Demystifying Annuities: Insights into Immediate, Fixed, and Variable Options

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Are annuities the golden ticket to financial security or a risky gamble that could leave you high and dry? Join Rob Wolf, as he cuts through the noise and lay bare the real facts about annuities. We dive deep into the five major types: immediate, fixed, fixed indexed, registered indexed linked, and variable annuities. This episode promises to unravel the intricacies of each, offering you a crystal-clear understanding of their unique features, benefits, and limitations. Whether you’re seeking guaranteed lifetime income or an alternative to bank CDs, we provide the insights you need to make informed financial decisions.

Discover how immediate annuities can serve as a hedge against longevity risk, ensuring you never outlive your resources, and why they may not be the perfect fit for everyone. We also explore why fixed annuities might be a safer bet for those wary of market volatility. If you’re serious about retirement planning and want to navigate the complex world of annuities with confidence, this episode is a must-listen. Tune in for a balanced and comprehensive look at how these financial products can fit into your broader investment strategy and potentially secure your financial future.

Learn more about Wolf Financial Advisory:
https://www.wolffinancialadvisory.com/

Disclosure: Robert Wolf, James Koenig, Sara Wolf, and Michael Rock are investment advisor representatives of, and securities and advisory services are offered through, USA Financial Securities. Member FINRA/SIPC. Additionally, Amanda Opulskas and Adam Wallace are registered non-solicitors of USA Financial Securities, A registered investment advisor. 6020 E. Fulton St., Ada, MI 49301. Wolf Advisory Services and Wolf Financial Advisory are not affiliated with USA Financial Securities.

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax, or estate planning advice. Investing carries an inherent element of risk and it is in everyone’s best interests to consult a tax, legal, or investment professional. The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities, member FINRA/SIPC. A registered investment adviser. Wolf Financial Advisory and USA Financial Securities are not affiliated entities.

Episode Transcript

Voiceover (00:00):
The strategies and concepts discussed are for
educational purposes only and donot represent specific
investment, tax or estateplanning advice.
Investing carries an inherentelement of risk and it is in
everyone's best interests toconsult a tax, legal or
investment professional.
Past performance does notguarantee future results.
Securities and advisoryservices are offered through USA

(00:22):
Financial Securities memberFINRA SIPC, a registered
investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.
Wolf Financial Advisory.
When it's important to you,it's important to us.
This is the Wolf FinancialPodcast.

(00:42):
Here's your host, Rob Wolf.

Rob Wolf (00:51):
Good day everyone.
Rob Wolf here with the WolfFinancial Podcast, and today
we're going to talk aboutannuities.
Boy you know what?
There's a lot of emotionalangst sometimes when annuities
are brought up, and it could beanywhere from man this is the
best investment in the world toman.
I got sold some just terribleinvestment advice.
It was an annuity and it wasthe worst thing ever.

(01:12):
So it's all over the place.
And what is the big deal aboutannuities?
So we're going to be talkingabout this to give some insight
on some of the things to beconsidering what they do, what
they don't do so that you canmake a informed decision as to
whether or not they would besomething that would be

(01:34):
appropriate within your plan.
So, first of all, what is anannuity?
An annuity is an investmentproduct that is issued by a life
insurance company.
So life insurance companiescould be Prudential, bright
House, nationwide.

(01:55):
Those are all insurancecompanies that many people have
heard of, and their form ofinvestments are annuities.
So there are many types ofannuities.
There's really five major typesright now.
There's immediate annuitiesfixed annuities fixed indexed

(02:18):
annuities registered indexedlinked annuities.
And then bearable annuities,indexed, linked annuities and
then bearable annuities.
There are some other types ofannuities that aren't as well
known and I'm not going to getinto those today.
But let's just break down alittle bit of each of these
types of annuities and whysomeone may want to have that in

(02:41):
their overall portfolio.
So what is an immediate annuity?
Well, the best way to look atan immediate annuity it's very
similar to if you had a pensionplan with your previous
workplace and they built up thismoney and they turned that big

(03:04):
lump sum that they built up toyou into a pension payment.
And a pension payment is justan immediate annuity.
They guarantee you income thatyou can never outlive.
And if you choose to want toinsure a spouse so that if you
pass away first for a lowermonthly payment, you can make

(03:27):
sure that spouse either gets 50%, 75% or even up to 100% of your
annuity payment and then, uponyour death and or of your spouse
if your spouse is covered thepayment stops.
It's just that simple.
So an immediate annuityprotects you from living too

(03:48):
long.
Longevity risk, right, we allthink about.
Well, what if I live too short?
You know, we think about lifeinsurance and what's needed if
we die prematurely.
But what if we live too longand we outlive our resources?
That's when an immediateannuity can make sense.
Now we don't see a ton ofimmediate annuities anymore.

(04:11):
There's a lot of goodalternatives to that.
I think one of the biggestdisadvantages of the immediate
annuity is that in many casesthere's no legacy involved.
Upon the death of the twospouses it's gone.
The insurance company ends upkeeping the money.
Now sometimes there could be aprovision called a period

(04:34):
certain in there where they'llguarantee payments for X number
of years regardless of how longyou live.
But in general, upon the deathof the annuitant and also a
covered spouse, in most casesthose payments cease and then
the potential beneficiariesdon't get any more money.
So we don't see a ton ofimmediate annuity can be a

(05:06):
really nice complement to theiroverall investment strategy
because they're not worriedabout leaving a legacy to
anybody and it takes away thelongevity risk of living too
long.
Immediate annuity pretty simple.
They issue a guaranteed fixedrate for a period of years

(05:27):
anywhere from three to fiveyears.
On average, some go out morethan seven years and you just
get a stated interest rate forthe period of time that you sign
up with the annuity, theafter-tax annuity, the money
grows tax deferred, so if youdon't use the money you don't
have to pay taxes on it untilyou draw the money out.
When you draw the money out,the gain comes out.

(05:49):
First you got to pay taxes onit and then you get into your
original cost basis, which comesback to you income tax free.
So many times people,especially CD type of people
that are looking to tie up intoa guaranteed fixed rate account
where they don't want to takeany principal risk with their

(06:09):
money, they'll get into a fixedannuity that also provides some
tax deferral benefits that theywould not otherwise get in a
regular bank CD.
You can also own a fixedannuity with a traditional IRA.
Of course the tax deferral onthe traditional IRA is a
non-issue because you would gettax deferral in any IRA.

(06:34):
It doesn't have to be in anannuity.
But you sometimes see what arecalled qualified fixed annuities
for those people that arelooking at more of that
guaranteed fixed rate they'rereally concentrating on and
they're not really worried aboutthe tax benefits.
Okay, so that's fixed annuities.
The next type of annuity is afixed indexed annuity.

(06:55):
Now we're getting into somecomplexity the immediate annuity
and fixed annuities.
Those are pretty easy.
It's easy.
You just got a few terms to gothrough and you know what you
got Fixed indexed annuities.
Now they're linking theinterest you make to a stock
market indice.
It may go up but it won't godown.

(07:17):
Your principal is guaranteed.
The idea behind a fixed indexedannuity is you try to link the
interest to a major stock marketand to see to make more
interest over the long run.
However, because there's noguarantee an index will go up,
it still gives you the downsideof protection, but no guaranteed

(07:38):
interest as far as accumulatingon the fixed indexed annuity.
Okay.
So you got that on the fixedindexed annuity, okay.
So, you got that.
So that would be immediateannuity, then fixed annuity,
fixed indexed annuity.
If you think of a big line andyou're going from left to right,
the immediate annuity and fixedannuity have the least amount

(07:58):
of risk.
The fixed indexed annuity isgoing to be right in the middle
and then you're going to getinto the registered indexed
linked annuities RILAs for shortand the variable annuities.
The registered indexed linkedannuities allow you to link the
money to a stock market to seeif the market goes up, you make

(08:20):
money up to a cap.
If it goes down, they give yousome downside protection, but
not complete downside protection.
You could build buffers of 10,15, 20%, as an example, where if
the S&P, as an example, goesdown 10% and you got a buffer of
15%, you won't lose any money.

(08:41):
Registered indexed linkedannuities tend to have a little
bit more upside potential thanthe fixed indexed annuities.
Again, you're taking on alittle bit more risk.
Therefore, you should get alittle bit more return.
Finally, you got the variableannuities.
Those are just like your 401ks,the IRAs that you may have

(09:05):
outside of annuities.
They have the investments.
They have the mutual fund-likeinvestments within it.
You can make a ton of money.
You can lose a ton of money.
Those are the ones that havethe most, perhaps, consternation
associated with them, becausethere could be a lot of fees

(09:27):
involved with a variable annuityand, depending on all the bells
and whistles that you can add,those fees can add up pretty
seriously.
Three to four percent right offthe bat, before you make any
money, are in fees are in fees.
Okay, so annuities range thegambit as far as safe to

(09:50):
extremely potentially aggressive.
The more aggressive you get,the more upside you have, but
you also have more principalrisk as well.
So is an annuity right for you?
It all depends.
What are your overallobjectives?
Are your overall objectivesguaranteed income?
Well, if you like the idea ofguaranteed income, annuities can

(10:13):
be a wonderful strategy toconsider within your portfolio.
If you are looking to do thisfor legacy purposes, there are
annuities that offer guaranteeddeath benefit riders that will
allow you to get a lifeinsurance type of benefit even

(10:38):
if you are uninsurable to buytraditional life insurance.
Really fantastic way for thosepeople that are looking to still
take risk, but they know thatthere's some health issues that
could reduce their overall lifeexpectancy where they could have

(10:59):
a guaranteed death benefitbuilding up, regardless of
results of the underlyinginvestment.
So, worst case scenario, theheirs get the death benefit
value.
So, worst case scenario, theerrors get the death benefit
value.
Best case scenario, they getthe market value of the annuity
because the overall investmentexperience worked out well.

(11:21):
So annuities are complexproducts.
It's not a simple.
They're good, they're bad.
There's no such thing as goodor bad investments.
The only thing that makessomething good or bad is if it
is right for you and yoursituation.
Uh, if your situation calls forX, y, z and you instead get ABC

(11:45):
, guess what?
It's probably not a goodinvestment for you.
Guess what it's probably not agood investment for you.
However, if you need X, y and Zand you get X, y and Z and it
fits the criteria you're lookingfor, then it could be a very
suitable investment within youroverall financial plan.

(12:07):
Again, the biggest thing to dois get educated.
Understand how these thingswork.
Understand why, if somebody isproposing you consider having an
annuity in your portfolio, whatis the rationale?

(12:30):
What is it that the advisorbelieves the benefit would be
for you, and does that benefitmake sense for where you are in
your situation?
Remember, you're still thedriver of this financial
planning discussion.
You are the one that makes thedecisions.
You need to be taking theownership and understanding and
demanding to be educated on whatyour options are so that, as

(12:54):
options are presented, youunderstand them in such a way
that you can make a properdecision with that.
So again, complex productsabsolutely Can they be wonderful
investment tools within yourportfolio?
Absolutely.
Get educated, understand andtake ownership and if you do

(13:17):
that, you will make the rightdecision when it comes to those
types of products.
This is Rob Wolf with the WolfFinancial Podcast.

Voiceover (13:28):
Thank you for listening to the Wolf Financial
Podcast.
For additional informationabout our firm, please visit our
websitewolfadvisorieservicescom.
Wolf Financial Advisory.
The strategies and conceptsdiscussed are for educational
purposes only and do notrepresent specific investment,

(13:49):
tax or estate planning advice.
Investing carries an inherentelement of risk and it is in
everyone's best interests toconsult a tax, legal or
investment professional.
Past performance does notguarantee future results.
Securities and advisoryservices are offered through USA
Financial Securities MemberFINRA SIPC, a registered
investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.
Member FINRA SIPC, a registeredinvestment advisor.

(14:10):
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.
There are significantdifferences between an
investment in an annuity and acertificate of deposit offered
by a financial institution.
Cds are bank products and areFDIC insured.
Guarantees on insuranceproducts, like an annuity, are
made by the claims-payingability of the underlying

(14:30):
insurance company and are notFDIC-insured.
In the event of an earlywithdrawal, an investor will pay
a penalty on the creditedinterest on a certificate of
deposit.
Annuities are subject to asurrender schedule which will
reduce the principal balance ofthe account and is not limited
to only the interest earned.
Annuities are best suited forlong-term investors.
To only the interest earned.
Annuities are best suited forlong-term investors.
Some features mentioned may beavailable only by the purchase

(14:52):
of a rider.
An optional addition to anannuity or life insurance policy
that is available for anadditional fee Depending on the
product interest credited may belimited to caps and or
participation rates.
Withdrawals prior to age 59 anda half may be subject to an
additional 10% tax penalty.
Surrender charges may apply.
Guarantees are provided by theclaims paying ability of the

(15:14):
underlying insurance company.