Episode Transcript
[00:00:00] Speaker A: Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
[00:00:17] Speaker B: Welcome to all Things Financial, the show that helps upgrade your financial literacy. Trey Peterson and Yellow Se Coutts are retirement planning specialists here to provide a unique and conservative approach to managing your money. Now here are your hosts, Trey Peterson and Yellow Se Koots.
[00:00:37] Speaker C: All right, hello, everyone. Welcome to the All Things Financial podcast. My name is Ryan Moffat and with me is Yellow say cuts. We've got a great topic again today. This is episode 17.
Time is flying by on these things. The episodes are racking up. It doesn't feel like we've done 17 episodes.
[00:00:55] Speaker A: Yellow say yeah, well, that's because you haven't.
[00:00:57] Speaker C: That's a fair point.
[00:00:59] Speaker A: You have like episode five for you. Maybe you're done a great job. People had a lot of positive feedback. So you're doing yeah, right.
[00:01:06] Speaker C: I don't know if this is five or six or whatever it is, but regardless, 17 episodes for, for the combination, some combination of the three of us. Is that fair to say?
Perfect. Well, welcome, listeners. We've got a great show today. A lot of good information, some similar topics, not surprisingly, finances and retirement. Surprise, surprise. Talking to the all things financial team. So if you've listened to previous podcasts, if you're listening today and you say, hey, some of this information makes sense and it resonates with me, feel free to reach out to us. We'll be happy to talk to you about your retirement plan. You can check us out on our website for previous podcast, atfpodcast.com. or you can always give us a call, ask some questions, email us a phone number. Here is 612-286-0580 at 612-286-0580 and let's dive in today. So yellow say, what are we talking about today?
[00:02:10] Speaker A: Well, I typically like it when you introduce the topics.
You know what? I can do that today. So today we're going to talk about a couple of things. June is annuity awareness month, so we're actually going to detail a few of the things that we think are important to consider. There's obviously different types of annuities. We're not going to spend time on all of them, but we will spend a little bit of time on fixed indexed annuities, talking about how returns are calculated. A few of the misconceptions about annuities and what they might be used for and how they could be used in your specific plan.
We'll talk about a few stats that concern financial professionals. We'll mention Social Security briefly and a few strategies. And I think we'll close things out if we have time to discuss a little bit on inflation.
[00:02:54] Speaker C: But I do have a quick question before we dive in. Who declared it a declaration? Who declared it annuity awareness month?
[00:03:03] Speaker A: Well, I don't know who declared it, but it turns out that if you want to draw awareness to just about any topic, just pick a month. Pick a month. And, yeah, so someone, I'm sure in the insurance industry, decided that it'd be great to make June annuity awareness month. I'm just simply taking advantage of it in a very self service way.
[00:03:26] Speaker C: That's funny. You know, it is, actually.
[00:03:29] Speaker A: And then I would say annuities are a small part of what we do, but, and they can be used, when used correctly, they can be a powerful tool, especially to discussing longevity risk and that sort of thing. But we do want to talk about that. And since it is annuity awareness month, why not?
[00:03:44] Speaker C: Couldn't agree more on your last two points. It is kind of, kind of funny, though. There's a month for everything. There's a day for everything. One of the local radio stations here, we're located southern Minneapolis suburbs, Burnsville, Minnesota, and one of our local radio stations, I swear they just Google whatever, today is the day and they talk about it every day. And I swear national Donut Day comes up at least three times a year, if not more.
So it's kind of comical when you say who came up with these things.
[00:04:15] Speaker A: Well, that's one that for sure deserves some recognition.
I'm with national Doughnut day. I can celebrate that.
[00:04:23] Speaker C: My local baker, I think they just do it on their own. Right? Like business is a little slow. Let's make a national donut day tomorrow. So very good.
[00:04:33] Speaker B: And now for some financial wisdom. It's time for the quote of the week.
[00:04:41] Speaker C: Well, we can dive in. We've got a financial wisdom quote of the week from Stephen Levitt, who says people who buy annuities, it turns out, live longer than people who don't. Not because the people who buy annuities are healthier to start with, but the evidence, evidence suggests that an annuities steady payout, lifetime payout, provides a little extra incentive to keep chugging along.
I think that's pretty good.
[00:05:07] Speaker A: Yeah, I think it is really good, actually. And I don't know where that additional incentive is or how much that quote is based, in fact. Right. I don't think that there's a study that actually can support that, but I do get the, get the sense that people who have annuitized or have turned on an income stream from the annuities that they have now, remember, annuities, they don't all function in this way, but traditionally, the reason why you would buy an annuity is you would hope to mitigate the risk of longevity, risk outlet in your assets, your resources, living longer and not having enough resources towards the end.
So eventually, you'd give your money to an insurance company, and in return, they'd give you an income stream. And that's just traditionally how annuities have been viewed and how they've functioned in the marketplace.
So the idea is the longer you live, the more you could potentially get into the insurance company's pocketbook. And if you end up dying early, well, potentially the insurance company ends up winning. So maybe that's the incentive to keep chugging along. Nobody wants the insurance company to win. Right.
[00:06:11] Speaker C: Right. Well, and the interesting thing is, when you look at this, you said traditionally, you're looking at kind of beating out that longevity risk. Well, a lot of times people are looking to come up with either a second pension or come up with a pension because their employer didn't have a pension. Right. And that's one of the ways that annuities can fit into people's retirement plans. And quite frankly, there's so many different types out there and products. There are a few main types that we'll uncover here in a little bit, but there's a few kind of, dare I say, silver bullet ways to accomplish things. And if the idea is, hey, I just want a steady paycheck in retirement, I want to make it easy. That's one of the ways that you can do that. That people traditionally would look at getting into some type of annuity is creating that second or first pension for themselves.
[00:07:01] Speaker A: Yeah, definitely. And actually, I like Stephen Levitt a lot. He wrote free economics, I'm sure. That's right.
[00:07:08] Speaker C: That's right. Yeah.
[00:07:10] Speaker A: In college, actually. I think one of my professors, I don't know if it was required reading or maybe the book just came out, and I happen to have read it. But it's a fascinating book, and I think Stephen does a really good job. Stephen, like I know him. Right. Stephen Lovett, that's a great job. He talks about, like, the hidden side of everything through economics. And I don't know if this is an example from the book, I do have one that I do remember from the book that I'll share just a second. But I, at any rate, we had a class, I think, where we discussed the dangers of, as an example, if you were to graph certain items, and the reason why maybe you want to graph two random items is you want to show how they might be correlated with each other. If you were to graph ice cream sales, for instance, and also crime, if you had those two graphs right next to each other, side by side, you would look at that and you might determine, hey, theres some correlation here. But really the problem is people draw conclusions from something like that without digging a little bit deeper. Like some people might even be tempted to draw a conclusion and say, hey, the ice cream is causing more crime, or vice versa. But what you're looking for is called the spurious data, the data that is not so obvious. And Steven Leavitt talks about that as the hidden side of everything through economic theory. And really what you're looking for is the fact that both ice cream sales and crime, what they're actually correlated to is weather when it's warmer outside, both of those tend to increase. But if you're missing that one piece, if you don't have that one piece of data and you just have two graphs side by side that are correlated with each other, you could end up with some faulty conclusions.
[00:08:51] Speaker C: Yeah, very interesting job.
[00:08:52] Speaker A: And obviously he gives a million examples that are much more sophisticated and elaborate in his book. But that's just one example of how sometimes we look at data and it's really important that you have. It's not, you know, it's, it's really easy to lie with statistics. And that's something that I want people to be aware of because a lot of times, you know, especially in this day and age, where everything is available at your fingertips, you can google anything, you can get information on anything. Be careful to draw conclusions in areas where maybe you're not a subject matter expert. Be careful to just receive information from just anybody. Right. People sometimes have an agenda, sometimes it's not obvious to you, and sometimes it can be very misleading.
[00:09:35] Speaker C: Yeah. So I do have to ask the question on Steven Lovett talking about the weather and how that's related to both ice.
[00:09:42] Speaker A: I don't know if that was his example, by the way, but it just came to mind.
[00:09:46] Speaker C: It just sounds like a very minnesotan example. I guess that's the point I'm getting at, right? In the winter, it's just too darn cold to do anything, including crime. I guess.
[00:09:55] Speaker A: Right? Yeah. Well, you know, I actually. I don't know if that's even a real example. Maybe crime is just as high in certain places regardless of whether. So there's probably other variables that go into that.
[00:10:05] Speaker C: No, it makes perfect sense to me. I mean, my father in law always said that because he was up in northern Minnesota. Way up, way up there in northern Minnesota. He would always say that, hey, it may be cold, but it keeps the riffraff out. So. And my golly, he was right.
[00:10:20] Speaker A: One example, though, from. From freakonomics that I really. That I liked and I remember is he was talking about, like, there's like, a daycare facility, and I don't know if Ryan, if your kids ever go to daycare, but my two year old, he. We've. We've gone through a few different daycares, and now we finally found one that we absolutely like. And. And by the way, I've been part of this problem. So in his book, he writes about a daycare that had a problem with parents consistently bringing picking up their kids late. And the daycare was at its wits end. They had. They'd sent letters to all the parents reminding them, hey, our staff, the people who work here, like they want to go home, too. Please pick up your children on time.
[00:11:00] Speaker C: And come get your kids.
[00:11:01] Speaker A: Yeah, come get your kids. Right, we're closing. Get your kids. Please get out. And unfortunately, nothing changed. Parents continued to consistently pick up their kids late.
[00:11:13] Speaker C: Right.
[00:11:13] Speaker A: So eventually, the daycare decided, you know what? We're tired of this. We're sending a new message to the parents. From now on, if you pick up your kids late, you are going to be assessed a penalty. There's going to be a fine for doing that. We're tired of you guys not picking up your kids on time. So what do you think happened?
[00:11:33] Speaker C: Well, I mean, people typically want to avoid penalties. I mean, is that the general gist of this?
[00:11:39] Speaker A: Yeah. Well, actually, it actually got worse. Right? Late pickups, they ended up increasing exponentially.
And the question is why? Why? Yeah, I mean, a lot of times when we're talking about this, we're talking about incentive structures. What ended up happening is the guilt that the parents experienced was removed. The guilt of what they were causing for the staff and the workers that were forcing them to come home late. They ended up removing that entirely. And instead, they looked at the pickup fee, the late fee, the penalty that's being assessed as a feature. That's a perk. Now I get to paid to be a few minutes late because the daycare served a lot of affluent families. They just looked at it as something they could pay for.
[00:12:25] Speaker C: So I'm removing my guilt by the new ala carte feature of paying to be late.
[00:12:31] Speaker A: Right. And really, the whole lesson here is incentives work. They're just not always going to work the way we intend for them to work.
So Steven does a great job about talking about all kinds of examples like this. So I'd highly recommend the book. It's a very interesting read. But he talks about these unintended consequences within our incentive structures.
[00:12:52] Speaker C: Yeah, very interesting. Very interesting. Well, so let's really dive into the meat and potatoes of this, but tell me a little bit about some of the basics of annuities. Like what are the top two or three? Just basic things that people need to know. Maybe there's three to five.
[00:13:09] Speaker A: Yeah, well, I think we'll, maybe we'll start. And not to spend too much time on Steven's quote, steven Levitt's quote of but him saying that people who buy annuities end up living longer, ironically. And annuities, as I mentioned, traditionally, are designed to be a tool that solves for longevity risk, the possibility that your retirement funds won't be there, won't be enough to cover your entire life. And that's where people actually have sought out insurance companies to help solve for that risk.
So I don't know. I think it's obviously, there's a lot that can be said there.
But one of the things that I'm going to start with, let me see here, it had a couple of notes.
So there's an infinite number of annuities out there today, and I don't want to spend too much time on all of them. I'm just going to go through it quickly. So there's fixed annuities? Fixed annuities are simple. Think of cds. There's going to be a stated rate of return.
You don't have to worry about it. There's going to be a terminal, by the way, all annuities are through insurance companies. That's where you can get an annuity, every single one of them through insurance companies. Obviously, they function differently, but they're all through insurance companies. So a fixed annuity would be the most basic of the annuities. I would say you're going to have a rate of return.
It's not going to change. There's going to be a term, three years, five years, seven years, whatever it is, every year, you're going to be credited that rate of return.
So that's a fixed annuity, variable annuities.
There's a lot that can be said here. I'm just going to sum it up briefly. Unfortunately, I would say most people end up having a variable annuity, and it's not that it's misrepresented, but it's oftentimes the reason why they have it is because maybe their advisor, whoever's helping them with their investments, that might be the only tool that they can offer in terms of the type of vehicle that they're looking for. And the conversation typically goes like this. Somebody's getting ready to retire.
Maybe they have a. They're accustomed to having some type of investment where they're contributing, they're putting money into their retirement savings, and now they're getting ready to retire, and they want a little bit more safety. They know that the market is volatile. Maybe they remember what it was like going through 2008, maybe 2001. Maybe that's just, they look at that and they say, hey, I'm no longer contributing. I'm no longer working. I'm not making contributions. My employer is no longer matching. Now I have to start taking distributions, I'm going to be pulling on these investments, and I'm in retirement. If there's something catastrophic that happens, if the market retracts and all of a sudden we see a huge correction, I might be out of luck here. I don't want to have that type of risk anymore. One thing you can do is you can adjust your risk profile. Rather than having 60% equities and 40% bonds, maybe you bring it back a little bit. Maybe you do 50 50, or maybe you do 40% equities and, I'm sorry, and 60% bonds, or you pursue an entirely different strategy. And that's where sometimes people get.
I don't want to say that the person is not acting in their best interest, but a lot of times, it's the only tool they have available, as I mentioned. So that's where somebody is maybe introduced to a variable annuity. And a lot of times, variable annuities are sold on the promise of safety. And unfortunately, that's a little bit misleading. So there's a couple of things that could be safe. Right. If that annuity is eventually used to create an income stream, like a self pension that Ryan, that we talked about, then yes, more than likely, there's going to be a guaranteed roll up rate. The roll up rate determines, like, it's a percentage, let's say it's 5%. It just means that the income value, which is different from the actual cash value, the income value will grow at a guaranteed rate, a predetermined rate for a period of time. And if you elect to turn on income, that's the value you're going to be using. They're going to be basing it off of the income value. However, your investment is still at risk in the market. And I can't tell you how many times when somebody comes in and they have a variable annuity and theyre convinced that their variable annuity grows at a guaranteed 5%. And then when we peel back the layers and we show them that their income value on their variable annuity grows at 5%, but the cash value is exposed to just as much risk as when they had it in the market within their four hundred one k. And people, there seems to be a disconnect on this conversation. So those are two very different things, your cash value versus your income value. And by the way, everything that im saying about cash value and income value that can also be applied to indexed annuities as well, which were going to talk about here in just a second. Anything to add?
[00:18:00] Speaker C: Yeah, well, what I wanted to comment on is that I think thats one of the biggest misconceptions on the variable annuity side is that theyll be sold with a slight of safety to them, saying, hey, you're protected from the market, but you're not protected from that market. There are two different values. It's like having two different accounts. And oftentimes the growth or the protection that you may receive, you're not talking about the same account. You might get growth on one account but then not the other account, or you might get protection on one account but not the other account. And it's really, really easy without knowing exactly how these work and without having some inside information. And I don't mean, you know, like secretive information, I just mean that you have, you happen to be, I think Yeltsin said, subject matter expert. Right. Without having enough information to make the decision and understand how they operate. The fact that there's multiple accounts within them can be really confusing for people. I think that's one of the things that we oftentimes see not only is the thought that they have is, you know, protection or safety on it, but then also, well talk more about this, but just also the fee side of things as well.
[00:19:08] Speaker A: Yeah, I know I've mentioned this on a previous podcast, but the fees are maybe my biggest gripe with variable annuities, Preston, for sure, I know there's a million ways you can explain those fees away. But at the end of the day, what we see is there's a large disparity between the income feature, the income benefit value, and the cash value. And that's okay, right? That's not necessarily the worst thing that can happen. But why is there a disparity between these two? In fact, without mentioning any names, we recently came across a variable annuity that really, it's not just the income value. And I wanted to talk about this a little later, but I might as well just jump in. It's not just the income value that you have that determines the payment you're going to receive. The other thing and the more critical item to know is, what are the payout rates? So you might have a giant income value, but what if the annuity company is only guaranteeing a 5% payout rate, and the market rate today might be a little bit higher? What if it's 6% or 7%? So your large income value doesn't mean very much if the payout rates aren't competitive. So one of the annuities, as I mentioned that we recently saw, was that if there was more than a certain disparity between the cash value and the income value, then the payout rate would be reduced.
So in other words, the investment hasn't performed. So the insurance company is mitigating their own risk by saying, hey, the investments that we have, the underlying investments that you've chosen, the investments within the annuity, they're not performing. So we're going to pay you a reduced payout rate. So it almost, in some ways, it's a two step problem. You have to know, okay, what is my income value? Did I get this because I wanted an income stream eventually, or did I get this because I wanted a little bit of safety? Safety that maybe traditionally wasn't provided for within a 401K or within the market or maybe within bonds themselves. Right.
[00:21:03] Speaker C: Right.
[00:21:03] Speaker A: So you have to be aware of why you got it to begin with. And then, of course, the fees themselves. That's maybe the biggest concern with variable annuities. We see fees on average, I would say between three and 5%. And those fees are made up of a couple of things.
You have your m and e, your mortality and expense fee that, I mean, that could range. I've seen it as low as probably 0.2% to maybe just a little over 1%.
You might have a rider fee on the product. Make sure that that rider fee is something that you actually need. A lot of times, your needs might change. Right. When maybe when you initially got it. There's nobody who's doing something that's not in your best interest. But as I talked about recently, the family who had an income rider, not only did they nothing need the income rider, income was a problem for them. Not in the sense that they didn't have enough. They had too much. Right. They did too much taxable income already relative to their expenses. So making sure that you actually need the rider that you have, and a lot of times you can turn off the rider. You can stop paying that rider fee if it's something you no longer need, if your situation has changed. But also you have the investments within variable annuities, and typically those average about 1% in additional fees. So all in a lot of times it's between three and 5%. And that's expensive. That's expensive, especially if the cash value is not performing. Sometimes you're stuck with an income product because the cash feature, the actual investment itself, is underperforming. Sometimes you're stuck with the death benefit. There might not be anything you can do because of how high the death benefit and the income value is relative to the cash or accumulation value.
[00:22:45] Speaker C: Yeah, I want to just quick pause on this because I know we just covered a ton of information, but it's worth saying that myself. Yellow say Trey, we're diving into this with people all the time to find out, hey, what are you actually paying? What is your actual benefit? What was this annuity designed for? And are you getting what you thought you were? We dive into this with people pretty frequently because a number of the people that we meet with do have some type of variable annuity or other annuity and oftentimes aren't 100% sure on what exactly it is or how it operates. And if that's you and you're listening and you're thinking, you know, I guess I maybe don't know all about this or maybe I don't know how much I pay on this, et cetera. Please, we're happy to help. You know, feel free to give us a call, email us whatever it may be, because we're happy to dive into this with you and help provide some clarification if you're a little unclear on what type of variable annuity or otherwise that you actually have and how it works. But I just want to give a quick, you know, don't, don't hesitate. Our phone number is 612-286-0580 or you can email us either yellow, say, Trey or myself, and our email address is our first nameealth.com. comma, the letter g, the word wealth.com dot. So with that, we can kind of keep going here. But at Yale, say, I just thought it'd be worth a saying that because it is a lot of information.
[00:24:09] Speaker A: Yeah, it is a lot of information. And I certainly don't want to be compared to your professor Ryan earlier. Well, what did you say about him?
[00:24:19] Speaker C: Oh, my goodness. So Yelsei and I were talking a little bit before the show here, and we're talking about both of us taking economics in college. And while yellow say loved it, I was a bit of the opposite. But it really was driven by the teacher, my goodness, my wonderful, wonderful economics teacher.
Two days in and theyre talking about supply and demand and trying to be relevant. I think theyre talking about like, well, if you only have three tacos at your taco store, but theres demand and people want four or five tacos, thats an example of how demand is high and just very monotone talked about tacos and Pepsi for supply and demand, and it was just really, really hard to buy into that.
[00:25:07] Speaker A: Yeah. I'm not, I'm not sure where that comparison, yeah, it doesn't seem to work.
[00:25:13] Speaker C: You know what, probably great saying, like, hey, they're college students. They probably like tacos and pepsis and things like that, you know, but I don't know, you had a professor talking about, you know, freakonomics and Steven Lovett really diving into the heart of things and how things work, and we got to talk about tacos with Pepsi.
[00:25:30] Speaker A: I thought you were saying that I reminded you of your professor because of how much I enjoy these topics.
[00:25:36] Speaker C: And only sometimes yellow say, no, of course, just all in good fun. All in good fun.
[00:25:44] Speaker A: But, well, let me jump into fixed indexed annuities.
[00:25:51] Speaker C: Yeah, let's dive in there.
[00:25:53] Speaker A: And I always say, whether you're getting information from us or somebody else, take things with a grain of salt.
I've said this a million times. There is no one glove that fits all. But if I were to make a case for a fixed indexed annuity, here's what I would say. Number one, the biggest reason why people look to an annuity, look to an insurance company to buy an annuity, to invest that way, is, as we mentioned, that conversation that you have as you're getting closer to retirement, and the fixed indexed annuity does provide for the type of safety that people are looking for. And what we mean by that is principal protection, market risk reduction. The principle is guaranteed. So there's a variety of different types. And even, I think lately in the last five years, there's been even other things, other ways that these products have been modified.
So this isn't, this isnt across the board, but just in general, a fixed index annuity, the amount that you give the insurance company, typically thats how much you have. And no matter what happens in the market, no matter what happens to the investments, the allocation or indexing credit strategies that youve chosen, youre not going to lose anything on that value. So that value is guaranteed. And people like that part. They like the idea that they cant lose anything. But certainly, if you can't lose anything, what's the trade off, Ryan?
[00:27:21] Speaker C: Well, you know, the funny thing is, as you're explaining this, I keep thinking about like, okay, so if I have ten tacos and, I don't know, back.
[00:27:29] Speaker A: To the tacos, I'll still have ten.
[00:27:34] Speaker C: Tacos in the future.
[00:27:35] Speaker A: Yeah. So what I'm trying to get at is you're giving up some of the upside.
[00:27:41] Speaker C: Correct? Sorry, I couldn't help it.
[00:27:43] Speaker A: So when the tacos do eventually make their way to the store, rather than getting all ten of, of the brand new tacos, you only get a portion, you get seven. Right. So you give up some of the upside for an exchange for downside protection.
I'm sorry, go ahead.
[00:28:00] Speaker C: Upside, in this example, what we're talking about really is, typically speaking, the growth, the rates of return. Yes, et cetera.
[00:28:08] Speaker A: Yeah. So in exchange for no downside risk, you get a percentage or a portion of the upside. And I hesitate to spend a whole lot of time on this, but I think I'm going to take a risk here and actually dive in a little bit deeper to tell you how they calculate the upside.
[00:28:26] Speaker C: Let's do it.
[00:28:27] Speaker A: So the first thing I'll mention is there's really, they're called indexing strategies, or allocations, if you will. And one of those allocations, and you'll see this a lot on many fixed indexed annuities. And one of those was called an annual point to point cap.
So remember, an annual point to point cap. So basically what happens is you've selected an index. You've selected an allocation, one of the investments available to you in a fixed indexed annuity. Now, remember, whenever you have a fixed indexed annuity, they actually don't invest in the index. They just have, basically they track the index for you and that determines your rate of return. But the money doesn't actually go in that index. So what they do is generally there's a cap. So the insurance company will set a cap and they'll say, hey, the most you can earn is 5%. But what they do is they take a look at that index and they look at it over the, basically over a twelve month period, whenever your effective date is on your contract from, let's say, 2024 to 2025, and they compare where the index is at the beginning of the year compared to at the end of the year, or I should say at the end of the twelve month period. If the index value is higher than what it was in the beginning than the beginning value, then they're going to credit a percentage increase. But remember, it's always going to be up to the cap. And I say that because caps are an interesting thing, right? Annuities are interest rate driven. So those caps have come up quite a bit. I want to say a couple of years ago, if we saw a 4% cap on an s and P 500 allocation, that was pretty impressive. Today, a lot of those caps are much higher. 5%, 6%, 7% caps on even higher than 7%, actually, recently we've seen. So that's basically the insurance company saying that's how we're going to limit the upside, through a cap, and we're going to do it on an annual point to point allocation. Not all allocations are annual point to point, but if you do see that, just think they're measuring the index from your effective date from one year, and then twelve months later they're looking at it again. And if there's any growth, that's the rate of return you have, but it's limited by the cap. So, Ryan, I don't know if I did a good job explaining that I've probably lost half the half of the five listeners that we have.
[00:30:47] Speaker C: You might have lost me off. No, I'm just.
I mean, I think that's great. Really. I think reiterating that is, you know, it's the whole adage of, okay, hey, I'm giving you total principal protection as the annuity provider. And what's in it for me, right. What I get out of it is that if your account earns x percentage, I get to keep a portion of that. And the cap strategy is saying, hey, no matter what you're going to get up to this cap amount, an amount is capped off. So if it does way, way, way more than that, then I end up doing better. If it doesn't do way more than that, it does at that, then you actually do really well compared to what the market's doing. Right. So there's a little bit of a give and take on that. And the give really is your principal protection. And it's for whatever the contract period is, whether it's five years or seven years or ten years. And that's a huge, huge give, quite frankly.
[00:31:45] Speaker A: Yep.
So another one that I want to mention is the monthly point to point. So whereas the annual point to point looks at the index value over a twelve month period, the monthly point to point is a little bit different. So they look at, let's say, your effective date, the date that the contract was initiated. Let's say it was June 15, for instance. Well, on the 15th of each month, they're actually going to record the index value. So every month on your effective date anniversary, your monthly anniversary, they're going to record that the value. And here's the tricky thing here. Usually the monthly point to point comes by way of a monthly sum. It's also referred to oftentimes as a monthly sum. So they do something a little bit different. So they look at that, they say, hey, with the difference between each monthly anniversary, they're going to put a cap on it as well. They're going to say every month you can earn up to, let's say, 2%. And I know it seems kind of low, but here's how they calculate it. Every month you can earn up to 2%. That's your cap. But they don't limit the downside. So if you have one bad month where, let's say, the index went down 20%, that could wipe out all of your returns. Because at the end of a twelve month period, they add up all of the gains, all of the monthly returns, and they subtract all of the monthly losses and that's your return. They just simply, that's why they call it the monthly sum. They add it all up together. And where the upside is capped, the downside is not. So you really could have one bad month and that could take away all of your returns. So where this is important is sometimes people make these decisions. They choose a specific allocation and then they wonder why they didn't get a return. When the market's up, right? On average, over the course of twelve months, the market might be way up. And you might say, hey, the allocation strategy I chose is supposedly tracking the S and P 500. But what if there was one month during that twelve month period where the S and P didn't perform? And that's where the monthly strategy, it's not a bad strategy. In fact, sometimes it provides for the highest returns compared to the annual point to point. But you just need to be aware of how those two function. And I realize for most people, most people aren't going to be making these decisions. Most people, unfortunately, sadly, we find that most people don't even reallocate. I would say. I think a few companies that we've reached out to, they said that less than 5% of people make annual allocation changes where they update those strategies.
Then the other thing is, I would say most people rely on their financial professional, whoever is helping them with their investments, to make these decisions on their behalf. What were trying to do is, as you look at those, maybe you consider talking through those investment allocations with your financial professional, whoevers helping you, rather than simply having them make those decisions and then also revisiting those, because you can make these changes annually, annually as the market changes, but also what ill mention a little bit, as renewal rates may also change and affect the performance of your account.
[00:34:57] Speaker C: Right. Well, it's kind of shocking that 5% or less actually make these changes or updates. And I understand that if they feel like it's on them to try and figure out what is the best option and what they should be checking for their renewals, et cetera, I can see why people might ignore that topic and press the easy button. But ultimately you have a representative that set you up with this account. And really it should be something that you guys are working on together to make sure that you're getting the best out of that account as possible.
[00:35:32] Speaker A: Yeah. The last thing I'll mention, there's more than just these three, but I would say these three. Actually, I'll mention two more.
There's more than just these two more that I'm going to mention. But I think these are maybe if you had an understanding of these four allocation strategies, if you will, then I think you're going to be further ahead than most people. In fact, I think many advisors don't even know how they work.
So the last couple, we'll start with a spread. So you'll see this a lot of times on the list of available allocations where maybe one of the strategies has a spread. And a lot of times I feel like people don't.
It's just not obvious what that means. What that means. Think of it like this. Think of if there is a spread. That means that you have to cover that spread first. So if you got a 10% rate of return, but there's a 7% spread on the account, that means that you need to pay the insurance company 7% first and you get what's left over. So it's kind of the other way around compared to the cap, where the cap, you get the first, let's say if there's a 7% cap, you get the first 7%. The insurance company gets everything else. After that. With a spread, the insurance company gets paid first, and you get the remaining amount if there is anything left over. Does that kind of make sense, Ryan, do you think?
[00:36:48] Speaker C: Yeah, it's an inverse version of what the cap is, right? I mean, ultimately, you're looking at it from a slightly different strategy, and sometimes it's worth having a little bit of both of those within the same account. Would you agree?
[00:37:02] Speaker A: Yeah, I think there's nothing wrong with the spread. It's not typically my favorite strategy.
The other thing that I would caution people against, sometimes you see both, um, both a cap and a spread, and I really don't like that at all. I can't tell you. I I don't know of a better way to say this, but think of, think of the, the product to begin with, right. The insurance company is guaranteeing you're not going to experience any losses, but in exchange, you get a part, portion of the gain, you get a part of the upside, and the insurance company is trying to mitigate, you know, their own risk, too. So I would say, don't give the insurance company more than one way to screw you.
There might be a better way to say that, but when I see a strategy that has both a cap and a spread, that would mean that first you got to cover the spread. The insurance company gets paid first, but then if there is any upside remaining for you, theyre going to cap that as well. And I dont like that. And unfortunately, some of the best companies in the industry, they have that as an allocation option within the available allocations. And I think sometimes that, I don't know, I just, I feel like even though you can still get a return, it might be a great strategy. I generally would try to avoid that if possible.
[00:38:20] Speaker C: Yeah, yeah. On the same indices. I agree. So, I mean, ultimately, what we're looking at on just a few of the different types of annuities out there, and there's no blanket recommendations, and there's no, like you said, yel say there's no one glove that fits all. But ultimately, what were looking at is saying, okay, theres certain types that are fixed, and theyre really pretty simple, theyre pretty basic.
You get good protection out of it, but also probably the smallest rates of return in the long run. You have variable annuities, which, I mean, the name kind of says it all right. There are a lot of variables to it, and the values can also vary. We typically, at all things financial, we typically ultimately are staying away from those, if for no other purpose, just because theres not a lot of certainty and because they had really high fees in comparison to others. And then lastly, what we just spent a good amount of time on are fixed index annuities, where you do get that total principal protection. You get to participate in the returns. So its a good balance between the two. And one of the things that we find is typically best about the fixed index is that theyre very, very low, fee or no fee, meaning that if youre comparing and saying, okay, in a traditional investment model, we would say, great, I want stocks for growth and I want bonds for some protection, some safety. Well, bonds have fees. Fixed index annuities, oftentimes you can find them without fees. So right there, youre gaining more just by saving some dollars on what youre paying on the funds themselves. So theres a lot of different ways to look at these in different capacities. And again, we're happy to dive into that with you, whether you are looking for just something or, hey, I need someplace where I can get some returns, but I also know that I want it to be totally safe. Or whether you're looking at it and saying, hey, I do want that additional pension, I do want that longevity income. So that way I've got an additional paycheck coming in for the rest of my life. Or if you're somebody that has one of these products and you're not 100% sure on how it works, we're happy to dive in with you. Give us a call. Phone number is 612-286-0580 yellow say a couple of quick tips on how to choose or if somebody is looking at an annuity, how to choose what company or how to know what to look for.
[00:40:46] Speaker A: So this one's tough because it doesn't have to be tough. But there's something to be said for your experience with the company. And what I mean is, from a consumer standpoint, if somebody is looking for income and we run the numbers, we look to see, hey, which company is going to guarantee the highest payout which company has.
Sometimes it comes down to that income value that we discussed and the guaranteed roll up rate.
Some companies are fantastic in the short term, where if you plan on turning on income within the first five to seven years, we know exactly who to point you to. Well, what if thats a little bit more uncertain for you? What if your plan to turn on income is more dependent on what happens in the market, what happens on your assets that have more market risk exposure. And maybe you dont intend to turn on income at all for the first five to seven years, but you certainly will. Maybe eventually, maybe when you hit, I dont know, RMDH, for instance. So theres a lot of considerations there.
A big one recently has been the enhanced benefits that annuities provide in terms of long term care features. Long term care benefits, that's been a big one for people. That's more just an additional benefit. Obviously, there's no certainty. We don't know that you're going to use that feature. But for a lot of people, knowing that they have that additional coverage gives them a lot of peace of mind. So they're, they're basing it off of not maybe the highest income payout, but who's going to give me the strongest long term care benefit? Should I have a triggering event? As we discussed, I think the last podcast or two podcasts ago where, you know, some of them are based on confinement, that's the only way you get the long term care benefit. Other annuities are based on two ADL's, two activities of daily living. If you can't complete those for 90 days without assistance from somebody, then you now have access to the long term care feature. And some of the long term care features, they pay out twice what the income benefit would be. Others are one and a half times. So it just really depends. There's a give and take on a lot of these different features and variables that these companies have. But what makes it even more challenging is, as I mentioned, the consumer experience. Some companies are absolutely known for answering the phone within a few minutes when you call. Some companies are very easy to deal with. Some companies are very corporate, and they really dont make any allowances for certain things that are maybe just a little bit out of the ordinary.
A lot of that really comes down to trusting the person who youre working with. And, you know, we've established good relationships over the years with many of these companies, and there's a few while they might come out with a great product or a great feature, or maybe they're very competitive in one area. Like if I can avoid it, I might, I might direct you to a different company. Right. If it's competitive, it's, if it's within a couple of bucks, if that's what we're talking about in terms of, you know, so let's say you're not even looking at an income feature but you just want growth with the added protection of principle. And were comparing the indexing strategies that I just discussed, and the caps are pretty competitive. The spreads, maybe those are low, the participation rates, maybe those are pretty high. Theyre pretty even. Or maybe one company has a slight edge. Im always going to direct you to the company thats going to provide for the best experience because ultimately that matters too. And its just really difficult to attach an actual quantitative value to what that might provide for you down the road when you actually, when maybe you have an incident or maybe you need to turn on income or maybe there's something unusual that you have to go.
[00:44:14] Speaker C: Right. No, I think that's really valuable information and good for people to consider. And these annuity companies, insurance companies, they do have ratings, a plus, a minus, b plus, et cetera. So they do have ratings. And to your point, yellow say is that when you're comparing and saying, hey, I'm looking at two different products that both suit my needs, how do I choose this one? It's kind of like getting your car taken care of, getting an oil change done. And, you know, I'm oversimplifying it, looking for just kind of a basic metaphor here. But, you know, the, the place with the lowest price for your car may not have some of the other thing, other things that really are what you're looking for or what are better for you from a customer service that are hard to put a dollar sign to. You know, maybe you pay a few bucks more at another place, but the service is much better. Uh, or the facility's better or whatever the case is just kind of a, you know, I don't know if that metaphor is a good one or not, but, you know, trying to put it into something that, that makes sense, that we all have to do on a daily basis, you know, we, what's that?
[00:45:15] Speaker A: It's such a simple way to put it. The service is much better. I think that's the word I was looking for as I went on my giant rant regarding the experience you might have with one company versus another.
[00:45:26] Speaker C: Well, but ultimately you're completely correct, right. Because really when you look at it, you can say, hey, if I'm looking for an income product, this one, maybe it's an a minus or a b company and we only use a rated companies, but if it's like an a minus company, let's say, and hey, it's going to give me an extra $100 a month or an extra $50 a month, you might say that's real money. That I want, man, if you can never get a hold of the people or if their customer service line, the teleprompter is not good and you're on hold forever, etcetera, versus maybe I didn't get as much income, I'm $50 short of the other product, but it's an a plus rated company and I get a hold of somebody every time and I can talk with them and they're very kind and polite and helpful. That's absolutely worth something.
[00:46:15] Speaker A: Yeah. At the end of the day, you can't spend kind and polite and all those types of things at the grocery store. You spend real dollars. I know that for most people it's going to come down to potentially guaranteed payouts or some of the other actual substantive features that we're talking about. I would say that the biggest way that why it matters to use an a rated company, though, is based on renewal rates. So all of those strategies that I mentioned, all those strategies, the insurance company has the ability to increase those or to decrease those. So imagine you're signing up for a ten year contract, ten year annuity. It's a very common term for an annuity. Sometimes it's five years, seven years. But a lot of them are ten years, ten year products where there's a surrender schedule and you have to pay something to get out of the contract. So imagine it's very competitive in the first year. That's what got you to buy in. That's why you decided, hey, I think I should peel off 15 or 20 or 30% of my, my nest egg and hand it over to an insurance company because theyre providing me all these amazing benefits and features. But imagine if in the second year they downgrade their indexing strategies, where their caps used to be 7%, but now theyre three or 4%. Or maybe the spreads are so high that its impossible for you to get a rate of return. So companies who do that, companies who downgrade those renewal rates, are typically companies who end up suffering in terms of the actual rating that they have. So they may no longer be an a rated company or they might be downgraded to an a minus or a b. And obviously, insurance companies don't want that. So they're incentivized to maintain their renewal rates. And there's companies this is actually tracked. You can look to see, hey, what's the renewal rate history that this company has on this specific product? And I would say that's where those ratings, whether it's Moody's or am best, where they really come into play. And it's important to look to see, hey, what's the rating that this insurance company has before I make a ten year commitment to handing them over a chunk of my retirement savings?
[00:48:19] Speaker C: Yeah, yeah. Absolutely. Absolutely. Things worth considering as we wrap up here. Yell, say, any, any final thoughts? Otherwise, I think just for something fun, I'll spend one to two minutes as we close on our retiree of the.
[00:48:32] Speaker A: I think we need something fun, Ryan.
[00:48:34] Speaker C: Something fun. No more economics and tacos and number of Pepsi's and supply and demand, right?
[00:48:39] Speaker A: Yeah. I really hope that the editing, editing team can get rid of the tacos. And everything that was said about your economics professor, that did not go over as well as I hoped it would.
[00:48:48] Speaker C: Well, you know, what I will say is that here, many, many years later, I still remember that lesson on supply and demand. So it must have worked to some capacity, right?
Also, our retiree of the week is Madonna Booter. She is age 93. She lives out in Spokane, in Washington. A really interesting, and I think this is kind of a neat story. So she actually, in her early twenties, became a nut. So not a high paying career, by the way. But interestingly enough, in her fifties and her, she started getting into running, and she started getting into competitive running, and then she expanded beyond that and she started doing triathlons. And at age 55, she did her first triathlon, and she kept doing them over and over and over again to the point where she earned the nickname the Iron Nun, which I think is great. And even into her eighties, well into her eighties, she was still competing in triathlon. She's done over. You want to take any guesses on how many Iron man's this woman has participated in? Yellow say, just take a guess. 4325.
[00:50:01] Speaker A: Oh, my goodness.
[00:50:02] Speaker C: 325 Ironman competitions. And I think it's a great story when you talk about, hey, what do I do in retirement? And also very, very tied into our conversation on protecting the possibility for longevity. Right. So our retiree of the week, Madonna Booter, the Iron nun. With that, we will close out. Thank you so much for listening. If you've got questions, if you want to take a look at an existing annuity or you just want more information on what that might look like for you, give us a call. Phone number is 612-286-0580 my name is Ryan. That's yellow. Say, Trey's out of the office today. Thank you so much for listening and have a great day.
[00:50:48] Speaker B: Thanks for listening to all things financial. You deserve to work with retirement plan planning specialists who care about your money and take a unique approach to your financial and retirement needs. Visit allthingsfinancial.com and set an appointment today.
