Demystifying Annuities: Insights into Immediate, Fixed, and Variable Options

Are annuities the golden ticket to financial security or a risky gamble that could leave you high and dry? Join Rob Wolf, as he cuts through the noise and lay bare the real facts about annuities. We dive deep into the five major types: immediate, fixed, fixed indexed, registered indexed linked, and variable annuities. This episode promises to unravel the intricacies of each, offering you a crystal-clear understanding of their unique features, benefits, and limitations. Whether you’re seeking guaranteed lifetime income or an alternative to bank CDs, we provide the insights you need to make informed financial decisions.

Discover how immediate annuities can serve as a hedge against longevity risk, ensuring you never outlive your resources, and why they may not be the perfect fit for everyone. We also explore why fixed annuities might be a safer bet for those wary of market volatility. If you’re serious about retirement planning and want to navigate the complex world of annuities with confidence, this episode is a must-listen. Tune in for a balanced and comprehensive look at how these financial products can fit into your broader investment strategy and potentially secure your financial future.

Learn more about Wolf Financial Advisory:
https://www.wolffinancialadvisory.com/

Disclosure: Robert Wolf, James Koenig, Sara Wolf, and Michael Rock are investment advisor representatives of, and securities and advisory services are offered through, USA Financial Securities. Member FINRA/SIPC. Additionally, Amanda Opulskas and Adam Wallace are registered non-solicitors of USA Financial Securities, A registered investment advisor. 6020 E. Fulton St., Ada, MI 49301. Wolf Advisory Services and Wolf Financial Advisory are not affiliated with USA Financial Securities.

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax, or estate planning advice. Investing carries an inherent element of risk and it is in everyone’s best interests to consult a tax, legal, or investment professional. The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities, member FINRA/SIPC. A registered investment adviser. Wolf Financial Advisory and USA Financial Securities are not affiliated entities.

Transcript

Understanding Annuities

Voiceover 0:00

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax or estate planning advice. Investing carries an inherent element of risk and it is in everyone's best interests to consult a tax, legal or investment professional. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities member FINRA SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities.

Voiceover 0:33

Wolf Financial Advisory. When it's important to you, it's important to us.

Voiceover 0:40

This is the Wolf Financial Podcast. Here's your host, Rob Wolf.

Rob Wolf 0:51

Good day everyone. Rob Wolf here with the Wolf Financial Podcast, and today we're going to talk about annuities. Boy you know what? There's a lot of emotional angst sometimes when annuities are brought up, and it could be anywhere from man this is the best investment in the world to man. I got sold some just terrible investment advice. It was an annuity and it was the worst thing ever. So it's all over the place. And what is the big deal about annuities? So we're going to be talking about this to give some insight on some of the things to be considering what they do, what they don't do so that you can make a informed decision as to whether or not they would be something that would be appropriate within your plan.

Rob Wolf 1:38

So, first of all, what is an annuity? An annuity is an investment product that is issued by a life insurance company. So life insurance companies could be Prudential, bright House, nationwide. Those are all insurance companies that many people have heard of, and their form of investments are annuities. So there are many types of annuities. There's really five major types right now. There's immediate annuities fixed annuities fixed indexed annuities registered indexed linked annuities. And then bearable annuities, indexed, linked annuities and then bearable annuities. There are some other types of annuities that aren't as well known and I'm not going to get into those today. But let's just break down a little bit of each of these types of annuities and why someone may want to have that in their overall portfolio.

Rob Wolf 2:43

So what is an immediate annuity? Well, the best way to look at an immediate annuity it's very similar to if you had a pension plan with your previous workplace and they built up this money and they turned that big lump sum that they built up to you into a pension payment. And a pension payment is just an immediate annuity. They guarantee you income that you can never outlive. And if you choose to want to insure a spouse so that if you pass away first for a lower monthly payment, you can make sure that spouse either gets 50%, 75% or even up to 100% of your annuity payment and then, upon your death and or of your spouse if your spouse is covered the payment stops. It's just that simple. So an immediate annuity protects you from living too long.

Rob Wolf 3:50

Longevity risk, right, we all think about. Well, what if I live too short? You know, we think about life insurance and what's needed if we die prematurely. But what if we live too long and we outlive our resources? That's when an immediate annuity can make sense.

Rob Wolf 4:07

Now we don't see a ton of immediate annuities anymore. There's a lot of good alternatives to that. I think one of the biggest disadvantages of the immediate annuity is that in many cases there's no legacy involved. Upon the death of the two spouses it's gone. The insurance company ends up keeping the money. Now sometimes there could be a provision called a period certain in there where they'll guarantee payments for X number of years regardless of how long you live. But in general, upon the death of the annuitant and also a covered spouse, in most cases those payments cease and then the potential beneficiaries don't get any more money. So we don't see a ton of immediate annuity can be a really nice complement to their overall investment strategy because they're not worried about leaving a legacy to anybody and it takes away the longevity risk of living too long.

Rob Wolf 5:21

Immediate annuity pretty simple. They issue a guaranteed fixed rate for a period of years anywhere from three to five years. On average, some go out more than seven years and you just get a stated interest rate for the period of time that you sign up with the annuity, the after-tax annuity, the money grows tax deferred, so if you don't use the money you don't have to pay taxes on it until you draw the money out. When you draw the money out, the gain comes out. First you got to pay taxes on it and then you get into your original cost basis, which comes back to you income tax free. So many times people, especially CD type of people that are looking to tie up into a guaranteed fixed rate account where they don't want to take any principal risk with their money, they'll get into a fixed annuity that also provides some tax deferral benefits that they would not otherwise get in a regular bank CD. You can also own a fixed annuity with a traditional IRA. Of course the tax deferral on the traditional IRA is a non-issue because you would get tax deferral in any IRA. It doesn't have to be in an annuity. But you sometimes see what are called qualified fixed annuities for those people that are looking at more of that guaranteed fixed rate they're really concentrating on and they're not really worried about the tax benefits. Okay, so that's fixed annuities.

Rob Wolf 6:52

The next type of annuity is a fixed indexed annuity. Now we're getting into some complexity the immediate annuity and fixed annuities. Those are pretty easy. It's easy. You just got a few terms to go through and you know what you got Fixed indexed annuities. Now they're linking the interest you make to a stock market indice. It may go up but it won't go down. Your principal is guaranteed. The idea behind a fixed indexed annuity is you try to link the interest to a major stock market and to see to make more interest over the long run. However, because there's no guarantee an index will go up, it still gives you the downside of protection, but no guaranteed interest as far as accumulating on the fixed indexed annuity. Okay. So you got that on the fixed indexed annuity, okay.

Rob Wolf 7:49

So, you got that. So that would be immediate annuity, then fixed annuity, fixed indexed annuity. If you think of a big line and you're going from left to right, the immediate annuity and fixed annuity have the least amount of risk. The fixed indexed annuity is going to be right in the middle and then you're going to get into the registered indexed linked annuities RILAs for short and the variable annuities. The registered indexed linked annuities allow you to link the money to a stock market to see if the market goes up, you make money up to a cap. If it goes down, they give you some downside protection, but not complete downside protection. You could build buffers of 10, 15, 20%, as an example, where if the S&P, as an example, goes down 10% and you got a buffer of 15%, you won't lose any money. Registered indexed linked annuities tend to have a little bit more upside potential than the fixed indexed annuities. Again, you're taking on a little bit more risk. Therefore, you should get a little bit more return. Finally, you got the variable annuities. Those are just like your 401ks, the IRAs that you may have outside of annuities. They have the investments. They have the mutual fund-like investments within it. You can make a ton of money. You can lose a ton of money. Those are the ones that have the most, perhaps, consternation associated with them, because there could be a lot of fees involved with a variable annuity and, depending on all the bells and whistles that you can add, those fees can add up pretty seriously. Three to four percent right off the bat, before you make any money, are in fees are in fees.

Rob Wolf 9:43

Okay, so annuities range the gambit as far as safe to extremely potentially aggressive. The more aggressive you get, the more upside you have, but you also have more principal risk as well. So is an annuity right for you? It all depends. What are your overall objectives? Are your overall objectives guaranteed income? Well, if you like the idea of guaranteed income, annuities can be a wonderful strategy to consider within your portfolio. If you are looking to do this for legacy purposes, there are annuities that offer guaranteed death benefit riders that will allow you to get a life insurance type of benefit even if you are uninsurable to buy traditional life insurance. Really fantastic way for those people that are looking to still take risk, but they know that there's some health issues that could reduce their overall life expectancy where they could have a guaranteed death benefit building up, regardless of results of the underlying investment. So, worst case scenario, the heirs get the death benefit value. So, worst case scenario, the errors get the death benefit value. Best case scenario, they get the market value of the annuity because the overall investment experience worked out well.

Rob Wolf 11:21

So annuities are complex products. It's not a simple. They're good, they're bad. There's no such thing as good or bad investments. The only thing that makes something good or bad is if it is right for you and your situation. Uh, if your situation calls for X, y, z and you instead get ABC, guess what? It's probably not a good investment for you. Guess what it's probably not a good investment for you. However, if you need X, y and Z and you get X, y and Z and it fits the criteria you're looking for, then it could be a very suitable investment within your overall financial plan.

Rob Wolf 12:07

Again, the biggest thing to do is get educated. Understand how these things work. Understand why, if somebody is proposing you consider having an annuity in your portfolio, what is the rationale? What is it that the advisor believes the benefit would be for you, and does that benefit make sense for where you are in your situation? Remember, you're still the driver of this financial planning discussion. You are the one that makes the decisions. You need to be taking the ownership and understanding and demanding to be educated on what your options are so that, as options are presented, you understand them in such a way that you can make a proper decision with that. So again, complex products absolutely Can they be wonderful investment tools within your portfolio? Absolutely. Get educated, understand and take ownership and if you do that, you will make the right decision when it comes to those types of products. This is Rob Wolf with the Wolf Financial Podcast.

Voiceover 13:28

Thank you for listening to the Wolf Financial Podcast. For additional information about our firm, please visit our website wolfadvisorieservicescom. Wolf Financial Advisory. The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax or estate planning advice. Investing carries an inherent element of risk and it is in everyone's best interests to consult a tax, legal or investment professional. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities Member FINRA SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities. Member FINRA SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities.

Voiceover 14:15

There are significant differences between an investment in an annuity and a certificate of deposit offered by a financial institution. Cds are bank products and are FDIC insured. Guarantees on insurance products, like an annuity, are made by the claims-paying ability of the underlying insurance company and are not FDIC-insured. In the event of an early withdrawal, an investor will pay a penalty on the credited interest on a certificate of deposit. Annuities are subject to a surrender schedule which will reduce the principal balance of the account and is not limited to only the interest earned. Annuities are best suited for long-term investors. To only the interest earned. Annuities are best suited for long-term investors. Some features mentioned may be available only by the purchase of a rider. An optional addition to an annuity or life insurance policy that is available for an additional fee Depending on the product interest credited may be limited to caps and or participation rates. Withdrawals prior to age 59 and a half may be subject to an additional 10% tax penalty. Surrender charges may apply. Guarantees are provided by the claims paying ability of the underlying insurance company.