The Basics of Annuities. How & Where to Use Them

Annuity Basics

Annuities get a bad rap, but are they truly in the "do not use" zone? In this episode, Michelle discusses the different types of annuities and how they can fit into your financial plan.

You'll Learn:

• The various types of annuities and their functionalities.

• How annuities can be structured to benefit your retirement goals.

• Real-world scenarios where annuities might be a good fit.

• Michelle's honest perspective on using annuities with clients.

This episode is for you if:

• You're nearing retirement and exploring income options.

• You're curious about annuities but unsure of their role in your finances.

• You want to make informed financial decisions for your future.

Time Stamps

00:20 Diving into Annuities

01:47 Understanding Fixed Annuities

03:59 Exploring Variable Annuities

06:17 Immediate Annuities Explained

08:29 Deferred and Indexed Annuities

11:46 When Annuities Make Sense

17:08 Final Thoughts on Annuities

19:40 Conclusion and Listener Engagement

• Transcript

  Introduction to the Podcast

  Welcome to me financial the podcast designed to inspire your financial life.Hello everyone. And welcome to the podcast. I am Michelle Moses, your host.I'm a certified financial planner, realtor, and former e commerce store owner.

  
  Understanding Annuities

  And today we're going to talk about annuities. I should have like. Fireworks going off or something I know everybody's favorite annuities, right?

  I mean, look at the things I get to talk about on here. Life insurance, annuities, uh, and I'm going to give you my opinion about them. People have a lot of questions and I see online that, uh, most people hate them. Honestly, if you're going to look at, um, like Dave Ramsey or something like that, they say to never buy them.

  Uh, and I'm going to tell you just different ways that I have used them. I've probably sold maybe I've been doing this for 20 years. So it hasn't, there are few and far between, and I'm going to tell you [00:01:00] when I do use them. And sometimes people ask for them and that's what the way that they feel comfortable.

  So, uh, annuities are basically, I'll go over what they are and then I'm going to go over, uh, the different categories of them and which ones I would pick for different situations. And most of the time it's when. People are retiring. That, that is most of the time. Uh, and I think if you were trying to make your own pension, then that might be one, but we'll go over all the different ones and the different instances where I would use one.

  And annuities, you know, I think you need to keep in mind with any product, any financial product. Life 401k. I mean, the bigger your financial product is, you The more money you're going to be paying somebody like me and the company. So an annuity is a contract between you and the insurance company and you are paying them for guarantees.

  That's basically what it is. You're setting up your own pension plan. There are a million [00:02:00] bells and whistles. I mean, I can't keep them straight and a lot of the people that I work with, so as an advisor, what I do is I call companies and they're these marketing agencies that we work with and you call and you say, Hey, I got Joe and he's such and such age and this is his situation.

  What do you recommend? This is kind of what we're looking for. You know, we'd like to make sure that he's going to get 1, 000 a month when he's in retirement. What do you have? Then they come back with these different things and then they're telling me about the bells and whistles because it really is impossible to keep them all straight.

  There are so, so, so many. Thousands. And I want, I think we can simplify it in this talk today. And so the, when you are going into retirement, you'll know which ones to pick. You've got different categories.

  
  Fixed Annuities Explained

  So there's a fixed annuities, which are basically, Hey, put this in here for three years and we're going to pay you 5 percent a year, pretty simple, right?

  I mean, kind of like a CD. Then [00:03:00] when you take your money out, then you can go do whatever you want with it. It depends, obviously, if it's an IRA, you'd have to roll it into another IRA, but it's something, you know, that you are guaranteed. And I think that's what you kind of have to think is top of mind when you're talking about annuities is that there is a guarantee and that's what you're paying for.

  So you're not going to make as much as in the stock market. You're just not. And a lot of them tout that, you know, that you can get in the stock market and look at how much it can make, but you're paying all of these fees and you're basically buying. A lot of, uh, options, so they're calls and puts and things like that to guarantee that they don't lose a lot of money and I'm not saying they all do that, but you know, you're paying money for all of these different contracts.

  You're paying money to do those trades. You're paying money to the insurance company, so you're not going to make as much as you would just putting it into index fund at, you know, Fidelity or something. So, you know, It is more expensive, but you are going to get a guarantee when you get into an annuity.

  
  Variable Annuities and Their Complexities

  So fixed [00:04:00] annuities, you know, you get a fixed rate and then you go into variable annuities and those are the ones variable means they go up and down with the stock market. This is where you can have a lot of bells and whistles. They've got like these income. A lot of them have income in them that the word income, I should say, you'll put all these writers on it.

  And basically a lot of times what they do is when your money goes up in the stock market, it will lock in that amount. So let's say you put in 50, it goes up to 60 and it goes back down to 50. If you had this, uh, income writer on there, they're called writers. Then you could lock it in at 60. and not go back down to 50.

  But the caveat is, is to lock it in at 60. You got to keep your money in there forever. You cannot ever go out of that annuity contract and you've got to annuitize what's called annuitization, uh, with the company. And so that's not really the way that I think most people understand it. They go, Oh, it goes up to 60 and then I lock [00:05:00] it in and then I'll be able to live off of that.

  Well, you'll be able to live off of that depending on how you choose to take the money, and we'll get into that later. And I'll come back to that example. So the variable annuities go up and down with the stock market, and they also have a lot of riders that would go with them. So you can have an accelerated.

  benefit, uh, rider, which would basically mean if you got a terminal illness, then it would start to pay out. You'd, you'd get a letter from a doctor and all of these little things that, you know, like if it's a long term care rider, they have those on there too. I haven't really seen where it's easy to satisfy.

  The, uh, conditions. I always worry about what I'm saying on here, honestly, that I'm gonna get in trouble, but I've never seen anybody be able to satisfy these things. It's kind of like these people that bought these long term care policies and they came to me 15 years ago. I mean, I've had people, they paid on those for 15 years and they literally got like 2, 500 back.

  Because, and they, they were, I mean, their parent was sick, you know, having [00:06:00] home health and all of that. So I, I really think some of these writers, I haven't seen a lot of them pay out. You know, if somebody is promising that, then hey, but you know, most of the time when people are doing, um, annuities with me, it's because they want to guarantee.

  So they're either going into the fixed annuities or we're going into what's my next topic.
  
  Immediate Annuities for Retirees

  It was immediate annuities and that's basically where you take money. So let's say you took 100, 000 and you put it in there and it would start paying within the next six months. And we, we do this a lot. My clients like these because if you listen to my other podcast, I talked about, uh, how I split up and do buckets of money with retirement.

  And so I split it up between three buckets. And in the first bucket is the one that we're living on right now. And a lot of people, uh, over the last 10 years have chosen to do what's called an immediate annuity. You give your money, they can immediately tell you what you're going to get in six months.

  And so let's say, you know, you had to put in 100, 000 to get 1, 000. a month payment every single [00:07:00] month because that's what the difference was between social security and what they needed to just live in the maybe they have a pension or you know, something else that is out there, but that's that was what we need to take out of their actual money that they have saved inside the four one case.

  And IRAs. We will sometimes do an immediate annuity again, we could do this outside of an I could just put it in bonds, but bonds go up and down, you know, like we could, When people are retiring, it's just a different mentality. I mean, it really, people go from, you know, like I accumulated all this money. I just don't want to lose it.

  I mean, that's what a lot of people, they're like, I just, I just don't wanna lose it. And so I don't care about making 8% and 9%. I, I would say the, I I, the average person, they just don't wanna lose any money. And so whatever we can do to just make sure that their retirement is comfortable, that they can sleep at night.

  And again, that is my job, is can you sleep at night? I, that's what we're gonna do. Uh, I, whatever my beliefs [00:08:00] are, it goes out the windows. I want it. To be so that people can sleep at night. They're not worried about their money. And so an immediate annuity sometimes does this when you're going into retirement.

  Uh, I'm, I'm sure there's other things that you could use it for. You know, there's a new rule for the, with the Secure Act quite a few years ago where you've gotta get money out in 10 years. You know, maybe you wanna use it for that. But there's, so there's fixed annuities where you get the fixed rate, there's variable annuities, uh, and immediate annuities.

  And there is, which you'll see online, another fourth option of deferred annuities.

  
  Indexed Annuities: Pros and Cons

  Those are kind of the same in my book, uh, as a variable annuity or like an indexed annuity and an indexed annuity. Uh, boy, you guys, I really am not, I'm not a huge fan of them. I, they invest in the stock market, but basically what they do is they say, okay, we're going to invest in the S and P 500 and you are, your contract is on November 1st.

  [00:09:00] And so next November 1st we're going to look at what the s and p 500 is, and if it's, you know, down 5%, then you are gonna be down and they give you this participation rate. So it just gets more and more and more comp complicated. So you could participate in it at a hundred percent. So then you would be down 5%.

  If the market was down five, or if it was up five, you'd be up five. Only on that day, and then if you were, if you have a 50% participation rate, then obviously you would be up 2.5% or down two point a half percent, and that's what you'd be locked in for the entire year. And so it just gets real complicated because it's like your money is going up and down with the market, but it really only locks in inside of your annuity at that date.

  Of your and whatever your participation rate is and where these get the index annuities get really, really super complicated is that they create their own indexes. So these companies make a lot more money if they create their own mutual funds and indexes. So if you were to go To Merrill Lynch, they have their own [00:10:00] mutual funds, right?

  If you go to any one of these companies with their annuities, then they have their own indexes with inside inside of these annuities. And it's because they can invest it themselves. And so they brand it and then they can charge a fee to manage the money. And so not only are they making a fee for charging on the annuity side of it for the insurance portion of it, but they're able to charge a fee on managing the money itself.

  And it just gets really, really complicated, really fast. And I'm not saying that people don't make money in them. It's mostly that a lot of these indexed annuities have a sales charge on them and you can't get out of them for eight or nine or 10 years. And so I've seen some people, they come to me and they have annuities inside of their IRA, which I haven't even gotten to the tax deferred stuff going on.

  And then every single time they put in new money, it starts over. The, the contract period, basically. And so I've had to tell people like, stop putting money in here [00:11:00] so that we can get it out because you got these, the person was selling them when they were 30 years old. There is absolutely no reason you need a guarantee from an insurance company.

  When you are 30 years old, you are in accumulation phase. You're trying to just gain as much, you know, You're, you're trying to take as much risk as you can, honestly, so that you can make as much as you can. And when you put it inside of annuity, again, the fees start to eat things up. So, you know, these index annuities just get super complicated, really, really fast.

  And even with me going to like two day meetings, I still get really confused by them, no matter how many illustrations they do. Um, so I think you should just. Just kind of keep it simple if you're going to use an annuity or if it sounds good. So the cases where I have seen them do well, as I said, the immediate annuities for retirees because they don't want to worry about it.

  They don't want to see bonds go up and down. They just want to know that they're going to get a price [00:12:00] or get a payment. I have seen people create their own pension plan. So annuities are great because you can put money in and it grows tax deferred like an IRA does, but you've already paid the tax.

  
  Deferred Annuities and Tax Implications

  So let's make it more like a Roth IRA, right?

  And, but when you bring it out, you are going to have to pay taxes on whatever you earned, but just a portion of it. So let's say you put a hundred thousand dollars into a deferred annuity. And it grows to 200, 000 when you retire and you start to take that 200, 000 out, you're going to have to pay 50 percent in taxes and 50 percent was the basis because you put in 100, 000 that you already paid taxes on.

  Your money is never your money until you pay taxes on it. And these deferred annuities kind of, you know, they will build on themselves. And I think if you were keeping it simple and you just had it in the market and you wanted to create your own pension plan, that might be a way, but I just think there's so many other options out there with individual 401ks and SEP IRAs.

  [00:13:00] And, you know, there's just so many other things out there, but I guess, you know, if you had maxed out that and your income was over the max, using annuities would be a great way to defer some taxes. And then you could just put money in there and have it grow tax deferred. It's just the bells and whistles that you've got to be concerned about.

  So it's like you're, you're like the annuity and you like the idea of creating your own pension plan and having your money grow tax deferred, but that's where you need to watch out where the, uh, What index is it invested in, how is it invested, what are the fees, and then all the bells and whistles of all the riders, of the income riders that are on there.

  That's where it could get expensive and where it could kind of, you know, bite you in the you know what. Uh, and so those are the basics of the four, so you got variable annuities, fixed annuities, indexed annuities, and immediate annuities.

  
  When Annuities Might Not Be Right for You

  And I have to say, if you are young, do not ever buy an annuity. I don't think you need it [00:14:00] unless you are.

  And I think once you're getting out of your young professional phase, then maybe you would want to do a deferred annuity to create your own pension plan. But there's also so many other things that I would do before that, that, you know, I would probably buy property and maybe buy Um, you know, max fund, like a whole life insurance policy so that if, cause you're probably having kids around then, and so you could have it like a double thing of having like a savings account inside your life insurance with the kids having, you know, a death benefit.

  And then you could also like pass your wealth on to your kids. And uh, I just think there's a lot of other things that come before annuities. So if you are under the age of. At least 50. I'd probably say 55. I don't think an annuity is ever probably right for you. It's just, it's, it, you're buying a guarantee.

  And if you want a guarantee and you want to know exactly how much you're going to get, just like a pension plan, because we all know pensions are going [00:15:00] away, then great, go buy an annuity and it could give you that peace of mind so that you can sleep at night. And that is why I've honestly sold some of these is because they do not like these, these clients don't like the stock market.

  They want to get some of it out of the stock market. They want to diversify. They're worried about it. And so they want a guarantee and they just want to know exactly how much they're going to make. And I think if that's what you want, then perfect. It is perfect for you. It's just that they get so complicated that you really need to make sure that you are with someone that you trust and that is going, they don't just sell annuities and life insurance.

  Honestly, I just don't think that you should go with somebody that only sells insurance and life and annuities, uh, because they're, oh my gosh, should I say this? It's all I know. And they are taught these things, uh, from these companies, you know, how great they are. And I've heard this So many times from other [00:16:00] advisors that they're with these companies that only do life insurance and annuities.

  And then they get out into the other world and they see all these other products and what the stock market can do and what IRAs and all these different tax strategies. And they're like, Oh, I was just an insurance salesman. And it's like, they're just in this hole. And so it, you know, these insurance products, they definitely serve a purpose.

  But only for a very few people. And so if you're going to spend money like this, it is for a long time and you need to make sure that you're sure about it. And so I definitely don't think that it's something that you should just go, Oh, people, you know, cause you do hear people online and they're like, don't ever buy an annuity for any reason.

  They're just scams. And that's not true either. And it's the same for life insurance. You know, people that are just like by term and forget the difference. I really think you're leaving a lot on the table with that. And, you know, so these all or nothing statements. I think that's kind of a red flag of somebody to watch out for of the, you know, this is the way to do it.

  
  Final Thoughts on Annuities

  It's really just another tool in [00:17:00] your toolbox that you could use to guarantee what you want and maybe grow your money tax deferred. I don't know, I don't know that I want to get into like how You get your money out of these annuities because that gets more complicated. You know, like if you're younger, you can roll it into another annuity.

  And if it's, you know, cause these, I, you could just take cash and put an annuity, but you could also take your IRA and put it in an annuity. And so it just depends on what your goal is with cash. It might be to defer the taxes because as it grows, right, you have to pay taxes on the earnings. But if you're taking an IRA and putting in an annuity, You're not going to make more than the stock market.

  You would only take an IRA and put it in an annuity because you wanted a guarantee of how much you were going to be able to take when you were retired. And that would be it. I, I, I see, yeah, I, again, I saw these people with IRAs when they're 30 years old and every [00:18:00] single time they put money in, then it started back over the sales charges and they were nine years.

  And so we're sitting there just waiting for these things to expire and they're not really making that much because they're these index ones that have point to point and they are at participation max of 50%. So if the market makes 10%, then they're going to make five. And I just think when you're 35 years old, like why, why would you do that?

  Just go put it in the market and you have the time. To ride the markets up and down, because if you have over seven to 10 years, you want to be in the stock market. If you have less than that, then you want to start looking at some of these insurance products and you want to start moving your money to be safer.

  Uh, so that's, I think I'm going to end it there just because it can get just really complicated. And I, I don't want to be talking in circles about annuities. And I, again, but I just wanted to have this because I see some of these people online and they just. Flat out say, you know, if you wanna stay middle class, buy an annuity or buy life [00:19:00] insurance, or, you know, it's just like that kind of stuff.

  Those statements just are never true because everybody wants a different thing. And you'll hear me say this a thousand times. Everybody is different. It's just like the clothes you wear. You're going to decide different clothes that you're going to wear. It is the same thing. You're deciding what kind of financial life you want to have.

  And then that's where you bring in all the different products and the different investment vehicles. And it's not like it's infinite, you know, like your clothing is, but it is very confusing on how to put them together. When you're talking about taxes and retirement and IRAs. It gets really complicated.

  And so I understand why people get confused.

  
  Conclusion and Listener Engagement

  Uh, and I hope that this helped bring a little bit of clarity around a very not exciting topic of annuities. Uh, and let me know if you have any questions or if you have topics for other. podcasts. I would love to hear from you. And I really hope that this helped educate you a little bit better and just feel a little bit better about your financial life.

  [00:20:00] And I hope you guys all have a wonderful day. Thank you so much for listening. I really, really appreciate it.

Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.