Bullshit on Stilts: Tackling the bullshitology of financial decisions.
Join two financial brains turned podcast hosts unleash their wit and wisdom drawing on vast financial backgrounds. Using highly-tuned bullshit sniffers they call out the clichés, crap spackle and flapdoodle spewed by so-called experts across the landscape of financial advice. Identifying as doctors of bullshitology you can count on your hosts to bring you a lively if not deadly mix of serious analysis, hijinx, and tomfoolery. All within a 99.1% bullshit free safe space.
Bullshit on Stilts: Tackling the bullshitology of financial decisions.
The Price of Peace of Mind: Total Costs of Annuities
Are you considering an annuity for your retirement plan? Before diving in, it’s crucial to understand the hidden costs that might be lurking beneath the surface! In this enlightening episode, we unravel the complexities around annuity fees, providing you with a comprehensive understanding of what to look out for.
We begin by demystifying annuities, dissecting their layered fee structures and emphasizing the importance of knowing what comprises each cost. From surrender charges that penalize early withdrawals to administrative fees that cover the basic management of your policy, we expose the financial intricacies that can dictate your overall investment performance.
Diving deeper, we discuss the often-misunderstood mortality and expense risk fees that may come with additional riders or guarantees. These fees can significantly influence your financial outcomes and require careful consideration. We also touch on investment management fees unique to variable annuities and how these can inflate costs with numerous underlying investments. All these factors combine into what we refer to as the "parfait" of annuity expenses, where each layer contributes to your total investment cost.
We aim to equip you with insights that will not only bolster your financial knowledge but also make you a more informed investor in annuities. Tune in for an engaging discussion that challenges you to think critically about your investment choices. Don’t forget to subscribe, share your thoughts, and leave a review—we love hearing from you!
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Developing your financial bullshit sniffer one episode at a time.
Welcome to Bullshit on Stilts. We're back for season two and let's just say it's as popular as a fart in a high-rise elevator. We're still barking at financial fairy dust like a dog and a mailman, and in this season we're serving up a fresh batch of debunking financial sales tactics and ads you never asked for, all while helping you sharpen your own bullshit sniffers for those life-changing financial decisions. So grab your favorite drink, bring your sense of humor and don't forget your calculator. Join us on our quest to expose the financial shenanigans that even your grandma would call bullshit on. It's time to get sniffing. Let's get after it. Hello, hello, hello, hey. Welcome back to Bullshit On Stilts. I'm your host, kelly Aulo.
Speaker 1:It's season two, which is kind of cool. We're in our second episode of season two and, really starting off season two, we decided to tackle annuities around developing your bullshit sniffer when it comes to annuities. Hey, they're pretty amazing solutions or financial instruments, and we talked a lot about that in our first episode. This episode, we're going to pull back the question that most people want to know first and foremost, which is hey, what are the costs when it comes to annuities? As we dig a little deeper, there's really, I think, five different fees that an annuity may have, depending on the type of annuity you are buying.
Speaker 1:So fees and how do they show up in annuities? So let's peel this onion back just a little bit. Those fees would be one surrender charges, Two, mortality and expense risk fees.
Speaker 4:It's actually mortality and risk expense, but whatever. Actually it's mortality risk and expense charge, but you know, whatever, I believe the technically correct phrase is mortality and expense risk.
Speaker 2:However, insurance companies may use slightly different phrases like mortality risk and expense and even mortality and risk expense and so on. So read the small print.
Speaker 1:That is the correct answer. Administrative fees is number three. Investment management fees, number four, and then lastly, rider fees, number five. So five fees may show themselves in an annuity contract. And let's kind of peel the onion back of each of these real quick. So one, when we're talking about surrender fees, see, an annuity contract is an agreement, a legal binding agreement, and with that you're going to give money to the insurance carrier in exchange for them providing you promises, guarantees and so forth. That surrender charge, otherwise known as a penalty, typically gets charged if we take our money out of the annuity contract too early.
Speaker 1:I'll give you a couple of examples. Right, If I have a seven-year penalty phase, surrender phase, I could have my first year of owning that annuity. If I had to take the money out, I might have to pay a 7% surrender fee. So I put $100,000 in. Something happens, I got to take all $100,000 out. Well, when I do that, I'm going to pay, in this example, a 7% penalty. So $7,000 is going to be kept by the carrier and I'll get the net remainder, or $93,000. In year two let's say nothing happened in year one we erase that example. We go to year two. Let's say nothing happened in year one, we erase that example, we go to year two and in this example the penalty is now 6% and that will decline all the way down to zero following the seventh year of owning that contract. So you always have to read the fine print. But in general that surrender fee tries to make sure that you invest in the annuity and make it a medium term investment as a minimum, and that's where this seven year surrender charge may come from.
Speaker 3:OK. Surrender fee periods are normally years and the surrender percentage declines over the years until they reach zero, over the years until they reach zero. So a seven-year surrender period might begin at 7%, then 6% and then 5%, all the way down to zero. That's a good takeaway, actually.
Speaker 1:Now, surrender charges can be a wide variety of them. You can have surrender charges as low as 3% for three years and as high as 10%, 15% for 10 to 15 years. It just depends on the annuity and what the small print says, definitely something you want to get your hands around, all right. So yeah, the next fee is administrative fees. So these are pretty straightforward. They're pretty small. It covers companies sending you statements, reporting, maybe simple management of the annuity, and they charge you. You could see $25 a year, $50 a year. If it goes to a percentage, you're probably at 0.1, 0.2, 0.3. Not a huge charge, but nonetheless something to know.
Speaker 3:I like 0.1 to 0.3 percent a whole lot better than the surrender fees that might be 7 to 10 to 15 percent. That's a no-brainer percent.
Speaker 1:That's a no brainer. Next, item up on the fees associated with annuities. So mortality and risk expense fees, or M&E charges for insurance carriers. M&e charges are those charges a carrier will put in place because they're on the other side of this contract. They're on the other side promising guaranteeing maybe a income benefit for life as an example, or maybe an enhanced death benefit. So it depends on the riders. But often you'll see how many charges when there is some kind of an enhancement or rider in place that increases the insurance company's exposure to death. Two, when shit happens in life and uncertainty hits and all of a sudden we pass away unexpectedly, or what have you.
Speaker 1:Mortality and risk expense. They're kind of a sandwich. They can be hefty, they could be upwards of one, one and a half percent or more, depending on the annuity. Oh, by the way, they do exist or can exist in all the categories of annuities. So you definitely want to read the fine print. If you have a death benefit rider, you may see a mortality and risk expense. If you have a guaranteed lifetime minimum income benefit rider and all these other riders, you may whether it's a fixed variable or an indexed annuity find some mortality and risk expenses in and part of your annuity I feel like there may be layers, like a breakfast parfait.
Speaker 5:You know, parfaits have layers.
Speaker 1:Yeah, parfait is probably a great, great example of annuity fees, because you're right, they do layer upon layer upon layer and you, as a consumer, someone that may own an annuity maybe your parents own annuities it's good to pull back the cover and look at those layers.
Speaker 4:So trying to keep track of the parfait of fees. So far you've listed surrender fees, admin fees and mortality and expense risk fees. That's three of the five layers to our parfait. If there were no other fees and I needed to get all of my money out of the annuity, say within the first year of ownership, I would be paying 7% surrender, 0.1% admin fee and potentially 1% immortality and risk expense fees. That's over 8% in fees and, like you said, if I keep the annuity and don't surrender it early, there is no surrender fee. You definitely don't want to surrender the annuity early.
Speaker 1:You're exactly right. And here's the deal. We've only gone through three of the five potential layers of fees, so let's get after the next couple and we'll wrap this up. Get after the next couple and we'll wrap this up. So the next fee we'll talk about really has to do with mostly variable annuities. Now, while we're on the variable annuity and yeah, there is one more thing I want to discuss it's an investment management fee. So remember what we talked about. We compared the 401k plan to the variable annuity, where in the variable annuity, you can invest money into essentially investment funds underneath the annuity stocks, bonds, real estate, oil and gas, precious metals, you name it. There's all sorts of things that you can invest underneath that. Well, each of those funds come with their own cost to invest. They can range from 0.1 or 2% a year, all the way above 2%, depending on the kind of investments the fund is actually investing in. So it's kind of a wide open area, but nonetheless an additional fee when you're investing your money into a variable annuity contract.
Speaker 3:The variable annuities investment funds sound like they can be a large expense. I assume that I can choose any of, or a combination of, investment funds that might allow me the opportunity to be mindful of the investment fees being charged.
Speaker 1:And last but not least and this is the fee that deals with being able to create more flexibility, customizing your annuity as you purchase it.
Speaker 3:Wait, wait, it's the rider fee.
Speaker 1:And it's the rider fee, and it's the rider fee.
Speaker 1:Yes, nailed it, winning at LifeThings and riders can be range in any amount, but certainly, I would say, the average rider out there. Across all of them, fees probably anywhere from 0.4% to 0.5 percent, all the way upwards of one and a half percent. So again, when you're layering fees on top of the other, you might find yourself all of a sudden in this example of variable annuity with fees of three plus percent if you add all the bells and whistles and gee whiz, bangs. Keep in mind, fees are okay so long as they can deliver a measurable value to you. So when we're looking at the fees, we want to understand what they're charging and then we go into well, how valuable is that?
Speaker 6:Hi, I'm the cleaning guy. Please don't complain about the restrooms. I was just listening in the hallway and that's such a solid point. If I'm paying for something, I need to know what kind of value I'm getting. Cleaning guy, please don't complain about the restrooms. I was just listening in the hallway and that's such a solid point. If I'm paying for something, I need to know what kind of value I'm getting from it. Thanks for the chat. I gotta get back to cleaning. If you need me, I'll be in one of the restrooms. I can tell you this. When cleaning the restrooms, I would fucking love one of those guaranteed annuity riders, something along the lines of guaranteed minimum amount of nasty. Gotta go Peace out. Did he actually just say guaranteed minimum amount of nasty?
Speaker 1:Indeed guaranteed minimum amount of nasty. That's funny. That's funny shit, right there man. That's funny shit, right there, man. Yeah, so one last thought about fees, expenses. So you know we're looking at fees as they arrive or are presented in the annuity contract itself. Right, there could be up to five Maybe there's a new one that I don't know about, but five that typically are out there.
Speaker 1:In addition to that, how do the fees compare? What's the average range of fees around a fixed annuity? And those are going to be somewhere anywhere from as low as no fee to maybe upwards of a half of a percent per year. Surrenders for a fixed annuity could be anywhere from three years upwards of 10 years, depending on how long that fixed annuity guarantees you a rate of interest. The next annuity, the fixed indexed annuity, is sort of a moderate level in terms of fees, where fixed annuities are very low in fees. Indexed annuities, moderate in fees, you might be looking at anywhere from zero, once again, percent upwards of 1% annually and depending, again, as we recall, depends on how, what kind of riders we're adding to that, it could be even higher than 1%. Lastly, the variable annuity here is that one that across the industry, when you add some income benefits and so forth to it, it's going to range anywhere from two to 4%. So nothing wrong with paying an expense. It's just a matter of making sure that you're getting a reasonable value back for that expenditure. If not, maybe there's a better mousetrap for your needs purposes and timelines.
Speaker 1:So I've been talking about value, and how do you measure value? And I'm sure there's questions out there saying, hey well, how the hell do you do that with an annuity and what am I measuring? So when we're looking at an annuity, it's an investment tool, it's an instrument, right? It's just being issued to us by an insurance company and, as a result, it's issued with often promises or guarantees as part of the overall value proposition, let's call it. So when you're being charged fees, it's important to understand what am I getting in return for the expenses. In a vacuum, we just walk through five layers of fees, what they are and what the ranges of that fee or might be, as well as how those fees apply to different annuities. But what are we comparing? The value, and we have to compare that to an investment account, whether it's your 401k, your IRA, whether it's a trust account, whether it's an individual brokerage account. The point is you're comparing the annuity as an investment tool to just a pure investment account, as an investment tool Within the investment account.
Speaker 1:Let's look at that. Does it give me any guarantees? No, not really. It gives me opportunities, it gives me statistics. It give, gives me statistics, probabilities, possibilities, but there are no real guarantees with the investment account in general, basic terms. So, as a result, it may cost me less. It may cost me a lot less than maybe an annuity does.
Speaker 1:But what if that annuity guarantees me certain things? What if it guarantees me, through a rider, the income for the rest of my life, no matter how badly I screw up the investment component of the annuity? What if that? What if it says that if you have a chronic illness, because I bought a rider, I now have a promise, guarantee by the carrier to do something if a chronic illness befalls me now or in my future, especially when I'm in my retirement years? So the value of what you're paying for in the annuity, what's that value? There has to be a value to guaranteeing income for the rest of your life over the opportunity in an investment account to manage your investments, to be able to both grow, stay ahead of inflation and pay me the amount of income I need for the rest of my life. Those are large variables within the investment account. Within the investment account, that's what I'm trying to get at when it comes to how do I measure the value of the things I'm being charged for within my annuity.
Speaker 5:So if I exclude the surrender fee, a reasonable estimated fee might be 3%, plus that includes admin at 0.2%, m&e fees at call it 1% Investment management or enhanced index fee for I guess 1%, and a rider fee say 1%, guaranteeing income for life or something. That seems like a lot.
Speaker 1:Yeah, that's how the numbers kind of boil down. Each of those layers can add fees that cost you real money year in and year out. So over the last what 20 minutes or so, we've hammered the hell out of fees and hopefully you're getting your hands around what those fees are, how they work and maybe some of the fees you don't need to pay for, depending on what you're trying to accomplish with an annuity. Hope this was helpful. Thanks a lot for tuning in. Remember our next episode. We're going to pull back the onion on annuity riders, how to customize them, and maybe start thinking about annuities from a tactical and or strategic standpoint. Hey, take care of yourself. We'll see you next time on Bullshit on Stills.
Speaker 1:Thanks for tuning in to another episode of Bullshit on Stills. We hope you enjoy season two and find it as refreshingly honest as ever, because who needs financial fluff when you can have some facts? Remember we're here to help you navigate through the financial fog and come out the other side with a clear head. A big thank you to our talented content creators from bensoundcom, upbeatio and pixabaycom, who make this journey a little bit funkier. Special shout out to Andre Rossi's Funky Street and upbeatio for providing the groovy theme music that's been setting the tone for our season. Two adventures Got a topic you want us to tackle or a financial myth you're curious about? Drop us a text and let us know what's on your mind. Until next time, keep your detectors on and your sniffers down.
