A Wiser Retirement®

334. What is a Better Alternative to an Annuity?

• Wiser Wealth Management • Episode 334

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Annuities are often marketed as the safe, guaranteed, no-risk answer for retirement income. For many retirees, that promise can sound incredibly appealing, especially during volatile markets or uncertain economic times. But the reality is far more complicated. In this episode of A Wiser Retirement® Podcast, we unpack the truth about annuities, why they are so commonly sold, and why many investors may be better served by a simpler, lower-cost strategy.

Related Podcast Episodes: 

Ep 106. Create a Cash Flow Strategy for Retirement

Ep 308. The Silent Tax: How Inflation Erodes Your Retirement

Related Financial Education Videos:

What is a Better Alternative to an Annuity?

Annuity Awareness Month: Stay Away from Annuities!

Other Links:

Buyer Beware: Why Do They Keep Trying To Sell You That Annuity?

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This podcast was produced by Wiser Wealth Management. Thanks for listening!

Welcome And Annuity Hype Check

SPEAKER_04

Have you ever been pitched an annuity as the safe, guaranteed, no-risk solution for retirement income? Then this episode's for you. Stay tuned.

SPEAKER_01

Welcome to a wiser retirement podcast, where we cut through the noise and bring you real, honest conversations about investing retirement and building lasting wealth. No sales pitches, no gimmicks, just everything your financial advisor won't tell you.

SPEAKER_04

Welcome to Wiser Retirement Podcast. I'm Casey Smith. Today I'm joined with financial advisor Michaela Dowdy. I'm sorry, I mispronounced your name. Superstar Michaela Dowdy. Superstar Michaela Dowdy. People still lined up. Her calendar's full.

SPEAKER_02

Your calendar's full too. We're awful. Yeah. Like honestly, every calendar's full around here right now.

SPEAKER_04

Uh we're here to discuss is there a better altern alternative to an annuity? Uh, don't forget to subscribe to the podcast wherever you're listening. Let's get started. So here's my thoughts on annuities. Okay. Okay. Bear with me for a second. Made some notes, my own notes outside the uh episode notes here. Oh, goodness. We'll see where this takes us. So I was thinking, you know, I love history. So I was thinking back in time that I feel like the annuity world is a lot like medieval Europe. Okay. So this would be roughly 500 to 1500 AD.

SPEAKER_03

Okay.

SPEAKER_04

And uh in medieval Europe at the time, the Catholic Church controlled uh most things, uh including education. And education was only for the clergy, not for the peasants.

SPEAKER_03

Yeah.

SPEAKER_04

And I feel that's exactly how annuities are structured. Where annuities I was wondering where you're going with this. Annuities are only understood by those that create these annuities and the peasants, the people who are they were sold to. Because annuities are never bought, they're sold.

SPEAKER_02

Correct. Yeah, very true.

SPEAKER_04

So the annuities that are sold to these peasants, uh, we are not to be told how these things work for real.

SPEAKER_02

Yeah.

SPEAKER_04

And so I I uh I lived in this world and the clergy would come and they would uh talk to us about how great these annuities are. Let me tell you, people, the conversation was not about you. The conversation was about how much commission we could get by selling this annuity.

SPEAKER_03

Yes.

Commissions Over Clients

SPEAKER_04

It was and the people I I remember it was right, I was right out of college. I was sitting in the the the room and I'll look at all these gray haired guys, look like me now, and they would go, How much do I get for this one? How much do I get for that one? How much do I get for this one? There is not one point that anybody ever said what is great for the client. It was how can I sell these things and get my commission? And that's the world of annuities.

SPEAKER_03

Which is very unfortunate.

SPEAKER_04

They they look upon because you look at the demographic that buy these a lot of uh single older women. Yeah, widows, they don't know, they just trust Johnny. They know Johnny from church, and Johnny, Johnny uh seems like a really nice guy, and he has a good man. He has a young, he has a he has a beautiful wife and and two two young children, and he's just a really nice guy. He wouldn't do anything to harm me.

SPEAKER_03

Yeah.

SPEAKER_04

And Johnny, Johnny's not clergy. Johnny's like No, that's what I was about to say.

SPEAKER_02

I was like, I don't there is that middle ground. I was like, because I don't even know sometimes the salesperson fully understands what's happening behind the curtain.

SPEAKER_04

I guarantee you they don't fully understand behind the curtain.

SPEAKER_02

It's just more so this would answer all of your fears that you just said to me. You said the key phrases I needed to know. And here it is. And this answers all of it. And perfect.

SPEAKER_04

Johnny's not clergy, but he's he's he he knows the clergy. The clergy has come and visited him and told him that you can sell this product, we'll give you 7% commission, maybe 10 if you sell enough.

SPEAKER_03

Yeah.

SPEAKER_04

And and these are the talking points, these will get people really excited about it.

SPEAKER_03

Yeah, yeah.

SPEAKER_04

So Johnny makes a ton of money, and the clergy makes a ton of money, and the peasants are just as broke as when they came in the first uh to begin with.

SPEAKER_02

Unfortunately, that that is exactly how that runs. So that's runs. That's already a start.

SPEAKER_04

And I'm I'm gonna get some emails uh about that because uh people say I bought an annuity and it was great for me. I this happens every episode. I I attack annuities. Um let me tell you, uh first of all, we've all bought the used car that ended up being a hunk of junk, and we feel like we're taken. Nobody wants to be a victim. Yeah, but chances are you're probably a victim.

SPEAKER_03

Yeah.

SPEAKER_04

Now, there is an annuity that we'll give an exclusion for, and that's the fixed annuity. So let's talk about that for a second. Yeah, fixed annuity.

SPEAKER_02

So your fixed annuity is more so that annuity that you're giving, you know, I almost would almost kind of compare it to like a CD in some ways. Not exactly. It's it's a little bit different. Your money's your your money will be locked up for a period of time.

SPEAKER_04

Well, no, no, it's just gone. Well, no, no, because in the fixed annuity, you're it's not an index annuity, but it's a fixed annuity where you're just giving you just giving$200,000 to the insurance company, they're gonna pay you$200 a month for life. But when you're gone, that money doesn't, that money's theirs.

SPEAKER_02

Yeah, but you could also, if the fixed annuity, if you're still in your surrender, you can still get it out. If you're still alive, you if you don't annuitize the policy, you still have access to the money.

SPEAKER_04

I'm assuming that you annuitize the policy. You're way smarter than I. You you were already that there was a way out. I was like, no, there's doom and gloom. Your money's gone forever. Um yes, I would I would assume that if you were buying a fixed annuity, you would be annuitizing it. No, you may not. In that case, where you what are you doing?

SPEAKER_02

They're just trying to get the return and have the security of it, which is not ideal, I don't think, in any regard.

SPEAKER_04

In your in your uh point, go buy a CD at night.

SPEAKER_02

Exactly. That's what I'm thinking of it as more of like you're locking it away for a set period of time, you can't receive it. Granted a C D you could get out of it pretty easily, but you know, still.

SPEAKER_04

All right. So if if if you purchase a fixed annuity, um, I'll give you a pass because maybe you just want that guaranteed income and you want to subs you want to subsidize social security and you're just gonna live on that and not worry about markets or anything else.

SPEAKER_03

Yeah.

Variable And Indexed Annuities Under The Hood

SPEAKER_04

Okay. Uh you buy that from your bank, the commission on that should be pretty low. Um, you don't even need uh uh to buy it from a bank. There's the companies that just only sell fixed annuities. Uh, but the ones that uh the ones that are terrible are the variable annuities and the indexed annuities.

SPEAKER_02

Yes.

SPEAKER_04

And those those are the ones that um when we see them, we try to rescue them. In fact, we have an annuity rescue program. We we use nationwide for it.

SPEAKER_03

Yeah.

SPEAKER_04

Uh it's a it's a flat um it's a flat fee annuity. Uh it doesn't have any guarantees to it. We strip all that stuff out and we just try to get you back into the Vanguard index funds. But the only reason why we have to do that is because there's significant tax consequences to getting rid of it. If it if you have an IRA annuity, you can just roll that into an IRA and invest, invest as you should have to uh to begin with. But the um uh the ver the variable annuity, the index annuity, those are the ones that we all want to focus on, um, focus on today. So Mikhaila, why don't you kind of explain? Um, well, first of all, I should stick to my notes. We don't sell annuities, we don't receive any commission for any products for that matter. Uh, we don't believe that most people need them, and we believe that there's a better way, which we'll get to here uh as we progress through the episode.

SPEAKER_02

Exactly.

SPEAKER_04

Uh so once you explain to us the index annuity and how that's well, we'll start with a simpler one. Uh variable annuity. Uh how how is that structured?

SPEAKER_02

Yeah. So it's more so that the variable annuity is giving you access to the broader market as far as you're getting the ability to, of course, you know, participate in the market returns. However, the, you know, really stipulation to that is that of course, there's going to be some sort of cap on your returns at the end of the day. And so that's why we really don't love these policies, is because there is typically some sort of cap that you're going to have in the index annuity. Yes, in the index that you're going to be facing as far as, you know, okay, well, you're going to invest in this product. And this product is, you know, then going to give you these sorts of options that you're going to have as an option. And if you were to invest invest in the SP 500, which makes you feel like you're still investing in the market, then um, with that, when you get into that, you're actually going to see that there's going to be different, you know, structures to how you can receive your returns. Some of those are point to point on, you know, an annual basis, some are on a monthly basis, even. I mean, I've even seen annuities where, you know, it was a month, it was reviewed on a monthly basis. And so with that, um, their returns for the year ended up being zero when the S P 500 was actually up, you know, you know, I think it was like almost 20% that year.

SPEAKER_03

Yeah.

Fine Print Traps And Capped Upside

SPEAKER_02

Um, and we were trying to really figure out, okay, how did this get marketed this way? And how are they saying this SP 500 when there's this cap and everything? And once we really got down into the details of that product, it ended up being that it was viewed on a month-to-month basis. But what they didn't fully tell you, besides in the fine print, was if the market was down for any month, the full percentage of those losses counted towards your maximum gain you could have each month, which the maximum gain you could have each month was like one to two percent. And so if the market was down 10% in one month, well, now you've just lost 10 months of any gain. So you were never actually going to have a return.

SPEAKER_04

Even the market was up what during that time period?

SPEAKER_02

20%.

SPEAKER_04

So the market was up 20%. Annuity gave you zero.

SPEAKER_02

Zero. Exactly. So there's like even just looking at this finer print where maybe you're not being taken advantage of in the fee side of things, which typically you are as well with, you know, variable and all of that as well. Um, but it is something that there is even, you know, opportunities you don't even realize, like, oh, well, I don't have this great commission charge or this other thing that I'm having to pay for, or, you know, these writers are really small fees that I'm willing to pay for. Okay, that's great. But have you actually looked at the fine print of when I'm invested, what are any returns? Because you have to keep up with inflation with that as well.

Taxes And Inheritance Pitfalls

SPEAKER_04

Yeah. That's my biggest issue with index annuity is they say they give you the upside, but protect you from the downside. And that really they protect you from the upside and the downside is what happens. Um the variable annuity is a little different in that it is structured uh I would say a little more simply. Um, you're putting money into an account, they are charging you a mortality expense for the life insurance portion, admin fees, probably some other fees. Uh, and then your money is going into uh they look like mutual funds. They can't call them that because they're so expensive. They call them separate managed accounts. So your money goes into the separate managed accounts and it will grow. It will track the market. But the problem is that it's doing it in a very inefficient manner, and then you have all this uh insurance expense being pulled out of your uh account values. Uh some people say, Oh, it's great for tax deferral. Uh and I'll get a little more advanced here for a second. Uh annuity is the worst thing you can pass to your the next generation. That is taxes income. There's no step up in basis. So if you're if you have are accumulating wealth, the last thing you want to do is uh try to save taxes by by putting money into a variable annuity. I would argue you could be more tax efficient just putting it into uh tax efficient ETFs inside a portfolio and do active tax loss harvesting and market volatility. Uh it it comes it comes back to how I started the episode. Education. If we can educate you on how these things work, not just annuities, but what the alternative is, then you're gonna be able to keep a lot more money in your pocket. And you should you just but you also have to have good behavior. You have to keep your head about you when when in times of turmoil.

SPEAKER_02

Definitely.

Inflation Risk And Fear-Based Pitching

SPEAKER_04

Um so it it's um uh some people say annuities are good for longevity protection. I would argue a fixed annuity would help you do that. I don't know that a variable annuity or index annuity I I would argue the index annuity is probably opposite of that in your example. Yeah, because if that was the market was up 20%, inflation was up a lot that year too. So if your value is basically zero, you you actually lost money because of because of purchasing power, right?

SPEAKER_02

Exactly. And so I think that's where it really does, you know, annuities so much do like speak to kind of what we were talking about earlier, those key phrases that you can say to like an annuity salesperson, as far as, well, I just need protection. I need to guarantee that my you know income's going to be here and that I'm going to be able to have, you know, um the principal still here, whatever that may be. Um, and so just making sure and having those kind of guarantees is really what, you know, the annuity kind of speaks to. Um, but it doesn't necessarily offer that, you know, full understanding of, okay, well, you might be able to protect in some way, shape, or form this principal or this income writer that you've purchased. But there's also so much more outside of that that isn't being protected because of that as well.

SPEAKER_04

Yeah, that's how they sell them. I I mean, the market's really volatile now. Uh, politics are crazy. You know, these these presidents and these congress people, they're gonna just take away your money. Uh, and then so you go, yeah, you're right. I need some type of a guarantee. Yeah. You also guarantee that when you drive your car out of the driveway that you're gonna get hit. It doesn't mean that you walk everywhere.

SPEAKER_02

Yeah.

SPEAKER_04

Right?

SPEAKER_02

Exactly.

Sponsor Guide And Reset

SPEAKER_04

You take it, you you take educated, you take educated, uh, you make educated decisions on where you want to take the risk, in our case, uh, in investing volatility. Where do I take the volatility so that I can keep up with inflation? When a gal uh a gallon of milk is thirty dollars a gallon in a few years, yeah. Uh I want to make sure that I can afford it. And you therefore you have to take on some some portfolio volatility. I I I saw an article recently. It said volatility is the cost of returns.

SPEAKER_02

Yeah, that's very true.

Education Beats Guarantees

SPEAKER_04

Returns are not free. It seems like they're free because oh my gosh, I made 20% last year. But the volatility was we were down to 10% at one point. Yeah. Right. So you so with with volatility comes uh returns over over time, certainly.

SPEAKER_02

Exactly.

SPEAKER_04

So let's just um let's just lock this up as far as um why we don't like these things. Um two to four percent internal cost is pretty common. You can add these writers.

SPEAKER_02

That's like that's another percent typically, half a percent.

SPEAKER_04

Yeah, it's it's like going you when you're buying it, it sounds great. It's like going to get ice cream and yeah, they're putting sprinkles on and gummies and and chocolate. And then you get home and do your you're like, why am I fat?

Build Your Own Annuity With Buckets

SPEAKER_02

Yeah. They do have a lot of uh different riders you can purchase with these that makes them definitely a lot more appetizing um and wanting to purchase. I've seen some that are like, you know, they have like the critical care associated with them, or um, you know, just saying that you could pull from this money if you just like it, not if you decided, but if you, you know, had an unfortunate health um event, which is great. Um, granted, the fact that you're having to pay an additional, you know, rider fee to get access to your own money in that instance is a bit, you know, concerning in and of itself. But um definitely something that there are just opportunities or like a guaranteed um minimum death benefit rider. I've seen that as well. Um so it basically just makes it like very much a life insurance policy at that point um too. So definitely different opportunities out there. Um, but I think the biggest one um that we've kind of seen is really surrender charges, especially, you know, during that seven to 10 year lockup period that you see with most annuities. Of course, now there are annuities you can buy for three years, five years. You can get shorter terms on them, but still typically you're saying seven to 10. And I feel like a lot of our middle-aged clients um, you know, have these. And, you know, and I think it is very much like a widow situation, something to that effect, um, where uh it was just a taken advantage of situation. And, you know, seven to 10 year lockup periods can be pretty devastating on funds like that. Um, and so I I just find it interesting, you know, a lot of times with annuities, it is something where it's like, oh, this is risk-free. You know, you're going to guarantee your principal, you're going to guarantee this sort of a return, or, you know, you're going to have this, you know, performance or this income or whatever it may be is they're guaranteeing with it. Um, and it's more of that risk-free reward in a way. But what I find fascinating with that is that you actually have it to where you're just taking another risk because at the end of the day, you're just replacing the risk of the market for the risk that you're not going to need this money for seven to 10 years.

SPEAKER_03

Yeah.

SPEAKER_02

Um, in a reality, in a lump sum, that nothing drastically is going to happen. And I'm not trying to be fearful either, but you know, it is something to say is this is very highly a potential that it does, you know, have this surrender charge. And, you know, those surrender fees, like I've seen some that it's a 12% at year 10.

SPEAKER_04

I think they yeah, typically start like 14. They don't drop until until the halfway through.

SPEAKER_02

Yeah. So they I've seen them start dropping about seven, like year seven on a yeah. And so yeah. And so then it just keeps dropping at that point. And then, you know, by and typically it's at the end of your, you know, you have to complete out that last year. So it really ends up being if it's a 10-year annuity, sometimes it can even look like 11 actually when you get down into it. Right. Um, because of when it actually ends for those surrender fees.

SPEAKER_04

Yeah. So you you you're limiting your access to principal. Um, they're also very complex. Yes. The index annuity formula, as you just described, I every one I have to look at, uh, it seems to be a little different.

SPEAKER_02

Yes, they are.

SPEAKER_04

And it it takes a uh deep, deep search to figure it out because they they're not, it's not sitting there on the statement.

Cash, Bonds, And Rebalancing Rules

SPEAKER_02

Yeah. Well, I think it's funny. Like, you know, you're looking at something complex when every single product out there has a fast fact sheet. Um, like you know, if you have to Google fast fact sheet for this annuity at this company purchased at this date, right? You know, you're you're looking at um a very complex thing at that point of someone's having to go through and actually gather everything to be in a readable three to five page format, you know. Um, and then even at that point, if you were to pull up the full documents, most of these, you know, have many, many pages of rules and regulations, the different things that they have. And you can really dive into what those formulas are. Um, but again, they vary depending on every single contract. It's not easy across the board to understand.

SPEAKER_04

And and the people selling these products typically haven't done any comprehensive financial planning for you. They they don't know what's good for you in the end. They they may have an idea of your investments and what your objective is, but it's it's like going down to the four dealership and telling them that you need a car. They're not gonna sit there and go, you know what? I think this Toyota might be a better fit for you. You should go across the street. No, they're gonna put you in whatever product is suitable for you that's on the lot.

SPEAKER_02

Yeah, exactly.

SPEAKER_04

And they're gonna, if you if you want white, they're gonna convince you that this blue car is is the best for you.

SPEAKER_02

Definitely.

SPEAKER_04

So it's exact that's exactly how that world works in the in the suitability era. Uh now there are some fiduciary advisors that do still sell these products. I don't know why. I think that they're they're stuck to the commission personally.

SPEAKER_03

Yeah.

SPEAKER_04

Uh the revenue. They come from the old world, they created their own firm, they're a little they're a little entrepreneuric, maybe. But uh, it does it doesn't make sense to me. And I think it creates a conflict of interest. However, they are supposed to maintain that fiduciary standard uh throughout the relationship. So they're supposed to pick what's best for you. And if they tell you to go across the street to tell you how to correct in that case, but I is that happening? I don't know. Is it even police? I don't even know if it's police to tell you the truth.

SPEAKER_02

I think you have to be able to state why you thought it was suitable if they ever do question it. Yeah. Um, I think you can get pushed on it at that point if they were to like file a complaint and say, I don't think this is a suitable investment.

Politics, Timing, And Market Myths

SPEAKER_04

Um technically that's another whole thing to you ever provide that. You ever get on a on an airplane and had a terrible experience? Have you? Yeah, yeah, you have. All right. So you you want to file a complaint. Do you know how hard that is to file a complaint? Multiply that times 10. That's how hard it is to file a complaint on an advisor that sold you an annuity. So it if you see complaints on an advisor's record, it was a lot of work to get that there. A lot of work. Uh again, uh, I feel like that these are products that get get sold, not not purchased. Um, inflation risk, uh, these things aren't inflation riders can cost you more, but typically these contracts are going to help you keep up with your with your purchasing power. So you have to be careful that I think we touched on that already.

SPEAKER_02

Yeah. Uh just to add to that, I will say like that's another thing where you get into those income riders and you're getting this guaranteed income, but you do have to think through the fact, okay, I am guaranteed$28,000 for the rest of my life. Okay, that's amazing. However, 25 years from now, that$28,000 is going to go a lot less far or not near as far as it is going to go today. Um so that's just something to consider because I feel like that's not a topic that's often considered during, you know, the sales process of these products. Um, and just making sure that, of course, maybe you're not purchasing that inflation rider, but if you're looking at a you know guaranteed income benefit, then you need to be considering that. Before we get back into the episode, have you ever wondered why annuities keep coming up as a recommended investment? While they're often pitched as a way to reduce risk and secure your future, annuities frequently benefit the salesperson more than the investor. Download Our free guide, buyer beware, why do they keep trying to sell you that annuity at wiserinvestor.com forward slash guides. Now let's get back to the episode.

SPEAKER_04

Okay. The clergy has been fired. Everyone in the land will not be educated.

SPEAKER_03

Amazing.

SPEAKER_04

And be able to make their own decisions. Okay. So let's let's do some education here.

unknown

Okay.

SPEAKER_04

What are we really worried about? When we buy an annuity, we buy it because we have fear of something. We have fear of the stock market. We look at the stock market, we don't understand it. We think it's a gambling machine. It can be a gambling machine. You can open a Robin Hood account and gamify this thing all you want to.

SPEAKER_02

But buy all the penny stocks.

Behavior, Time Horizons, And Reserves

SPEAKER_04

For most for most of us, uh this is this is not it's not that case at all. So there are different things that you can do or need to understand. Let's start with what we need to understand first. Okay. Is that the stock market in a year's time could be up 60%, it could be down 60%. It can be very volatile over a 12-month period. Over a three-month period, you pretty much cut that in half. It could be up 30 over three years, it could be down 30 over three years. You get to five years, you cut that in half again, probably around 15 up, 15 down. You get out to 10 years, the worst thing that's ever really happened is break-even. You get out to 20 years, the worst thing that's ever happened is probably an average 5% rate of return per year.

SPEAKER_03

Yeah.

SPEAKER_04

So what what that telling what that tells is telling us is that time solve all solves all of our problems. Time will erase our our fears. So then you have to worry about okay, what do I do in the short term? So knowing that markets are efficient, companies that make money win. Uh we have to have rational behavior. We have to kind of mix something together on our own. And this is what we would call our our own annuity at this point. We can create our own annuity. But we need we need a recipe for this. Um the recipe is low-cost index funds. You you gotta drive your cost down below one tenth of a percent. You need tax efficiency. Um, it needs to be designed to last no matter what happens in the short term or long term in the markets, and you need diversification across the globe. And you need some cash. Right.

SPEAKER_02

Exactly.

SPEAKER_04

So academic research, uh risk management, market pricing, these are uh well, risk management, academic research tell us that we can do this. Um market pricing where we enter the market doesn't really matter. So if the market's at all-time highs, then you'll still be successful with this approach.

SPEAKER_03

Exactly.

SPEAKER_04

If it's at lows, then you'll be really successful. But let let's let's focus on like a three to five percent withdrawal framework. So if we're gonna take out somewhere between three and five percent annually, here's what I would do. I would structure picture three buckets. So you have three red Home Depot buckets. One, two, three. In the first bucket, you can put anywhere from two to five years of your withdrawals. So whatever you need to withdraw money from. So if you're gonna pull out um$20,000 a year, just using an easy number, then you'd have either 40,000 or 100,000 in there, depending on how much security you want to build in. That cash bucket today can earn probably three, three and a half, maybe four percent. Um, so it's not just sitting there idle, it's it's earning something. And if that's where your monthly payment comes from every single month. The next bucket is gonna be about 40% of the account value, not counting the cash. And that's gonna be sitting in bonds. Mostly short-term US treasuries, uh, things that are guaranteed. Uh in a low-yield environment, you might have to go into high-quality corporates. You might want to add a little bit of foreign bonds like BNDX from Vanguard in there to be able to um get some uh foreign exposure, hedge basically you're hedging the dollar. Um, if the dollar goes up a lot in value, that hurts bonds. So BNDX helps helps you to hedge that. So you have a small percentage of that. So that's about 40% between that bond fund and then your in that second bucket and then your first bucket, you probably have eight to ten years of reserve.

SPEAKER_02

Yeah, typically.

Questions To Ask Your Salesperson

SPEAKER_04

Worst thing that's ever happened. Worst thing that's ever happened. Actually, benefited bonds, yeah. Yeah, right. Your bonds are probably up four or five percent. Um you've you have now protected yourself from the worst thing that's ever happened with bonds and cash.

SPEAKER_02

Exactly.

SPEAKER_04

60% needs to go into something like the S P 500 index fund. Diversify that a little bit, add a little bit of foreign, add a little bit of small cap. You could add a little bit of technology if you wanted to, uh sector, uh sector ETF. Um that 60% I would say that you probably would never need that in your entire life. Depending on how much money we're talking about.

unknown

Okay.

SPEAKER_04

Um that 60% is gonna earn what the market earns, and in the really good years, your 60% might turn into 65 or 70% of the total of the two bucket, the last two buckets. And when that happens, you take your gains and you put it back into the second bucket, the bond bucket. We've basically created what the insurance companies are doing with your money, except they're keeping all the gains. And in your example, they gave you zero.

SPEAKER_02

Yeah.

SPEAKER_04

They got 20%.

SPEAKER_02

They got 20%, and you got nothing.

SPEAKER_04

A goose egg.

SPEAKER_02

Yeah.

SPEAKER_04

That's an extreme example. I haven't seen that one personally, but uh, I have seen very low returns of indexed annuities where they cap you out at uh three, four, five percent per year. Market did 20. Uh, and then your same thing, it's but it's what you get on the monthly basis, right? Yes. So I'll give you some more education. Uh, we posted this, I posted this on my LinkedIn page and on X uh recently. The market, the stock market actually has bigger moves at nighttime than it does during the daytime.

SPEAKER_02

Interesting.

SPEAKER_04

So if you're gonna try to time the market because you're scared of what Mr. Trump's gonna do with your portfolio or what Mr. Biden might do with your portfolio, insert name a politician here.

SPEAKER_02

Yes.

Closing Notes And Disclosures

SPEAKER_04

Um, I'll I'll give you a real quick tip. It doesn't matter. It doesn't matter who's in office. There's no correlation between your portfolio and who the president is. No correlation. There are daily movements related to what they may say or do, yes, but in the end, we don't live off of our daily portfolio movements. We live off the year. Yeah right. And exactly there's very little correlation. We just need companies to make money. If Mr. Trump was in office, or he is in office, Mr. Trump's in office and none of the companies made money, the market's going to be zero. Even if he said all the right things that you agreed with.

unknown

Yep.

SPEAKER_04

If Coca-Cola doesn't sell syrup, if Delta doesn't sell seats, the soft market goes to zero.

unknown

Right?

SPEAKER_02

Survivor and Atlanta choices.

SPEAKER_04

I like that. No matter what the president of the United States says, right? Yep. If he says all the wrong things, according to you, and Delta sells seats and everything else, you're still gonna make money.

SPEAKER_02

Exactly.

SPEAKER_04

We had one client out of hundreds that insisted on sitting out in the first Trump administration. And they sat he sat out. He lost so much money. And the second administration goes, like, I don't like this guy, but I'm uh but I'm in. Just put me all in this time.

SPEAKER_02

Not making the same mistake twice. Yes.

SPEAKER_04

I had a heart for him. Most most people would not be able to stay here. Uh if you're dictating when we're in or out of the out of the market. But um, so so so think about think about this. When the market closes, and I have this graph in my head, and I and I I I maybe we can add the link to my uh LinkedIn on uh on this podcast show notes so people can see that. But when the market closes at night, the rest of the world's still open, right? When we come to work, they're kind of going to sleep, so their their markets are shut down. So there's a lot of things that are still happening in the world. When the the if you look at the open market open and market close, it doesn't open where it where it closed the day prior. A lot of times it might open 500 points higher, 500 points lower, right? Yeah, those differences at nighttime and the opens are often greater than the daytime and what happens in daytime. So if you decide to sit out of the stock market, you're missing out on most of your returns.

SPEAKER_03

Yeah.

SPEAKER_04

Now, this will be solved in probably three or four years because New York Stock Exchange says that they're gonna move everything to the uh to blockchain. And once they move the everything to the blockchain, then uh they'll have to have 24-hour trading. So Michaela has volunteered to do the night shift.

SPEAKER_02

Yeah, that's it. That's me. You'll call at 2 a.m. and I'll be here.

SPEAKER_04

Um so so yeah, there'd probably be some interns for that hour, maybe. I don't know. Um late night concerns. So the whole point here is that we we have as humans, we get these biases that we that we think if we think about something long enough, it becomes factual. And that that's what a lot of people do, and that's how they end up in annuities because of this market stuff. Just because you don't understand something doesn't mean it's bad. It just means that maybe you should take a little time. Read read a random walk down Wall Street.

SPEAKER_03

Yeah.

SPEAKER_04

That's a great book. That's a great book to understand how markets work and what you should be doing. A lot of our investment philosophy comes from a random walk. So it's it's a you can create this portfolio, which is a lot of what we do here. You can create a portfolio like this, and you don't have to use 40 bonds, 60 stocks. You could use 30 bonds, 70 stocks. You you can do the opposite. You could use 60 bonds, 40 stocks. There's so many different ways you can mix it. But the important thing is that you have that cash reserve set up. If you're still working, you have a paycheck, it's called your emergency reserve fund.

SPEAKER_03

Yeah.

SPEAKER_04

When you're retired, it's called a cash bucket. Uh, and that that cash bucket is separate from your emergency reserve. And that is what allows you to take keep taking a monthly distribution, no matter what happens in the market, no matter what chaos is happening. You don't have to participate in that.

SPEAKER_02

Yeah. Well, and I feel like that's why too, like so many of our clients, when the market is, you know, going down or, you know, there are these more volatile swings, we're not getting as many phone calls as you would think. You know, it's not that, oh, there's all, you know, a lot of, you know, concern and anxiety and that sort of thing. It really is more so, okay, for our retirees that are taking money, they still know they're going to receive their, you know, quote unquote retirement paycheck each month. And that's because we have, you know, established this cash bucket philosophy. And even if the market's going to be down for a few, you know, a couple of years or something to that effect, we're going to make sure we're, you know, raising cash at optimal times to replenish that bucket. But then also, you know, um, they can rest assured that they're still going to be okay on the other side. And I think it's because of this sort of education and because of the fact that, you know, this is established and they have effectively created their own insurance policy on their investments.

SPEAKER_04

Yeah. I mean, there's no guarantees. There's no in this, in this, uh, in this approach. There's, but I I would argue that the only way I see stocks and bonds going to zero, I would argue that your insurance product's probably not guaranteed either, because that means the US government has collapsed. Seriously.

SPEAKER_03

Yeah.

SPEAKER_04

I mean, the gut US government backs these insurance policies. But if there's no if the government's not there, like what do you what are you gonna do?

SPEAKER_03

Yeah.

SPEAKER_04

You're you're gonna stay in line like everybody else. You're not gonna have any liquidity. So if you want to have a doomsday portfolio, that's a whole different podcast. But I I think for for most sensible people, uh it just doesn't make sense to buy these annuities. You're they're high commission, which you pay for that. You pay for it by locking your money up, yeah. Uh higher fees, um you know, fear-based cell tasted tactics. Um, so I I just I there there's a better way. Yeah. And this is something that uh any fiduciary financial advisor would be able to model out and say, no, don't buy the annuity. This is this is our process instead.

SPEAKER_03

Yeah.

SPEAKER_04

Uh and they start with we have a cash bucket, then you're in the right place.

unknown

Yeah.

SPEAKER_02

Exactly. I I will say though, I do think something too, and I think we've kind of touched on this a little bit, is like if you are someone that's listening to this and you're like, well, what happens if I've already purchased the annuity?

SPEAKER_03

Yeah.

SPEAKER_02

You know, it is something that, of course, like we do this day in, day out of, you know, I feel like I've had a lot of annuities lately that we've done analysis of um just to see. And, you know, I've even had, you know, a client that stayed in the annuity and is actually going to, you know, pull income from it in the future simply because she's already, you know, paid into it for so many years.

SPEAKER_04

She's 20 years down the road.

SPEAKER_02

She's 20 years, yeah. And, you know, she's a very risk-averse individual and also she doesn't have any children that this money is going to be left to necessarily. And so it just makes the most sense for her at this time to say, okay, let's use this for the income benefit once you retire. And, you know, you've already paid in for this benefit. Let's utilize it to your advantage. Um, because at the end of the day, sure, we could pull it all out, you know, without a surrender. But then at the same time, you know, this income benefit does look great and it has a nice little inflation associated with it. She did purchase that. And so it's just something that, you know, I don't want it to be this big doom and gloom of like we're always no to annuity.

SPEAKER_04

Of course, ideally, we would still fiduciary advisors in the end. We have to look at how we got here and what is in your best interest. We're not gonna just go, we're gonna liquidate this annuity and move it on out.

SPEAKER_02

Definitely.

SPEAKER_04

That's usually my intention. But as I get into it, yes, you you have to take a look and see. Uh no, actually, this you need to keep keep this. The difference is let's look back from when they bought it to where we are today. What if they didn't hadn't have bought it? And we'll say we put this into um even a conservative allocation, they would have so much more money.

SPEAKER_02

Definitely.

SPEAKER_04

But you can't change that. No, you can't you can only look at the current situation. And that's why we had we do have that annuity rescue program. So we we can get people out of annuities uh into uh a much, much cheaper version, uh still an annuity, still have the tax protection.

SPEAKER_03

Exactly.

SPEAKER_04

Uh but if you have an IRA and you're outside your surrender period, get that thing to an into an IRA. I'm sorry, if you have a uh a qualified annuity, right? Get that thing out into an IRA.

SPEAKER_03

Yeah.

SPEAKER_04

If you're past your surrender period. Typically that's what we're doing in most cases. We have to wait for surrender periods to expire. And and then clients see it though. They come in, they're like, I don't know if I should have done this. And and you start looking at it with them, and it gets down within like it's a two percent penalty, and they looked at what's happened with the rest of their money. Yeah, they're like, just get it out. I'll pay the two percent. I want to participate in this over here. This is not doing anything for me.

SPEAKER_03

Yeah.

SPEAKER_04

Uh because they got sold the annuity. And a lot of and a lot of them come in and say, I have this annuity, I probably shouldn't have had it. Uh I don't know why I did it. I don't know why you did it. You you got sold, you got sold something. It's exactly no different than how'd you end up with that car? A lot, a lot of times we get sold cars too, and we're like, I don't know, I like it, but no, it's like, oh, well, if you don't buy this car right now, someone else is gonna get it.

SPEAKER_02

Someone else is gonna get it. You know, and then it's like, oh, I've got to buy it or I'm gonna lose it.

SPEAKER_04

They only made one at the manufacturer.

unknown

Yeah.

SPEAKER_04

There's not another one in the land. Um, okay. So if you're gonna go talk to your annuity person today and you're like, hmm, I listened to this podcast. Uh, I have some questions for you. Uh, let's give them some questions they can ask.

SPEAKER_02

Yeah, I think a great one is asking how are they compensated off of the product?

SPEAKER_03

Yep.

SPEAKER_02

Um, and really understanding that I will say something that I've heard here recently, even is there is a commission. They will tell you you're not paying the commission directly. Sure, you're not writing them a check for five to 10%, but they are getting paid off of that policy for the time period you have it. Um, so just be really mindful of that. While they may say you're not writing them a check for it, you're not paying them directly, you are paying them because of the reasons we've outlined in the contract.

SPEAKER_04

You're paying somebody.

SPEAKER_02

You're paying somebody somewhere.

SPEAKER_04

I want to know what fees I'm paying to anybody is the question you asked. Exactly.

SPEAKER_02

Exactly.

SPEAKER_04

How are you compensated? Um, first of all, if they they say, well, you don't have to pay me, the phone company pays me. And so for some reason in people's head, they go, Oh, I don't have to pay for this. Someone else is paying for it.

unknown

Yeah.

SPEAKER_04

You're paying you're still paying for it. Yeah, just like volatility is the price to rate of return, uh, locking your money being locked up and your fees that you pay on an annual basis forever in this product is what's paying that commission indirectly.

SPEAKER_02

Exactly.

SPEAKER_04

And I would say if they they say, you know, maybe a more direct question, do you receive a commission for me buying this product? And if the answer is yes, you get up and leave.

SPEAKER_02

Um, and really just understanding, you know, what those commissions are um as well. And then what are the total internal fees of the policy as well? So it's really understanding, okay, this product, and like you were just saying, what are all of these fees?

SPEAKER_04

I don't exactly the person selling it to you wouldn't necessarily know that answer. I really believe that.

SPEAKER_02

Yeah. And I think if they can't explain it, then that's another, you know, red flag.

SPEAKER_04

I think or they won't explain all of them.

SPEAKER_02

They won't, yes, exactly. It's oh, well, you see this fee over here, but it's paying for this benefit. Or, you know, it just gets very um, you know, murky. And we had somewhere, I think, written on our notes um that basically if you can't explain it in five minutes, it's a little bit too complicated. Yeah. Um, and that's one of those things where if they can't explain to you their fee structure, I'd say 30 seconds. Yeah, then it it's problematic. Um, and then I think your third question um as well is what are the surrender terms? So really understanding how do you get the money out? How do I get the money out of here? And you know, of course, there's going to be typically you can get that, you know, 10% of the account value each year without a penalty. Right. Um, but in addition to that, understand well, what is the surrender? If I needed this entire policy, like all of the funds out of this policy, what does that look like? And typically that year 10 number is gonna be 10 to 14%. It's gonna be what you're starting at.

SPEAKER_03

Yeah.

SPEAKER_02

Um, so just be really mindful of that. And then the fourth one is what's the projected long-term rate of return expected? Um, so really just understanding, okay, what growth should I be anticipating off of this policy? Um, what should I be seeing off of this? And then really having a breakdown of, of course, you know, that's going to go into the options that they have for you to invest in, but really understanding, like we were saying, kind of that formula that they're utilizing in order to, you know, make it to where what your returns are. Um, and then I think really just seeing how they answer those questions and if they have the ability to answer those questions.

SPEAKER_04

Watch them squirm. They probably won't squirm at all. These are all really good salespeople uh when it comes down to it. They probably could sell toothpick to people with no teeth, honestly. Um, that's what makes them successful.

SPEAKER_03

Yeah.

SPEAKER_04

Uh thank you, Michaela. Thanks for listening to today's episode. If you like this podcast, please leave us a review wherever you are listening. Your review means a lot to us. Additionally, if you want to download our free guide, buyer beware, why did they keep trying to sell you that annuity on our website? Go to a wiserinvestor.com forward slash guides, where you can find it in our show notes. We see you guys again next week.

SPEAKER_00

Thanks for listening to a wiser retirement podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today, head to wiserinvestor.com and reach out. This podcast is strictly for informational purposes only and is not to be considered as investment advice or solicitation to buy or sell any financial products, securities, digital assets, or any other investment vehicles, or basis to make any financial decision. Wiser Wealth Management Incorporated is a registered investor advisor with the SEC. The host and or guest may personally own securities, digital assets, or other investment vehicles mentioned on this podcast. Neither the host nor guest of the show are compensated for their participation, and no referral fees are paid to or received by any host or guest for clients, listeners, or similar interests. Investments involve risk, and unless otherwise stated are not guaranteed, be sure to first consult with a qualified financial advisor, tax professional, insurance professional, andor legal professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.