Retirement Answer Man

You may still have some questions about annuities so in this episode I answer your annuity questions. We have had several listeners ask some great questions which will help clarify how annuities work. After diving deep into annuities during this 5-week long month, we can all look forward to the next series where you will learn how to figure out who you will be in retirement. But before that, listen to this episode to get all of your annuity questions answered. 

Why can’t people just self-annuitize?

Ryan asks: why don’t individuals self-annuitize by using the IRS required minimum distribution (RMD) tables. This way they can keep control of their assets with the additional benefit of being able to leave the assets as an inheritance. 

This is actually a great idea and the idea that the IRS has behind the RMD. The primary difference between this example and an annuity is the risk factor. In an annuity, the risk has been removed in exchange for your loss of control of assets. So in this example, you would still maintain control of the assets but you would still need to factor in market risk and execution risk. Would you prefer to use your IRA in this way or get an annuity?

Do RMD’s play a factor in annuities?

Another listener is curious about the role that RMD’s play in annuities. Her husband recently bought an annuity and was told that he would have to begin the annuitization phase at age 70 ½ due to the RMD. 

The reason that he has this stipulation is that he must have bought the annuity using tax-deferred assets. If you have other tax-deferred assets you could postpone the annuitization period as long as you are still taking the RMD from other sources. If you have bought an annuity, did you use pre-tax or post-tax assets?

Why do insurance companies handle annuities, and how do they make money?

Insurance companies handle annuities instead of banks or investment firms because they are pooling risk from a large group of individuals to spread the risk in a similar way as that of an insurance policy. But the insurance company makes money much like a bank. They collect money from thousands of individuals and then they are able to invest it and earn a larger percentage than that of their policy payout. It’s like you going and buying a cd. It is important to remember that an annuity shouldn’t be seen as an investment but rather as a pre-purchased pension. 

What if you don’t want to know all the details surrounding annuities?

One listener thinks that annuities sound like an excellent option for her retirement but she doesn’t want to know about the fees and charges. With an annuity, it is important not just to read but also understand the contract which is no easy task. The way the contracts are written could cause you to accidentally break the contract if you aren’t careful. If you aren’t looking to be swamped by details, a fixed annuity is much more straight forward than a variable annuity. 

If you are considering an annuity you need to first think about your overall retirement strategy. Let the process drive decision making. Consider why you are interested in annuities. Are you looking to insure longevity risk, simplify your financial life, or buy a pension? Remember that you are not buying an investment. So what do you think of annuities? Do they seem like a good option for you?

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

HOT TOPIC SEGMENT

  • [2:18] Who are you going to be in retirement? 

PRACTICAL PLANNING SEGMENT

  • [6:50] Why wouldn’t people just self-annuitize?
  • [8:55] Do RMD’s play a factor in annuities?
  • [10:54] Why do insurance companies handle annuities?
  • [13:40] What if you don’t want to know all the details surrounding annuities?
  • [16:06] Are insurance companies selling off their annuity lines because they feel they can’t be profitable?

THE HAPPY LAB SEGMENT

  • [20:24] I am excited about next month’s series that focuses on who you will be in retirement

TODAY’S SMART SPRINT SEGMENT

  • [21:14] Eat the frog - do the thing you don’t want to do first thing in the morning

Resources Mentioned In This Episode

BOOK - Eat that Frog by Brian Tracy

Rock Retirement Club

Roger’s YouTube Channel - Roger That

BOOK - Rock Retirement  by Roger Whitney

Work with Roger

Roger’s Retirement Learning Center

 

Direct download: RAM284.mp3
Category:general -- posted at: 6:00am CDT

In this episode of the annuity series, we’ll discuss the pros and cons of variable annuities so that you can learn whether a variable annuity should be a part of your retirement plan. During the Hot Topic segment, we’ll discuss the Rock Retirement Club since enrollment just opened back up. Then in the Practical Planning segment, we jump back into our discussion on annuities. You’ll learn all about variable annuities to help you become more informed. Listen to this episode to learn the pros and cons of variable annuities. 

Is the Rock Retirement Club right for you?

The Rock Retirement Club has opened its doors once again! Now with over 200 people, the RRC was created last fall as a safe space to help others in various points along their retirement journey. The motto of the Rock Retirement Club is, “Walk with the wise and become wise.” Check out the RRC if you are interested in these 3 things:

  1. Get a world-class education on how to ‘do’ retirement. We do this by creating educational courses, workshops run by experts, and meetups on how to do specific things. 
  2. Take action. We have a monthly action plan to help you take baby steps towards your retirement goals and we give you the tools to take action.
  3. It is a safe place to walk with others along this retirement journey. 

What is the difference between a variable annuity and a fixed annuity?

There was $200B in annuity sales in 2018. Of that, $100B was in variable annuities. Since variable annuities are such a big part of the market, we should learn more about them. How is a variable annuity different than a fixed annuity? There are still the 2 phases of annuities: the accumulation period and the annuitization or distribution phase. In a fixed annuity you are paid based on a fixed rate specified in the contract. In a variable annuity, you are able to choose from a menu of mutual fund clones then when you go to annuitization you are paid based on what the portfolio was able to grow to. Basically, the case for variable annuities is that you’ll be able to potentially build a bigger pot to annuitize from. 

Pros and cons of variable annuities

Variable annuities have many riders to choose from

Another thing variable annuities have are riders. There are a lot of riders that are designed to provide you with income at some level without having to annuitize first. But the devil is in the details with these riders. You can often get a death benefit rider or a long-term care rider. There could be a guaranteed withdrawal benefit which may give you some guarantee about how much you’ll be able to withdraw. A lifetime income benefit rider can provide you with a guaranteed lifetime income. There could be a guaranteed minimum accumulation rider and so many others to choose from. Check out the Good Financial Cents website to learn more about the different types of riders you may come across with variable annuities.

What are some disadvantages to variable annuities?

Since you are investing in markets you could end up with a lower payout. If you do well and the assets grow they will be taxed as ordinary income rather than capital gains. Then there are the fees. There is a mortality expense, an investment expense, a manager expense, a surrender fee, and then, of course, the riders. There could be anywhere from 2.5% - 4% in annual fees, but if you get any riders attached then those fees could bump up to 6%. These types of products are usually sold rather than being sought out. The people that are selling annuities aren’t fiduciaries so they don’t have your best interest at heart. 

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

HOT TOPIC SEGMENT

  • [3:31] The Rock Retirement Club has opened its doors once again

PRACTICAL PLANNING SEGMENT

  • [10:01] How is a variable annuity different than a fixed annuity?
  • [14:20] Variable annuities have many riders to choose from
  • [16:35] What are some disadvantages to annuities?

THE HAPPY LAB SEGMENT

  • [22:45] To be happy we need to minimize confusion

TODAY’S SMART SPRINT SEGMENT

  • [24:35] What can you simplify in your life?

Resources Mentioned In This Episode

GoodFinancialCents.com/annuity-riders

Rock Retirement Club

Roger’s YouTube Channel - Roger That

BOOK - Rock Retirement  by Roger Whitney

Work with Roger

Roger’s Retirement Learning Center

Direct download: RAM283.mp3
Category:general -- posted at: 6:00am CDT

On today’s episode of Retirement Answer Man, we’ll consider the pros and cons of fixed annuities. During this series on annuities, we are discussing whether annuities are right for your retirement. Many people choose pretirement as an income floor for their first few years of retirement to help them ease into the lifestyle and decrease financial risk. An annuity can be considered a backend floor to cover your retirement spending in your 80’s, 90’s and even 100’s. We all know that longevity is a big factor in retirement planning and a fixed annuity could help supplement your social security income in old age. Listen to this episode to help you consider the pros and cons of fixed annuities so that you can judge whether an annuity is a good choice for your #retirement.

What are the pros and cons of fixed annuities? 

What are the pros for a fixed annuity? Since an annuity is like a pension that you pay for in advance, you get a guaranteed income for the rest of your life. Once you buy it and put it in place you can‘t really mess it up. It also offers protection for your future self. You may not be as astute in your later years and an annuity can help protect you against fraud, poor judgment, etc. An annuity also gives you a kind of longevity insurance since you get payments for your entire life whether you live until 80 or 110.

Although an annuity can simplify things, you must give up some things in return. First of all, you give up your lump sum. In doing so, you lose the opportunity to use the money in a different way. You don’t really know how much you will get in return since it is gone if you die the next day. Another potential downside is inflation. By the time you actually begin annuity payments, the inflation can lower your purchasing power by 20% or more. You also give up the opportunity to leave a legacy with the money.

Why did B.W. choose to purchase an annuity?

B.W. is a member of the Rock Retirement Club and has recently retired at age 55. He has decided to dive headfirst into retirement financial planning. Since he chose a bucket strategy for retirement expense planning. He has 10 years of spending set aside until he reaches the age of 65. At age 65 he’ll receive Social Security and a pension which will cover 75% of his costs. He decided to find an annuity to cover the other 25%. B.W. chose a deferred annuity since he doesn’t need the money until the age of 65. He looks at purchasing an annuity as an insurance policy rather than an investment. Listen to this episode to hear why B.W. chose to purchase an annuity to cover his retirement expenses.

How did B.W. determine which annuity to buy?

B.W. started searching for annuities by considering the amount of money that he wanted to cover. He also knew how much he was willing to spend. This led him to explore the options that he could afford. He narrowed his selection down to one consideration: What would be the guaranteed joint life income stream from the annuity? He looked at just about every annuity there was and considered various sources. B.W. ended up choosing a deferred fixed annuity called SPDA (single premium deferred annuity). He chose an annuity that would cover both the lives of he and his wife. Are you considering an annuity as a way to provide income in retirement? Listen now to hear how B.W. figured out which annuity would work best for his goals. 

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

HOT TOPIC SEGMENT

  • [4:10] Have you considered a backend floor to cover your retirement spending?
  • [8:25] What do you give up with an annuity?

PRACTICAL PLANNING SEGMENT

  • [21:28] Why did B.W. choose to purchase an annuity?
  • [24:22] How did he determine what to buy?
  • [27:37] What class of annuity did he end up with?
  • [30:10] What were the options that he considered?

THE HAPPY LAB SEGMENT

TODAY’S SMART SPRINT SEGMENT

Resources Mentioned In This Episode

PODCAST - Total Life Freedom

Episode 280

Rock Retirement Club

Roger’s YouTube Channel - Roger That

BOOK - Rock Retirement  by Roger Whitney

Work with Roger

Roger’s Retirement Learning Center

Direct download: RAM282.mp3
Category:general -- posted at: 6:00am CDT

This week on Retirement Answer Man, we define what role an annuity could play in your portfolio. Annuities can be a polarizing topic in the financial world but we need to think critically with a curious and open mind rather than vilify or glorify these investment tools. I’m checking my own biases at the door to bring you the most reliable information I can. Annuities may not be the most exciting topic, but we want you to rock retirement with intentionality so let’s dive in and learn as much as we can. 

Rock Retirement Club enrollment is back

Last year we opened the Rock Retirement Club as an online space where you can get your retirement questions answered and engage with people like yourself. Everyone in the club is learning as much as they can so that they can rock their retirement. You’ll also find resources to take action so that you have all the tools you need to rock your retirement. Our little club has grown over the past year and we only open enrollment during certain periods. This subscription-based club will be open for enrollment soon. Check out RockRetirementClub.com and put yourself on the waitlist so that you will be notified as soon as enrollment is open. 

In retirement, you have true freedom

Retirement is a special time because you finally have the ability to organize your life however you want maybe. You can do what you want, live where you want, and hang out with whoever you want without a job or social constraint tying you down. I recently read an article which proposed that college towns make a great place to retire. The author had 6 reasons to justify her theory: 

  1. Cost of living is generally less expensive, so your retirement fund may stretch farther.
  2. There are exciting events, museums, and culture.
  3. College towns are diverse both ethnically and politically. 
  4. There is usually great access to healthcare.
  5. You can be surrounded by youthful energy.
  6. There are plenty of opportunities to get involved in the community. 

What do you think of this idea? Would you consider retiring to a college town?

How can you make your retirement funds last as long as you?

The biggest question in retirement is how to make your money as long as you do. The problem is; no one knows how long they may live. In addition to unknown longevity, market risk, cognitive and physical decline, inflation are other unknown issues that we may experience in retirement. That is why we are exploring the topic of annuities. With the unknown of the future, it can be nice to have a certainty to help you through as you age. Let’s explore how an annuity can help you to maintain your lifestyle as you get older no matter what life throws at you.

What roles annuities can play in your portfolio?

  1. Longevity insurance. In this changing world where most people don’t have pensions, an annuity can act as a substitute for the typical employee pension. The difference is that you have to buy it yourself rather than getting it from the company you work for.
  2. Guaranteed income. We underestimate the importance of social security. An annuity can be a second source of social capital. It can replace your pretirement income and help support your lifestyle later in life. It has the added benefit that you can’t overspend or mismanage it
  3. Help to supplement your no-go years. You could plan your annuity to turn on at age 80 or so. This in addition to social security can support your needs as your life slows down. 
  4. Simplify things for your future self. You don’t know where you will be in 30 years. By buying an annuity you are securing another source of income that you won’t have to worry about or even think about. This can help protect you from fraud, cognitive decline or even greedy kids. 

Have you thought about the roles an annuity can play in your portfolio? What do you think? Do these benefits outweigh the costs? Listen in to hear the positives and negatives involved in getting an annuity in retirement

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

HOT TOPIC SEGMENT

  • [4:40] You have the ability to organize your life however you want

PRACTICAL PLANNING SEGMENT

  • [13:16] How can you make your retirement funds last as long as you?
  • [16:43] What roles annuities can play?
  • [36:33] What are the costs of an annuity?

THE HAPPY LAB SEGMENT

  • [40:56] I’m reading a book I really love

TODAY’S SMART SPRINT SEGMENT

  • [42:56] Check out Atomic Habits by James Clear to prepare for our series in August

Resources Mentioned In This Episode

Market Watch article - 6 Reasons a College Town is the Perfect Place to Retire

BOOK - Atomic Habits by James Clear

Rock Retirement Club

Roger’s YouTube Channel - Roger That

BOOK - Rock Retirement  by Roger Whitney

Work with Roger

Roger’s Retirement Learning Center

 

Direct download: RAM281.mp3
Category:general -- posted at: 6:00am CDT

Do you know the annuity basics? Over the next 4 episodes, we will explore annuities to see if they have a place in your retirement journey. We’ll discover how they work and if they can help you rock retirement all the way into your 80’s, 90’s, and beyond. On this episode, we’ll start from the beginning and explore our own biases and then cover the annuity basics. By the end of this series, you can decide whether annuities are the right choice for you. Are you ready to get your financial geek on? Strap on your headphones and get ready to explore annuity basics so you can rock retirement.

Annuities: love them or hate them?

Just like in politics, finance has its own polarized camps of thinking. There is an active management camp and a passive management camp. The passive camp says that lower cost is always better and the active camp says the opposite is true. Annuities also have their own love them or hate them camps. Before we begin to have a discussion on annuities it’s important to acknowledge your own biases. I want you to come to this discussion with an open mind. Many of us use positional thinking and believe there are only 2 sides of the coin. But the downside to positional thinking there is that no curiosity remains to explore other ideas. Over the next 4 episodes try to remain open to critical discussion so that we can start a dialogue about annuities. 

Understanding annuity basics

An annuity is a contract that you make with an insurance company. When considering an annuity it is important to read and understand the prospectus. The details are extremely complicated, not just for the layman but for financial advisors as well. Every insurance company is different and so are the features and the contracts they offer. When it comes to taxes, annuities can be tricky. You’ll want to consult your tax advisor before locking yourself into an annuity. The most important consideration is that the contract controls everything. 

Annuities have 2 phases

The 2 phases to an annuity are the accumulation phase and the annuititzation phase. The accumulation period is the period in which the money that you put in is being put to work. The annuitization period is when you start to receive payments which typically occur monthly until the time of death. There is often a death benefit in the case of unexpected death if you are to pass away before the annuitization period begins. 

What are the 3 types of annuities?

  1. A Fixed Annuity earns a fixed interest rate that is predetermined. The payments will be fixed when you annuitize. These can include 2 types: an immediate annuity which starts right away or a deferred annuity. The deferred annuity starts at a later date at which time you can decide to take it all back or get an income stream from the money invested.
  2. A Variable Annuity is less secure and has a menu of investment options similar to mutual funds. These go up and down with the performance of the investment. These have higher fees and your annuity payments can vary based on performance. 
  3. An Equity-Indexed Annuity has money invested in a fixed account. You could earn additional interest based on the contract. 

The potential benefits of annuities are tax deferral, guaranteed income stream, and creditor protection. They guarantee against loss and income. Over the next few episodes, we will explore whether they are worth the cost of the extra fees, the time costs, and the lack of flexibility. Be sure to listen as we dive into the question of annuities with an engineering approach to see if annuities would be a good tool for you to use to rock your retirement.

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

HOT TOPIC SEGMENT

  • [2:55] Annuities: love them or hate them?
  • [8:10] My feelings on annuities

PRACTICAL PLANNING SEGMENT

  • [12:33] What is an annuity?
  • [22:00] What types of annuities are there?

THE HAPPY LAB SEGMENT

  • [28:47] How are you doing with your chosen word of the year?

TODAY’S SMART SPRINT SEGMENT

  • [31:13] Identify a bias you have

Resources Mentioned In This Episode

Episode 252

Rock Retirement Club

Roger’s YouTube Channel - Roger That

BOOK - Rock Retirement  by Roger Whitney

Work with Roger

Roger’s Retirement Learning Center

 

Direct download: RAM280.mp3
Category:general -- posted at: 6:00am CDT

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