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 Final Annuity Chapter: Taxes and Tactics
Annuities often appear in retirement planning discussions surrounded by jargon and overpromises. But what happens when you look beyond the glossy brochure? This episode cuts through the sales tactics to reveal what you actually need to know about annuity taxation.
We dive deep into the practical differences between qualified and non-qualified annuities, explaining how each is taxed and when penalties might apply. Did you know non-qualified annuities use a "last in, first out" approach to taxation, meaning all your gains get taxed first? Or that even non-retirement annuities face that dreaded 10% penalty before age 59½? These critical details often get buried in financial fine print.
Beyond taxation, we explore how annuities can function as alternative assets within a diversified portfolio. Rather than viewing them solely as income vehicles, we demonstrate how stripped-down indexed annuities might reduce portfolio volatility while potentially adding incremental returns without the fees associated with many bond funds.
Most importantly, we provide context for when annuities might actually make mathematical sense in your financial plan. By layering guaranteed income sources to cover essential expenses, you can create retirement security without sacrificing growth potential or liquidity. But this requires understanding exactly what you're buying and why you're buying it.
Whether you're considering an annuity purchase or already own one, this episode equips you with the right questions to ask financial professionals. Remember - it's not just what they tell you that matters, but how they respond to your informed questions that reveals whether they truly have your best interests at heart.
We love to hear your thoughts, questions, and ideas. Send us a text!
Developing your financial bullshit sniffer one episode at a time.
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.
Speaker 2:Welcome to Bullshit On Stilts. I'm Mark Robinson, along with the premier host of this, kelly Allo. We're live. This is season two, episode four, and today we're talking more about annuities. In this first, on this series on annuities, we talked about the different types of annuities unpacking annuities, those being fixed, those being variable and fixed indexed annuities. The second one was the price of peace of mind, total cost of your annuities, and with the riders. Number three was on riders, customizing your retirement safety net, and today we are talking about taxes and tactics. Cool, kelly, how are you today? I'm good man.
Speaker 1:I'm good.
Speaker 2:I'm sorry to present you with such a highly edited or will be edited opening to this. You know I've had AI filling in for me for the last several weeks we have been like really good.
Speaker 3:You almost didn't miss it.
Speaker 1:Yeah, that's funny. No, we wanted to help folks develop their bullshit sniffers when it comes to annuities. So much of social media advertising and sales is really done from the insurance side of the business and tremendous amounts of retirement discussion topics running out of money. The government owns 50% of your 401k.
Speaker 3:Take a listen to Season 1 Financial Fairy Tales, Episodes 17, 18, and 19.
Speaker 1:All of those talking points are typically going to drive a person towards annuity purchases because they're from insurance-licensed agencies, firms and so forth. So we thought, hey, let's maybe help everybody break this down. And really the first three annuity episodes we sort of think of it as boot camp, not here to tell you what annuity to buy, but just here to equip you with some deeper awareness around how they work, what kind of engines they are, what kind of customizations you can do with annuities that you can't with investment accounts, 401k accounts. And today that'll wrap it up with our final installment in this annuity series and we're going to be focusing on those taxes, any penalties that may apply to annuities. Focusing on those taxes, any penalties that may apply to annuities, as well as how do you view an annuity like an asset class alongside stocks, bonds, funds, indexes, exchange-traded funds?
Speaker 2:I have a trenchant question for you.
Speaker 4:What does that mean?
Speaker 2:Define trenchant.
Speaker 1:First, because I'm confused. Really heavy question.
Speaker 4:Oh, I get it, it's like Kelly, stepping on a scale Talk about distrust with the federal government.
Speaker 2:Indeed, front and center polarized Yep Overreach of the government In years past, if not indeed currently. About financial institutions, yep, whether it's conscious or subliminal in the consumer a safe haven with insurance companies, maybe putting some money and investing it with an insurance company with the perception of it being safer and less affected, as is financial services and certainly the whims and edicts from the federal government. What do you think about that?
Speaker 1:My perception of the average consumer out there is that anything financial, whether it's auto insurance, life insurance, disability insurance, retirement accounts, brokerage accounts, transferring brokerage accounts into my trust, all of that that financial side of the world I think most people are more and more skeptical of the advice they're given by the professionals that work in that industry and, as we've talked, there are a large percentage, a percentage that do really good work and put the consumer's interest ahead of theirs period. But there's an awful lot I would say majority that there are times where they don't necessarily put their clients' interests ahead of their own. So I don't know. I think I'm taking this way in the wrong direction.
Speaker 2:No, but it's good. But I think it was just a question. Look, we'll solve for this and we'll talk about it next week, because I'm going to put this all in front of my peeps on Reddit. Okay, All right.
Speaker 1:They'll let you know. They'll let you know sales professional from financial services. That comes across very professionally, that is clean in how they speak, they communicate well, they answer questions directly because they're not afraid of the facts that whatever is associated with whatever their recommendations are and I think that there are, and I've met, professionals all over the place that operate with that mentality. But again, I'm going to say that's the minority of that marketplace, the professional sales professionals, marketplace agents, brokers, advisors. So I think that consumers are fearful of decision regret right.
Speaker 2:It makes sense now, but three weeks later.
Speaker 1:Why the hell did I do this?
Speaker 3:kind of decision regret.
Speaker 1:I can't afford this kind of decision regret, I hate making mistakes, and I think that comes from more than any place else. Well, whether it's high-pressure sales or not, it's pressure sales tactics that's used out there, and before you know it, you're signing a check to purchase something or deposit some money into some account, and you can't remember for the life of you why that made sense.
Speaker 2:Well, and that comes to the fore, that decision regret when we talk about annuities, because when we talk about withdrawal, or when we talk about penalties for early withdrawal or just cashing it in before the surrender period is over, that can put a real hurt on you, which I know you'll be covering with this yeah, there's always the yeah buts and with every pro there's a con and certainly annuity worlds.
Speaker 1:There are benefits and there are drawbacks to annuities and when you start understanding that which hopefully this series will help I think you're in a much better position to be able to go out and meet with a sales professional and have that discussion and then compare their comments against a second sales professional representing some other organization, company or agency and you're in the catbird seat when you start developing really damn good questions around stuff that's being said to you. That's there really the features and benefits. Let's not pay attention to any of the drawbacks.
Speaker 2:Yes, so when you mentioned pros and cons, I just have a question here from the quality of the recording here, is my ankle monitor providing any kind of feedback?
Speaker 1:I mean the blinking blue light is reflecting off of underneath the table and along the wall here.
Speaker 2:But beyond that, I mean I was going to wear a full-length dress and I decided to dress mid-anniversary More like a sarong. Well, your inseam is kind of short, so I get that. The slippers are a nice touch.
Speaker 1:Yeah, so, yeah. So annuities, they're pretty cool. I just, I know that in my personal experience most consumers don't know how to really look at the annuity. What's it going to do for me? Why would I ever think of using an annuity? What happens once I'm invested in an annuity? You know what are my choices thereafter. Am I limited? Am I not limited? You know? Blah, blah, blah.
Speaker 2:So what we have here and this will be, I think these are podcasts that are truly archival, Only because delete isn't an option. By that I mean, there are things that folks can go back to and refer to and get just straight arrow approaches and explanations and definitions to this.
Speaker 1:So in fact this is one of the things we talked about. If you're sitting in your car and you arrived to your meeting at Fidelity Investments or ABC Financial or whomever, and you're going in for a meeting it might be a review meeting and you own annuities it may be a meeting around retirement and you suspect that there'll be annuity discussions or you know that there'll be annuity discussions these things 20, 30 minutes long you can pop that in and just kind of refresh your brain and jot down I don't know two, three, four key questions. That would be a hugely differentiated experience for you going in with some knowledge. And again, I think you've said this time and time again, mark that it's not exactly the answer they give you while you're asking the question. How do they respond and what does your belly tell you? Is it truth? Is it not true?
Speaker 1:Oh wow, that's a really good point Are they trustworthy now more, or are they less trustworthy based on how they answer the question, if they even do?
Speaker 4:answer those questions.
Speaker 2:That's what I kind of envision Even though they're speaking Even though they're speaking, and why I know that this series here, this four-part series here, is so good and so definitive, is because I didn't write one word of it. That makes sense.
Speaker 4:I can tell there are no 75 cent words.
Speaker 2:Let's get going here. Let's get into section one. This is just titled annuity taxation and you're going to cover qualified annuities tax benefits and withdrawal taxation. Kelly.
Speaker 1:Yeah. So we're going to do kind of a higher touch to this. We're not tax advisors, We've just lived around this stuff for a few decades. We've interacted withies in there. I took money out of my brokerage account and I swung over and I put 50 grand into an annuity. That is a non-qualified, in other words, it's not a retirement account. Now the cool part about the non-qualified the growth you get from the annuity while you own it until you withdraw any money out of it is tax deferred, just like a retirement account. So that's pretty cool.
Speaker 1:If you're looking for tax deferred growth on non retirement dollars, it could be a kind of a cool solution for you to consider the other and we'll come back to this but the other type of annuity is called a qualified annuity. So that type of annuity you're going to have retirement funds inside the annuity. It will operate just like a 401k, just like an IRA, in that pre-tax dollars go in. You're not taxed on them going in or you get your tax deduction at the end of the year going in. It grows tax deferred and just like an IRA, a qualified annuity with retirement funds in it. They have a required minimum distribution, meaning that as of right now, when you're 73 years old, you have to start taking out some money little by little from the annuity. So those two, the non-qualified and qualified annuities, are sort of where the tax discussion starts.
Speaker 1:Have I lost you yet? Nope, Okay, Nope, nope, Okay. You want me to keep going? Keep going, Okay. So let's talk about just focus on the growth inside of an annuity, Either the non-qualified or the qualified. When I add money or value to my annuity, I'm accumulating annuity value. That's called growth. When I take my growth out of an annuity, it will be taxed as ordinary income tax Shit.
Speaker 4:My pencil broke. What did he say?
Speaker 1:It will be taxed as ordinary income tax. It's not taxed as capital gains like my investment brokerage account would be, or my individually owned trading account at Schwabcom or something. It will be taxed as ordinary income. How that's treated the non-retirement version, the non-qualified account.
Speaker 3:Yeah, the taxable annuity.
Speaker 1:If I put $10,000 in the annuity and there's $10,000 of growth, my annuity now is worth $20,000. If I were to take out all $20,000 in one fell swoop, half $10,000 would be considered growth and that half would be taxed at my ordinary income tax level Is that called the premium, or is that called basis?
Speaker 2:How do insurance companies categorize that?
Speaker 1:So principal tax, basis tax, cost basis premium, all of them are used and I've seen them used interchangeably. So they all mean the same thing, which is the money you put in the after-tax, money you put into the non-qualified annuity is not taxed when you take it back out of your annuity. It's only in that taxable situation only the gain will face ordinary income tax, whatever it is the year that you withdraw money.
Speaker 2:And if one from a practical matter, from a tax reporting, the report that they get year-end, it's a 1099-R. Yeah, the the 1099R will show what was principal or premium.
Speaker 1:That's exactly right. Yep, yep. Here's where the wrinkle. Let's stay on the non-qualified, the taxable annuity side for a second. Let's say that I withdrew of my example, put 10 grand in. It's worth 20,000 now and I didn't withdraw all 20,000. Let's say I just took two grand out. How do you think that's going to be taxed? Do you think it's half and half? Do you think it's only my principal or do you think it's only gain? I hate multiple choice.
Speaker 2:I love multiple choice questions. I think it would be the gain that is the correct answer.
Speaker 1:So it's a last in, first out approach to taxation, meaning the last dollar that went into my annuity. When I withdraw the two grand, that's $2,000 of the last 2000 that went into my annuity contract. Since I just put 10 grand in the new dollars, the other 10,000 that's grown, that's considered new I'm going to get all my gain first if I'm withdrawing it in a couple grand here, a couple grand there, how?
Speaker 2:many more instances? Can you recount or itemize where it is last in first out?
Speaker 1:Oh gosh, you can opt for that in your brokerage accounts. In terms of how you want withdrawals to be treated, you can ask it to be pro rata. You can do a lot of different things there, but I mean, the only thing that I ever think of last in, first out is going to be an annuity. Are you thinking of anything?
Speaker 2:else. No, I'm not. Yeah, you hit it.
Speaker 1:Hit the one I wanted you to yeah, because when you're trading in your your, your personal account, your trust account and you you buy a fund, that's your premium, your cost basis, your starting point of your principal investment amount. When you sell that let's say I have been buying that over the last five years I have all sorts of different purchase points that create different sizes of gain or loss in that stock itself and I can go in and literally, as a surgeon, cut out the specific purchase date given the gain or loss that I'm trying to achieve with that sale when I sell that position or a portion of that position. So it's much more finite and manageable in the brokerage side, I think.
Speaker 2:Yeah, it sure is, yeah, it sure is yeah.
Speaker 1:The only tool you have on the annuity side that gets you out of the last and first out scenario is when you have this taxable annuity, this non-qualified annuity, and instead of just grabbing money out a few times a year, once a year, you say, hey, I want to annuitize this contract and I want the contract to begin to pay me, in my example, a monthly payout from my annuity for the rest of my life, or whatever my decision is.
Speaker 1:It could be a 10-year period, certain it could be for the rest of my life, or whatever my decision is, it could be a 10 year period, certain it could be for the rest of my life and my spouse's life. Whatever that decision is, when I annuitize my payment now, the tax treatment will be part of the money that's sent to me is principal and part is gain. So only part of that paycheck that I get paid out will be taxable. And then you brought this up. At the end of the year you'll get a 1099R for your tax preparation and it'll depict on that form what dollar amount is taxable and what dollar amount is not. So this is complicated stuff. I mean, this isn't for the faint of heart, and why we're talking about this is there's so much more to the annuity decision than just income for life, and that's unfortunately what's really sold out there very hard. Is that income for life?
Speaker 2:scenario. We've covered the taxation. We've focused a lot on the non-qualified. Do you?
Speaker 1:want to go to the qualified now. Yeah, so before we punch out of this, just the qualified is far easier If it's a traditional retirement account, meaning that I put pre-tax dollars in, I got my tax write-off and that someday when I take money out of this it's going to be fully taxed, meaning ordinary tax. That's the traditional retirement account. I want an example.
Speaker 3:Don't you dare ask for an example.
Speaker 4:But conflicted, because it means he will talk more.
Speaker 1:Do not ask An example, if you're retiring and you're working with an advisor and let's say you have 500 grand in your 401k, let's say 100 grand goes to a annuity. In that event, from your 401k, that 100 grand in that annuity and anything inside the annuity, from here on out when you withdraw money out, will be fully taxable.
Speaker 2:And is that clear that that annuity is registered?
Speaker 1:as an individual retirement account Annuity or retirement annuity, I think, is what they usually call it. So fully taxable again, ordinary income.
Speaker 3:Yeah, but what about my Roth annuity?
Speaker 1:If you have a Roth IRA. Now the annuities can be kind of interesting with a Roth IRA because you still have no taxes associated with withdrawals, but you could also have no taxes on income payments for life, or maybe for life across yours and your surviving spouse's life. So Roth annuities are pretty cool from a standpoint of tax deferral tax-free, with some safety nets. If you're of the opinion, you want.
Speaker 2:Yeah, that's really cool, it is. Yeah, mark's so regal in his dress, or?
Speaker 1:salon.
Speaker 4:From my angle, all I see is a flashing blue light.
Speaker 2:Okay, so we've gone through withdrawal taxations. Let's move to early withdrawal penalties yeah.
Speaker 1:So this is something that a lot of people don't know, and when you're putting money into an annuity, if you withdraw money out of the annuity before you're 59 and a half, you will face that dreaded 10% penalty on the withdrawn amount of money.
Speaker 4:That would be the IRS early withdrawal penalty of 10% and that applies to the taxable growth portion of the contract.
Speaker 1:So you don't want to be 20 putting your money into an annuity. If you ever think you're going to have to take money out of that annuity for whatever's going on in life before you're 59 and a half, that might not be the best way and that's not exclusive to an annuity.
Speaker 2:If you are under 59 and a half and you put money into an annuity and you're 35 and you want to take money out, that would be the same case with if you opened up an IRA.
Speaker 1:If you open up an IRA, yeah. Yes, yeah, yeah yeah 59 and a half penalty rule. It exists with the annuities. I was just a little surprised that it existed with non-qualified annuities, the taxable side of the annuities.
Speaker 2:So again, putting money to work in an annuity, be very clear as to what those penalties could be, but we know why there's a penalty, because you're keeping taxation from home For 200 points. Who is the government? Well, that's right, that's right, that's exactly.
Speaker 1:Yeah yeah. One of the things that I want to be clear is terminology with life insurance is incredibly important Life insurance products to include annuities. When I say withdraw money out of an annuity, I mean you're taking the money out of the annuity wrapper, away from the insurance company and a pay and checks being sent to your house. That's a withdrawal. If you have an annuity and you say I don't need this annuity anymore, I'm going to move my money from annuity A to annuity B, that's not a withdrawal, that would be a transfer, and in that case you can transfer annuity monies in a very tax-wise manner called a tax-free exchange. 1035.
Speaker 2:Yeah, tax code yeah, 1035.
Speaker 1:Yeah, so just be very clear when you're asking a question to a sales professional, what happens? What would I pay in surrenders and fees and admin charges or whatever, and early withdrawal penalties if I withdraw money?
Speaker 2:that's a huge deal. All right, can I let's stay within the insurance realm here. Can I take an annuity and transfer that to an insurance policy, or vice versa? Can I take an ira and do that you?
Speaker 1:can um wow, I think here he knows Watch him shake policy, and I think the answer is no, he knows you watch him shake his head to find the answer you can. Life policy to annuity, but not annuity life policy annuity to annuity you can, but let's double check that because I might be yeah, and just to our, to people that listen to the podcast.
Speaker 2:The reason we're able to get all this fact-checked is we really start this podcast. It might be 30 minutes or so. We start it right after our second bowl of Lucky Charms in the morning.
Speaker 4:I hope he isn't doing the Scottish coat thingy under his dress.
Speaker 2:We put it on pause again when we're screwing up that might be four or five times we take a dino-nuggies break around one or two half hour on the nap with the mats. Then we come back in this and kind of fix all this stuff up. So we'll have all the facts for that by the end of this podcast. Let's see what this is. You did that with such precision. Did you ever fact check on a presidential debate or anything?
Speaker 1:I used to fact check CNBC at night. I would. I would sit there and I would type in things that I didn't understand. I'd pause it and I'd type in something I didn't understand. I'd review it quick and I'm like, oh, now I got it. And then I'd unpause it so I could track some of the Jedi Knight conversations that were going on with Kudlow and Company and some of those econ-focused things.
Speaker 3:Yeah, that's what I did. Sounds like a dating profile from whyyoucantgetadatecom.
Speaker 1:So we did that fax check? Yep, we did and we found that that was correct. You can do a 1035 from a life policy to an annuity, assuming there's cash value to do that transfer of. But you can't do a 1035 tax-free transfer from an annuity to a life insurance policy.
Speaker 2:So what are strategies to avoid penalties?
Speaker 1:So they're not great and wonderful. There's a few strategies you can use right. One strategy is to make sure you're clear as to any annual penalty-free withdrawal option. You may have Usual and customary 10% of the contract value. Going back to our $20,000 annuity, 10% is two grand. I could withdraw two grand out annually and have no penalties.
Speaker 1:That means surrender penalties by the annuity contract itself. It's not speaking to the 59 and a half IRS penalty. That's one way to say gee whiz, what are the penalty freeze? Did he say freeze? Because in the future, if my contract is projected to be X, I could take 10% out and I could help pay for I don't know my property taxes at both my residence and my cabin up north, as an example. The other way is to just understand that there are penalty withdrawals, that there is a 59 and a half age early withdrawal penalty. So when you're purchasing an annuity, be very clear that that money is not money you're relying on over the next five to 10 years, that you have other sources to turn around and grab five grand out of 10 grand here or there if you need it, so that you don't knock on the penalty surrender fee window as it may apply to your annuity.
Speaker 2:This comes down to one of the podcasts we did on the Fab Five, which would fall under really number one and number two know what you own and why you own it, which would minimize or completely obviate you taking Obviate.
Speaker 4:What is to stave off, to prevent or avert, obviate?
Speaker 3:That is so Jeopardy of you.
Speaker 2:Completely obviate you taking withdrawal penalties because you decided this wasn't right for me. That's right. No, that's exactly right.
Speaker 1:Plan right yeah, because, again, if someone's speaking to you and convincing you of all the benefits, the features, the bells and whistles, but they're not talking about some of the drawbacks or things to be mindful of when you put this golf club, so to speak, into your financial plan, of investment holdings and so forth, and it's something that should be thought of. I sometimes think of annuity and penalty phases and surrenders, sort of like. I do a bond. If I'm buying a 10-year bond, I don't expect to sell the bond in my example here for 10 years, so I don't care what happens between now and 10 years. Outside of that issue, we're going bankrupt. I don't expect to sell the bond in my example here for 10 years, so I don't care what happens between now and 10 years. Outside of that issue, we're going bankrupt, I don't care. And sort of.
Speaker 1:When you look at the annuity landscape, I think that's the mentality you have to have. By the way, one little caveat that a lot of people don't necessarily talk about with annuities, if I put my money into, let's say, an indexed annuity and I'm doing it for really good reasons we'll talk about those next when I take my money if I reallocate 100% of the annuity money back into stocks, bonds, mutual funds, index funds, that will be the moment I pay taxes on the gain, whatever's in that contract. So it's not quite the same as reallocating in other instances with other investments. That bill, that tax bill, will be paid if I reallocate money out of an annuity wrapper into regular old stocks, bonds, funds, land. And I think that's something to keep in mind because I think we'll be talking about how do you use annuities when you're considering what you want to achieve within your investment plans.
Speaker 2:Let's go there right now, is that?
Speaker 1:all right yeah.
Speaker 2:Let's talk about annuities as alternatives perhaps to other packaged products where you can invest in the marketplace.
Speaker 1:Yeah, To me, alternatives is a huge space right In the investment world. Yes, Things like hedge funds, commodity funds, private equity funds, master limited partnerships I mean all sorts of alternatives. And what's rarely considered an alternative in investment advisory land will be how do we, could we, should we, incorporate an annuity or maybe different annuities into our overall plan? Would it be beneficial? And so when I think of the annuities, I do think of them as an alternative asset. They bring lots of interesting characteristics to an otherwise normally asset allocated, investmentocated investment plan of stocks, bonds, cash, some alternatives normally a real estate investment trust, maybe little precious metals in there.
Speaker 2:Yeah, so they're a modifier in this degree. When you're talking about ETFs and mutual funds and UITs, they're a modifier of this, the same generic investment being at an asset class like equities, but it's a modifier to the taxation on that. Is that how you're meaning this?
Speaker 1:I sort of look at-.
Speaker 2:For the correlate person. How would you describe that?
Speaker 1:It depends on what we're talking about, where we're talking about. So, if we're talking about mutual funds I own mutual funds I can put money in my stock funds, my bond funds, my alternative investment funds those are my, that's my landscape. Well, if we're talking about principal protection, if we're talking about having a bunch of cash on hand so that I can take paychecks out of my cash high yield savings account if we're talking about I want to invest and take very little risk to my principal and we're talking about a realm that is lived in by certificate of deposits from banks, us Treasury bonds, fully guaranteed by the US government. We're talking about high-yield savings accounts, fully insured by the FDIC. So we're talking about a market.
Speaker 1:What also fits there is fixed annuities, and so if a fixed annuity is offering you let's say, in my example, 1% higher interest rate on your money than a high-yield savings account, it's guaranteed, it's insured and it's backed by a sinking fund in the state, might be something worth looking at. Just might be. Oh, by the way, do you want a little tax-deferred deferral on your money in there? Do you want to pay the interest on the CDs you own every year, even though you haven't done anything with your CD. So I think that's where fixed annuities can play.
Speaker 2:Yeah, I agree with that.
Speaker 1:Now we're talking about the mutual funds If I'm looking for, let me ask you this Mark if I'm a person that I'm allocated pretty balanced let's say, 50% in stock, 50% in bonds you know I'm pretty comfortable with that, but I'm a little concerned around market volatility. I hope he gets this question right Is there annuity that might be able to play a role in that moderately allocated plan that helps to maybe address some of your concerns about downside market.
Speaker 2:Well, sure you could do an indexed 100%, you could do an indexed annuity to that and that truly is an alternative, particularly because you're not investing into the stock market.
Speaker 1:That's right. And what else do you get with that typical indexed annuity?
Speaker 2:Well, you mitigate any downside value and, as you would always say that, what is it? Zero is your hero.
Speaker 1:That's right.
Speaker 2:That's one of the big selling points, and one of the hardest thing that is, investment managers hate to get into this spot is when they've got to dig out of a negative return, particularly if it's double digits it takes often forever to get out of that mess.
Speaker 1:And you and I know we've done this a couple minutes now in our lives that even a fixed income fund, bond funds they have downside deviation. They have negative returning years In 08, core fixed income, high quality bonds, us corporates and so forth Typically the stalwart in every allocated portfolio core fixed US bonds that turned in a negative 12 plus percent. So if I'm trying to get rid of that downside deviation, an indexed annuity can be a beautiful play. The other cool thing about that is I don't have to add anything to that indexed annuity and I might be able to get it for $0 in expenses. So if I'm only going to own it for five or seven years, what do I care.
Speaker 1:I don't need a big income rider on it necessarily. I don't need to pay a point and a half for this rider and 25 basis points for another. I just want you to be my substitution for some bond exposure. Give me a decent single-digit return and zero downside performance. That tastes good. That's how someone can actually fundamentally change their risk versus reward ratio of what they're willing to invest in, essentially by taking away some of that risk.
Speaker 2:Yes. So Fidelity Magellan is Fidelity Magellan whether you buy it but in a brokerage account, or you buy it within an annuity or 401k. But there's other implications based on time horizon, based on your willingness to take on risk or mitigate downside, and that's what you can get within the annuity. That's right. So is that optionality? You get to shape what you want.
Speaker 4:You can shape how it grows. You can shape safety around retirement income. You can shape the minimum amount of death benefit. You can shape cost of living increases in the retirement income. How about a shape of a new car?
Speaker 1:Look, if I'm a growth-oriented investor or I need growth-oriented returns let's say 7%, 8%, 9%, 10% returns maybe the index isn't what I need. Maybe I need a variable annuity because I can invest in the market through these investment accounts. But I can do that. And, like you're talking about customizing what I add to this chassis, what if I screw everything up and my investment thoughts were just out in left field? Well, with the right income rider, it doesn't matter, because I can turn that income on based off of some theoretic value called the income base or benefit base, whatever the term is the carrier is using. So I can shape and do it with some safety nets in annuity land. The only safety net I have within investment land is diversification. That's predominantly my safety net in investment land.
Speaker 2:You know. I just want to make an observation. You've been working with artificial intelligence.
Speaker 3:Oh my God. Thank you so much for mentioning us, mark Hello. What's up Can we shut up Hi.
Speaker 2:Oh my God, Over the last two or three weeks here and now you're with a real blockhead and you're doing really quite well Am.
Speaker 1:I.
Speaker 2:Yeah you're really doing quite well here.
Speaker 1:All right, we're going to move on to it's not surprising, it really is. And when you're in front of me and those doe eyes of yours, I just get into this zone.
Speaker 2:You and those doe eyes of yours. I just get into this zone.
Speaker 1:What the hell is going on? All right, so let's get back to practical considerations when to consider annuities. Yeah.
Speaker 2:And, what is important, what questions should we be asking? What kind of answers we're looking for?
Speaker 1:Boy. Annuities can run the gambit in how you use it right, and I think we just touched on some of them right Variable annuities, index annuities if you're looking at equities and you're in stocks, mutual funds they might be something consider. I'm not saying put 100 of your money into it, but maybe 20 makes sense from a risk adjustment standpoint. Bonds well, we're back into the fixed annuities and indexed annuities. Cash reserves, fixed annuities, targeted date funds that exist out there, like retirement funds. You're in a 401k, you've been in a targeted date.
Speaker 1:When you retire, it might make sense to consider some exposure to an annuity that can lock in some percentage of your income that you're looking forward to utilizing in retirement Dividend stocks, income that you're looking forward to utilizing in retirement Dividend stocks. People will make an argument that an immediate or deferred annuities work well compared to a dividend stock account. I don't know. I mean, I get what they're trying to do, but the dividend stock account and the approach to investing in an account populated by strong dividend-paying stocks, that's a hard comparison in my mind to do.
Speaker 2:Can we go back to the target date funds? There are target date funds that used to be up to retirement. They were structured that way and then a bunch of wise guys got together about 10 years ago and said what are we doing that? Let's do it through yes, through retirement, and part of that was to hang on to the assets, of course. But is that a better idea, through the 401k, or maybe structuring something within an annuity to accomplish the same thing? And what's my optionality to do that?
Speaker 1:Yeah, I think that in this conversation that we're having right this second, no matter what it is, it boils down to how much income can I derive from that? Could be an IRA 401k, could be a broker.
Speaker 3:So, for instance, the amount of income my IRA can kick out to me.
Speaker 1:So, when it comes to that, we take risk in investment land, when we're withdrawing money to live on, and that risk has everything to do with the volatilities of the marketplace and the unknown. And all we got to do is look back at 2008, for example, and say, if you retired January 1st 2008 with a million dollars and you were invested like most people and in this case we'll say 40 stocks, 60 bond you lost almost 40% of your money and you withdrew money to live on that year. So in that scenario, when you start year two and you're down 40% on your nest egg, generating income from invested monies that's the risk that's presented to the individual investor, the retiree With annuities you don't take that risk. You shift that risk and say someone else will take on that risk.
Speaker 3:What risk?
Speaker 1:Generating income from invested monies because they're going to promise to send me a paycheck monthly when I say to. And I can structure it in a lot of different ways. I can structure it, like I said, across both myself and my spouse. That survives me as an example. So we don't have to lose sources of income even when one of us passes if I'm using an annuity. So there's a role for annuities. It's just a matter of keep your eyes open, read the small print and ask some really good questions about those annuities before you pull the trigger, and feel free to send us a note. You know text us with a question. We're happy to give you some insight from our perspective when it comes to these products and how they might or may not work in your best interest over the course of a 10, 20, 30-year retirement.
Speaker 2:And I think one of the benefits of this podcast and I can say this because, as I said, I have not contributed anything to this from a content standpoint is that you say for folks to read the prospectus, what they do get out of this is a caveat.
Speaker 2:After, we're acting or Kelly is acting in this case as your consumer protection or investor protection, because he indeed does know the prospectus and he does know where the caveats are, the potential downsides, because typically what you get is the sales side of this. So you get all the potential benefits of it explained in glittering generalities, as it's called, and nondescript nouns to where you really don't know. And that's why, coming to this podcast, you kind of get the skinny more from protecting you with it. And I have never seen an individual make such elaborate origami out of an annuity perspective as Kelly here.
Speaker 3:Yeah, those are really nice. I'm fantastic.
Speaker 4:I like to make shadow puppets with my hands.
Speaker 1:I'm on the local tourist beat. I've got a little trailer.
Speaker 2:You know how people that own Jeeps. Now they've got all their little ducks out in front Kelly's got his little prospectus origami out there.
Speaker 1:That's right, they're all on my tail bumper.
Speaker 2:Yeah well, they're all in the I think you go all the way back to the first Federal Reserve chairman of the Federal Reserve and you've got the face. Likenesses of them are just absolutely unbelievable.
Speaker 1:They really are.
Speaker 2:Yeah, and I like your Ben Bernanke probably the best. Yeah, because you got the beard in there, plus the bald head that was that's artistic? Yes, that is artistic Very much so.
Speaker 1:So let's. There was a lot here, but let's recap this.
Speaker 2:So let's just start with, let's just bang through. We went through and just jump in on this the annuity taxation we've had qualified, we've got non-qualified Taxation. We've got qualified, we've got non-qualified. With the non-qualified, if you put in $10,000 and it grows to $20,000, if you are taking money out, it's going to be a split between that, between the gains which would be taxed as normal regular income, and then of course, you'd have something that says it was a return of principal or premium. With that, with the qualified, it would all be just like your 401K it would be taxed as ordinary income. And the really cool one is that Roth. And what I thought was cool about that, kelly, is that you know what you could take that tax-free and that could be intergenerational For at least one person, yes, for at least one person, yeah if I pass away, katrina gets to continue to spend that money and it continues on Again.
Speaker 1:Remember that, unless otherwise noted. When they talk income for life on annuities, assume that is not adjusted for inflation. So in bond land you know, if you get a 5% straight interest-paying bond, it's called a bullet. So think of it that way. You may generate or be paid $5,000 per $100,000 in your annuity if it's a 5% income payout. The question is what does $5,000 buy 20 years from now with inflation? What does it buy in 30 years? And obviously the answer is not nearly as much as it did at the starting point.
Speaker 2:So you could have a hedge against taxes with the Roth. You could put a rider on there for COLA, cost of living adjustment Correct, and you're willing to pay for that. If that's the price you're willing to pay for peace of mind, yep. So think about the optionality with that.
Speaker 1:When I think of it I'm thinking of how do I layer income in my retirement? So let's just assume and everybody's is different, but let's just say that my Social Security benefit, retirement benefit, is $24,000. Let's just say that's what it is. And if I have an annuity that's paying me, I don't know another 20 000 a year, I'm up to 45 000 an income that's coming into the house. If I have other accumulated savings and retirement and brokerage accounts, maybe an inheritance, maybe whatever that's above and beyond that, I might be able to take some money out for lifestyle.
Speaker 1:But having my needs, the things that I have to pay for, no matter what well, I need a place to live, shelter, I need food. So I need groceries, I need the utilities I need. What are the needs? The coach purse isn't a need. I mean in economics it's not a need. In someone's lifestyle they may look at that as a need. So if you can provide 100% of your needs in retirement through reliable income sources and you have, let's say, a decent amount of accumulated assets outside of it for the all shucks of the times and so forth and so on, you're in pretty doggone good shape, because the needs typically are going to run 60, 70% of your spending in retirement.
Speaker 2:Let's just go down this and I have another question for you. So we've talked about penalties, early withdrawal, know what you own, why you own it, and you better have a good plan, because annuities are not the place where you want to go. Uh-oh, I'm changing my mind. That's right, or I shouldn't have gotten into this. So with that, we do know. We've talked about how it can work with alternative investments and even, within a particular asset class, the optionality that that can create for you based on taxes and other riders you can put with that.
Speaker 2:When to consider annuities We've talked about that. What questions you should be asking? Which still goes back to one of our original big fab five ones Know what you own, why you own it, how you do it compared to what and what your total costs are. You know what I did. I spoke too long to where I lost my train of thought again. And that's getting down to like 30 seconds, to where I kind of forget what we were talking about, but I know it'll come back to me.
Speaker 4:Senior moment. It's brought to you by what was I talking about? One a day capsules.
Speaker 3:Oh no, Wow, those capsules really work.
Speaker 2:Annuities do offer a tremendous alternative or complement with an E to other investment categories. R&d I agree with you, it is a different asset class.
Speaker 1:It is. We've done the work where we've looked at the impact of an indexed annuity within a stock bond portfolio and it does do what you want it to do. From a diversification standpoint, it can reduce the overall risk measured by volatility of the stock bond plan and it can add incremental return to that plan. Oh, by the way, if we don't have riders or anything on this indexed annuity, it doesn't cost me anything. Next time you look at your account, find out how much that fixed income bond fund is charging you 0.3, 0.6. Heck, some of them real return kind of stuff are up in the 0.9s, even though their historical returns are less than seven. So it's interesting how you could actually reduce your costs, reduce your volatility risk and add incremental return through the use of a stripped-down indexed annuity as an example.
Speaker 2:And look at how indexed annuities any indexed annuities 10 years ago, they were just vilified 15 years ago. You know why? Because we didn't understand them.
Speaker 1:Because the illustration software didn't have guardrails.
Speaker 2:That's right. It didn't.
Speaker 1:We look at this more from the asset class and what we want this to do, and if we arrive with brainstorming that someone might be well served from an indexed annuity as an example, it's a matter of now shopping for the right annuity from a cost. Do I want annuity with a bonus or not? Do I want an income writer or not? Maybe I have a health issue and so I want a beefier death benefit on the annuity, never mind the income, I don't care about that. As an example, there's just so many ways the annuity in a technician's hand, a strategist's hand, can be incorporated for the benefit of the investor more so than the benefit of the advisor. So that's it. So I think we covered most everything. Yeah, are we in agreement? Yeah, no, this is good. Yeah, so that's it. So I think we covered most everything. Yeah, are we in agreement?
Speaker 2:Yeah, this is good yeah.
Speaker 1:This has been okay. This has been somewhat information, not really. You probably wasted most of your time on this day. Well, is that? Is that I hear a big sigh of my God.
Speaker 2:You know what it's really really good information. It really is, but it's almost, like you know, it's, I don't know, a lecture on mosquito reproduction or the DNA.
Speaker 1:That's what this feels like you know I've spent the last 45 days. What are they called Fruit? Flies or fauna during the Devonian and crustacean period stuff like that yeah. But you know, it's really really good stuff.
Speaker 2:It's really okay, and you know what made this such a great podcast? What's that? You didn't get out your stupid calculator.
Speaker 1:I didn't, I didn't, I took it out way before you got here. I was using the hell out of that calculator because you know what I was doing. This individual has an annuity at a half a million bucks, paying 3.81% in fees, and do you know, based on my math, how much income they'll receive when they turn on the faucet? I'm glad you're asking me 24 grand, I was just going to say 24.
Speaker 2:The only reason is because you told me yesterday Okay $24,000. And, ladies and gentlemen, that's a 3.81 rounded up from 3.816.
Speaker 3:Wouldn't, rounding up, make it 8.2%.
Speaker 1:Here's the rub Mark's on a roll the annual cost of that annuity is nearly $21,000. So every year he's shelling out $21,000 in expenses for the promise right now of $24,000 a year for the rest of his life, while he's still shelling out those fees, which means that the contract value will be below the value that that fee, that payout, is calculated off of and you won't get rid of your annuity.
Speaker 2:It's a way that they kind of create these things to lock you into keeping your money in insurance company land. Kelly, you're kind of like the doge of insurance and investing annuities. I mean, you just go in there and point out where the waste is. Here's the interesting thing, and I don't know that this will make it.
Speaker 1:but here's the interesting thing On that same guy's situation, we and take the half a million away, not withdraw it, just transfer it to a fixed indexed annuity for the next five years. Nothing on it, no fees. What's 540 at about a 5% return over five years. That's go ahead. You got your calculator 47?.
Speaker 2:No, you said 500 at 5.4 or something 5% over.
Speaker 1:So what was it? Oh no, I thought annually. Just simple, simple calc on that Don't be doing simple 500 at 5.4.
Speaker 2:I think that's 27.
Speaker 1:638. Future value after five years at 5%.
Speaker 2:Oh, I bet you I'm an annual income off of it.
Speaker 1:No, no, no, oh okay 638, and then you take times 0.
Speaker 2:He's killing me, Claire. Can you believe this?
Speaker 1:Just think of this In five years that same income off of this thing would be 46,000. Of this thing would be 46,000 for, and I didn't spend five years paying 21,000 a year in expenses on my variable annuity?
Speaker 2:That's huge. That is huge. Can I ask a question how many decimal decimal places to the right Can you go on pie?
Speaker 1:I mean just you yourself. Me, I'm good with two, you're good with two 3.14, isn't it? I would love a chicken pot pie actually Is that right, Claire. She's looking up at the ceiling. She doesn't know. Look at her. Look at her. You're looking in the ceiling. You're looking for the cobwebs in your forehead a trillion places. I think Google has it out to a trillion.
Speaker 2:Yeah, you must be jealous.
Speaker 1:I'm good, I'm good I operate with four decimal points on my HP. 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 upbeat dot IO 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.
