March 28, 2025 • 53 mins
Annuities often appear in retirement planning discussions surrounded by jargon and overpromises. But what happens when you look beyond the glossy brochure? This episode cuts through the sales tactics to reveal what you actually need to know about annuity taxation.
We dive deep into the practical differences between qualified and non-qualified annuities, explaining how each is taxed and when penalties might apply. Did you know non-qualified annuities use a "last in, first out" approach to taxation, meaning all your gains get taxed first? Or that even non-retirement annuities face that dreaded 10% penalty before age 59½? These critical details often get buried in financial fine print.
Beyond taxation, we explore how annuities can function as alternative assets within a diversified portfolio. Rather than viewing them solely as income vehicles, we demonstrate how stripped-down indexed annuities might reduce portfolio volatility while potentially adding incremental returns without the fees associated with many bond funds.
Most importantly, we provide context for when annuities might actually make mathematical sense in your financial plan. By layering guaranteed income sources to cover essential expenses, you can create retirement security without sacrificing growth potential or liquidity. But this requires understanding exactly what you're buying and why you're buying it.
Whether you're considering an annuity purchase or already own one, this episode equips you with the right questions to ask financial professionals. Remember - it's not just what they tell you that matters, but how they respond to your informed questions that reveals whether they truly have your best interests at heart.
We love to hear your thoughts, questions, and ideas. Send us a text!
Developing your financial bullshit sniffer one episode at a time.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Welcome to Bullshit on Stilts.
We're back for season two andlet's just say it's as popular
as a fart in a high-riseelevator.
We're still barking atfinancial fairy dust like a dog
and a mailman, and in thisseason we're serving up a fresh
batch of debunking financialsales tactics and ads you never
(00:23):
asked for, all while helping yousharpen your own bullshit
sniffers for those life-changingfinancial decisions.
So grab your favorite drink,bring your sense of humor and
don't forget your calculator.
Join us on our quest to exposethe financial shenanigans that
even your grandma would callbullshit on.
It's time to get sniffing.
Let's get after it.
Speaker 2 (00:45):
Welcome to Bullshit On Stilts.
I'm Mark Robinson, along withthe premier host of this, kelly
Allo.
We're live.
This is season two, episodefour, and today we're talking
more about annuities.
In this first, on this serieson annuities, we talked about
the different types of annuitiesunpacking annuities, those
(01:06):
being fixed, those beingvariable and fixed indexed
annuities.
The second one was the price ofpeace of mind, total cost of
your annuities, and with theriders.
Number three was on riders,customizing your retirement
safety net, and today we aretalking about taxes and tactics.
(01:27):
Cool, kelly, how are you today?
I'm good man.
Speaker 1 (01:30):
I'm good.
Speaker 2 (01:31):
I'm sorry to present you with such a highly edited or
will be edited opening to this.
You know I've had AI filling infor me for the last several
weeks we have been like reallygood.
Speaker 3 (01:42):
You almost didn't miss it.
Speaker 1 (01:43):
Yeah, that's funny.
No, we wanted to help folksdevelop their bullshit sniffers
when it comes to annuities.
So much of social mediaadvertising and sales is really
done from the insurance side ofthe business and tremendous
amounts of retirement discussiontopics running out of money.
(02:04):
The government owns 50% of your401k.
Speaker 3 (02:07):
Take a listen to Season 1 Financial Fairy Tales,
Episodes 17, 18, and 19.
Speaker 1 (02:14):
All of those talking points are typically going to
drive a person towards annuitypurchases because they're from
insurance-licensed agencies,firms and so forth.
So we thought, hey, let's maybehelp everybody break this down.
And really the first threeannuity episodes we sort of
(02:35):
think of it as boot camp, nothere to tell you what annuity to
buy, but just here to equip youwith some deeper awareness
around how they work, what kindof engines they are, what kind
of customizations you can dowith annuities that you can't
with investment accounts, 401kaccounts.
And today that'll wrap it upwith our final installment in
(02:58):
this annuity series and we'regoing to be focusing on those
taxes, any penalties that mayapply to annuities.
Focusing on those taxes, anypenalties that may apply to
annuities, as well as how do youview an annuity like an asset
class alongside stocks, bonds,funds, indexes, exchange-traded
funds?
Speaker 2 (03:15):
I have a trenchant question for you.
Speaker 4 (03:17):
What does that mean?
Speaker 2 (03:18):
Define trenchant.
Speaker 1 (03:19):
First, because I'm confused.
Really heavy question.
Speaker 4 (03:22):
Oh, I get it, it's like Kelly, stepping on a scale
Talk about distrust with thefederal government.
Speaker 2 (03:28):
Indeed, front and center polarized Yep Overreach
of the government In years past,if not indeed currently.
About financial institutions,yep, whether it's conscious or
subliminal in the consumer asafe haven with insurance
companies, maybe putting somemoney and investing it with an
(03:57):
insurance company with theperception of it being safer and
less affected, as is financialservices and certainly the whims
and edicts from the federalgovernment.
What do you think about that?
Speaker 1 (04:07):
My perception of the average consumer out there is
that anything financial, whetherit's auto insurance, life
insurance, disability insurance,retirement accounts, brokerage
accounts, transferring brokerageaccounts into my trust, all of
that that financial side of theworld I think most people are
(04:28):
more and more skeptical of theadvice they're given by the
professionals that work in thatindustry and, as we've talked,
there are a large percentage, apercentage that do really good
work and put the consumer'sinterest ahead of theirs period.
But there's an awful lot Iwould say majority that there
(04:52):
are times where they don'tnecessarily put their clients'
interests ahead of their own.
So I don't know.
I think I'm taking this way inthe wrong direction.
Speaker 2 (05:04):
No, but it's good.
But I think it was just aquestion.
Look, we'll solve for this andwe'll talk about it next week,
because I'm going to put thisall in front of my peeps on
Reddit.
Okay, All right.
Speaker 1 (05:18):
They'll let you know.
They'll let you know salesprofessional from financial
services.
That comes across veryprofessionally, that is clean in
how they speak, theycommunicate well, they answer
questions directly becausethey're not afraid of the facts
that whatever is associated withwhatever their recommendations
(05:40):
are and I think that there are,and I've met, professionals all
over the place that operate withthat mentality.
But again, I'm going to saythat's the minority of that
marketplace, the professionalsales professionals, marketplace
agents, brokers, advisors.
So I think that consumers arefearful of decision regret right
(06:03):
.
Speaker 2 (06:03):
It makes sense now, but three weeks later.
Speaker 1 (06:05):
Why the hell did I do this?
Speaker 3 (06:07):
kind of decision regret.
Speaker 1 (06:08):
I can't afford this kind of decision regret, I hate
making mistakes, and I thinkthat comes from more than any
place else.
Well, whether it'shigh-pressure sales or not, it's
pressure sales tactics that'sused out there, and before you
know it, you're signing a checkto purchase something or deposit
some money into some account,and you can't remember for the
life of you why that made sense.
Speaker 2 (06:30):
Well, and that comes to the fore, that decision
regret when we talk aboutannuities, because when we talk
about withdrawal, or when wetalk about penalties for early
withdrawal or just cashing it inbefore the surrender period is
over, that can put a real hurton you, which I know you'll be
covering with this yeah, there'salways the yeah buts and with
(06:50):
every pro there's a con andcertainly annuity worlds.
Speaker 1 (06:55):
There are benefits and there are drawbacks to
annuities and when you startunderstanding that which
hopefully this series will helpI think you're in a much better
position to be able to go outand meet with a sales
professional and have thatdiscussion and then compare
their comments against a secondsales professional representing
(07:16):
some other organization, companyor agency and you're in the
catbird seat when you startdeveloping really damn good
questions around stuff that'sbeing said to you.
That's there really thefeatures and benefits.
Let's not pay attention to anyof the drawbacks.
Speaker 2 (07:33):
Yes, so when you mentioned pros and cons, I just
have a question here from thequality of the recording here,
is my ankle monitor providingany kind of feedback?
Speaker 1 (07:42):
I mean the blinking blue light is reflecting off of
underneath the table and alongthe wall here.
Speaker 2 (07:48):
But beyond that, I mean I was going to wear a
full-length dress and I decidedto dress mid-anniversary More
like a sarong.
Well, your inseam is kind ofshort, so I get that.
The slippers are a nice touch.
Speaker 1 (07:57):
Yeah, so, yeah.
So annuities, they're prettycool.
I just, I know that in mypersonal experience most
consumers don't know how toreally look at the annuity.
What's it going to do for me?
Why would I ever think of usingan annuity?
What happens once I'm investedin an annuity?
(08:18):
You know what are my choicesthereafter.
Am I limited?
Am I not limited?
You know?
Blah, blah, blah.
Speaker 2 (08:24):
So what we have here and this will be, I think these
are podcasts that are trulyarchival, Only because delete
isn't an option.
By that I mean, there arethings that folks can go back to
and refer to and get juststraight arrow approaches and
explanations and definitions tothis.
Speaker 1 (08:44):
So in fact this is one of the things we talked
about.
If you're sitting in your carand you arrived to your meeting
at Fidelity Investments or ABCFinancial or whomever, and
you're going in for a meeting itmight be a review meeting and
you own annuities it may be ameeting around retirement and
you suspect that there'll beannuity discussions or you know
(09:06):
that there'll be annuitydiscussions these things 20, 30
minutes long you can pop that inand just kind of refresh your
brain and jot down I don't knowtwo, three, four key questions.
That would be a hugelydifferentiated experience for
you going in with some knowledge.
And again, I think you've saidthis time and time again, mark
(09:29):
that it's not exactly the answerthey give you while you're
asking the question.
How do they respond and whatdoes your belly tell you?
Is it truth?
Is it not true?
Oh wow, that's a really goodpoint Are they trustworthy now
more, or are they lesstrustworthy based on how they
answer the question, if theyeven do?
Speaker 4 (09:49):
answer those questions.
Speaker 2 (09:51):
That's what I kind of envision Even though they're
speaking Even though they'respeaking, and why I know that
this series here, this four-partseries here, is so good and so
definitive, is because I didn'twrite one word of it.
That makes sense.
Speaker 4 (10:04):
I can tell there are no 75 cent words.
Speaker 2 (10:06):
Let's get going here.
Let's get into section one.
This is just titled annuitytaxation and you're going to
cover qualified annuities taxbenefits and withdrawal taxation
.
Kelly.
Speaker 1 (10:20):
Yeah.
So we're going to do kind of ahigher touch to this.
We're not tax advisors, We'vejust lived around this stuff for
a few decades.
We've interacted withies inthere.
I took money out of mybrokerage account and I swung
(10:49):
over and I put 50 grand into anannuity.
That is a non-qualified, inother words, it's not a
retirement account.
Now the cool part about thenon-qualified the growth you get
from the annuity while you ownit until you withdraw any money
out of it is tax deferred, justlike a retirement account.
So that's pretty cool.
(11:09):
If you're looking for taxdeferred growth on non
retirement dollars, it could bea kind of a cool solution for
you to consider the other andwe'll come back to this but the
other type of annuity is calleda qualified annuity.
So that type of annuity you'regoing to have retirement funds
inside the annuity.
(11:29):
It will operate just like a401k, just like an IRA, in that
pre-tax dollars go in.
You're not taxed on them goingin or you get your tax deduction
at the end of the year going in.
It grows tax deferred and justlike an IRA, a qualified annuity
(11:51):
with retirement funds in it.
They have a required minimumdistribution, meaning that as of
right now, when you're 73 yearsold, you have to start taking
out some money little by littlefrom the annuity.
So those two, the non-qualifiedand qualified annuities, are
sort of where the tax discussionstarts.
Have I lost you yet?
Nope, Okay, Nope, nope, Okay.
You want me to keep going?
Keep going, Okay.
(12:12):
So let's talk about just focuson the growth inside of an
annuity, Either thenon-qualified or the qualified.
When I add money or value to myannuity, I'm accumulating
annuity value.
That's called growth.
When I take my growth out of anannuity, it will be taxed as
(12:36):
ordinary income tax Shit.
Speaker 4 (12:38):
My pencil broke.
What did he say?
Speaker 1 (12:39):
It will be taxed as ordinary income tax.
It's not taxed as capital gainslike my investment brokerage
account would be, or myindividually owned trading
account at Schwabcom orsomething.
It will be taxed as ordinaryincome.
How that's treated thenon-retirement version, the
(13:01):
non-qualified account.
Speaker 3 (13:02):
Yeah, the taxable annuity.
Speaker 1 (13:03):
If I put $10,000 in the annuity and there's $10,000
of growth, my annuity now isworth $20,000.
If I were to take out all$20,000 in one fell swoop, half
$10,000 would be consideredgrowth and that half would be
taxed at my ordinary income taxlevel Is that called the premium
(13:26):
, or is that called basis?
Speaker 2 (13:27):
How do insurance companies categorize that?
Speaker 1 (13:31):
So principal tax, basis tax, cost basis premium,
all of them are used and I'veseen them used interchangeably.
So they all mean the same thing, which is the money you put in
the after-tax, money you putinto the non-qualified annuity
is not taxed when you take itback out of your annuity.
It's only in that taxablesituation only the gain will
(13:55):
face ordinary income tax,whatever it is the year that you
withdraw money.
Speaker 2 (13:58):
And if one from a practical matter, from a tax
reporting, the report that theyget year-end, it's a 1099-R.
Yeah, the the 1099R will showwhat was principal or premium.
Speaker 1 (14:11):
That's exactly right.
Yep, yep.
Here's where the wrinkle.
Let's stay on the non-qualified, the taxable annuity side for a
second.
Let's say that I withdrew of myexample, put 10 grand in.
It's worth 20,000 now and Ididn't withdraw all 20,000.
Let's say I just took two grandout.
How do you think that's goingto be taxed?
Do you think it's half and half?
(14:33):
Do you think it's only myprincipal or do you think it's
only gain?
I hate multiple choice.
Speaker 2 (14:38):
I love multiple choice questions.
I think it would be the gainthat is the correct answer.
Speaker 1 (14:45):
So it's a last in, first out approach to taxation,
meaning the last dollar thatwent into my annuity.
When I withdraw the two grand,that's $2,000 of the last 2000
that went into my annuitycontract.
Since I just put 10 grand inthe new dollars, the other
10,000 that's grown, that'sconsidered new I'm going to get
(15:05):
all my gain first if I'mwithdrawing it in a couple grand
here, a couple grand there, how?
Speaker 2 (15:12):
many more instances?
Can you recount or itemizewhere it is last in first out?
Speaker 1 (15:19):
Oh gosh, you can opt for that in your brokerage
accounts.
In terms of how you wantwithdrawals to be treated, you
can ask it to be pro rata.
You can do a lot of differentthings there, but I mean, the
only thing that I ever think oflast in, first out is going to
be an annuity.
Are you thinking of anything?
Speaker 2 (15:38):
else.
No, I'm not.
Yeah, you hit it.
Speaker 1 (15:39):
Hit the one I wanted you to yeah, because when you're
trading in your your, yourpersonal account, your trust
account and you you buy a fund,that's your premium, your cost
basis, your starting point ofyour principal investment amount
.
When you sell that let's say Ihave been buying that over the
last five years I have all sortsof different purchase points
(16:05):
that create different sizes ofgain or loss in that stock
itself and I can go in andliterally, as a surgeon, cut out
the specific purchase dategiven the gain or loss that I'm
trying to achieve with that salewhen I sell that position or a
portion of that position.
(16:25):
So it's much more finite andmanageable in the brokerage side
, I think.
Speaker 2 (16:30):
Yeah, it sure is, yeah, it sure is yeah.
Speaker 1 (16:32):
The only tool you have on the annuity side that
gets you out of the last andfirst out scenario is when you
have this taxable annuity, thisnon-qualified annuity, and
instead of just grabbing moneyout a few times a year, once a
year, you say, hey, I want toannuitize this contract and I
(16:53):
want the contract to begin topay me, in my example, a monthly
payout from my annuity for therest of my life, or whatever my
decision is.
It could be a 10-year period,certain it could be for the rest
of my life, or whatever mydecision is, it could be a 10
year period, certain it could befor the rest of my life and my
spouse's life.
Whatever that decision is, whenI annuitize my payment now, the
(17:14):
tax treatment will be part ofthe money that's sent to me is
principal and part is gain.
So only part of that paycheckthat I get paid out will be
taxable.
And then you brought this up.
At the end of the year you'llget a 1099R for your tax
preparation and it'll depict onthat form what dollar amount is
(17:37):
taxable and what dollar amountis not.
So this is complicated stuff.
I mean, this isn't for thefaint of heart, and why we're
talking about this is there's somuch more to the annuity
decision than just income forlife, and that's unfortunately
what's really sold out therevery hard.
Is that income for life?
Speaker 2 (17:56):
scenario.
We've covered the taxation.
We've focused a lot on thenon-qualified.
Do you?
Speaker 1 (18:05):
want to go to the qualified now.
Yeah, so before we punch out ofthis, just the qualified is far
easier If it's a traditionalretirement account, meaning that
I put pre-tax dollars in, I gotmy tax write-off and that
someday when I take money out ofthis it's going to be fully
taxed, meaning ordinary tax.
That's the traditionalretirement account.
(18:25):
I want an example.
Speaker 3 (18:25):
Don't you dare ask for an example.
Speaker 4 (18:27):
But conflicted, because it means he will talk
more.
Speaker 1 (18:30):
Do not ask An example , if you're retiring and you're
working with an advisor andlet's say you have 500 grand in
your 401k, let's say 100 grandgoes to a annuity.
In that event, from your 401k,that 100 grand in that annuity
and anything inside the annuity,from here on out when you
withdraw money out, will befully taxable.
Speaker 2 (18:51):
And is that clear that that annuity is registered?
Speaker 1 (18:54):
as an individual retirement account Annuity or
retirement annuity, I think, iswhat they usually call it.
So fully taxable again,ordinary income.
Speaker 3 (19:03):
Yeah, but what about my Roth annuity?
Speaker 1 (19:05):
If you have a Roth IRA.
Now the annuities can be kindof interesting with a Roth IRA
because you still have no taxesassociated with withdrawals, but
you could also have no taxes onincome payments for life, or
maybe for life across yours andyour surviving spouse's life.
So Roth annuities are prettycool from a standpoint of tax
(19:29):
deferral tax-free, with somesafety nets.
If you're of the opinion, youwant.
Speaker 2 (19:34):
Yeah, that's really cool, it is.
Yeah, mark's so regal in hisdress, or?
Speaker 1 (19:38):
salon.
Speaker 4 (19:41):
From my angle, all I see is a flashing blue light.
Speaker 2 (19:44):
Okay, so we've gone through withdrawal taxations.
Let's move to early withdrawalpenalties yeah.
Speaker 1 (19:50):
So this is something that a lot of people don't know,
and when you're putting moneyinto an annuity, if you withdraw
money out of the annuity beforeyou're 59 and a half, you will
face that dreaded 10% penalty onthe withdrawn amount of money.
Speaker 4 (20:08):
That would be the IRS early withdrawal penalty of 10%
and that applies to the taxablegrowth portion of the contract.
Speaker 1 (20:15):
So you don't want to be 20 putting your money into an
annuity.
If you ever think you're goingto have to take money out of
that annuity for whatever'sgoing on in life before you're
59 and a half, that might not bethe best way and that's not
exclusive to an annuity.
Speaker 2 (20:28):
If you are under 59 and a half and you put money
into an annuity and you're 35and you want to take money out,
that would be the same case withif you opened up an IRA.
Speaker 1 (20:38):
If you open up an IRA , yeah.
Yes, yeah, yeah yeah 59 and ahalf penalty rule.
It exists with the annuities.
I was just a little surprisedthat it existed with
non-qualified annuities, thetaxable side of the annuities.
Speaker 2 (20:49):
So again, putting money to work in an annuity, be
very clear as to what thosepenalties could be, but we know
why there's a penalty, becauseyou're keeping taxation from
home For 200 points.
Who is the government?
Well, that's right, that'sright, that's exactly.
Speaker 1 (21:04):
Yeah yeah.
One of the things that I wantto be clear is terminology with
life insurance is incrediblyimportant Life insurance
products to include annuities.
When I say withdraw money outof an annuity, I mean you're
taking the money out of theannuity wrapper, away from the
insurance company and a pay andchecks being sent to your house.
(21:25):
That's a withdrawal.
If you have an annuity and yousay I don't need this annuity
anymore, I'm going to move mymoney from annuity A to annuity
B, that's not a withdrawal, thatwould be a transfer, and in
that case you can transferannuity monies in a very
tax-wise manner called atax-free exchange.
(21:47):
1035.
Speaker 2 (21:48):
Yeah, tax code yeah, 1035.
Speaker 1 (21:50):
Yeah, so just be very clear when you're asking a
question to a sales professional, what happens?
What would I pay in surrendersand fees and admin charges or
whatever, and early withdrawalpenalties if I withdraw money?
Speaker 2 (22:07):
that's a huge deal.
All right, can I let's staywithin the insurance realm here.
Can I take an annuity andtransfer that to an insurance
policy, or vice versa?
Can I take an ira and do thatyou?
Speaker 1 (22:22):
can um wow, I think here he knows Watch him shake
policy, and I think the answeris no, he knows you watch him
(22:48):
shake his head to find theanswer you can.
Life policy to annuity, but notannuity life policy annuity to
annuity you can, but let'sdouble check that because I
might be yeah, and just to our,to people that listen to the
podcast.
Speaker 2 (23:04):
The reason we're able to get all this fact-checked is
we really start this podcast.
It might be 30 minutes or so.
We start it right after oursecond bowl of Lucky Charms in
the morning.
Speaker 4 (23:14):
I hope he isn't doing the Scottish coat thingy under
his dress.
Speaker 2 (23:16):
We put it on pause again when we're screwing up
that might be four or five timeswe take a dino-nuggies break
around one or two half hour onthe nap with the mats.
Then we come back in this andkind of fix all this stuff up.
So we'll have all the facts forthat by the end of this podcast
.
Let's see what this is.
(23:37):
You did that with suchprecision.
Did you ever fact check on apresidential debate or anything?
Speaker 1 (23:44):
I used to fact check CNBC at night.
I would.
I would sit there and I wouldtype in things that I didn't
understand.
I'd pause it and I'd type insomething I didn't understand.
I'd review it quick and I'mlike, oh, now I got it.
And then I'd unpause it so Icould track some of the Jedi
Knight conversations that weregoing on with Kudlow and Company
and some of those econ-focusedthings.
Speaker 3 (24:05):
Yeah, that's what I did.
Sounds like a dating profilefrom whyyoucantgetadatecom.
Speaker 1 (24:10):
So we did that fax check?
Yep, we did and we found thatthat was correct.
You can do a 1035 from a lifepolicy to an annuity, assuming
there's cash value to do thattransfer of.
But you can't do a 1035tax-free transfer from an
annuity to a life insurancepolicy.
Speaker 2 (24:29):
So what are strategies to avoid penalties?
Speaker 1 (24:32):
So they're not great and wonderful.
There's a few strategies youcan use right.
One strategy is to make sureyou're clear as to any annual
penalty-free withdrawal option.
You may have Usual andcustomary 10% of the contract
value.
Going back to our $20,000annuity, 10% is two grand.
(24:53):
I could withdraw two grand outannually and have no penalties.
That means surrender penaltiesby the annuity contract itself.
It's not speaking to the 59 anda half IRS penalty.
That's one way to say gee whiz,what are the penalty freeze?
(25:14):
Did he say freeze?
Because in the future, if mycontract is projected to be X, I
could take 10% out and I couldhelp pay for I don't know my
property taxes at both myresidence and my cabin up north,
as an example.
The other way is to justunderstand that there are
penalty withdrawals, that thereis a 59 and a half age early
(25:37):
withdrawal penalty.
So when you're purchasing anannuity, be very clear that that
money is not money you'rerelying on over the next five to
10 years, that you have othersources to turn around and grab
five grand out of 10 grand hereor there if you need it, so that
you don't knock on the penaltysurrender fee window as it may
(26:01):
apply to your annuity.
Speaker 2 (26:02):
This comes down to one of the podcasts we did on
the Fab Five, which would fallunder really number one and
number two know what you own andwhy you own it, which would
minimize or completely obviateyou taking Obviate.
Speaker 4 (26:16):
What is to stave off, to prevent or avert, obviate?
Speaker 3 (26:19):
That is so Jeopardy of you.
Speaker 2 (26:21):
Completely obviate you taking withdrawal penalties
because you decided this wasn'tright for me.
That's right.
No, that's exactly right.
Speaker 1 (26:28):
Plan right yeah, because, again, if someone's
speaking to you and convincingyou of all the benefits, the
features, the bells and whistles, but they're not talking about
some of the drawbacks or thingsto be mindful of when you put
this golf club, so to speak,into your financial plan, of
investment holdings and so forth, and it's something that should
(26:51):
be thought of.
I sometimes think of annuityand penalty phases and
surrenders, sort of like.
I do a bond.
If I'm buying a 10-year bond, Idon't expect to sell the bond
in my example here for 10 years,so I don't care what happens
between now and 10 years.
Outside of that issue, we'regoing bankrupt.
I don't expect to sell the bondin my example here for 10 years
, so I don't care what happensbetween now and 10 years.
Outside of that issue, we'regoing bankrupt, I don't care.
And sort of.
(27:11):
When you look at the annuitylandscape, I think that's the
mentality you have to have.
By the way, one little caveatthat a lot of people don't
necessarily talk about withannuities, if I put my money
into, let's say, an indexedannuity and I'm doing it for
really good reasons we'll talkabout those next when I take my
money if I reallocate 100% ofthe annuity money back into
(27:35):
stocks, bonds, mutual funds,index funds, that will be the
moment I pay taxes on the gain,whatever's in that contract.
So it's not quite the same asreallocating in other instances
with other investments.
That bill, that tax bill, willbe paid if I reallocate money
(27:55):
out of an annuity wrapper intoregular old stocks, bonds, funds
, land.
And I think that's something tokeep in mind because I think
we'll be talking about how doyou use annuities when you're
considering what you want toachieve within your investment
plans.
Speaker 2 (28:11):
Let's go there right now, is that?
Speaker 1 (28:13):
all right yeah.
Speaker 2 (28:14):
Let's talk about annuities as alternatives
perhaps to other packagedproducts where you can invest in
the marketplace.
Speaker 1 (28:22):
Yeah, To me, alternatives is a huge space
right In the investment world.
Yes, Things like hedge funds,commodity funds, private equity
funds, master limitedpartnerships I mean all sorts of
alternatives.
And what's rarely considered analternative in investment
advisory land will be how do we,could we, should we,
(28:44):
incorporate an annuity or maybedifferent annuities into our
overall plan?
Would it be beneficial?
And so when I think of theannuities, I do think of them as
an alternative asset.
They bring lots of interestingcharacteristics to an otherwise
normally asset allocated,investmentocated investment plan
(29:06):
of stocks, bonds, cash, somealternatives normally a real
estate investment trust, maybelittle precious metals in there.
Speaker 2 (29:13):
Yeah, so they're a modifier in this degree.
When you're talking about ETFsand mutual funds and UITs,
they're a modifier of this, thesame generic investment being at
an asset class like equities,but it's a modifier to the
taxation on that.
Is that how you're meaning this?
Speaker 1 (29:33):
I sort of look at-.
Speaker 2 (29:34):
For the correlate person.
How would you describe that?
Speaker 1 (29:37):
It depends on what we're talking about, where we're
talking about.
So, if we're talking aboutmutual funds I own mutual funds
I can put money in my stockfunds, my bond funds, my
alternative investment fundsthose are my, that's my
landscape.
Well, if we're talking aboutprincipal protection, if we're
(30:00):
talking about having a bunch ofcash on hand so that I can take
paychecks out of my cash highyield savings account if we're
talking about I want to investand take very little risk to my
principal and we're talkingabout a realm that is lived in
by certificate of deposits frombanks, us Treasury bonds, fully
guaranteed by the US government.
We're talking about high-yieldsavings accounts, fully insured
(30:24):
by the FDIC.
So we're talking about a market.
What also fits there is fixedannuities, and so if a fixed
annuity is offering you let'ssay, in my example, 1% higher
interest rate on your money thana high-yield savings account,
it's guaranteed, it's insuredand it's backed by a sinking
fund in the state, might besomething worth looking at.
(30:46):
Just might be.
Oh, by the way, do you want alittle tax-deferred deferral on
your money in there?
Do you want to pay the intereston the CDs you own every year,
even though you haven't doneanything with your CD.
So I think that's where fixedannuities can play.
Speaker 2 (31:02):
Yeah, I agree with that.
Speaker 1 (31:03):
Now we're talking about the mutual funds If I'm
looking for, let me ask you thisMark if I'm a person that I'm
allocated pretty balanced let'ssay, 50% in stock, 50% in bonds
you know I'm pretty comfortablewith that, but I'm a little
concerned around marketvolatility.
I hope he gets this questionright Is there annuity that
(31:25):
might be able to play a role inthat moderately allocated plan
that helps to maybe address someof your concerns about downside
market.
Speaker 2 (31:37):
Well, sure you could do an indexed 100%, you could do
an indexed annuity to that andthat truly is an alternative,
particularly because you're notinvesting into the stock market.
Speaker 1 (31:47):
That's right.
And what else do you get withthat typical indexed annuity?
Speaker 2 (31:53):
Well, you mitigate any downside value and, as you
would always say that, what isit?
Zero is your hero.
Speaker 1 (31:58):
That's right.
Speaker 2 (31:59):
That's one of the big selling points, and one of the
hardest thing that is,investment managers hate to get
into this spot is when they'vegot to dig out of a negative
return, particularly if it'sdouble digits it takes often
forever to get out of that mess.
Speaker 1 (32:16):
And you and I know we've done this a couple minutes
now in our lives that even afixed income fund, bond funds
they have downside deviation.
They have negative returningyears In 08, core fixed income,
high quality bonds, uscorporates and so forth
(32:36):
Typically the stalwart in everyallocated portfolio core fixed
US bonds that turned in anegative 12 plus percent.
So if I'm trying to get rid ofthat downside deviation, an
indexed annuity can be abeautiful play.
The other cool thing about thatis I don't have to add anything
(32:59):
to that indexed annuity and Imight be able to get it for $0
in expenses.
So if I'm only going to own itfor five or seven years, what do
I care.
I don't need a big income rideron it necessarily.
I don't need to pay a point anda half for this rider and 25
basis points for another.
I just want you to be mysubstitution for some bond
(33:21):
exposure.
Give me a decent single-digitreturn and zero downside
performance.
That tastes good.
That's how someone can actuallyfundamentally change their risk
versus reward ratio of whatthey're willing to invest in,
essentially by taking away someof that risk.
Speaker 2 (33:43):
Yes.
So Fidelity Magellan isFidelity Magellan whether you
buy it but in a brokerageaccount, or you buy it within an
annuity or 401k.
But there's other implicationsbased on time horizon, based on
your willingness to take on riskor mitigate downside, and
(34:04):
that's what you can get withinthe annuity.
That's right.
So is that optionality?
You get to shape what you want.
Speaker 4 (34:11):
You can shape how it grows.
You can shape safety aroundretirement income.
You can shape the minimumamount of death benefit.
You can shape cost of livingincreases in the retirement
income.
How about a shape of a new car?
Speaker 1 (34:23):
Look, if I'm a growth-oriented investor or I
need growth-oriented returnslet's say 7%, 8%, 9%, 10%
returns maybe the index isn'twhat I need.
Maybe I need a variable annuitybecause I can invest in the
market through these investmentaccounts.
But I can do that.
(34:43):
And, like you're talking aboutcustomizing what I add to this
chassis, what if I screweverything up and my investment
thoughts were just out in leftfield?
Well, with the right incomerider, it doesn't matter,
because I can turn that incomeon based off of some theoretic
value called the income base orbenefit base, whatever the term
(35:07):
is the carrier is using.
So I can shape and do it withsome safety nets in annuity land
.
The only safety net I havewithin investment land is
diversification.
That's predominantly my safetynet in investment land.
Speaker 2 (35:23):
You know.
I just want to make anobservation.
You've been working withartificial intelligence.
Speaker 3 (35:28):
Oh my God.
Thank you so much formentioning us, mark Hello.
What's up Can we shut up Hi.
Speaker 2 (35:33):
Oh my God, Over the last two or three weeks here and
now you're with a realblockhead and you're doing
really quite well Am.
Speaker 1 (35:40):
I.
Speaker 2 (35:42):
Yeah you're really doing quite well here.
Speaker 1 (35:45):
All right, we're going to move on to it's not
surprising, it really is.
And when you're in front of meand those doe eyes of yours, I
just get into this zone.
Speaker 2 (35:56):
You and those doe eyes of yours.
I just get into this zone.
Speaker 1 (35:57):
What the hell is going on?
All right, so let's get back topractical considerations when
to consider annuities.
Yeah.
Speaker 2 (36:02):
And, what is important, what questions should
we be asking?
What kind of answers we'relooking for?
Speaker 1 (36:07):
Boy.
Annuities can run the gambit inhow you use it right, and I
think we just touched on some ofthem right Variable annuities,
index annuities if you'relooking at equities and you're
in stocks, mutual funds theymight be something consider.
I'm not saying put 100 of yourmoney into it, but maybe 20
makes sense from a riskadjustment standpoint.
(36:27):
Bonds well, we're back into thefixed annuities and indexed
annuities.
Cash reserves, fixed annuities,targeted date funds that exist
out there, like retirement funds.
You're in a 401k, you've beenin a targeted date.
When you retire, it might makesense to consider some exposure
to an annuity that can lock insome percentage of your income
(36:51):
that you're looking forward toutilizing in retirement Dividend
stocks, income that you'relooking forward to utilizing in
retirement Dividend stocks.
People will make an argumentthat an immediate or deferred
annuities work well compared toa dividend stock account.
I don't know.
I mean, I get what they'retrying to do, but the dividend
stock account and the approachto investing in an account
(37:13):
populated by strongdividend-paying stocks, that's a
hard comparison in my mind todo.
Speaker 2 (37:23):
Can we go back to the target date funds?
There are target date fundsthat used to be up to retirement
.
They were structured that wayand then a bunch of wise guys
got together about 10 years agoand said what are we doing that?
Let's do it through yes,through retirement, and part of
that was to hang on to theassets, of course.
But is that a better idea,through the 401k, or maybe
(37:47):
structuring something within anannuity to accomplish the same
thing?
And what's my optionality to dothat?
Speaker 1 (37:53):
Yeah, I think that in this conversation that we're
having right this second, nomatter what it is, it boils down
to how much income can I derivefrom that?
Could be an IRA 401k, could bea broker.
Speaker 3 (38:07):
So, for instance, the amount of income my IRA can
kick out to me.
Speaker 1 (38:11):
So, when it comes to that, we take risk in investment
land, when we're withdrawingmoney to live on, and that risk
has everything to do with thevolatilities of the marketplace
and the unknown.
And all we got to do is lookback at 2008, for example, and
say, if you retired January 1st2008 with a million dollars and
(38:32):
you were invested like mostpeople and in this case we'll
say 40 stocks, 60 bond you lostalmost 40% of your money and you
withdrew money to live on thatyear.
So in that scenario, when youstart year two and you're down
40% on your nest egg, generatingincome from invested monies
(38:53):
that's the risk that's presentedto the individual investor, the
retiree With annuities youdon't take that risk.
You shift that risk and saysomeone else will take on that
risk.
Speaker 3 (39:04):
What risk?
Speaker 1 (39:04):
Generating income from invested monies because
they're going to promise to sendme a paycheck monthly when I
say to.
And I can structure it in a lotof different ways.
I can structure it, like I said, across both myself and my
spouse.
That survives me as an example.
So we don't have to losesources of income even when one
(39:26):
of us passes if I'm using anannuity.
So there's a role for annuities.
It's just a matter of keep youreyes open, read the small print
and ask some really goodquestions about those annuities
before you pull the trigger, andfeel free to send us a note.
You know text us with aquestion.
We're happy to give you someinsight from our perspective
(39:50):
when it comes to these productsand how they might or may not
work in your best interest overthe course of a 10, 20, 30-year
retirement.
Speaker 2 (39:59):
And I think one of the benefits of this podcast and
I can say this because, as Isaid, I have not contributed
anything to this from a contentstandpoint is that you say for
folks to read the prospectus,what they do get out of this is
a caveat.
After, we're acting or Kelly isacting in this case as your
(40:20):
consumer protection or investorprotection, because he indeed
does know the prospectus and hedoes know where the caveats are,
the potential downsides,because typically what you get
is the sales side of this.
So you get all the potentialbenefits of it explained in
glittering generalities, as it'scalled, and nondescript nouns
(40:46):
to where you really don't know.
And that's why, coming to thispodcast, you kind of get the
skinny more from protecting youwith it.
And I have never seen anindividual make such elaborate
origami out of an annuityperspective as Kelly here.
Speaker 3 (41:02):
Yeah, those are really nice.
I'm fantastic.
Speaker 4 (41:05):
I like to make shadow puppets with my hands.
Speaker 1 (41:06):
I'm on the local tourist beat.
I've got a little trailer.
Speaker 2 (41:10):
You know how people that own Jeeps.
Now they've got all theirlittle ducks out in front
Kelly's got his littleprospectus origami out there.
Speaker 1 (41:16):
That's right, they're all on my tail bumper.
Speaker 2 (41:18):
Yeah well, they're all in the I think you go all
the way back to the firstFederal Reserve chairman of the
Federal Reserve and you've gotthe face.
Likenesses of them are justabsolutely unbelievable.
Speaker 1 (41:29):
They really are.
Speaker 2 (41:30):
Yeah, and I like your Ben Bernanke probably the best.
Yeah, because you got the beardin there, plus the bald head
that was that's artistic?
Yes, that is artistic Very muchso.
Speaker 1 (41:43):
So let's.
There was a lot here, but let'srecap this.
Speaker 2 (41:44):
So let's just start with, let's just bang through.
We went through and just jumpin on this the annuity taxation
we've had qualified, we've gotnon-qualified Taxation.
We've got qualified, we've gotnon-qualified.
With the non-qualified, if youput in $10,000 and it grows to
$20,000, if you are taking moneyout, it's going to be a split
(42:04):
between that, between the gainswhich would be taxed as normal
regular income, and then ofcourse, you'd have something
that says it was a return ofprincipal or premium.
With that, with the qualified,it would all be just like your
401K it would be taxed asordinary income.
And the really cool one is thatRoth.
And what I thought was coolabout that, kelly, is that you
(42:27):
know what you could take thattax-free and that could be
intergenerational For at leastone person, yes, for at least
one person, yeah if I pass away,katrina gets to continue to
spend that money and itcontinues on Again.
Speaker 1 (42:44):
Remember that, unless otherwise noted.
When they talk income for lifeon annuities, assume that is not
adjusted for inflation.
So in bond land you know, ifyou get a 5% straight
interest-paying bond, it'scalled a bullet.
So think of it that way.
You may generate or be paid$5,000 per $100,000 in your
(43:06):
annuity if it's a 5% incomepayout.
The question is what does$5,000 buy 20 years from now
with inflation?
What does it buy in 30 years?
And obviously the answer is notnearly as much as it did at the
starting point.
Speaker 2 (43:23):
So you could have a hedge against taxes with the
Roth.
You could put a rider on therefor COLA, cost of living
adjustment Correct, and you'rewilling to pay for that.
If that's the price you'rewilling to pay for peace of mind
, yep.
So think about the optionalitywith that.
Speaker 1 (43:40):
When I think of it I'm thinking of how do I layer
income in my retirement?
So let's just assume andeverybody's is different, but
let's just say that my SocialSecurity benefit, retirement
benefit, is $24,000.
Let's just say that's what itis.
And if I have an annuity that'spaying me, I don't know another
(44:01):
20 000 a year, I'm up to 45 000an income that's coming into
the house.
If I have other accumulatedsavings and retirement and
brokerage accounts, maybe aninheritance, maybe whatever
that's above and beyond that, Imight be able to take some money
out for lifestyle.
(44:22):
But having my needs, the thingsthat I have to pay for, no
matter what well, I need a placeto live, shelter, I need food.
So I need groceries, I need theutilities I need.
What are the needs?
The coach purse isn't a need.
I mean in economics it's not aneed.
In someone's lifestyle they maylook at that as a need.
(44:42):
So if you can provide 100% ofyour needs in retirement through
reliable income sources and youhave, let's say, a decent
amount of accumulated assetsoutside of it for the all shucks
of the times and so forth andso on, you're in pretty doggone
good shape, because the needstypically are going to run 60,
(45:05):
70% of your spending inretirement.
Speaker 2 (45:09):
Let's just go down this and I have another question
for you.
So we've talked about penalties, early withdrawal, know what
you own, why you own it, and youbetter have a good plan,
because annuities are not theplace where you want to go.
Uh-oh, I'm changing my mind.
That's right, or I shouldn'thave gotten into this.
So with that, we do know.
We've talked about how it canwork with alternative
investments and even, within aparticular asset class, the
(45:32):
optionality that that can createfor you based on taxes and
other riders you can put withthat.
When to consider annuities We'vetalked about that.
What questions you should beasking?
Which still goes back to one ofour original big fab five ones
Know what you own, why you ownit, how you do it compared to
what and what your total costsare.
You know what I did.
(45:54):
I spoke too long to where Ilost my train of thought again.
And that's getting down to like30 seconds, to where I kind of
forget what we were talkingabout, but I know it'll come
back to me.
Speaker 4 (46:09):
Senior moment.
It's brought to you by what wasI talking about?
One a day capsules.
Speaker 3 (46:13):
Oh no, Wow, those capsules really work.
Speaker 2 (46:16):
Annuities do offer a tremendous alternative or
complement with an E to otherinvestment categories.
R&d I agree with you, it is adifferent asset class.
Speaker 1 (46:26):
It is.
We've done the work where we'velooked at the impact of an
indexed annuity within a stockbond portfolio and it does do
what you want it to do.
From a diversificationstandpoint, it can reduce the
overall risk measured byvolatility of the stock bond
plan and it can add incrementalreturn to that plan.
(46:51):
Oh, by the way, if we don'thave riders or anything on this
indexed annuity, it doesn't costme anything.
Next time you look at youraccount, find out how much that
fixed income bond fund ischarging you 0.3, 0.6.
Heck, some of them real returnkind of stuff are up in the 0.9s
, even though their historicalreturns are less than seven.
(47:14):
So it's interesting how youcould actually reduce your costs
, reduce your volatility riskand add incremental return
through the use of astripped-down indexed annuity as
an example.
Speaker 2 (47:26):
And look at how indexed annuities any indexed
annuities 10 years ago, theywere just vilified 15 years ago.
You know why?
Because we didn't understandthem.
Speaker 1 (47:38):
Because the illustration software didn't
have guardrails.
Speaker 2 (47:41):
That's right.
It didn't.
Speaker 1 (47:43):
We look at this more from the asset class and what we
want this to do, and if wearrive with brainstorming that
someone might be well servedfrom an indexed annuity as an
example, it's a matter of nowshopping for the right annuity
from a cost.
Do I want annuity with a bonusor not?
(48:04):
Do I want an income writer ornot?
Maybe I have a health issue andso I want a beefier death
benefit on the annuity, nevermind the income, I don't care
about that.
As an example, there's just somany ways the annuity in a
technician's hand, astrategist's hand, can be
incorporated for the benefit ofthe investor more so than the
(48:29):
benefit of the advisor.
So that's it.
So I think we covered mosteverything.
Yeah, are we in agreement?
Yeah, no, this is good.
Yeah, so that's it.
So I think we covered mosteverything.
Yeah, are we in agreement?
Speaker 2 (48:35):
Yeah, this is good yeah.
Speaker 1 (48:37):
This has been okay.
This has been somewhatinformation, not really.
You probably wasted most ofyour time on this day.
Well, is that?
Is that I hear a big sigh of myGod.
Speaker 2 (48:49):
You know what it's really really good information.
It really is, but it's almost,like you know, it's, I don't
know, a lecture on mosquitoreproduction or the DNA.
Speaker 1 (49:04):
That's what this feels like you know I've spent
the last 45 days.
What are they called Fruit?
Flies or fauna during theDevonian and crustacean period
stuff like that yeah.
But you know, it's reallyreally good stuff.
Speaker 2 (49:19):
It's really okay, and you know what made this such a
great podcast?
What's that?
You didn't get out your stupidcalculator.
Speaker 1 (49:27):
I didn't, I didn't, I took it out way before you got
here.
I was using the hell out ofthat calculator because you know
what I was doing.
This individual has an annuityat a half a million bucks,
paying 3.81% in fees, and do youknow, based on my math, how
much income they'll receive whenthey turn on the faucet?
(49:49):
I'm glad you're asking me 24grand, I was just going to say
24.
Speaker 2 (49:53):
The only reason is because you told me yesterday
Okay $24,000.
And, ladies and gentlemen,that's a 3.81 rounded up from
3.816.
Speaker 3 (50:03):
Wouldn't, rounding up , make it 8.2%.
Speaker 1 (50:06):
Here's the rub Mark's on a roll the annual cost of
that annuity is nearly $21,000.
So every year he's shelling out$21,000 in expenses for the
promise right now of $24,000 ayear for the rest of his life,
while he's still shelling outthose fees, which means that the
contract value will be belowthe value that that fee, that
(50:27):
payout, is calculated off of andyou won't get rid of your
annuity.
Speaker 2 (50:38):
It's a way that they kind of create these things to
lock you into keeping your moneyin insurance company land.
Kelly, you're kind of like thedoge of insurance and investing
annuities.
I mean, you just go in thereand point out where the waste is
.
Here's the interesting thing,and I don't know that this will
make it.
Speaker 1 (50:50):
but here's the interesting thing On that same
guy's situation, we and take thehalf a million away, not
withdraw it, just transfer it toa fixed indexed annuity for the
next five years.
Nothing on it, no fees.
What's 540 at about a 5% returnover five years.
(51:11):
That's go ahead.
You got your calculator 47?
.
Speaker 2 (51:17):
No, you said 500 at 5.4 or something 5% over.
Speaker 1 (51:23):
So what was it?
Oh no, I thought annually.
Just simple, simple calc onthat Don't be doing simple 500
at 5.4.
Speaker 2 (51:32):
I think that's 27.
Speaker 1 (51:34):
638.
Future value after five yearsat 5%.
Speaker 2 (51:36):
Oh, I bet you I'm an annual income off of it.
Speaker 1 (51:38):
No, no, no, oh okay 638, and then you take times 0.
Speaker 2 (51:43):
He's killing me, Claire.
Can you believe this?
Speaker 1 (51:46):
Just think of this In five years that same income off
of this thing would be 46,000.
Of this thing would be 46,000for, and I didn't spend five
years paying 21,000 a year inexpenses on my variable annuity?
Speaker 2 (52:05):
That's huge.
That is huge.
Can I ask a question how manydecimal decimal places to the
right Can you go on pie?
Speaker 1 (52:11):
I mean just you yourself.
Me, I'm good with two, you'regood with two 3.14, isn't it?
I would love a chicken pot pieactually Is that right, Claire.
She's looking up at the ceiling.
She doesn't know.
Look at her.
Look at her.
You're looking in the ceiling.
You're looking for the cobwebsin your forehead a trillion
(52:35):
places.
I think Google has it out to atrillion.
Speaker 2 (52:36):
Yeah, you must be jealous.
Speaker 1 (52:37):
I'm good, I'm good I operate with four decimal points
on my HP.
Thanks for tuning in to anotherepisode of Bullshit on Stills.
We hope you enjoy season twoand find it as refreshingly
honest as ever, because whoneeds financial fluff when you
can have some facts?
Remember we're here to help younavigate through the financial
(52:58):
fog and come out the other sidewith a clear head.
A big thank you to our talentedcontent creators from
bensoundcom, upbeatio andpixabaycom, who make this
journey a little bit funkier.
Special shout out to AndreRossi's funky Street and upbeat
dot IO for providing the groovytheme music that's been setting
(53:21):
the tone for our season twoadventures.
Got a topic you want us totackle or a financial myth
you're curious about?
Drop us a text and let us knowwhat's on your mind.
Until next time, keep yourdetectors on and your sniffers.
Welcome to Bullshit on Stilts.
We're back for season two andlet's just say it's as popular
as a fart in a high-riseelevator.
We're still barking atfinancial fairy dust like a dog
and a mailman, and in thisseason we're serving up a fresh
batch of debunking financialsales tactics and ads you never
(00:23):
asked for, all while helping yousharpen your own bullshit
sniffers for those life-changingfinancial decisions.
So grab your favorite drink,bring your sense of humor and
don't forget your calculator.
Join us on our quest to exposethe financial shenanigans that
even your grandma would callbullshit on.
It's time to get sniffing.
Let's get after it.
Speaker 2 (00:45):
Welcome to Bullshit On Stilts.
I'm Mark Robinson, along withthe premier host of this, kelly
Allo.
We're live.
This is season two, episodefour, and today we're talking
more about annuities.
In this first, on this serieson annuities, we talked about
the different types of annuitiesunpacking annuities, those
(01:06):
being fixed, those beingvariable and fixed indexed
annuities.
The second one was the price ofpeace of mind, total cost of
your annuities, and with theriders.
Number three was on riders,customizing your retirement
safety net, and today we aretalking about taxes and tactics.
(01:27):
Cool, kelly, how are you today?
I'm good man.
Speaker 1 (01:30):
I'm good.
Speaker 2 (01:31):
I'm sorry to present you with such a highly edited or
will be edited opening to this.
You know I've had AI filling infor me for the last several
weeks we have been like reallygood.
Speaker 3 (01:42):
You almost didn't miss it.
Speaker 1 (01:43):
Yeah, that's funny.
No, we wanted to help folksdevelop their bullshit sniffers
when it comes to annuities.
So much of social mediaadvertising and sales is really
done from the insurance side ofthe business and tremendous
amounts of retirement discussiontopics running out of money.
(02:04):
The government owns 50% of your401k.
Speaker 3 (02:07):
Take a listen to Season 1 Financial Fairy Tales,
Episodes 17, 18, and 19.
Speaker 1 (02:14):
All of those talking points are typically going to
drive a person towards annuitypurchases because they're from
insurance-licensed agencies,firms and so forth.
So we thought, hey, let's maybehelp everybody break this down.
And really the first threeannuity episodes we sort of
(02:35):
think of it as boot camp, nothere to tell you what annuity to
buy, but just here to equip youwith some deeper awareness
around how they work, what kindof engines they are, what kind
of customizations you can dowith annuities that you can't
with investment accounts, 401kaccounts.
And today that'll wrap it upwith our final installment in
(02:58):
this annuity series and we'regoing to be focusing on those
taxes, any penalties that mayapply to annuities.
Focusing on those taxes, anypenalties that may apply to
annuities, as well as how do youview an annuity like an asset
class alongside stocks, bonds,funds, indexes, exchange-traded
funds?
Speaker 2 (03:15):
I have a trenchant question for you.
Speaker 4 (03:17):
What does that mean?
Speaker 2 (03:18):
Define trenchant.
Speaker 1 (03:19):
First, because I'm confused.
Really heavy question.
Speaker 4 (03:22):
Oh, I get it, it's like Kelly, stepping on a scale
Talk about distrust with thefederal government.
Speaker 2 (03:28):
Indeed, front and center polarized Yep Overreach
of the government In years past,if not indeed currently.
About financial institutions,yep, whether it's conscious or
subliminal in the consumer asafe haven with insurance
companies, maybe putting somemoney and investing it with an
(03:57):
insurance company with theperception of it being safer and
less affected, as is financialservices and certainly the whims
and edicts from the federalgovernment.
What do you think about that?
Speaker 1 (04:07):
My perception of the average consumer out there is
that anything financial, whetherit's auto insurance, life
insurance, disability insurance,retirement accounts, brokerage
accounts, transferring brokerageaccounts into my trust, all of
that that financial side of theworld I think most people are
(04:28):
more and more skeptical of theadvice they're given by the
professionals that work in thatindustry and, as we've talked,
there are a large percentage, apercentage that do really good
work and put the consumer'sinterest ahead of theirs period.
But there's an awful lot Iwould say majority that there
(04:52):
are times where they don'tnecessarily put their clients'
interests ahead of their own.
So I don't know.
I think I'm taking this way inthe wrong direction.
Speaker 2 (05:04):
No, but it's good.
But I think it was just aquestion.
Look, we'll solve for this andwe'll talk about it next week,
because I'm going to put thisall in front of my peeps on
Reddit.
Okay, All right.
Speaker 1 (05:18):
They'll let you know.
They'll let you know salesprofessional from financial
services.
That comes across veryprofessionally, that is clean in
how they speak, theycommunicate well, they answer
questions directly becausethey're not afraid of the facts
that whatever is associated withwhatever their recommendations
(05:40):
are and I think that there are,and I've met, professionals all
over the place that operate withthat mentality.
But again, I'm going to saythat's the minority of that
marketplace, the professionalsales professionals, marketplace
agents, brokers, advisors.
So I think that consumers arefearful of decision regret right
(06:03):
.
Speaker 2 (06:03):
It makes sense now, but three weeks later.
Speaker 1 (06:05):
Why the hell did I do this?
Speaker 3 (06:07):
kind of decision regret.
Speaker 1 (06:08):
I can't afford this kind of decision regret, I hate
making mistakes, and I thinkthat comes from more than any
place else.
Well, whether it'shigh-pressure sales or not, it's
pressure sales tactics that'sused out there, and before you
know it, you're signing a checkto purchase something or deposit
some money into some account,and you can't remember for the
life of you why that made sense.
Speaker 2 (06:30):
Well, and that comes to the fore, that decision
regret when we talk aboutannuities, because when we talk
about withdrawal, or when wetalk about penalties for early
withdrawal or just cashing it inbefore the surrender period is
over, that can put a real hurton you, which I know you'll be
covering with this yeah, there'salways the yeah buts and with
(06:50):
every pro there's a con andcertainly annuity worlds.
Speaker 1 (06:55):
There are benefits and there are drawbacks to
annuities and when you startunderstanding that which
hopefully this series will helpI think you're in a much better
position to be able to go outand meet with a sales
professional and have thatdiscussion and then compare
their comments against a secondsales professional representing
(07:16):
some other organization, companyor agency and you're in the
catbird seat when you startdeveloping really damn good
questions around stuff that'sbeing said to you.
That's there really thefeatures and benefits.
Let's not pay attention to anyof the drawbacks.
Speaker 2 (07:33):
Yes, so when you mentioned pros and cons, I just
have a question here from thequality of the recording here,
is my ankle monitor providingany kind of feedback?
Speaker 1 (07:42):
I mean the blinking blue light is reflecting off of
underneath the table and alongthe wall here.
Speaker 2 (07:48):
But beyond that, I mean I was going to wear a
full-length dress and I decidedto dress mid-anniversary More
like a sarong.
Well, your inseam is kind ofshort, so I get that.
The slippers are a nice touch.
Speaker 1 (07:57):
Yeah, so, yeah.
So annuities, they're prettycool.
I just, I know that in mypersonal experience most
consumers don't know how toreally look at the annuity.
What's it going to do for me?
Why would I ever think of usingan annuity?
What happens once I'm investedin an annuity?
(08:18):
You know what are my choicesthereafter.
Am I limited?
Am I not limited?
You know?
Blah, blah, blah.
Speaker 2 (08:24):
So what we have here and this will be, I think these
are podcasts that are trulyarchival, Only because delete
isn't an option.
By that I mean, there arethings that folks can go back to
and refer to and get juststraight arrow approaches and
explanations and definitions tothis.
Speaker 1 (08:44):
So in fact this is one of the things we talked
about.
If you're sitting in your carand you arrived to your meeting
at Fidelity Investments or ABCFinancial or whomever, and
you're going in for a meeting itmight be a review meeting and
you own annuities it may be ameeting around retirement and
you suspect that there'll beannuity discussions or you know
(09:06):
that there'll be annuitydiscussions these things 20, 30
minutes long you can pop that inand just kind of refresh your
brain and jot down I don't knowtwo, three, four key questions.
That would be a hugelydifferentiated experience for
you going in with some knowledge.
And again, I think you've saidthis time and time again, mark
(09:29):
that it's not exactly the answerthey give you while you're
asking the question.
How do they respond and whatdoes your belly tell you?
Is it truth?
Is it not true?
Oh wow, that's a really goodpoint Are they trustworthy now
more, or are they lesstrustworthy based on how they
answer the question, if theyeven do?
Speaker 4 (09:49):
answer those questions.
Speaker 2 (09:51):
That's what I kind of envision Even though they're
speaking Even though they'respeaking, and why I know that
this series here, this four-partseries here, is so good and so
definitive, is because I didn'twrite one word of it.
That makes sense.
Speaker 4 (10:04):
I can tell there are no 75 cent words.
Speaker 2 (10:06):
Let's get going here.
Let's get into section one.
This is just titled annuitytaxation and you're going to
cover qualified annuities taxbenefits and withdrawal taxation
.
Kelly.
Speaker 1 (10:20):
Yeah.
So we're going to do kind of ahigher touch to this.
We're not tax advisors, We'vejust lived around this stuff for
a few decades.
We've interacted withies inthere.
I took money out of mybrokerage account and I swung
(10:49):
over and I put 50 grand into anannuity.
That is a non-qualified, inother words, it's not a
retirement account.
Now the cool part about thenon-qualified the growth you get
from the annuity while you ownit until you withdraw any money
out of it is tax deferred, justlike a retirement account.
So that's pretty cool.
(11:09):
If you're looking for taxdeferred growth on non
retirement dollars, it could bea kind of a cool solution for
you to consider the other andwe'll come back to this but the
other type of annuity is calleda qualified annuity.
So that type of annuity you'regoing to have retirement funds
inside the annuity.
(11:29):
It will operate just like a401k, just like an IRA, in that
pre-tax dollars go in.
You're not taxed on them goingin or you get your tax deduction
at the end of the year going in.
It grows tax deferred and justlike an IRA, a qualified annuity
(11:51):
with retirement funds in it.
They have a required minimumdistribution, meaning that as of
right now, when you're 73 yearsold, you have to start taking
out some money little by littlefrom the annuity.
So those two, the non-qualifiedand qualified annuities, are
sort of where the tax discussionstarts.
Have I lost you yet?
Nope, Okay, Nope, nope, Okay.
You want me to keep going?
Keep going, Okay.
(12:12):
So let's talk about just focuson the growth inside of an
annuity, Either thenon-qualified or the qualified.
When I add money or value to myannuity, I'm accumulating
annuity value.
That's called growth.
When I take my growth out of anannuity, it will be taxed as
(12:36):
ordinary income tax Shit.
Speaker 4 (12:38):
My pencil broke.
What did he say?
Speaker 1 (12:39):
It will be taxed as ordinary income tax.
It's not taxed as capital gainslike my investment brokerage
account would be, or myindividually owned trading
account at Schwabcom orsomething.
It will be taxed as ordinaryincome.
How that's treated thenon-retirement version, the
(13:01):
non-qualified account.
Speaker 3 (13:02):
Yeah, the taxable annuity.
Speaker 1 (13:03):
If I put $10,000 in the annuity and there's $10,000
of growth, my annuity now isworth $20,000.
If I were to take out all$20,000 in one fell swoop, half
$10,000 would be consideredgrowth and that half would be
taxed at my ordinary income taxlevel Is that called the premium
(13:26):
, or is that called basis?
Speaker 2 (13:27):
How do insurance companies categorize that?
Speaker 1 (13:31):
So principal tax, basis tax, cost basis premium,
all of them are used and I'veseen them used interchangeably.
So they all mean the same thing, which is the money you put in
the after-tax, money you putinto the non-qualified annuity
is not taxed when you take itback out of your annuity.
It's only in that taxablesituation only the gain will
(13:55):
face ordinary income tax,whatever it is the year that you
withdraw money.
Speaker 2 (13:58):
And if one from a practical matter, from a tax
reporting, the report that theyget year-end, it's a 1099-R.
Yeah, the the 1099R will showwhat was principal or premium.
Speaker 1 (14:11):
That's exactly right.
Yep, yep.
Here's where the wrinkle.
Let's stay on the non-qualified, the taxable annuity side for a
second.
Let's say that I withdrew of myexample, put 10 grand in.
It's worth 20,000 now and Ididn't withdraw all 20,000.
Let's say I just took two grandout.
How do you think that's goingto be taxed?
Do you think it's half and half?
(14:33):
Do you think it's only myprincipal or do you think it's
only gain?
I hate multiple choice.
Speaker 2 (14:38):
I love multiple choice questions.
I think it would be the gainthat is the correct answer.
Speaker 1 (14:45):
So it's a last in, first out approach to taxation,
meaning the last dollar thatwent into my annuity.
When I withdraw the two grand,that's $2,000 of the last 2000
that went into my annuitycontract.
Since I just put 10 grand inthe new dollars, the other
10,000 that's grown, that'sconsidered new I'm going to get
(15:05):
all my gain first if I'mwithdrawing it in a couple grand
here, a couple grand there, how?
Speaker 2 (15:12):
many more instances?
Can you recount or itemizewhere it is last in first out?
Speaker 1 (15:19):
Oh gosh, you can opt for that in your brokerage
accounts.
In terms of how you wantwithdrawals to be treated, you
can ask it to be pro rata.
You can do a lot of differentthings there, but I mean, the
only thing that I ever think oflast in, first out is going to
be an annuity.
Are you thinking of anything?
Speaker 2 (15:38):
else.
No, I'm not.
Yeah, you hit it.
Speaker 1 (15:39):
Hit the one I wanted you to yeah, because when you're
trading in your your, yourpersonal account, your trust
account and you you buy a fund,that's your premium, your cost
basis, your starting point ofyour principal investment amount
.
When you sell that let's say Ihave been buying that over the
last five years I have all sortsof different purchase points
(16:05):
that create different sizes ofgain or loss in that stock
itself and I can go in andliterally, as a surgeon, cut out
the specific purchase dategiven the gain or loss that I'm
trying to achieve with that salewhen I sell that position or a
portion of that position.
(16:25):
So it's much more finite andmanageable in the brokerage side
, I think.
Speaker 2 (16:30):
Yeah, it sure is, yeah, it sure is yeah.
Speaker 1 (16:32):
The only tool you have on the annuity side that
gets you out of the last andfirst out scenario is when you
have this taxable annuity, thisnon-qualified annuity, and
instead of just grabbing moneyout a few times a year, once a
year, you say, hey, I want toannuitize this contract and I
(16:53):
want the contract to begin topay me, in my example, a monthly
payout from my annuity for therest of my life, or whatever my
decision is.
It could be a 10-year period,certain it could be for the rest
of my life, or whatever mydecision is, it could be a 10
year period, certain it could befor the rest of my life and my
spouse's life.
Whatever that decision is, whenI annuitize my payment now, the
(17:14):
tax treatment will be part ofthe money that's sent to me is
principal and part is gain.
So only part of that paycheckthat I get paid out will be
taxable.
And then you brought this up.
At the end of the year you'llget a 1099R for your tax
preparation and it'll depict onthat form what dollar amount is
(17:37):
taxable and what dollar amountis not.
So this is complicated stuff.
I mean, this isn't for thefaint of heart, and why we're
talking about this is there's somuch more to the annuity
decision than just income forlife, and that's unfortunately
what's really sold out therevery hard.
Is that income for life?
Speaker 2 (17:56):
scenario.
We've covered the taxation.
We've focused a lot on thenon-qualified.
Do you?
Speaker 1 (18:05):
want to go to the qualified now.
Yeah, so before we punch out ofthis, just the qualified is far
easier If it's a traditionalretirement account, meaning that
I put pre-tax dollars in, I gotmy tax write-off and that
someday when I take money out ofthis it's going to be fully
taxed, meaning ordinary tax.
That's the traditionalretirement account.
(18:25):
I want an example.
Speaker 3 (18:25):
Don't you dare ask for an example.
Speaker 4 (18:27):
But conflicted, because it means he will talk
more.
Speaker 1 (18:30):
Do not ask An example , if you're retiring and you're
working with an advisor andlet's say you have 500 grand in
your 401k, let's say 100 grandgoes to a annuity.
In that event, from your 401k,that 100 grand in that annuity
and anything inside the annuity,from here on out when you
withdraw money out, will befully taxable.
Speaker 2 (18:51):
And is that clear that that annuity is registered?
Speaker 1 (18:54):
as an individual retirement account Annuity or
retirement annuity, I think, iswhat they usually call it.
So fully taxable again,ordinary income.
Speaker 3 (19:03):
Yeah, but what about my Roth annuity?
Speaker 1 (19:05):
If you have a Roth IRA.
Now the annuities can be kindof interesting with a Roth IRA
because you still have no taxesassociated with withdrawals, but
you could also have no taxes onincome payments for life, or
maybe for life across yours andyour surviving spouse's life.
So Roth annuities are prettycool from a standpoint of tax
(19:29):
deferral tax-free, with somesafety nets.
If you're of the opinion, youwant.
Speaker 2 (19:34):
Yeah, that's really cool, it is.
Yeah, mark's so regal in hisdress, or?
Speaker 1 (19:38):
salon.
Speaker 4 (19:41):
From my angle, all I see is a flashing blue light.
Speaker 2 (19:44):
Okay, so we've gone through withdrawal taxations.
Let's move to early withdrawalpenalties yeah.
Speaker 1 (19:50):
So this is something that a lot of people don't know,
and when you're putting moneyinto an annuity, if you withdraw
money out of the annuity beforeyou're 59 and a half, you will
face that dreaded 10% penalty onthe withdrawn amount of money.
Speaker 4 (20:08):
That would be the IRS early withdrawal penalty of 10%
and that applies to the taxablegrowth portion of the contract.
Speaker 1 (20:15):
So you don't want to be 20 putting your money into an
annuity.
If you ever think you're goingto have to take money out of
that annuity for whatever'sgoing on in life before you're
59 and a half, that might not bethe best way and that's not
exclusive to an annuity.
Speaker 2 (20:28):
If you are under 59 and a half and you put money
into an annuity and you're 35and you want to take money out,
that would be the same case withif you opened up an IRA.
Speaker 1 (20:38):
If you open up an IRA , yeah.
Yes, yeah, yeah yeah 59 and ahalf penalty rule.
It exists with the annuities.
I was just a little surprisedthat it existed with
non-qualified annuities, thetaxable side of the annuities.
Speaker 2 (20:49):
So again, putting money to work in an annuity, be
very clear as to what thosepenalties could be, but we know
why there's a penalty, becauseyou're keeping taxation from
home For 200 points.
Who is the government?
Well, that's right, that'sright, that's exactly.
Speaker 1 (21:04):
Yeah yeah.
One of the things that I wantto be clear is terminology with
life insurance is incrediblyimportant Life insurance
products to include annuities.
When I say withdraw money outof an annuity, I mean you're
taking the money out of theannuity wrapper, away from the
insurance company and a pay andchecks being sent to your house.
(21:25):
That's a withdrawal.
If you have an annuity and yousay I don't need this annuity
anymore, I'm going to move mymoney from annuity A to annuity
B, that's not a withdrawal, thatwould be a transfer, and in
that case you can transferannuity monies in a very
tax-wise manner called atax-free exchange.
(21:47):
1035.
Speaker 2 (21:48):
Yeah, tax code yeah, 1035.
Speaker 1 (21:50):
Yeah, so just be very clear when you're asking a
question to a sales professional, what happens?
What would I pay in surrendersand fees and admin charges or
whatever, and early withdrawalpenalties if I withdraw money?
Speaker 2 (22:07):
that's a huge deal.
All right, can I let's staywithin the insurance realm here.
Can I take an annuity andtransfer that to an insurance
policy, or vice versa?
Can I take an ira and do thatyou?
Speaker 1 (22:22):
can um wow, I think here he knows Watch him shake
policy, and I think the answeris no, he knows you watch him
(22:48):
shake his head to find theanswer you can.
Life policy to annuity, but notannuity life policy annuity to
annuity you can, but let'sdouble check that because I
might be yeah, and just to our,to people that listen to the
podcast.
Speaker 2 (23:04):
The reason we're able to get all this fact-checked is
we really start this podcast.
It might be 30 minutes or so.
We start it right after oursecond bowl of Lucky Charms in
the morning.
Speaker 4 (23:14):
I hope he isn't doing the Scottish coat thingy under
his dress.
Speaker 2 (23:16):
We put it on pause again when we're screwing up
that might be four or five timeswe take a dino-nuggies break
around one or two half hour onthe nap with the mats.
Then we come back in this andkind of fix all this stuff up.
So we'll have all the facts forthat by the end of this podcast
.
Let's see what this is.
(23:37):
You did that with suchprecision.
Did you ever fact check on apresidential debate or anything?
Speaker 1 (23:44):
I used to fact check CNBC at night.
I would.
I would sit there and I wouldtype in things that I didn't
understand.
I'd pause it and I'd type insomething I didn't understand.
I'd review it quick and I'mlike, oh, now I got it.
And then I'd unpause it so Icould track some of the Jedi
Knight conversations that weregoing on with Kudlow and Company
and some of those econ-focusedthings.
Speaker 3 (24:05):
Yeah, that's what I did.
Sounds like a dating profilefrom whyyoucantgetadatecom.
Speaker 1 (24:10):
So we did that fax check?
Yep, we did and we found thatthat was correct.
You can do a 1035 from a lifepolicy to an annuity, assuming
there's cash value to do thattransfer of.
But you can't do a 1035tax-free transfer from an
annuity to a life insurancepolicy.
Speaker 2 (24:29):
So what are strategies to avoid penalties?
Speaker 1 (24:32):
So they're not great and wonderful.
There's a few strategies youcan use right.
One strategy is to make sureyou're clear as to any annual
penalty-free withdrawal option.
You may have Usual andcustomary 10% of the contract
value.
Going back to our $20,000annuity, 10% is two grand.
(24:53):
I could withdraw two grand outannually and have no penalties.
That means surrender penaltiesby the annuity contract itself.
It's not speaking to the 59 anda half IRS penalty.
That's one way to say gee whiz,what are the penalty freeze?
(25:14):
Did he say freeze?
Because in the future, if mycontract is projected to be X, I
could take 10% out and I couldhelp pay for I don't know my
property taxes at both myresidence and my cabin up north,
as an example.
The other way is to justunderstand that there are
penalty withdrawals, that thereis a 59 and a half age early
(25:37):
withdrawal penalty.
So when you're purchasing anannuity, be very clear that that
money is not money you'rerelying on over the next five to
10 years, that you have othersources to turn around and grab
five grand out of 10 grand hereor there if you need it, so that
you don't knock on the penaltysurrender fee window as it may
(26:01):
apply to your annuity.
Speaker 2 (26:02):
This comes down to one of the podcasts we did on
the Fab Five, which would fallunder really number one and
number two know what you own andwhy you own it, which would
minimize or completely obviateyou taking Obviate.
Speaker 4 (26:16):
What is to stave off, to prevent or avert, obviate?
Speaker 3 (26:19):
That is so Jeopardy of you.
Speaker 2 (26:21):
Completely obviate you taking withdrawal penalties
because you decided this wasn'tright for me.
That's right.
No, that's exactly right.
Speaker 1 (26:28):
Plan right yeah, because, again, if someone's
speaking to you and convincingyou of all the benefits, the
features, the bells and whistles, but they're not talking about
some of the drawbacks or thingsto be mindful of when you put
this golf club, so to speak,into your financial plan, of
investment holdings and so forth, and it's something that should
(26:51):
be thought of.
I sometimes think of annuityand penalty phases and
surrenders, sort of like.
I do a bond.
If I'm buying a 10-year bond, Idon't expect to sell the bond
in my example here for 10 years,so I don't care what happens
between now and 10 years.
Outside of that issue, we'regoing bankrupt.
I don't expect to sell the bondin my example here for 10 years
, so I don't care what happensbetween now and 10 years.
Outside of that issue, we'regoing bankrupt, I don't care.
And sort of.
(27:11):
When you look at the annuitylandscape, I think that's the
mentality you have to have.
By the way, one little caveatthat a lot of people don't
necessarily talk about withannuities, if I put my money
into, let's say, an indexedannuity and I'm doing it for
really good reasons we'll talkabout those next when I take my
money if I reallocate 100% ofthe annuity money back into
(27:35):
stocks, bonds, mutual funds,index funds, that will be the
moment I pay taxes on the gain,whatever's in that contract.
So it's not quite the same asreallocating in other instances
with other investments.
That bill, that tax bill, willbe paid if I reallocate money
(27:55):
out of an annuity wrapper intoregular old stocks, bonds, funds
, land.
And I think that's something tokeep in mind because I think
we'll be talking about how doyou use annuities when you're
considering what you want toachieve within your investment
plans.
Speaker 2 (28:11):
Let's go there right now, is that?
Speaker 1 (28:13):
all right yeah.
Speaker 2 (28:14):
Let's talk about annuities as alternatives
perhaps to other packagedproducts where you can invest in
the marketplace.
Speaker 1 (28:22):
Yeah, To me, alternatives is a huge space
right In the investment world.
Yes, Things like hedge funds,commodity funds, private equity
funds, master limitedpartnerships I mean all sorts of
alternatives.
And what's rarely considered analternative in investment
advisory land will be how do we,could we, should we,
(28:44):
incorporate an annuity or maybedifferent annuities into our
overall plan?
Would it be beneficial?
And so when I think of theannuities, I do think of them as
an alternative asset.
They bring lots of interestingcharacteristics to an otherwise
normally asset allocated,investmentocated investment plan
(29:06):
of stocks, bonds, cash, somealternatives normally a real
estate investment trust, maybelittle precious metals in there.
Speaker 2 (29:13):
Yeah, so they're a modifier in this degree.
When you're talking about ETFsand mutual funds and UITs,
they're a modifier of this, thesame generic investment being at
an asset class like equities,but it's a modifier to the
taxation on that.
Is that how you're meaning this?
Speaker 1 (29:33):
I sort of look at-.
Speaker 2 (29:34):
For the correlate person.
How would you describe that?
Speaker 1 (29:37):
It depends on what we're talking about, where we're
talking about.
So, if we're talking aboutmutual funds I own mutual funds
I can put money in my stockfunds, my bond funds, my
alternative investment fundsthose are my, that's my
landscape.
Well, if we're talking aboutprincipal protection, if we're
(30:00):
talking about having a bunch ofcash on hand so that I can take
paychecks out of my cash highyield savings account if we're
talking about I want to investand take very little risk to my
principal and we're talkingabout a realm that is lived in
by certificate of deposits frombanks, us Treasury bonds, fully
guaranteed by the US government.
We're talking about high-yieldsavings accounts, fully insured
(30:24):
by the FDIC.
So we're talking about a market.
What also fits there is fixedannuities, and so if a fixed
annuity is offering you let'ssay, in my example, 1% higher
interest rate on your money thana high-yield savings account,
it's guaranteed, it's insuredand it's backed by a sinking
fund in the state, might besomething worth looking at.
(30:46):
Just might be.
Oh, by the way, do you want alittle tax-deferred deferral on
your money in there?
Do you want to pay the intereston the CDs you own every year,
even though you haven't doneanything with your CD.
So I think that's where fixedannuities can play.
Speaker 2 (31:02):
Yeah, I agree with that.
Speaker 1 (31:03):
Now we're talking about the mutual funds If I'm
looking for, let me ask you thisMark if I'm a person that I'm
allocated pretty balanced let'ssay, 50% in stock, 50% in bonds
you know I'm pretty comfortablewith that, but I'm a little
concerned around marketvolatility.
I hope he gets this questionright Is there annuity that
(31:25):
might be able to play a role inthat moderately allocated plan
that helps to maybe address someof your concerns about downside
market.
Speaker 2 (31:37):
Well, sure you could do an indexed 100%, you could do
an indexed annuity to that andthat truly is an alternative,
particularly because you're notinvesting into the stock market.
Speaker 1 (31:47):
That's right.
And what else do you get withthat typical indexed annuity?
Speaker 2 (31:53):
Well, you mitigate any downside value and, as you
would always say that, what isit?
Zero is your hero.
Speaker 1 (31:58):
That's right.
Speaker 2 (31:59):
That's one of the big selling points, and one of the
hardest thing that is,investment managers hate to get
into this spot is when they'vegot to dig out of a negative
return, particularly if it'sdouble digits it takes often
forever to get out of that mess.
Speaker 1 (32:16):
And you and I know we've done this a couple minutes
now in our lives that even afixed income fund, bond funds
they have downside deviation.
They have negative returningyears In 08, core fixed income,
high quality bonds, uscorporates and so forth
(32:36):
Typically the stalwart in everyallocated portfolio core fixed
US bonds that turned in anegative 12 plus percent.
So if I'm trying to get rid ofthat downside deviation, an
indexed annuity can be abeautiful play.
The other cool thing about thatis I don't have to add anything
(32:59):
to that indexed annuity and Imight be able to get it for $0
in expenses.
So if I'm only going to own itfor five or seven years, what do
I care.
I don't need a big income rideron it necessarily.
I don't need to pay a point anda half for this rider and 25
basis points for another.
I just want you to be mysubstitution for some bond
(33:21):
exposure.
Give me a decent single-digitreturn and zero downside
performance.
That tastes good.
That's how someone can actuallyfundamentally change their risk
versus reward ratio of whatthey're willing to invest in,
essentially by taking away someof that risk.
Speaker 2 (33:43):
Yes.
So Fidelity Magellan isFidelity Magellan whether you
buy it but in a brokerageaccount, or you buy it within an
annuity or 401k.
But there's other implicationsbased on time horizon, based on
your willingness to take on riskor mitigate downside, and
(34:04):
that's what you can get withinthe annuity.
That's right.
So is that optionality?
You get to shape what you want.
Speaker 4 (34:11):
You can shape how it grows.
You can shape safety aroundretirement income.
You can shape the minimumamount of death benefit.
You can shape cost of livingincreases in the retirement
income.
How about a shape of a new car?
Speaker 1 (34:23):
Look, if I'm a growth-oriented investor or I
need growth-oriented returnslet's say 7%, 8%, 9%, 10%
returns maybe the index isn'twhat I need.
Maybe I need a variable annuitybecause I can invest in the
market through these investmentaccounts.
But I can do that.
(34:43):
And, like you're talking aboutcustomizing what I add to this
chassis, what if I screweverything up and my investment
thoughts were just out in leftfield?
Well, with the right incomerider, it doesn't matter,
because I can turn that incomeon based off of some theoretic
value called the income base orbenefit base, whatever the term
(35:07):
is the carrier is using.
So I can shape and do it withsome safety nets in annuity land
.
The only safety net I havewithin investment land is
diversification.
That's predominantly my safetynet in investment land.
Speaker 2 (35:23):
You know.
I just want to make anobservation.
You've been working withartificial intelligence.
Speaker 3 (35:28):
Oh my God.
Thank you so much formentioning us, mark Hello.
What's up Can we shut up Hi.
Speaker 2 (35:33):
Oh my God, Over the last two or three weeks here and
now you're with a realblockhead and you're doing
really quite well Am.
Speaker 1 (35:40):
I.
Speaker 2 (35:42):
Yeah you're really doing quite well here.
Speaker 1 (35:45):
All right, we're going to move on to it's not
surprising, it really is.
And when you're in front of meand those doe eyes of yours, I
just get into this zone.
Speaker 2 (35:56):
You and those doe eyes of yours.
I just get into this zone.
Speaker 1 (35:57):
What the hell is going on?
All right, so let's get back topractical considerations when
to consider annuities.
Yeah.
Speaker 2 (36:02):
And, what is important, what questions should
we be asking?
What kind of answers we'relooking for?
Speaker 1 (36:07):
Boy.
Annuities can run the gambit inhow you use it right, and I
think we just touched on some ofthem right Variable annuities,
index annuities if you'relooking at equities and you're
in stocks, mutual funds theymight be something consider.
I'm not saying put 100 of yourmoney into it, but maybe 20
makes sense from a riskadjustment standpoint.
(36:27):
Bonds well, we're back into thefixed annuities and indexed
annuities.
Cash reserves, fixed annuities,targeted date funds that exist
out there, like retirement funds.
You're in a 401k, you've beenin a targeted date.
When you retire, it might makesense to consider some exposure
to an annuity that can lock insome percentage of your income
(36:51):
that you're looking forward toutilizing in retirement Dividend
stocks, income that you'relooking forward to utilizing in
retirement Dividend stocks.
People will make an argumentthat an immediate or deferred
annuities work well compared toa dividend stock account.
I don't know.
I mean, I get what they'retrying to do, but the dividend
stock account and the approachto investing in an account
(37:13):
populated by strongdividend-paying stocks, that's a
hard comparison in my mind todo.
Speaker 2 (37:23):
Can we go back to the target date funds?
There are target date fundsthat used to be up to retirement
.
They were structured that wayand then a bunch of wise guys
got together about 10 years agoand said what are we doing that?
Let's do it through yes,through retirement, and part of
that was to hang on to theassets, of course.
But is that a better idea,through the 401k, or maybe
(37:47):
structuring something within anannuity to accomplish the same
thing?
And what's my optionality to dothat?
Speaker 1 (37:53):
Yeah, I think that in this conversation that we're
having right this second, nomatter what it is, it boils down
to how much income can I derivefrom that?
Could be an IRA 401k, could bea broker.
Speaker 3 (38:07):
So, for instance, the amount of income my IRA can
kick out to me.
Speaker 1 (38:11):
So, when it comes to that, we take risk in investment
land, when we're withdrawingmoney to live on, and that risk
has everything to do with thevolatilities of the marketplace
and the unknown.
And all we got to do is lookback at 2008, for example, and
say, if you retired January 1st2008 with a million dollars and
(38:32):
you were invested like mostpeople and in this case we'll
say 40 stocks, 60 bond you lostalmost 40% of your money and you
withdrew money to live on thatyear.
So in that scenario, when youstart year two and you're down
40% on your nest egg, generatingincome from invested monies
(38:53):
that's the risk that's presentedto the individual investor, the
retiree With annuities youdon't take that risk.
You shift that risk and saysomeone else will take on that
risk.
Speaker 3 (39:04):
What risk?
Speaker 1 (39:04):
Generating income from invested monies because
they're going to promise to sendme a paycheck monthly when I
say to.
And I can structure it in a lotof different ways.
I can structure it, like I said, across both myself and my
spouse.
That survives me as an example.
So we don't have to losesources of income even when one
(39:26):
of us passes if I'm using anannuity.
So there's a role for annuities.
It's just a matter of keep youreyes open, read the small print
and ask some really goodquestions about those annuities
before you pull the trigger, andfeel free to send us a note.
You know text us with aquestion.
We're happy to give you someinsight from our perspective
(39:50):
when it comes to these productsand how they might or may not
work in your best interest overthe course of a 10, 20, 30-year
retirement.
Speaker 2 (39:59):
And I think one of the benefits of this podcast and
I can say this because, as Isaid, I have not contributed
anything to this from a contentstandpoint is that you say for
folks to read the prospectus,what they do get out of this is
a caveat.
After, we're acting or Kelly isacting in this case as your
(40:20):
consumer protection or investorprotection, because he indeed
does know the prospectus and hedoes know where the caveats are,
the potential downsides,because typically what you get
is the sales side of this.
So you get all the potentialbenefits of it explained in
glittering generalities, as it'scalled, and nondescript nouns
(40:46):
to where you really don't know.
And that's why, coming to thispodcast, you kind of get the
skinny more from protecting youwith it.
And I have never seen anindividual make such elaborate
origami out of an annuityperspective as Kelly here.
Speaker 3 (41:02):
Yeah, those are really nice.
I'm fantastic.
Speaker 4 (41:05):
I like to make shadow puppets with my hands.
Speaker 1 (41:06):
I'm on the local tourist beat.
I've got a little trailer.
Speaker 2 (41:10):
You know how people that own Jeeps.
Now they've got all theirlittle ducks out in front
Kelly's got his littleprospectus origami out there.
Speaker 1 (41:16):
That's right, they're all on my tail bumper.
Speaker 2 (41:18):
Yeah well, they're all in the I think you go all
the way back to the firstFederal Reserve chairman of the
Federal Reserve and you've gotthe face.
Likenesses of them are justabsolutely unbelievable.
Speaker 1 (41:29):
They really are.
Speaker 2 (41:30):
Yeah, and I like your Ben Bernanke probably the best.
Yeah, because you got the beardin there, plus the bald head
that was that's artistic?
Yes, that is artistic Very muchso.
Speaker 1 (41:43):
So let's.
There was a lot here, but let'srecap this.
Speaker 2 (41:44):
So let's just start with, let's just bang through.
We went through and just jumpin on this the annuity taxation
we've had qualified, we've gotnon-qualified Taxation.
We've got qualified, we've gotnon-qualified.
With the non-qualified, if youput in $10,000 and it grows to
$20,000, if you are taking moneyout, it's going to be a split
(42:04):
between that, between the gainswhich would be taxed as normal
regular income, and then ofcourse, you'd have something
that says it was a return ofprincipal or premium.
With that, with the qualified,it would all be just like your
401K it would be taxed asordinary income.
And the really cool one is thatRoth.
And what I thought was coolabout that, kelly, is that you
(42:27):
know what you could take thattax-free and that could be
intergenerational For at leastone person, yes, for at least
one person, yeah if I pass away,katrina gets to continue to
spend that money and itcontinues on Again.
Speaker 1 (42:44):
Remember that, unless otherwise noted.
When they talk income for lifeon annuities, assume that is not
adjusted for inflation.
So in bond land you know, ifyou get a 5% straight
interest-paying bond, it'scalled a bullet.
So think of it that way.
You may generate or be paid$5,000 per $100,000 in your
(43:06):
annuity if it's a 5% incomepayout.
The question is what does$5,000 buy 20 years from now
with inflation?
What does it buy in 30 years?
And obviously the answer is notnearly as much as it did at the
starting point.
Speaker 2 (43:23):
So you could have a hedge against taxes with the
Roth.
You could put a rider on therefor COLA, cost of living
adjustment Correct, and you'rewilling to pay for that.
If that's the price you'rewilling to pay for peace of mind
, yep.
So think about the optionalitywith that.
Speaker 1 (43:40):
When I think of it I'm thinking of how do I layer
income in my retirement?
So let's just assume andeverybody's is different, but
let's just say that my SocialSecurity benefit, retirement
benefit, is $24,000.
Let's just say that's what itis.
And if I have an annuity that'spaying me, I don't know another
(44:01):
20 000 a year, I'm up to 45 000an income that's coming into
the house.
If I have other accumulatedsavings and retirement and
brokerage accounts, maybe aninheritance, maybe whatever
that's above and beyond that, Imight be able to take some money
out for lifestyle.
(44:22):
But having my needs, the thingsthat I have to pay for, no
matter what well, I need a placeto live, shelter, I need food.
So I need groceries, I need theutilities I need.
What are the needs?
The coach purse isn't a need.
I mean in economics it's not aneed.
In someone's lifestyle they maylook at that as a need.
(44:42):
So if you can provide 100% ofyour needs in retirement through
reliable income sources and youhave, let's say, a decent
amount of accumulated assetsoutside of it for the all shucks
of the times and so forth andso on, you're in pretty doggone
good shape, because the needstypically are going to run 60,
(45:05):
70% of your spending inretirement.
Speaker 2 (45:09):
Let's just go down this and I have another question
for you.
So we've talked about penalties, early withdrawal, know what
you own, why you own it, and youbetter have a good plan,
because annuities are not theplace where you want to go.
Uh-oh, I'm changing my mind.
That's right, or I shouldn'thave gotten into this.
So with that, we do know.
We've talked about how it canwork with alternative
investments and even, within aparticular asset class, the
(45:32):
optionality that that can createfor you based on taxes and
other riders you can put withthat.
When to consider annuities We'vetalked about that.
What questions you should beasking?
Which still goes back to one ofour original big fab five ones
Know what you own, why you ownit, how you do it compared to
what and what your total costsare.
You know what I did.
(45:54):
I spoke too long to where Ilost my train of thought again.
And that's getting down to like30 seconds, to where I kind of
forget what we were talkingabout, but I know it'll come
back to me.
Speaker 4 (46:09):
Senior moment.
It's brought to you by what wasI talking about?
One a day capsules.
Speaker 3 (46:13):
Oh no, Wow, those capsules really work.
Speaker 2 (46:16):
Annuities do offer a tremendous alternative or
complement with an E to otherinvestment categories.
R&d I agree with you, it is adifferent asset class.
Speaker 1 (46:26):
It is.
We've done the work where we'velooked at the impact of an
indexed annuity within a stockbond portfolio and it does do
what you want it to do.
From a diversificationstandpoint, it can reduce the
overall risk measured byvolatility of the stock bond
plan and it can add incrementalreturn to that plan.
(46:51):
Oh, by the way, if we don'thave riders or anything on this
indexed annuity, it doesn't costme anything.
Next time you look at youraccount, find out how much that
fixed income bond fund ischarging you 0.3, 0.6.
Heck, some of them real returnkind of stuff are up in the 0.9s
, even though their historicalreturns are less than seven.
(47:14):
So it's interesting how youcould actually reduce your costs
, reduce your volatility riskand add incremental return
through the use of astripped-down indexed annuity as
an example.
Speaker 2 (47:26):
And look at how indexed annuities any indexed
annuities 10 years ago, theywere just vilified 15 years ago.
You know why?
Because we didn't understandthem.
Speaker 1 (47:38):
Because the illustration software didn't
have guardrails.
Speaker 2 (47:41):
That's right.
It didn't.
Speaker 1 (47:43):
We look at this more from the asset class and what we
want this to do, and if wearrive with brainstorming that
someone might be well servedfrom an indexed annuity as an
example, it's a matter of nowshopping for the right annuity
from a cost.
Do I want annuity with a bonusor not?
(48:04):
Do I want an income writer ornot?
Maybe I have a health issue andso I want a beefier death
benefit on the annuity, nevermind the income, I don't care
about that.
As an example, there's just somany ways the annuity in a
technician's hand, astrategist's hand, can be
incorporated for the benefit ofthe investor more so than the
(48:29):
benefit of the advisor.
So that's it.
So I think we covered mosteverything.
Yeah, are we in agreement?
Yeah, no, this is good.
Yeah, so that's it.
So I think we covered mosteverything.
Yeah, are we in agreement?
Speaker 2 (48:35):
Yeah, this is good yeah.
Speaker 1 (48:37):
This has been okay.
This has been somewhatinformation, not really.
You probably wasted most ofyour time on this day.
Well, is that?
Is that I hear a big sigh of myGod.
Speaker 2 (48:49):
You know what it's really really good information.
It really is, but it's almost,like you know, it's, I don't
know, a lecture on mosquitoreproduction or the DNA.
Speaker 1 (49:04):
That's what this feels like you know I've spent
the last 45 days.
What are they called Fruit?
Flies or fauna during theDevonian and crustacean period
stuff like that yeah.
But you know, it's reallyreally good stuff.
Speaker 2 (49:19):
It's really okay, and you know what made this such a
great podcast?
What's that?
You didn't get out your stupidcalculator.
Speaker 1 (49:27):
I didn't, I didn't, I took it out way before you got
here.
I was using the hell out ofthat calculator because you know
what I was doing.
This individual has an annuityat a half a million bucks,
paying 3.81% in fees, and do youknow, based on my math, how
much income they'll receive whenthey turn on the faucet?
(49:49):
I'm glad you're asking me 24grand, I was just going to say
24.
Speaker 2 (49:53):
The only reason is because you told me yesterday
Okay $24,000.
And, ladies and gentlemen,that's a 3.81 rounded up from
3.816.
Speaker 3 (50:03):
Wouldn't, rounding up , make it 8.2%.
Speaker 1 (50:06):
Here's the rub Mark's on a roll the annual cost of
that annuity is nearly $21,000.
So every year he's shelling out$21,000 in expenses for the
promise right now of $24,000 ayear for the rest of his life,
while he's still shelling outthose fees, which means that the
contract value will be belowthe value that that fee, that
(50:27):
payout, is calculated off of andyou won't get rid of your
annuity.
Speaker 2 (50:38):
It's a way that they kind of create these things to
lock you into keeping your moneyin insurance company land.
Kelly, you're kind of like thedoge of insurance and investing
annuities.
I mean, you just go in thereand point out where the waste is
.
Here's the interesting thing,and I don't know that this will
make it.
Speaker 1 (50:50):
but here's the interesting thing On that same
guy's situation, we and take thehalf a million away, not
withdraw it, just transfer it toa fixed indexed annuity for the
next five years.
Nothing on it, no fees.
What's 540 at about a 5% returnover five years.
(51:11):
That's go ahead.
You got your calculator 47?
.
Speaker 2 (51:17):
No, you said 500 at 5.4 or something 5% over.
Speaker 1 (51:23):
So what was it?
Oh no, I thought annually.
Just simple, simple calc onthat Don't be doing simple 500
at 5.4.
Speaker 2 (51:32):
I think that's 27.
Speaker 1 (51:34):
638.
Future value after five yearsat 5%.
Speaker 2 (51:36):
Oh, I bet you I'm an annual income off of it.
Speaker 1 (51:38):
No, no, no, oh okay 638, and then you take times 0.
Speaker 2 (51:43):
He's killing me, Claire.
Can you believe this?
Speaker 1 (51:46):
Just think of this In five years that same income off
of this thing would be 46,000.
Of this thing would be 46,000for, and I didn't spend five
years paying 21,000 a year inexpenses on my variable annuity?
Speaker 2 (52:05):
That's huge.
That is huge.
Can I ask a question how manydecimal decimal places to the
right Can you go on pie?
Speaker 1 (52:11):
I mean just you yourself.
Me, I'm good with two, you'regood with two 3.14, isn't it?
I would love a chicken pot pieactually Is that right, Claire.
She's looking up at the ceiling.
She doesn't know.
Look at her.
Look at her.
You're looking in the ceiling.
You're looking for the cobwebsin your forehead a trillion
(52:35):
places.
I think Google has it out to atrillion.
Speaker 2 (52:36):
Yeah, you must be jealous.
Speaker 1 (52:37):
I'm good, I'm good I operate with four decimal points
on my HP.
Thanks for tuning in to anotherepisode of Bullshit on Stills.
We hope you enjoy season twoand find it as refreshingly
honest as ever, because whoneeds financial fluff when you
can have some facts?
Remember we're here to help younavigate through the financial
(52:58):
fog and come out the other sidewith a clear head.
A big thank you to our talentedcontent creators from
bensoundcom, upbeatio andpixabaycom, who make this
journey a little bit funkier.
Special shout out to AndreRossi's funky Street and upbeat
dot IO for providing the groovytheme music that's been setting
(53:21):
the tone for our season twoadventures.
Got a topic you want us totackle or a financial myth
you're curious about?
Drop us a text and let us knowwhat's on your mind.
Until next time, keep yourdetectors on and your sniffers.
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