Are Annuities Good or Bad?

Today, we'll be discussing whether annuities are good or bad. Hello and welcome to Money Talks. My name is Ken Wink with Summit Financial Consulting here in Southeastern Michigan. If you'd like more info about what you hear during our show today, give us a call 586-226-2100 or you can visit us at our website summitfc.net. While you're at the website, be sure to check out the podcast page. You can check on our old shows and you can also subscribe on Apple Podcasts, Spotify, or Amazon Music. So if you Google search about annuities, odds are it's gonna be a mixed bag. And in some cases, people are actually gonna say very terrible things. In certain circumstances, annuities can be absolutely fantastic in my opinion. In other cases, they are very, very bad. So we'll sort it all out today. Before I jump in, let me introduce my co-host, Tony Shore. Tony, according to you, what is a better investment? A vinyl record collection or an annuity?

Wow. Okay. Okay. Here we go. Definitely an annuity. Records, typically, most of them don't end up holding the value. The margins are very slim. Now, sometimes if you have patience and years, it's kind of like the market. It depends on the time you have. You know, if you start collecting in your twenties and you're going to hold onto those there, some of them are going to be worth a lot of money in your sixties, but most of them are not. So there you go. Although had you, had I kept all the records I'd collected in my youth and kept them pristine, um, that would have been a good investment because now records are worth more than they ever have been. But no, it depends on the situation and it depends on the record, right? I have records that I paid $5 for in a used bin that are now worth $300, right? A collectible that's rare. I have records that I paid $60 for, brand new, colored vinyl, limited edition, that are worth... $10 if I can find someone who wants it. Oh, wow. So that's the way that works. But that's the question. Are annuities good or bad? That's like asking, are cats good or bad? Are children good? Are kids good or bad? They can be holy terrors, but we love them. So, yeah, some annuities are horrible. I mean, I looked at a... a variable annuity once, and you'll probably get into this, but I'm like, why would anyone want this? It definitely wasn't right for me. I mean, there were high fees. It could go down in value. So there was still risk. I mean, I might as well. And the interest I'd make, I'm like, well, I should probably just put my money in the market at this point. The market is so, so I don't know, you know, I mean, annuities can get complicated, but I know it's become so competitive over the years that the insurance companies have changed. These aren't your father's annuities or your grandfather's annuities. And so there are annuities with no fees now and with limited, no downside annuities. and some upside and so, and even some liquidity, not full liquidity, but some, but you're gonna sacrifice, you know, what do they say? The three things, growth, liquidity, and safety. Are those the three things and you have to give up? You can have two, but you can't have all three.

Is that what they say? I'd probably throw in tax deferral, too. Oh, yeah. Yeah.

But they say usually you have to give up one to get another or something. And so it depends on the situation. But yeah. Yeah. Record collecting. I love it. You know that. Yeah. But could I sell all my records for what I initially paid for them right now? Probably not.

Yeah.

They're worth a lot of money, but still I'm probably not going to come out ahead. All right. So better than crypto. Got it. Yeah. Well, well, it's a, it's a more, it's a known quantity and yes, it's a, it's a lot less risky than crypto. That's for sure. Yeah. The risk isn't there.

I'll sort of start by saying that during the show, I'm definitely going to share opinions and experiences. This is not investing advice as we have to do one on one. If you're listening to this and there's somebody who is pitching you an annuity or you're doing your own research online and about an annuity, please give us a call at 586-226-2100. We'll be able to tell you pretty quickly whether it's a good one or a bad one and whether it's appropriate for you and your situation. So before I jump into the good things about annuities, because there are definitely good ones and there are definitely situations where it's a perfect fit, I'm just going to cover for a few minutes a couple of potential drawbacks or risks that people should be aware of. Sure. So we'll put the bad before the good, I guess. So in my opinion, if you're not working with a fiduciary, annuities have the potential to be the most abused financial products. There are investments out there, annuities that will have a 12-year, 15-year, or even a lifetime commitment. And then they pay huge commissions. So, again, some advisors, especially ones who are not fiduciaries, it's tempting. You know, it's tempting for them to sell something that pays them a big commission. And in a lot of cases, they're not going to explicitly describe what the details are as it relates to the surrender schedule. So if you're looking at an annuity, I would argue the very first thing you got to do is just figure out how long am I going to be tied up in this thing? And, you know, sometimes being in it longer could be a benefit. So on a quick side note, interest rates are higher than they were seven years ago, 10 years ago, 15 years ago. So there are some products where you might say, you know what, I want to lock in today's interest rates for longer. So there's a case where you can, a case can be made to do a longer term one if you're trying to lock in some kind of an interest rate or beneficial potential upside.

The majority of the time when you're looking at these 12, 15 year products, they're going to have a huge bonus, which means you get money on the front end. But, you know, you can't get something for nothing if you get an upfront bonus, which is the justification that a lot of financial advisors will use to switch from one product to another. you're usually getting less earnings potential. So my bottom line with that little segment, Tony, is there's no such thing as a free lunch and you've got to do a lot of due diligence if you're looking at a longer term product or a product that has a bonus on it.

Right. And a lot of people are just there are some so-called financial professionals or financial planners out there who are just insurance salesmen and just doing it for the commissions. And they're not overall wealth managers and they're not financial services professionals who are licensed and looking out for your best interest. They're not necessarily fiduciaries. So you do have to be careful because, again, They might put you into whatever's going to get them the best commission. However, I know for your clients, you only look at these if it's a really good option to meet their needs. And you have to look at all the factors. I mean, they've really gotten competitive and the insurance companies want you to work with them. So they offer every year I hear of better and better options. No downside. So you have principal protection. Little to no fees in some annuities. And then it just all depends on the upside and the terms. How long is this for? And what if I need to access some of that money? And some you can take up to 10% out a year with no penalties, no early withdrawal penalties, right? Right.

Yeah. It takes a ton of due diligence to figure out what the top tier options are. I mean, there's literally hundreds and hundreds of options out there. Out of all the hundreds, we only think there's about seven that are worthwhile.

Right. But you don't want to. That's another reason not to work with one of the big box name brand companies who have their own products. If you go directly to that company or a representative for that company, they're just going to say, OK, here's what our company offers. And you can look at various companies and the you know, you look at the guarantees, but. you do have to do your due diligence because, uh, there are so many different types and that's, and that's one of the drawbacks to annuities are the terms, uh, the, um, the different types and people you, I bet you've had people come to you who have annuities and they've gotten into annuity that wasn't right for them. Right.

Oh yeah. So somebody comes out of my office and says, yeah, this guy at the bank, so it'll be an annuity. Um, It usually doesn't end well. So there are so many annuities that are just straight up trash, in my opinion. And a lot of times these big brokerage houses and banks, they will form a relationship with one, maybe two companies. So that's all they recommend is one or two companies. So what I typically recommend and past performance can't predict future performance and all guarantees are backed by the claims paying ability of the issuing insurance company and all the disclaimers out there. If you go to the bottom of the website of the person that you're working with, I would argue it helps if they're part of a registered investment advisory firm, especially licensed with the securities, or not licensed, but regulated by the Securities and Exchange Commission.

Because then they're a fiduciary and they're held to that standard and they're audited to make sure every recommendation they make to their people they work with is in their people they work with's best interests and not theirs.

Right, yeah. So being regulated by the SEC, it doesn't imply a higher level of education or training or anything, but it does... require that they're actually a fiduciary. Every client I sit down with, their financial advisors are telling them that they're fiduciaries, but they're not actually fiduciaries. Right. We'll typically have to do what's in the best interest of the client or what's... considered suitable in a lot of cases. Yeah. And suitability is so easy to explain away with a sentence or two and then sell a person a piece of trash. So, you know, it's really tough and you really got to make sure that you're working with somebody who can look at, in my opinion, you got to have access to hundreds of products and dozens of companies if you're going to be able to find that diamond in the rough.

Yeah. But, you know, the negativity I hear out there, you know, when I see somebody, a talking head on TV or an investment person who's really dissing annuities, they tick off the negatives, which are some of what you just said. And I'm like. well, they just explained they're only – they just, you know, they said high fees, there's no liquidity, and then they tick off a couple others. And I'm like, well, those are only true for – Like everything they named was a variable annuity, one type. And there are so many different types. I'm like, none of those or only one of those applies to a fixed indexed annuity or another type of annuity, an indexed annuity, right? Yeah.

Yeah, so there are four main types that we look at from time to time, and they're good and they're bad with each of those different types. Sure.

Like any investment has good and bad. I mean, there's risk that you got risk. You have, you have liquidity and yeah. And so sometimes you have to give up some, if you want to, if you don't want risk, you have to give up some liquidity. Right.

Right. So I guess I could start, you know, we've mentioned variable a couple of times and I can't get into it. product specifics, but most of the old school variable annuities did have fees or high fees. And actually this is one thing that applies to all annuities. There are a lot of annuity sales people that will say, Hey, you're going to, I guarantee you, you're going to make six, seven, eight, 9% per year. If someone says that your ears have to perk up and you have to pick up the phone and give me a call. Most oftentimes what they're selling is an income benefit. So, no, your account value will most likely not go up seven, eight, nine percent per year if someone's pitching that. But what will go up is your income benefit. An income benefit is like a fake number on a piece of paper that eventually when you retire, that's what your income will be based upon. But it is not the same as actually making money inside the contract. So you've got to be really, really careful when people start throwing big numbers like that around. Yeah, it's usually not true.

Yeah, you have to be careful. You have to be careful. So what are some of the benefits of some of the annuities? Like you said, there's six or seven companies or six or seven options out there that are good or that have benefits that can help people. What are the good sides of annuity? One of the problems is liquidity because some annuities... You have to be in them a certain time, and there are surrender charges if you take money out before that time, correct? That's a negative.

Yeah, there's one. So we've mentioned some bad things about the old variable annuities. Yeah. There are some old variable annuities where you pay an annual fee. And in exchange for that, you can get all the money out at any time for any reason. So there, there are some that have liquidity, but then, you know, like you were saying earlier, there's, there's an offset fees. Yeah. So then, you know, maybe one, 1.25% fee to be able to have that liquidity feature. Yikes. But there are newer ones that we actually really like that are technically called variable annuities. But the acronym for them is Ryla. Never heard of it. So it's a registered index linked annuity.

So I have heard of that Ryla. Okay.

Yeah. So with that, you know, again, I can't get into super specifics, but one product that we like, you have 100 percent downside protection over a six year period. So it goes down. You don't have to worry about losing money. It's got 100 percent downside protection, but with no fees. And you can make in some cases up to 50 percent over the six years. So that's taking some of the features of other types of annuities and sort of baking it into the cake of what we would call a newer variable.

I thought all variable annuities, I didn't know that there was any type of variable annuity that offered downside protection or principal protection.

Yeah, there are some that they will have 20 or 30 percent downside protection or 10 percent downside protection. So it's all about offset. So there are some that have 10 percent downside protection. And then they promise that you'll make not only what the index fund makes, which is usually the S&P 500 or the NASDAQ, but then they'll actually give you more than what the market makes.

Interesting.

With no fees and downside protection. 20% downside protection that will give you a cap on what you can make, maybe 100% over the six years. Wow.

So they keep getting better and better because I always thought that fixed index annuity, where there's 100% downside protection, in other words, your principal's always protected, no fees... And then the exchange for that was it would be tied to an index. You're not in the market, but it's tied to, say, the S&P 500. And so you would make a portion of that up to, say, 8% or 10%, right? 10% or 15% in some cases. So I know I'm going to have downside protection. I know that if the market's up, I'll make – Up to 10%. If the market's up 20, I still only make 10 and that's the, what I'm giving up. And then it has to be in there for, you know, five years or whatever it is. And then I can take 10% out a year if I need to, uh, And so so that's interesting. And I like that because they say zero is your hero. I love a lot of people when they're in retirement. They don't want to see their principal go down. Right. And so some of these have principal protection. Of course, everything we're talking about here is based on the claims paying ability of the issuing insurance company, which is why you only work with top rated companies. Correct. Right.

Right. Yeah. Financial strength is very, very important. Yeah. So, yeah, you want to keep a close eye on that when you're selecting any investment, really. Sure. So, yeah, that's that's the big struggle that we have, Tony, is that what you just described was a fixed index. And that's been around for a long time. And when interest rates are low. all these products are not as flashy when interest rates are relatively high, the way that they are right now. Sure. I some surprisingly good options.

And the biggest, like a MIGA is a good option for people who want to save money. And it's, you know, instead of using a bank CD, you know, a better option might be a MIGA if the interest rates are good, but if interest rates are low, it's less appealing. Right. Is that what you're saying? Yeah.

So a MIGA is the third option that we regularly recommend to clients. So MIGA stands for multi-year guaranteed annuity. And what that basically means is they are promising to pay you an interest rate for a certain period of time. It could be one year, two year, three years, five years, 10 years, whatever is a good fit and appropriate for your liquidity needs. There are options that have absolutely no liquidity. There are options that allow you to take out 10% per year. All of them typically will have a rider that says, if you go into a nursing home or if you pass away, you're going to get all the money back without any problems. But that's the big debate, Tony. With a MIGA, you know what you're going to make. Yeah. Not written in stone, but it's written.

And it usually outperforms CD. It's like a CD at the bank, but it typically outperforms them.

Right. Yeah. It doesn't have FDIC insurance, but then it is backed by the claims paying ability of the issuing insurance company.

And most of those insurance companies have to carry insurance through the state for about two up to $250,000 per account, which is the exact same amount FDIC insures for. So yeah.

Yeah.

I mean,

If you want a sure thing, as far as your interest rate is concerned, I can't say a sure thing because anything's possible. But if you want a fixed rate, then Omega is a good choice. If you want your profit potentially locked in every single year, that's the biggest benefit to a fixed indexed. Because they'll put a cap on how much you can make. Like you said, nine, 10, 11%, whatever it is. So the good thing about that is if you make that 10% in a year, it's locked in. And then the next year, if the market goes down, you don't lose anything. But the problem with that is if the market goes up 25, 30% in a year, you made 10 when the market was up 25 or 30. And that's where a Ryla makes sense. A Ryla is great because they don't have an annual cap. So if they, they'll just tell you, Hey, over the next six years, you can make 50%. We don't, or 45% or whatever it is. We don't care. If it's in one year or a little bit, all six years, all they do is they look at the value the day you started it, the value after six years. And if it's up, they'll give that to you.

So gains aren't locked in year to year, but there are advantages to that six year period. And yeah, interesting.

Yeah. And most financial advisors, again, this is in my opinion, but most financial advisors are not going to talk about RILAs because...

I've worked with hundreds of them and I've never had one bring one up. Why is that?

There's very few that want to go through all of the licensing that's required and all of the annual fees and audits that are required to hold all these licenses.

So for on your end fees and licenses on your end.

Yes.

The financial on the client's end.

No, no, no.

You have to jump through hoops.

Financial advisors at the jump through hoops, in my opinion, to be able to maintain their licensing, to be able to sell Ryla. So, um, When I'm going against my competitors, it's usually fun for us because we just have, in some cases, more products because we have more licenses that we maintain here. So, yeah, it's a competitive advantage for us. And if you are getting pitched an annuity by someone, I'd highly recommend getting a second opinion, whether it's from us or somebody else. Just make sure you're... person that you're working with is not looking out for their commissions and instead is looking out for what's in your best interest.

Plus you see people all the time. I bet can come to you who are overinsured or underinsured or, uh, getting into something that they shouldn't have. Um, and that's a problem and they've been sold a bill of goods. And, uh, that's what I love about you and your team there. Um, it's a family and, um, Literally and figuratively, you've got a great team, not all literally related, but some family there and a family business. But you feel like a family and you really care about your clients. That comes through. And I think that's so important when you're working with a financial professional, whether it's you and Summit Financial Consulting or whether our listeners and viewers find another trusted financial professional, find someone you can trust who's a true fiduciary. who is under scrutiny by the FINRA, the SEC, and are held to that accountability standard and are going to look out for your best interests. I think that's really important when dealing with annuities. But again, don't write them off. You want to have access to every tool in the toolbox because I bet you've seen some people come in and the solution for them for income and retirement is, I was just like, okay, you've got this growth and you've got this money here that could be used. This is a perfect opportunity. Some people just fit right into the RILAs or the fixed index or some type of an annuity that would really help them.

Yeah, I think so. So there are actual studies out there that say if your income is set in stone, so whether it's a pension or some other, there could be an annuity potentially that provides an income for life. People sleep better at night knowing that all their bills are. Oh, sure.

Guaranteed lifetime income is what people are looking for. And so there are solutions out there. But again, that word guarantee, how is it guaranteed? Is it by the issue and claims paying ability of an insurance company? Is it on some word of some guy somewhere who sold you a bill of goods? You really need to do due diligence and work with a trusted financial team that has the experience and has been around.

Yeah. Yeah. There is another option out there that we don't use very often. That's called a SPIA. Oh, yeah. So that's a single premium immediate annuity. So that's a product where you give the insurance company some money and then they turn around and they send you an income for the rest of your life or for the rest of both your lives if you're married. The internal money that you make on a product like that is usually only one or two percent. Yeah. But if you are just really obsessed with having an income for life, you know, it may be an option. But all the other products we just mentioned, they typically do all have the option to add on an income for life.

Right, or an income, a lifetime income rider, right? I mean, you can get a fixed index annuity or a rider or anything pretty much and add a rider that will give you a guaranteed income for life. Yeah.

Yeah, so here's the shocker is that in a lot of cases, we don't recommend those because there's typically a fee. And in exchange for that fee, that's gonna reduce the inheritance for your heirs potentially. And the probability of you completely running out of money It's probably low. You know, I again, I would prefer that our listeners just take everything that we said today and consider it hypothetical because it really is a one on one conversation that needs to depends on your situation. Yeah.

Don't let anybody or any article or anything you read say, you know, this is what you need or this is the number because you have to do the math and look at your own personal goals, personal situation, personal risk tolerance, as you're always saying. Right, Ken?

Yeah, absolutely. And we would love to sit down with any of our listeners or viewers. We could go over your entire situation. We could look at should you do IRA to Roth IRA conversions? Should you look at a product that provides an income for life? Should you just use a MIGA and just live off the interest and let the principal stand pat? When should you turn on Social Security? How should you title your accounts? Should you have a will or a trust between our team at Summit Financial, Summit Health, Summit Insurance, Summit Tax, and the attorneys that we work hand in hand with to create estate planning documents. I'm not an attorney. We've got to work with an attorney to create estate planning documents. But just having a comprehensive team look at everything that you have going on, I think it will improve your probability of having a successful retirement and making sure that your heirs eventually get the money that you'd like them

to have. There you go, and that's what it's all about. Well, Ken, a great show today, a lot of information for our listeners out there. Is there anything else you want to add before we go?

We we ask our clients periodically for anything that they'd like to see. We've got a lot of clients that are regularly watching the podcast and are watching it on YouTube and listening to the podcast. And we appreciate that. So I just wanted to say thanks to Marsha for suggesting this topic today. Oh, yeah. Yeah. So another client actually requested that we get. Everyone's favorite advisor, Jim Wink, on the show. So we're going to work on that.

Jim's a popular guy. They're trying to replace me, aren't they? A lot of the listeners and viewers are like, could we get Jim on instead of Tony? Is that what you're hearing?

No. Everyone loves Tony, too. Yeah. You're probably going to do three, three faces on the screen here in the coming weeks.

So, yeah, I would love to have Jim on the show. You and I can really team up and give Jim a hard time.

You know, I'm looking forward already, Tony.

Are you looking forward to that? Yeah, I am. I am as well. I know a lot of the listeners call in and viewers say that they'd like to hear Tony talk more about pizza on the show. So we'll work that.

Yeah.

Yeah.

All right, Ken.

Well, great show today and let our listeners know how they can get ahold of you. I know you guys offer a no obligation, no charge consultation to answer their questions.

If someone would like a complimentary phone call or meeting, we'd love to touch base with you. Give us a call at 586-226-2100 or go to summitfc.net and touch base with us. We'll reach out to you and go over all of the topics and more that we discussed today.

All right. Thanks, Ken. And listeners and viewers, thanks for watching and listening today. That does it for today's episode of Money Talks with Summit Financial Consulting, LLC, and our host, the man himself, Ken Wink. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial, working with people you trust. Call 586-226-2100 or visit summitfc.net. Join us again soon for another episode of Money Talks.