standard of living in retirement, even as costs keep rising.
The strategies we use are designed in part to help you with inflation and longevity risks. Not only are we trying to match your risk tolerance with your investment holdings, we want to help make sure you don’t end up outliving your retirement savings. If you’re interested in having that conversation, give us a call at 251-333-5151, or find us at gulfcoastfa.com. That’s gulfcoastfa.com.
Alright, coming up next - There’s always a lot going on in the world! Particularly the world of finance. It seems like there’s major headlines every week affecting investors, especially those in or near retirement. Join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Stay tuned!
Segment 2 - Michelle with the News of the Week:
Josh: “Welcome back to Coasting in Retirement, your host Josh Null here! As we discussed before the break, it seems like there’s major headlines every week affecting investors, especially those in or near retirement. Coasting in Retirement’s co-host Michelle and I are going to help you all understand and decipher the deeper meaning of those headlines, particularly the ones that relate to our show topic and have an impact on those in or near retirement. So with out further adieu, here’s “Michelle with the news of the week”!:
1. Michelle: Let’s start with a site called The Annuity Expert. The title of the article is “Why Annuities are a poor investment choice”.
Josh: This article is actually a prospecting type of article designed to get it’s author more client opportunities, not a judgement, just an observation. The main takeaways are the things we discussed earlier in the show: they are often a long-term contract, there is a loss of control over your investment, sometimes there is no or low interest earned, and some types of annuities have high fees. I think another main takeaway from this article is this – in my humble opinion – I think when discussing annuities it’s important you are talking to a securities licensed financial professional and not just an insurance licensed agent. That probably sounds a little arrogant given that I am a securities licensed advisor – fee for service specifically – but I say that because the hot annuity of the moment – FIAs – are complicated, and there’s a lot of really talented bs artists out there selling them without giving a truly accurate portrayal. This article asks and answers the question – are annuities a scam? NO – the scam part comes into unrealistic promises and statement of misfact. If it’s not in writing and understandable it doesn’t exist.
2. Michelle: Josh, we’re going to do 2 headlines at once because it kind of argues both sides of a particular product. Kiplinger says that “Fee-Based Annuities may not be your best bet” while Nasdaq.com seems to have a totally different opinion in their article titled “Fee-Only Annuities: Will They Be a Game-Changer for Clients, Advisors, And An Industry?”. So, which is it?
Josh: So Michelle, we didn’t talk much about fee-based annuities, or really how annuities payout yet. In broad terms, most annuities are sold on a commission basis, typically a percentage of the annual premium. Different types of annuities pay different rates, and typically the longer the surrender period the higher the payout to the agent. For example, a 3 yr MYGA will have a much lower commission than a 12 year FIA, in general. Now, let’s contrast that with fee-based annuities. These sprung up mostly in response to the Dept of Labor best interests rules back in 2017 and folks wanting to fall under the fiduciary umbrella of fee for service while still using annuities. I’ve been doing this financial services thing for over 13 years now and I still don’t see where fee-based annuities have made much of a dent in the overall industry’s production levels. Part of that is because the products themselves don’t require much ongoing guidance. I guess you could make an argument for a fee-based VA because there is some management going on of the subaccount, but FIA’s just track an index without a lot of adjustment, and there’s no ongoing adjustments needed for income annuities or MYGAs. So in summary, yes, fee-based annuities are a nice thing for fee-based advisors to point to, but a lot of times it just means your paying the same amount of commission for the same amount of work, just over a longer period of time.
3. Michelle: Alright Josh, I’ve got a another group of headlines that seem to contradict each other, kind of like you said in the beginning of the show that there is definitely a cats vs dogs mentality to the information available about annuities. Let’s start with the somewhat pro-annuity article from CNBC Business: “Despite what you’ve heard, annuities aren’t all bad”,
Josh: So, listeners, think back to what we’ve discussed so far in this show. If you’re listening to this in podcast form, rewind a little back to where we discuss the different types of annuities. If you trying to use an allen wrench when a Phillips screwdriver is required, you’re going to get frustrated, and if you have the wrong goals, or have bought the salesman’s promises without doing your own research, you’re going to get frustrated as well. What do annuities do well? Provide income streams. Protect against longevity risks. Provide capital preservation in some cases. Sometime provide some tax deferral benefits. What do annuities do poorly? Capital appreciation. At or above market growth. Liquidity. Even the VA sales guys have to admit that while they don’t cap growth like a FIA does, they still have pretty hefty fees eating away at the principal.
4. Michelle: Back to Kiplinger – I don’t get the impression that these guys are great fans of annuities – anyway, Kiplinger states very clearly, “The strong case against buying annuities”. Josh – I see this occasionally in my daily life – someone mentions the word “annuity” and it’s immediately bashed as the worst idea ever. Why is this?
Josh: So this article was written by what appears to be a fee-based advisor, and I think he makes a lot of good points, points I mostly agree with. For example – this author is referring to Vas, which typically do have a “high” commission structure, are generally expensive, and often have income riders – Guaranteed withdrawal benefit in this case – that don’t always pass the mathematical squeeze test when you really dive into them. But here’s my pushback – man, for the love of Pete, re-title your article “the strong case against buying VAs” so that people can at least try to recognize the differences. Sure, you can apply some of his logic to FIAs, but trying to say that Deferred and Immediate income annuities are always bad for people that want guaranteed, stable, life long income is just silly. Or saying that someone that wants a decent guaranteed rate of return for a few years in a MYGA is dumb. Just be product specific with your criticism, dude.
5. Michelle: Alright Josh, last headline for this week. Canvas Annuity has an article that discussed the similarities and differences between annuities and pensions. I have a pension! Does this mean I have an annuity? What are the differences?
Josh: So, briefly – pensions are typically employer funded “defined benefit” retirement plans. Your eventual payout will be determined by your years of service, your age and your income. You will often see annuities used at the tail end of a pension plan to provide the actually life time income – TransAmerica comes to mind on one I worked on recently. The most closely similar annuity would be a deferred income annuity, where contributions are made periodically thoughout the years leading up to a future income payment. A couple of broad statements – private pensions are becoming less common, most pensions you see now are usually government employee related or very large, historical type of industry, like Ascend Performance Materials in Pensacola. Discuss how someone can basically create their own pension using an annuity.
Josh: Michelle, great job with the headlines, these are all important pieces of information that impacts those in or near retirement. And for our listeners that are impacted by this news of the week, or interested in learning more, we invite you to take action and start a conversation about your financial plan. You can reach us at 251-333-5151 or find us at gulfcoastfa.com.
Alright folks, coming up after the break, we get to have a little fun and probably get picked on a little bit by my co-host, Michelle. Our next segment is titled, “Where Josh nailed it, where Josh was a little off”. I’m going to share some opinions I’ve made public that proved fairly accurate, and for balance, or at least be fair, a few where I didn’t quite stick the landing. I am human after all! See you after that break!
Segment 3- Where Josh nailed it, where Josh was a little off:
Welcome back! So the point of Coasting in Retirement is to offer guidance to those in or near retirement, which means I often give my professional opinion. And while I am proud of thought, care and due diligence I put into giving my professional opinion, both on this show and in my financial planning practice, I’m also human, which means I don’t always stick the landing perfectly. So each week I get to poke a little fun at myself by admitting to any thoughts or opinions I’ve put out there that weren’t 100% on point. BUT this segment has to be fair, so I also get to pointing to some of my thoughts and opinions that were pretty accurate. We call this segment “Where Josh nailed it, and where Josh was a little off”. Alright Michelle, what’s first?
1. Michelle: So Josh, let’s start with something you mentioned at the beginning of the show, the annuity ad about 8.5% return and risk-free growth. I believe your saying is that there is a difference between return OF your money and return ON your money. So – did you nail it with this opinion, or are you a little off?
Josh: This is a great way to kick off this segment, Michelle. I feel like I nailed it, and have nailed it for years. First, let’s parse out the wording in that Annuity Alliance banner ad, because each word matters, and probably had to pass some form of compliance. Josh – talk about return of money, caps, how risk free is not 100% accurate, and how sometimes the “Guaranteed Withdrawal Benefits GWB” or “Enhanced Withdrawl Benefits” do not play out exactly as desired.
2. Michelle: Josh – you’ve expressed this opinion - most of the time that someone writes an article about annuities, whether pro or against, they lump all annuities into one basket and that this can be misleading. Nailed it or little off?
Josh: Nailed it, although I will say the financial articles have gotten somewhat more accurate in the past handful of years when discussed annuities. I know annuities have more similarities than differences but it’s silly at best and ignorant at worst to lump them all together. There’s a recent Market Watch opinion article as an example, “Why annuities are a bad idea for almost everyone”. Very similar to the Kiplinger article we mentioned during the news of the week segment. The Kiplinger article was talking about VA’s, while the Market Watch article is specifically about deferred income annuities…but you wouldn’t know that by the title or the article information. It’s not that he’s not wrong, and I can somewhat appreciate how emotional some of these authors get about this sensitive topic, it’s just that he’s just using a shotgun approach and hitting all kinds of different products.
3. Michelle: Utilizing insurance products that feature capital preservation with some upside potential. Nailed it or a little off?
Josh: This is somewhat nuanced question because of the role insurance plays in our practice. I’ll start by saying I was a little off a few years when it came to the retirees in my client base. Let me explain. I am an independent financial advisor that works with a larger independent RIA called Prime Capital Advisors for my and my clients’ investment management needs. Financial advisors generally take two routes on their way to becoming independent financial planners and investment managers like me. One track is coming up thru a wirehouse or brokerage like Merrill Lynch, Morgan Stanley or Ed Jones. Another path is through the insurance side, such as New York Life or Mass Mutual. I came up on the insurance side. Which would lead one to think that I would have built an insurance focused practice, but instead I built an investment management and financial planning based practice.
Why? Because I have dealt with insurance companies for many years now and have learned to have a healthy skepticism of some of the narratives they present. Or at least some of the sales agent representing them. Not a distrust necessarily, I just follow Ronald Reagan’s advice of “trust but verify”. So any of my clients that use insurance products in their planning walk in with eyes wide open and all aspects discussed. That said, in the situations where we decided a capital preservation focused insurance product was the best fit for a particular client’s needs, those clients in general have had some peace of mind during this recent market downturn and particularly during the market volatility of the past 2 years. It takes some of the worry off the table. Does that mean insurance products like these are for everyone? No. But it means that I much more open minded about it than I was 2 years ago.
4. Michelle: Fixed index annuity sales will level off as some of the features become less attractive in a down market. Nailed it or a little off?
Josh: I was off! Fixed index annuity sales are up 25% from this time last year, the overall annuity market is up 27%. Here’s why. First, positive approach – my advisor brethren sometimes forget how important people’s money are to them and how much they worry about it. Don’t worry about the 20% decrease in your account, it will be alright! So when the market is volatile there’s tons of people that want to take some or all of that up and downs out of their portfolio, and annuities provide some options to do this. The bad side? The crazy market is like chum to the insurance produce shark salesmans – and I say men because most of the are – and they use fear tactics and inflated promises to snag a LOT of investment dollars. These are the guys that make the rest of us trying to do the right thing look bad. Stop it, guys. You wear me out.
5. Michelle: Alright, one more Josh. You said on more than one occasion that the Auburn Tigers football team would offer interim head coach Cadillac Williams a 2-3 year deal because there was little downside plus huge upside to making him the head coach. Nailed it or a little off?
Josh: Off. Totally off. Is it ok to discuss this, Michelle? Is this getting into the “religion” or “politics” arena? I know Auburn at least tried to do the right thing by making Cadillac the “associate head coach” but I mean, Hugh Freeze…really? Note: it’s up to Michelle how deep we go into this, such as me asking her how she would feel if she got our phone bill and I “accidentally” called a bunch of hookers – er, excuse me, escorts – at least a dozen times. Or lying to recruits that no major violations were in place, effectively trapping them once they committed? This may be too radioactive / emotional for the radio show. Either way this needs to be a back and forth because Michelle’s opinion matters more than mine in this discussion.
Great stuff, great job Michelle. Alright, coming up next: we reach into our listener mailbag for our question of the week! Stay tuned!