Safe Money - 4-26-25

Episode Transcript

Speaker 1 (00:00):
Good morning to all. Craig Schillig 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 in 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

(00:22):
using cash 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 Control Medicare community meetings.
I give those via zoom. I give two every month,
or you can email me at Craig at Craigshillig dot

(00:46):
com and that's my name, cr Aig at cr Aig
s c h I L l ig dot com. Today
I want to talk to you guys about annuities. An
annuity is simply a product that, through annual payments, systematically

(01:09):
liquidates a principle some over a lifetime. In its traditional meeting,
an annuity offers a benefit that can't be found at
any other financial vehicle. That benefit is an income that
cannot be outlived no matter how long lived the individual

(01:29):
is some history about annuity contracts. A primary concern for
individuals today is having enough money in retirement to afford
a comfortable and worry free lifestyle. While a robust stock
portfolio is certainly one method of achieving this, many Americans

(01:50):
today rely on more traditional methods of ensuring a steady
income during retirement years. One of these methods is through
the purchase of an annuity. The term annuity hearkens back
to a Greek word annus, which means year and refers

(02:11):
to an annual income payment is initially conceived, an annuity
is simply a product that, through annual payments to an annuitant,
systematically liquidates a principal sum over a lifetime. An annuity
offers a benefit that can't be found in any other

(02:32):
financial vehicle. That benefit is an income that cannot be outlived,
no matter how long the individual's lifetime is. Annuities provide
a lifetime income. In today's economy, annuities are used frequently
as a vehicle to which to accumulate the fund that
will be used to provide a retirement income. Although annuities

(02:55):
were introduced to the American market in the middle of
the eighteenth century. They did not achieve much popularity until
about the nineteen thirties, when America and the rest of
the world were in the throes of the Great Depression.
The prevailing interest rates in the economy were very low,
and the individual American who had money was interested in

(03:18):
making sure that he or she had a safe and
certain income. By nineteen thirty three, there were about three
hundred thousand annuity contracts that were in force in the
United States. Although this might appear to indicate significant market penetration,

(03:39):
it pales when compared to the seventy million life insurance
contracts that were also enforce at that time. While annuity
market penetration was sluggish, it wasn't the only problem annuity
insurers faced. Giant strides were made in the development of
drugs for dreaded diseases, and medical treatments and facilities improved markedly,

(04:05):
with an expected result, people were going to live longer.
These improvements and mortality, combined with low interest rates, meant
losses for insurers when innuitants outlived expectations and the interest
rates failed to rebound quickly enough and insurers are as.

(04:27):
Insurers made annuity income pay passed well beyond what they anticipated.
Annuities offer a stable income that may continue for the
buyer's lifetime, and that income is based on a guaranteed
interest rates. Another financial development would eventually have a profound
effect on annuities. A new way for individuals to potentially

(04:51):
gain greater returns by participating in the stock market that
was interviewed introduced to the United States in nineteen twenty
eight twenty four with the birth of the first mutual fund.
The period following World War II was a time of
strong economic growth as the pent up demand for consumer

(05:14):
goods whose purchase was delayed first by the Great Depression
and then by World War Two that caused the economy
to sour. As the stock maria continued to produce substantial returns,
the demand for equity securities increased and annuity buyers began
to look for similar returns from their annuity contracts. Consumers

(05:39):
demanded equity based products that could overcome the effects of
inflation there was a by product of postwar economic expansion.
To meet this demand, the insurance industry developed and introduced
the variable annuity in nineteen fifty two. Income payments under
these contracts varied fromment period to payment period, depending on

(06:02):
the performance of the underlying investment portfolio. Presumably, as the
economy continued to expand, both the inflation rate and the
income payments would climb. Although variable annuities soon took hold
with annuity buyers, the US Supreme Court decision seven years
later decided that variable annuities would be subject to securities regulation,

(06:29):
which caused many insurance companies to temporarily stop issuing these contracts.
Annuities provide owners with a number of advantages other than
a retirement income. Chief among these is the tax treatment
that deferred annuities receive. By purchasing and investing in a

(06:49):
deferred annuity, a contract owner can avoid current income taxation
of their earnings. By avoiding current income taxation, earnings that
might have been used to pay current income taxes can
remain in the annuity to produce additional earnings. Annuities tax

(07:10):
advantages aren't limited to tax deferral, however, annuities offer additional
tax advantages. For example, an investor purchasing a deferred variable
annuity can change his or her investment ops allocation in
the contracts variable some accounts whenever desired. Typically, such changes

(07:32):
are made to accommodate a new financial goal for the
investor or to modify his or her level of risk.
From a tax point of view. The important issue is
that the contract owner can make these changes without being
required to recognize income, as would be required if, for example,
the investor liquidated his or her stock portfolio to purchase

(07:55):
a bond. In addition to these tax benefits, a contract
owner who will lex to annuitize his or her non
qualified deferred annuity contract, for example, to take periodic income
payments from it, will find that part of each periodic
income payment can be tax free as a return of

(08:18):
his or her investment in the annuity contract. That rule
still holds true today. The principal market for non qualified annuities,
based on various studies, is the middle income market, generally
comprised of individuals with annual incomes below one hundred and
fifty thousand dollars of annual income. Not surprisingly, because the

(08:41):
principal use of annuities is to provide retirement income, the
reasons why people buy annuities is not particularly startling. They
purchase them primarily to ensuring income for themselves or for
a spouse. There are other reasons, however, including to have
funds available in case of emergencies. The desire to provide

(09:05):
a comfortable income in retirement is an important motivator for
saving money in a qualified retirement program, as well as
outside such a qualified program. When we consider the nature
of an annuity, it becomes fairly simple to see why
its features make it so suitable for this function. An

(09:26):
annuity is traditionally defined as the liquidation of a principal
sum to be distributed on a periodic payment basis, to
commence at a specific time and to continue throughout a
specified period of time or for the duration of a

(09:46):
designated life or lives. In addition to providing for liquidation
of a principle sum in periodic payments, deferred annuities also
enable contract owners to accumulate fund that is eventually distributed
through those periodic payments. Both these dominant features of an annuity,

(10:08):
liquidation and accumulation, offer contract owners important benefits that make
annuities particularly suitable for providing retirement income. Annuities offer two
important advantages, tax deferral and an income that cannot be outlift.

(10:29):
Let's consider both of these. Tax deferral. Tax deferral enables
an annuity contract owner during the accumulation phase of the
contract to accumulate a greater amount of funds than would
be possible without tax deferral. The reason for that phenomenon

(10:50):
is simply to explain. If you have a current taxable account,
whether it's a savings account, a CD, or even a
mutual fund portfolio, the owner incurs an income tax liability.
Each year. Income is credited to the account, even if
it's not distributed. If an account earns one thousand dollars
in a given year, the owner must recognize that one

(11:14):
thousand dollars for tax purposes, and they will send them
a ten ninety nine generally at the end of January.
Every tax year. If he or she is in a
twenty four percent tax bracket, the federal tax bill will
amount to about two hundred and forty dollars for that
calendar year. That two hundred and forty dollars, when taken

(11:37):
from the account and used to pay the tax liability,
is money that is no longer available to earn additional interest.
It is interesting to note that in a currently taxable account,
the income must be recognized and the income tax liability
incurred regardless of whether the income is actually received in

(12:00):
interest earned on a CD. For example, a certificate of
a deposit is taxable income to the owner in that
year that it's credited, even though the owner never actually
receives it in the year it was credited. Please remember that.
I find a lot of you guys out there that
have a bunch of money in CDs and you can't

(12:22):
figure out why your income taxes keep increasing every year.
It's because they send you a ten ninety nine every January.
If you had that equal amount in just a fixed annuity,
a fixed deferred annuity, you wouldn't receive a ten ninety
nine statement. Hence, you wouldn't have to recognize that income

(12:43):
that's being reinvested in the contract or via tax deferral
for a later point in time the interest that's yes. So,
because of the favorable tax treatment, all of the earnings
credit are available in the deferred annuity to earn additional interest.

(13:06):
Let's talk about some retirement goals here. Annuities. Again, it's
an income that can't be outlived due to the tax
deferral and the ability to reallocate assets from one. If
you have a variable account. A subaccount to another in
the same annuity would also give a variable annuities an

(13:28):
important advantage in long term savings when compared to other
financial products. It's not tax deferral, however, there is the
principal advantage of an annuity. Instead. The principal advantage is
its ability to provide an income that an annuitant can't outlive,
regardless of how long that life turns out to be,

(13:50):
and was cited by eighty four percent of annuity purchasers
as an important reason for their annuity being purchased. Think
of how important that particular benefit might be. Suppose you're
age sixty five and you had a sum of money
from which to provide a needed supplemental retirement income for

(14:12):
the remainder of your life. Let's use the example of
three hundred grand, and you could not obtain any additional
funds under any circumstances, you could invest the three hundred
grand in a money market and have supplemental income equal
to the interest that is earned. Assuming an interest rate
at four percent, your annual retirement income would be about

(14:34):
twelve thousand dollars of interest. However, because you did not
invade the principle, you'll never run out of money. The
supplemental retirement income you received would provide much in the
way of luxuries, and probably, excuse me, wouldn't provide as
much in the way of luxuries and provide not very

(14:55):
many necessities either. Because that approach doesn't provide sufficient and
supplemental retirement income for you. You might decide to look
up your life expectancy in an actuarial table and find
that at age sixty five, your life expectancy is about
twenty one years. So, if you've run some quick math,

(15:17):
if you determine that you can increase your annual income
by twenty thousand by withdrawing an increasing amount of principle
and a declining amount of interest each year. At that rate,
assuming you could continue to earn four percent on the balance,
the principle would last exactly twenty one years. Because twenty

(15:38):
thousand of supplemental retirement income isn't sufficient to maintain your lifestyle,
you decide to try to increase your earnings on the principle,
knowing that by placing your funds and investments that can
produce a higher income, you will be risking the loss
of the principle However, if you can increase your earnings
on the principle to say six and a quarter percent,

(16:02):
you can take annual a drawals of twenty six thousand,
forty dollars each year from the account and not exhaust
the principle until the end of twenty one years. Based
on that reasoning, you decide to move your principle out
of a money market account and invest in a high
yield bond. However, what risk have you taken by being

(16:23):
in bonds. The risk that immediately come to mind is
the bonds may lose their value if interest rates increase.
Bonds and interest rates have an inverse relationship, and because
these high yield bonds have a low rating, the risk
is greater than the issuer may be unable to meet
the interest in principal payments at some time in the future.

(16:45):
The more significant risk, however, relates to your life span.
If you live longer than twenty one years, and remember,
half of people your at age sixty five will outlive
our life expectancy, your retirement income will cease entirely before
your lifetime. The additional risk that you have assumed in

(17:07):
the risk of outliving your money. Then there's the alternative,
of course, that's to purchase an annuity at age sixty five.
The monthly income that you can purchase per one thousand
a principle ranges from about five to seven dollars. Now,
this does depend on rates at a given time, So

(17:29):
if we go back to my three hundred thousand principal example,
you can apply that to the purchase of a single
premium immediate annuity. They would pay an annual lifetime income
between eighteen and twenty five thousand, depending on the carrier
and rates at that time. And if you live longer
than twenty one years, that actuaryal table considers your remaining

(17:50):
life expectancy and your retirement income will continue. Annuities may
serve both an accumulation and distribution function. They come in
a variety of types and maybe classified according to whether
they're fixed or variable deferred or immediate, single or flexible
premium and so on. So you guys have heard me

(18:16):
talk about spias before, I use those a lot. In
four I usually like to do a five year spia.
A five year track record or what I use sixty
months is a good way to pay for whether it's
your paychecks or your play checks and then every five
years we can readdress it. So spiel works great for that.

(18:39):
When we're talking about comparing annuities to CDs, CDs are
going to be interest. So we'll just talk about deferred
fixed annuity, not a fixed in, not a fixed indextinuity.
I'm just talking about a fixed annuity. So if CDs
are paying, oh, let's argue if you have lesson fifty thousand,

(19:01):
CDs are gonna pay three three point fifty maybe four percent,
but you might have to have more than one hundred
grand for that. Annuities will usually pay a point or
maybe seventy five basis points higher than a fixed annuity.
But again, remember you can defer that interest, and with

(19:21):
a flexible deferred annuity you could make more deposits down
the road. Now, remember fixed annuities are going to act
like CDs. There's a hold period. Now. CDs are usually shorter,
so you can get some CDs or maybe only thirty days.
Annuities won't do thirty days. Now, there are some companies

(19:41):
out there that I don't represent that I know I'll
do like a one or a two year annuity, but
generally they're gonna be about three years. So if you
have a three year CD versus a three year annuity.
Three year annuity is always gonna win both on tax
savings and deferral options on top of what interests are

(20:02):
going to offer you. So please keep that in mind.
Because tax season's over. You guys paid your taxes. You
know what, Your income probably went up and your income
taxes went up if you had a lot of money
in CDs because you had to pay for that interest
even if you didn't withdraw it. So something to keep

(20:23):
that into account we're talking about. So again, I do
a lot of different type of annuity portfolios, whether they're
deferred annuities, fixed index annuities. You guys have also heard
me talk about fixed income annuities. That's also a different

(20:43):
product line altogether. But again, remember people don't like annuities.
They like what annuities do, so just keep that in mind.
You can't compare an annuity to a stock portfolio or
you know, the SMP, the Dow. Pick your favorite stock.

(21:07):
I don't care if it's Apple, IBM, or Microsoft. You
can't compare the two. The beauties of annuities are one
the deferral, but two, especially on non qualified money, is
going to be the tax deferral exclusion ratio. That exclusion
ratio really helps minimize which your overall tax bite is. Now,

(21:30):
if your annuities in inn IRA, you have to pay
taxes on that, there's no getting around that. But non
qualified money, that exclusion ratio is very very advantageous. Let's see,
So a fixed annuity is one under which the insurer,

(21:53):
rather than the contract owner, bears the risk of the
loss of the principle. One key point on that is
what's safer a bank or an insurance company. Everybody puts
money into a bank. Why it's safe you have FDIC insurance,
But what does FDIC stand for? The IC means insurance corporation.

(22:17):
Banks are insured. Insurance companies are the ones carrying the
risk on that. So I ask you which is going
to be safer, a CD or an annuity When we're
talking about if there's a dissolvents rate. Now there's not

(22:37):
bad mouthing CDs. Please understand that CDs have a place
in your overall financial home, especially for short term pockets
and money. If we're only talking thirty days to you know,
eighteen months something like that. Again, most fixed deferred annuities
are going to run minimum three year old periods, so

(23:01):
keep that in mind. So a couple of the companies
that I represent a lot, you guys have heard me
talk about pen Mutual, I do Mass Mutual. You've heard
of a theme I've talked about, American Equity. I know

(23:22):
alliances out there, Jackson National sometimes too. American Equity is
another one. Those are the big players. Some of those
are actually in downtown West of Moines. So I do
represent all those, and depending on your situation or what
you're looking for, determines which companies we would set up

(23:46):
your portfolio with. One other item on annuities, also, don't
forget under CDs, that's going to be probatable. That's going
to fall under a probatable asset. Make sure you have
a TOD on the a transfer on death, but that
would also still count against your estates state tax number

(24:09):
or your estate's tax exclusionary number. Where if you have
your money in an annuity, because that's by contract beneficiary designation,
that would transfer to whatever named beneficiary you have automatically.
That's another fringe benefit of annuities that separates them from CDEs.

(24:31):
So please keep that in mind. Don't forget I give
monthly virtual meetings virtual meetings regarding Medicare every two I
do two different companies every month. In one meeting, i'd
cover Medicare supplements and a standalone drug plan. I usually
do that plan with well Mark. The other company I

(24:53):
talk about most often is United Healthcare, and they're the
sponsor of my other virtual meeting, and under that meeting,
I talk about Medicare Parts SLEEP, Parts C and Medicare
advantage plans. You can call my office at five six
three three three two two two zero zero for the
zoom meeting codes and additional dates and times, or you're

(25:15):
welcome to email me at Craig at Craigshilig dot com
and that's my name, c R A I G at
c R a I G S c h I L
L I G dot com and I can send you
the virtual zoom link meeting codes. This is Craig Shillig

(25:37):
with Safe Money