Safe Money - 12-14-2024

Episode Transcript

Speaker 1 (00:00):
Good morning to all. Craig Shillig here and this is
Safe Money. I'm here every Saturday to talk with our
listeners about financial strategies we use to manage and protect
assets safely. I've been an insurance agent for over twenty
four years. During that time, I've learned a few insurance strategies,
like using annuities as safe money harbors, or using cash

(00:22):
value life insurance to supplement retirement income. Just a reminder,
you can call our office at five six three three
three two two two zero zero if you'd like to
enroll into one of my virtual Medicare community meetings I
do via zoom. I give one every month, or you

(00:43):
can email me at craigat Craigshillig dot com and that's
c R a Ig at c R a Ig s
c H I l l ig dot com. Today, I

(01:08):
want to talk about annuities. To simplify things, think to yourself,
annuities are a pension. A pension is an annuity. Now,
annuities in the media sometimes get a pretty bad wrap.
Advisors say annuities are not right for every client, but
when they are right, they can be the perfect financial

(01:30):
planning solution. Remember that no one likes annuities. They like
what annuities do. A deferred annuity is one of several
investment options you can choose from defund your IRA. You
might think that a deferred annuity isn't suitable as an
investment option for an IRA, since both deferred annuities and

(01:54):
iras generally provide for the deferral of income taxes on
ours until they're withdrawn. However, there are several reasons, aside
from tax deferral, that may make a deferred annuity a
sound funding choice for your IRA. Some common features of

(02:14):
iras and deferred annuities. Iras and deferred annuities share several
common features. Both iras and deferred annuities provide for the
deferral of income taxes on gains, interest, dividends, and earnings
within the account until the time the money is withdrawn.

(02:35):
They offer varying degrees of credit or protection based on
particular state laws. They are intended as long term saving options.
You subject the account owner to early withdrawal penalties unless
an exception applies. But the common features shared by deferred
annuities and iras do not necessarily make them mutually exclusive.

(03:01):
Let's talk about income. Deferred annuities offer the opportunity to
annuitize the account, which involves exchanging the cash value of
the deferred annuity for a stream of income payments that
can last for the lifetime of the contract owner and
his or her spouse that can help in retirement by

(03:22):
providing a steady, reliable income. But converting your account to
an income stream means you're generally locked into these payments,
unless the annuity provides a commuted benefit option allowing you
to cash out the balance of your income payments. Another
income option offered by some defferred annuities provides guaranteed income

(03:47):
payments without relinquishing the entire cash value of the annuity.
The guaranteed lifetime withdrawal benefit allows you to receive an
annual income for the rest of your life, well having
to annuitize the annuities entire cache value. Some deferred annuities

(04:08):
offer a riter that provides you with a minimum income
equal to no less than your premium payments less any
prior withdrawals. With this writer, you're assured of receiving minimum
income payments based on their premiums you paid into your annuity,
even if the annuities accumulation value has dipped below your

(04:30):
investment in the contract due to poor investment performance. Let's
talk about principle protection. Deferred annuities may offer protection of
your principle. Fixed deferred annuities guarantee your principle and a
minimum rate of interest as declared in the contract when

(04:52):
you buy the annuity contract. However, the interest rate the
annuity pays may actually exceed the minimum rate and may
last for a certain period of time, such as one year,
after which the rate may change. Deferred variable annuities also
may offer protection through writers attached to the basic annuity. Now,

(05:16):
remember annuity writers typically come with an additional cost. For example,
a common annuity writer restores your annuities accumulation value to
the amount of your total premiums paid if after a
prescribed number of years, the accumulation value is less than
the premiums you paid, excluding any withdrawals. Let's talk about

(05:41):
death benefit. Another benefit offered by some deferred annuities is
a death benefit guaranteed to equal at least your investment
in the contract. Most annuity death benefits provide that if
you die prior to converting your account to a stream
of income payments, known as a newization. Your annuity beneficiaries

(06:02):
will receive an amount equal to your investment in the contract,
less any withdrawals you may have had, less any withdrawals
you may have taken, or the accumulation value, whichever is greater.
Another death benefit perk two annuities also is annuities fall

(06:24):
under contract law, which means the death benefits are paid
directly to a name beneficiary and you don't have to
deal with that going through a probate court. So some
reasons why an annuity may not be a good idea.
One is fees rmds, known as required minimum distributions or

(06:46):
surrender charges, and sometimes the tax deferral. Let's talk about fees.
Some deffered annuities charge mortality and expense fees in addition
to other fees that may be greater than fees charge
in other investments. Specifically, deferred annuities may charge fees for
a death benefit, minimum income writer, and or principal protection.

(07:11):
The point on the fees is this, not all contracts
are the same, so make sure you buy a good
annuity contract. Rmds required minimum distributions. As an owner of
a traditional IRA, you're required to take rmds, which are
known as required minimum distributions beginning at age seventy two.

(07:34):
Deferred annuities outside of an IRA do not have this requirement.
That'd be called a non qualified annuity. So buying an
annuity with an IRA now adds that RMD requirement to
the annuity. Let's talk about surrender charges. Deferred annuities come
with surrender charges, which charge a penalty for taking withdrawals

(07:57):
from the annuity prior to mature. These surrender charges may
make deferred annuities less liquid than some other types of investments. However,
many deferred annuities waive surrender charges for withdrawals up to
certain amounts, such as ten percent of your deposit of

(08:18):
the account value for rm ds, or for withdrawals based
on a guaranteed minimum withdrawal writer and if the annuity
is annuitized into a stream of payments. Tax deferral deferred
annuities offer deferral of income taxes on gains and earnings

(08:39):
of account values within the annuity. Iras also offer tax
deferral of gains and earnings, so you're receiving no additional
income tax benefit by investing in a deferred annuity through
an IRA is an annuity right for you? Some differred
annuities afford benefit that may not be available in other

(09:01):
types of investments, making annuities an option to consider for
your IRA. However, most of these benefits come at a
cost that can reduce your account value. Before funding your
IRA with a deferred annuity, please talk to your financial professional.

(09:22):
Some things you'll want to know. Does the annuity have
surrender charges and if so, how much are the charges?
Is there any amount I can withdraw from the annuity,
such as require minimum distributions without incurring an additional surrender charge?
Can the annuity decrease in value? Are there any options

(09:44):
available in the annuity to protect my investment? What are
the benefit options and what are their costs? Are there
any fees or charges that apply to this annuity? Is
the financial strength of the company issuing the annuity and
how is their reserves? If annuity benefits fit your financial plan,

(10:11):
a deferred annuity maybe a good option for your IRA.
Let's look at some real life annuity solutions. I'm going
to talk about asset protection, reducing your rmds and taxes.
I'll talk about retirement income the guarantees that allow for

(10:31):
aggressive investing, and we'll talk about inheritability. So let's talk
about asset protection first. Asset protection is another key benefit
that many annuity supporters point to. For example, when a
client passed away with very little of his retirement portfolio left,

(10:51):
an annuity provided a nice surprise for the client's surviving widow.
He was withdrawing over ten percent annually just to keep afloat.
One by one, his investments were being drained Naturally, the
client's widow expected a terrible inheritance. She had seen her
late husband savings pounded by market volatility and excessive withdrawals.

(11:16):
But it turned out that years earlier, the client had
purchased a fifty thousand dollars variable annuity with a living
income benefit. The widow was entitled to one hundred percent
of the original fifty thousand dollars investment. That was when
she had her AHA moment. If more of the husband's

(11:37):
retirement savings had been in that annuity or something similar
to that annuity, he could have avoided much of the
market risk and might have enjoyed a guaranteed income he
could now live, potentially leaving a much larger larger legacy
for his wife. Let's talk about reduced rmds and taxes.

(12:01):
A different type of annuity proved to be the ideal
situate solution for another client, a men in his seventies
whose required minimum distributions from retirement accounts were much higher
than his retirement income needs. And a lot of my
clients fall into this bucket. You guys retire and your

(12:24):
expenses go down, but then you turn seventy two or
seventy three, and you got to start taking rmds even
though you don't need the money. For this client, the
rmds were so high they caused a big tax issue,
pushing him into a higher tax bracket. Worse still, they
forced him to take distributions from accounts regardless of the

(12:46):
market conditions, depleting his portfolio's potential. A q LOAC, known
as a qualified longevity Annuity contract, proved to be the
perfect answer. The contracts are deferred income annuities funded by
a qualified retirement plan or IRA. They're exempt from rmds

(13:08):
known as required minimum distributions until the account holder reaches
age eighty five. Up to two hundred thousand dollars per
person can be converted from a retirement plan or IRA
into a Q lock, either all at once or over time.
These contracts have the option of naming a spouse as

(13:29):
a joint a new attempt, raising the total investment limit
from two hundred thousand to four hundred thousand. Since their
deferred annuities, the guaranteed monthly income stream must start at
a future date. This solution greatly improved the client's RMD
calculation as well as helped him take some assets off

(13:52):
the roller coaster ride of the volatile market. Let's talk
about retirement income. Yiser had a client who was preparing
for retirement. After reviewing her entire financial situation, he determined
that even with her monthly Social Security check, her potential
monthly retirement income would fall some two thousand dollars a

(14:18):
month short of what she needed for necessary and discretionary spending.
Our belief is that fixed, non negotiable expenses need to
be covered by fixed guaranteed income. That guaranteed income may
come from a pension and Social Security, but if they
aren't enough, an income annuity can be the perfect solution

(14:39):
for this spot. Showing the client how putting some of
her IRA savings into a fixed annuity would give her
the dependable monthly income she needed to cover the shortfall
without affecting other portfolio assets. A fixed annuity, as opposed

(14:59):
to a variable annuity with a lifetime income writer, suited
the client's aversion to volatility where her income needs were concerned.
She didn't want to have to worry about market conditions
on a monthly basis to know that she would be
able to pay her bills on time every month. Another
advantage of an income annuity for this client was the

(15:22):
easy set it and forget it factor. The income stream
is as automated as possible, which suits clients who never
had to manage their own finances. Once issued, this annuity
cannot be terminated or surrendered, and the premium paid for
the annuity is not refundable and cannot be withdrawn without

(15:44):
a penalty. Let's talk about guarantees that allow for more
aggressive investing. An advisor as a longtime client who purchased
a variable annuity back in the nineties, when the yield
on a ten year treasury was about eight and a
half percent and the insurance companies assumed clients would have

(16:05):
shorter life spans, and these factors led to an increased
payout rate for that annuity contract. Consequently, for most of
the time the client had owned it, the income it
generated what's higher than any other annuity he had bought
in later years, especially when interest rates tanked to zero percent.

(16:27):
In addition, the underlying account values compounded and tax deferred
growth over the decades produced an average annual return of
roughly ten and a quarter percent. The client asked to
review how his old annuity compared to new ones today
to assess options currently available in the rising interest rate environment,

(16:52):
but it was never worth changing the old annuity. However,
until about a year or two ago, the client again
asked to review the annuity situation and a new annuity
with an income writer that would actually increase the client's
guaranteed income by roughly twenty percent because of the new terms,

(17:12):
fee schedule, and etc. That newer annuity contract companies were offering.
As interest rates have moved up, several insurance companies began
to offer very competitive income options on their fixed indexed
annuity platform. Fixed index annuities, known as fias, provide a

(17:34):
fixed rate of income with an account value with account
values that are linked to a market index. They offer
downside protection on the account value in exchange for limiting
upside potential. The guaranteed income from an FIA allowed the
client and his wife to leave their remaining retirement assets

(17:55):
relatively aggressively invested. But that's the end of this story.
The client did not move all the money from the
old annuity to the new one. He kept about seventy
five thousand dollars in that thirty year old variable annuity.
One potential long term problem with the new policy was

(18:16):
that the income doesn't increase over time. Therefore, the income
will be slowly eroded by inflation. The old variable annuity,
on the other hand, offers the option of getting variable annuitization,
which differs from fixed annuitization in that if the account

(18:37):
value rises with the market, the annuitization amount increases too.
Of course, variable annuitization is a two way street. When
the market's up, your payment will be up. When the
market tanks, you're going to have a lower monthly payment.
Income payments will decrease if there's insufficient returns on that

(19:00):
vestment account come anniversary time. I do a lot of
split annuity arrangements in our office that kind of help
with limiting some of this we park a bucket of
money into a deferred annuity, and well, let's just call
it over five years or sixty months, and then I

(19:22):
put the rest of the money into an index annuity
known as a fixed indextenuity FIA, and the goal is
to try to recapture that money we've taken over that
five year period, and we'll readdress it again then in
four or five years. Let's talk about inheritability. Last year,

(19:43):
a woman with a terminal illness approach her financial advisor.
The woman was worried about leaving her loved ones financially secure,
especially since she could no longer qualify for life insurance.
We explored innuities as a tool to help her achieve
her goal of leaving a lasting leg The client had
worked hard to build wealth and was concerned about not

(20:05):
just her children's future, but also protecting her wealth no
matter how the markets performed. The advisors suggested a variable
annuity with an enhanced death benefit. It would not only
guarantee her family of substantial payout, but also provide the
potential for some market linked growth during her remaining life years.

(20:28):
This solution helped reduce the client's anxiety about leaving her
loved ones without financial support. Even if she passed away
during a market downturn, her family would still receive guaranteed
a guaranteed benefit amount, which was much more than her
investments alone could have yielded at that point. By choosing

(20:50):
an annuity, she could focus on spending her final days
with her loved ones, knowing she had secured their financial future.
This demonstrates the unique ability of annuities to offer asset protection,
growth potential, and wealth transfer capabilities even when life and

(21:11):
market circumstances may otherwise pose a challenge. One last bit
I'll give you about annuities. So annuities are basically opposite
of life insurance, if that makes any sense at all.
Life insurance typically are going to pay when you die
unless you buy a cash value life insurance that you

(21:31):
can use while you're living, but strictly term insurance that
would pay out upon death. Annuities do the opposite. They
pay you to live. Now, you can structure an annuity
to pay out longer than your life, but those are
there's different types of contracts, so there's different ways to

(21:53):
structure that. And I'd be happy to talk with anybody
about that because everybody's situation is different. A friendly reminder.
I give monthly virtual meetings regarding Medicare for two different
companies every month. In one meeting, I cover the Medicare
Supplement plan and a standalone drug plan. That meeting is

(22:14):
normally sponsored by well Mark. I do these meetings on
the third week of every month, Tuesday and Thursday at
ten am, and I usually schedule them about six months out.
I don't have I have my January dates already, but
I'm only scheduled out till June of twenty five at
this time. My other meeting on Thursday at ten am,

(22:37):
is sponsored by United Healthcare, and in that meeting, I
focus more on Medicare Part C known as Medicare Advantage Plans.
You can call her off as at five six three
three three two two two zero zero for the zoom
meeting codes and additional dates and times. You're also welcome
to email me at Craig at craig show dot com

(23:01):
and that's c R A I G at c R
A I G S c H I L L I
G dot com, and I'd be happy to send you
the virtual zoom link meeting codes. This is Craig Schillig

(23:23):
with safe money