May 16, 2024 • 12 mins
Are annuities the right investment for your retirement? In today’s episode, we’re diving into the world of annuities to help you understand what they are, how they work, and whether they might be a good fit for your retirement strategy. Whether you're new to the concept or looking to deepen your understanding, this conversation should give you some important items to think about.
Here’s some of what we discuss in this episode:
- What is an annuity and how do they work?
- What are some benefits of annuities?
- What are some drawbacks of annuities?
- Who should consider annuities?
- How can annuities fit into a retirement portfolio?
WAYS TO CONNECT:
Book a 15-minute discovery call with the team here: https://calendly.com/rachel-bwg
Visit https://bulmanwealth.com/marcos-lemus to learn more about Marcos Lemus and the other members of the team.
If you have any questions about what we discussed or anything else in your financial plan, email us at ask@bulmanwealth.com. You can also reach the team by phone at (916) 458-8199.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
What is an annuity?
Is an annuity right for you?
Are they as bad or as good aspeople say they are?
How do they work?
We will dig into some of thedetails around annuities in
today's episode of the yourFinancial Compass podcast.
Speaker 2 (00:23):
Welcome.
You are listening to the BowmanWealth Group's Financial
Compass Podcast, a showdedicated to helping you
successfully navigate to andthrough your retirement.
Our Financial Compass processgoes beyond traditional holistic
financial planning.
We care as much about you andyour lifestyle as we do about
your plan.
Your hosts are Bowman WealthGroup financial advisors who,
(00:45):
for more than two decades, haveprovided financial leadership
for those they serve.
Speaker 1 (00:51):
This is Marcos Lemus.
I'm a financial advisor atBullman Wealth Group in
Roseville, California, and youare listening to your Financial
Compass.
Thanks, first and foremost, toour listeners.
If this is your first timejoining us and tuning in, thank
you.
If you are a returning listener, welcome back.
We appreciate all the support.
If anything sticks out andresonates with you today maybe
(01:11):
you've got comments, maybeyou've got questions or feedback
please feel welcome to reach usat our email address.
It's the best way to get incontact with us.
That email is ask atbullmanwealthcom.
That's A-S-K atbullmanwealthcom.
That's A-S-K atbullmanwealthcom.
Every episode we focus onspecific topics, questions that
(01:32):
people often share and have incommon in the financial world,
and today's episode is aroundthe topic of annuities.
You may have heard of thembefore, maybe you haven't.
We'll talk a little bit aboutthem today.
So what is an annuity?
How do they work?
Is it the right investmentvehicle for me?
We will begin to uncover someof these answers today.
So running out of money remainsa top concern for retirees.
(01:53):
According to a recent survey,only 40% of Americans feel
confident about their retirementsavings.
When working with a client ontheir retirement planning, there
are a few things that can bereally beneficial to solving
their biggest concern runningout of money.
What is one way retirees cansupplement their retirement
income?
Well, there are several ways,but one of those ways is a
(02:15):
pension, and some annuities havethe potential to be utilized as
a pension style investment.
The greater predictable incomethat a retiree has, the less
pressure it puts on the rest oftheir assets.
So, naturally, if a person hasa healthy amount of income from
various assets that they cancount on, plus social security
(02:36):
benefits, there's certainly lesspressure on the rest of their
financial assets 401ks, iras,roth IRAs in order to fill a
large portion of thesupplemental income.
The greater the amount ofpredictable income an investor
has, the more flexibility theywill have to utilize other
investments, like stocks andbonds, more strategically.
(02:57):
Unfortunately, pensions are nolonger the norm.
According to the Bureau ofLabor Statistics, 84% of
full-time workers had pensionsin 1981.
In 2022, only 15% of privateindustry workers had access to a
defined benefit plan.
So, knowing such a large numberof retirees do not have a
(03:20):
workplace pension, what is apossible solution?
Well, annuities haveincreasingly become an important
ingredient to the retirementrecipe because they offer
retirees asset protection andpredictable income.
Annuities can be used to achievemultiple strategic objectives,
and there are different types ofannuities and annuity plans
(03:41):
from many different companiesthat offer them.
Let's talk a little bit aboutwhat an annuity is.
An annuity is aninsurance-based financial
product designed to accept fundsby an individual, by an
investor, which will be paidback to that individual at a
later date, in either a streamof income payments or as a lump
(04:02):
sum.
It is the contract or promisewith the insurance company to
take in payments over a periodof time or in a lump sum until a
certain event occurs.
Now that event could be.
A certain amount of time haspassed, a certain age has been
reached or death, when thecompany pays it back at a
(04:22):
certain rate or all at once fora predetermined period of time,
including for life or lifetimepayments.
Now this may seem complicated,but the general concept is
pretty simple.
You place money with aninsurance company in exchange
for an income stream for aspecific period of time or for
(04:43):
life that grows at either afixed rate or changing rate,
depending on the type of annuity.
While annuities can be acornerstone of your retirement
plan, it's important to know howone might work and how it might
be best fit for you.
The more informed you are aboutyour choices, the better
prepared you will be to make themost prudent decision.
(05:05):
There are pros and cons toalmost every investment vehicle
and it's important to know thoseup front before making a final
decision.
We always want to take intoconsideration each person's
individual situation, sinceeveryone's portfolio needs are
different.
Needs are different.
(05:26):
It's important to be educatedon annuities, to understand your
options, to understand how theywork, understand the benefits,
the drawbacks and everything inbetween before adding an annuity
to your financial plan.
You want to select a companywith a high rating by an
independent rating agency likeStandard Poor's or Moody's.
So what are some benefits thatannuities include?
(05:46):
Well, annuities have somebenefits, such as tax benefits.
While the annuity depositsaren't tax deductible, you don't
have to pay taxes on the growthand on the earnings until you
begin taking withdrawals, so thetax deferral can have quite an
effect on the growth of aninvestment.
(06:07):
Another benefit is paymentoptions, right?
These certain payment optionscan help supplement social
security and other incomestreams, right?
We talked about either, youknow, obviously a lump sum, but
a more common option is a streamof income over a period of time
or lifetime payments.
Another benefit is riskmitigation.
So, if we're looking at a wholecomprehensive portfolio and
(06:32):
we're taking a small portion andpositioning it into an annuity,
well, that effectivelymitigates some of the risk that
would normally be experienced inthe markets in terms of
volatility.
Now, annuities might not beright for everyone.
So what are some of thedrawbacks or things to consider
before purchasing an annuity?
Well, annuities are generallylong-term products and a lot of
(06:58):
times they have a penalty forsurrendering early.
So the terms can be differentdepending on which company,
depending on which product, butit's important to understand
that timeframe If there's apotential need for all of the
money or all those funds to besurrendered before that term is
up.
Another thing is the rate ofreturn.
(07:18):
The rate of return could belower than what may be earned in
a strong stock market.
Another thing is payments.
So you know this can be set uplike a pension, but this
generally does not increasepayments.
There are no cost of livingadjustments to outpace inflation
or keep up with inflation, soit's one thing to keep in mind.
(07:40):
The last thing is complicatedcontracts.
Some of these contracts can bevery complicated and very
in-depth.
So it's important to partnerwith somebody who understands
each product, understands eachcompany and can help break down
the contracts and make it easilydigestible so that you can
understand and making the rightdecision for you and your
(08:03):
situation.
Lastly, fees A lot of times youwant to make sure and your
situation.
Lastly, fees A lot of times youwant to make sure that you're
aware of any fees.
If you're paying a fee for sometype of writer or some feature,
you want to make sure youunderstand what that fee is and
what you're getting in return.
Despite any negative press onannuities there are good
annuities just as there are badones.
It's also important to notethat an annuity would likely
(08:26):
never be your only source ofretirement income.
An annuity should work togetherwith your other retirement
assets as part of an overallcomprehensive financial plan.
So you might be asking yourselfhow do I know if an annuity is
right for me?
We just talked about some ofthe pros and cons of annuities
and there's certainly a lot toconsider.
So what questions can you, aslisteners, ask yourselves when
(08:50):
considering an annuity?
Do you have concerns aboutrunning out of money in
retirement?
How much monthly income do youneed to maintain your desired
retirement lifestyle once yourpaycheck stops, once your salary
stops?
Do you understand your risktolerance and are you currently
taking on too much investmentrisk?
Are you currently working withan independent fiduciary who is
(09:12):
legally and morally obligated toact in your best interests?
So how does Bowman Wealth Grouptypically put an annuity to use
in someone's portfolio, if it'sa fit.
As the saying goes, if youdon't have a plan, you're
planning to fail.
This is an old adage.
That's true for a lot of things, but certainly true when it
comes time for retirement.
In terms of a comprehensivefinancial plan, it almost again
(09:34):
should never be someone's fullportfolio, but as a portion of a
portfolio in order to remove alarge degree of the market
volatility.
This would be one way to take asmall portion off of the
volatility table, so to speak,that the markets would normally
expose funds to.
It is always important to lookat everything as a whole at a
(09:54):
high level, to make sure thateach part of the portfolio is
playing its respective roleproperly and fits in with the
overall plan, and that'sessentially how we at Bowman
Wealth Group utilize annuitiesif it makes sense.
Now, this has been obviously avery quick run through of
annuities and this is justscratching the surface.
(10:14):
As I mentioned, these can getcomplicated and not all
annuities are created equal.
There are many differentcomponents, many different
features, different annuities,different types of annuities,
and we can certainly dig intothat in another episode as we
dive deeper into annuityfeatures, additional riders and
things that may set annuities,and we can certainly dig into
that in another episode as wedive deeper into annuity
features, additional riders andthings that may set annuities
(10:35):
apart from others.
So, as always, I want to thankyou guys so much for listening.
If anything you heard resonatedwith you today, you want to dig
deeper into anything inparticular, you want to see if
this fits your situation or not,feel free to reach out to us at
that email address.
Again, that email is ask atBowman wealthcom.
(10:56):
Special thanks to our listenersand subscribers.
If you are new to our podcast,give us a follow.
Keep an eye out for futureepisodes.
We appreciate all the supportfrom you guys.
Join us next time on yourfinancial compass.
This has been your host, marcosLemus with Bowman Wealth Group.
Take care.
Speaker 2 (11:20):
The following content is for informational purposes
only.
It is not intended to provideany tax or legal advice or
provide the basis for anyfinancial decisions, nor is it
intended to be a projection ofcurrent or future performance or
an indication of future results.
Purchases are subject tosuitability.
This requires a review of aninvestor's objective, risk
tolerance and time horizons.
Investing always involves riskand possible loss of capital.
(11:40):
Opinions expressed are solelythose of Bowman Wealth Group and
our editorial staff.
The information contained inthis material has been derived
from sources believed to bereliable, but does not guarantee
accuracy and completeness anddoes not report to be a complete
analysis of the materialsdiscussed.
Any references to protectionbenefit or lifetime income
generally refer to fixedinsurance products, never
securities or investmentproducts.
Insurance and annuity productguarantees are backed by the
(12:01):
financial strength and claimspaying ability of the issuing
insurance company.
An annuity is intended to be along-term tax-deferred
retirement vehicle.
Earnings are taxable asordinary income when distributed
and if withdrawn before age 59and a half, may be subject to a
10% federal tax penalty.
If the annuity will fund an IRAor other tax-qualified plan,
the tax deferral feature offersno additional value.
Qualified distributions from aRoth IRA are generally excluded
(12:22):
from gross income, but taxes andpenalties may apply to
non-qualified distributions.
Consult a tax advisor forspecific information.
This is not a recommendation tosurrender or otherwise purchase
an insurance product.
You should review your specificpolicy and financial situation
with your advisor.
Any statements or opinionsexpressed should in no way be
construed or interpreted as asolicitation to sell or offer to
sell advisory services to anyresidents of any state other
(12:43):
than the states where otherwiselegally permitted.
Advisory services are offeredthrough Chris Bullman Inc.
Dba.
Bullman Wealth Group.
Registration as an investmentadvisor does not imply a certain
level of skill or training.
Insurance products and servicesare offered and sold through
Chris Bowman Inc.
Dba.
Bwg Insurance Agency.
What is an annuity?
Is an annuity right for you?
Are they as bad or as good aspeople say they are?
How do they work?
We will dig into some of thedetails around annuities in
today's episode of the yourFinancial Compass podcast.
Speaker 2 (00:23):
Welcome.
You are listening to the BowmanWealth Group's Financial
Compass Podcast, a showdedicated to helping you
successfully navigate to andthrough your retirement.
Our Financial Compass processgoes beyond traditional holistic
financial planning.
We care as much about you andyour lifestyle as we do about
your plan.
Your hosts are Bowman WealthGroup financial advisors who,
(00:45):
for more than two decades, haveprovided financial leadership
for those they serve.
Speaker 1 (00:51):
This is Marcos Lemus.
I'm a financial advisor atBullman Wealth Group in
Roseville, California, and youare listening to your Financial
Compass.
Thanks, first and foremost, toour listeners.
If this is your first timejoining us and tuning in, thank
you.
If you are a returning listener, welcome back.
We appreciate all the support.
If anything sticks out andresonates with you today maybe
(01:11):
you've got comments, maybeyou've got questions or feedback
please feel welcome to reach usat our email address.
It's the best way to get incontact with us.
That email is ask atbullmanwealthcom.
That's A-S-K atbullmanwealthcom.
That's A-S-K atbullmanwealthcom.
Every episode we focus onspecific topics, questions that
(01:32):
people often share and have incommon in the financial world,
and today's episode is aroundthe topic of annuities.
You may have heard of thembefore, maybe you haven't.
We'll talk a little bit aboutthem today.
So what is an annuity?
How do they work?
Is it the right investmentvehicle for me?
We will begin to uncover someof these answers today.
So running out of money remainsa top concern for retirees.
(01:53):
According to a recent survey,only 40% of Americans feel
confident about their retirementsavings.
When working with a client ontheir retirement planning, there
are a few things that can bereally beneficial to solving
their biggest concern runningout of money.
What is one way retirees cansupplement their retirement
income?
Well, there are several ways,but one of those ways is a
(02:15):
pension, and some annuities havethe potential to be utilized as
a pension style investment.
The greater predictable incomethat a retiree has, the less
pressure it puts on the rest oftheir assets.
So, naturally, if a person hasa healthy amount of income from
various assets that they cancount on, plus social security
(02:36):
benefits, there's certainly lesspressure on the rest of their
financial assets 401ks, iras,roth IRAs in order to fill a
large portion of thesupplemental income.
The greater the amount ofpredictable income an investor
has, the more flexibility theywill have to utilize other
investments, like stocks andbonds, more strategically.
(02:57):
Unfortunately, pensions are nolonger the norm.
According to the Bureau ofLabor Statistics, 84% of
full-time workers had pensionsin 1981.
In 2022, only 15% of privateindustry workers had access to a
defined benefit plan.
So, knowing such a large numberof retirees do not have a
(03:20):
workplace pension, what is apossible solution?
Well, annuities haveincreasingly become an important
ingredient to the retirementrecipe because they offer
retirees asset protection andpredictable income.
Annuities can be used to achievemultiple strategic objectives,
and there are different types ofannuities and annuity plans
(03:41):
from many different companiesthat offer them.
Let's talk a little bit aboutwhat an annuity is.
An annuity is aninsurance-based financial
product designed to accept fundsby an individual, by an
investor, which will be paidback to that individual at a
later date, in either a streamof income payments or as a lump
(04:02):
sum.
It is the contract or promisewith the insurance company to
take in payments over a periodof time or in a lump sum until a
certain event occurs.
Now that event could be.
A certain amount of time haspassed, a certain age has been
reached or death, when thecompany pays it back at a
(04:22):
certain rate or all at once fora predetermined period of time,
including for life or lifetimepayments.
Now this may seem complicated,but the general concept is
pretty simple.
You place money with aninsurance company in exchange
for an income stream for aspecific period of time or for
(04:43):
life that grows at either afixed rate or changing rate,
depending on the type of annuity.
While annuities can be acornerstone of your retirement
plan, it's important to know howone might work and how it might
be best fit for you.
The more informed you are aboutyour choices, the better
prepared you will be to make themost prudent decision.
(05:05):
There are pros and cons toalmost every investment vehicle
and it's important to know thoseup front before making a final
decision.
We always want to take intoconsideration each person's
individual situation, sinceeveryone's portfolio needs are
different.
Needs are different.
(05:26):
It's important to be educatedon annuities, to understand your
options, to understand how theywork, understand the benefits,
the drawbacks and everything inbetween before adding an annuity
to your financial plan.
You want to select a companywith a high rating by an
independent rating agency likeStandard Poor's or Moody's.
So what are some benefits thatannuities include?
(05:46):
Well, annuities have somebenefits, such as tax benefits.
While the annuity depositsaren't tax deductible, you don't
have to pay taxes on the growthand on the earnings until you
begin taking withdrawals, so thetax deferral can have quite an
effect on the growth of aninvestment.
(06:07):
Another benefit is paymentoptions, right?
These certain payment optionscan help supplement social
security and other incomestreams, right?
We talked about either, youknow, obviously a lump sum, but
a more common option is a streamof income over a period of time
or lifetime payments.
Another benefit is riskmitigation.
So, if we're looking at a wholecomprehensive portfolio and
(06:32):
we're taking a small portion andpositioning it into an annuity,
well, that effectivelymitigates some of the risk that
would normally be experienced inthe markets in terms of
volatility.
Now, annuities might not beright for everyone.
So what are some of thedrawbacks or things to consider
before purchasing an annuity?
Well, annuities are generallylong-term products and a lot of
(06:58):
times they have a penalty forsurrendering early.
So the terms can be differentdepending on which company,
depending on which product, butit's important to understand
that timeframe If there's apotential need for all of the
money or all those funds to besurrendered before that term is
up.
Another thing is the rate ofreturn.
(07:18):
The rate of return could belower than what may be earned in
a strong stock market.
Another thing is payments.
So you know this can be set uplike a pension, but this
generally does not increasepayments.
There are no cost of livingadjustments to outpace inflation
or keep up with inflation, soit's one thing to keep in mind.
(07:40):
The last thing is complicatedcontracts.
Some of these contracts can bevery complicated and very
in-depth.
So it's important to partnerwith somebody who understands
each product, understands eachcompany and can help break down
the contracts and make it easilydigestible so that you can
understand and making the rightdecision for you and your
(08:03):
situation.
Lastly, fees A lot of times youwant to make sure and your
situation.
Lastly, fees A lot of times youwant to make sure that you're
aware of any fees.
If you're paying a fee for sometype of writer or some feature,
you want to make sure youunderstand what that fee is and
what you're getting in return.
Despite any negative press onannuities there are good
annuities just as there are badones.
It's also important to notethat an annuity would likely
(08:26):
never be your only source ofretirement income.
An annuity should work togetherwith your other retirement
assets as part of an overallcomprehensive financial plan.
So you might be asking yourselfhow do I know if an annuity is
right for me?
We just talked about some ofthe pros and cons of annuities
and there's certainly a lot toconsider.
So what questions can you, aslisteners, ask yourselves when
(08:50):
considering an annuity?
Do you have concerns aboutrunning out of money in
retirement?
How much monthly income do youneed to maintain your desired
retirement lifestyle once yourpaycheck stops, once your salary
stops?
Do you understand your risktolerance and are you currently
taking on too much investmentrisk?
Are you currently working withan independent fiduciary who is
(09:12):
legally and morally obligated toact in your best interests?
So how does Bowman Wealth Grouptypically put an annuity to use
in someone's portfolio, if it'sa fit.
As the saying goes, if youdon't have a plan, you're
planning to fail.
This is an old adage.
That's true for a lot of things, but certainly true when it
comes time for retirement.
In terms of a comprehensivefinancial plan, it almost again
(09:34):
should never be someone's fullportfolio, but as a portion of a
portfolio in order to remove alarge degree of the market
volatility.
This would be one way to take asmall portion off of the
volatility table, so to speak,that the markets would normally
expose funds to.
It is always important to lookat everything as a whole at a
(09:54):
high level, to make sure thateach part of the portfolio is
playing its respective roleproperly and fits in with the
overall plan, and that'sessentially how we at Bowman
Wealth Group utilize annuitiesif it makes sense.
Now, this has been obviously avery quick run through of
annuities and this is justscratching the surface.
(10:14):
As I mentioned, these can getcomplicated and not all
annuities are created equal.
There are many differentcomponents, many different
features, different annuities,different types of annuities,
and we can certainly dig intothat in another episode as we
dive deeper into annuityfeatures, additional riders and
things that may set annuities,and we can certainly dig into
that in another episode as wedive deeper into annuity
features, additional riders andthings that may set annuities
(10:35):
apart from others.
So, as always, I want to thankyou guys so much for listening.
If anything you heard resonatedwith you today, you want to dig
deeper into anything inparticular, you want to see if
this fits your situation or not,feel free to reach out to us at
that email address.
Again, that email is ask atBowman wealthcom.
(10:56):
Special thanks to our listenersand subscribers.
If you are new to our podcast,give us a follow.
Keep an eye out for futureepisodes.
We appreciate all the supportfrom you guys.
Join us next time on yourfinancial compass.
This has been your host, marcosLemus with Bowman Wealth Group.
Take care.
Speaker 2 (11:20):
The following content is for informational purposes
only.
It is not intended to provideany tax or legal advice or
provide the basis for anyfinancial decisions, nor is it
intended to be a projection ofcurrent or future performance or
an indication of future results.
Purchases are subject tosuitability.
This requires a review of aninvestor's objective, risk
tolerance and time horizons.
Investing always involves riskand possible loss of capital.
(11:40):
Opinions expressed are solelythose of Bowman Wealth Group and
our editorial staff.
The information contained inthis material has been derived
from sources believed to bereliable, but does not guarantee
accuracy and completeness anddoes not report to be a complete
analysis of the materialsdiscussed.
Any references to protectionbenefit or lifetime income
generally refer to fixedinsurance products, never
securities or investmentproducts.
Insurance and annuity productguarantees are backed by the
(12:01):
financial strength and claimspaying ability of the issuing
insurance company.
An annuity is intended to be along-term tax-deferred
retirement vehicle.
Earnings are taxable asordinary income when distributed
and if withdrawn before age 59and a half, may be subject to a
10% federal tax penalty.
If the annuity will fund an IRAor other tax-qualified plan,
the tax deferral feature offersno additional value.
Qualified distributions from aRoth IRA are generally excluded
(12:22):
from gross income, but taxes andpenalties may apply to
non-qualified distributions.
Consult a tax advisor forspecific information.
This is not a recommendation tosurrender or otherwise purchase
an insurance product.
You should review your specificpolicy and financial situation
with your advisor.
Any statements or opinionsexpressed should in no way be
construed or interpreted as asolicitation to sell or offer to
sell advisory services to anyresidents of any state other
(12:43):
than the states where otherwiselegally permitted.
Advisory services are offeredthrough Chris Bullman Inc.
Dba.
Bullman Wealth Group.
Registration as an investmentadvisor does not imply a certain
level of skill or training.
Insurance products and servicesare offered and sold through
Chris Bowman Inc.
Dba.
Bwg Insurance Agency.
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