Ep 30: This Is Why You Never Assume

On This Episode

We often see people making certain assumptions about retirement that just aren’t correct. Let’s explore some of those on today’s show.

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PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:


Marc: Hey, everybody. Welcome into Retirement Planning Redefined. Thanks for hanging out in the podcast with us as we talk investing finance and retirement with John and Nick from PFG Private Wealth. On this episode of the podcast, we’re going to talk about not making assumptions reasons, why to never assume. We all do it as humans, but when it certainly comes to retirement, there’s some ways and pretty easy ways to just not make these assumptions, but yet it does happen. So we’re going to talk through that a little bit, got a couple of bullet points we’re going to go over, but first let me say, hey to the guys. What’s going on John and Nick? How are you doing John?


John: I’m doing good. I’m doing good. I don’t know if I mentioned it on the past podcast, but we moved to a new house and it’s been a couple of months and just settling in. So getting some new furniture, which if anyone’s ordered furniture recently, everything’s back ordered by about two months. So we finally have some of that trickling in and so it’s nice to settle into a new place and then getting ready to enjoy it with the weather turning around here.


Marc: Very nice. Yeah. If you bought or tried to buy a lumber as well, holy moly. Lumbers through the roof if you’ve gone even to just a Lowe’s or something to get some plywood. It’s pretty crazy. But Nick, what’s going on with you? How are you?


Nick: Just staying busy. No complaints. I have a friend coming down to visit. He was one of the early people to get vaccinated, so he’s coming down to visit in another week or two. So that’d be kind of cool we’ll do everything outside and all that kind of stuff, but to have some sort of activity and a friend in town will be a good time.


Marc: Yeah. Absolutely. Absolutely. Well, good. Well, I’m glad you guys are doing well. So let’s jump in and talk about this week’s topic, making assumptions. As I mentioned before, I mean, it’s common right? We’re humans. We do it in all sorts of areas and ways in life, but when we’re talking about retirement, there’s a few of these that maybe just don’t hold water anymore. So let’s start with a classic one here guys. I’ll spend less when I retire. I mean, we’ve heard that for a number of years and I get it, but at the same time, I just think with the cost of everything going up, the way it is, and my dad used to tell me when you get to retirement and he got there, he’s like, “Every day is a Saturday,” and he’s like, “I always spend the most money on a Saturday.” And I thought that was a good way of looking at it because you’re inclined to just do more, at least you want to anyway. That’s the goal of retirement right, is to get out there and do those things you’ve wanted to.


Yeah. Well, one of the things that we oftentimes talk about with people is really the whole goal of this planning process and the work that we put in over the years that are leading up to retirement is to allow you to not have to spend less, to want to spend the same. Maybe you’ll pay a little bit less on certain things here and there. Maybe you got the house paid off, but really from a lifestyle standpoint and your analogy that your father used of every day’s a Saturday is correct in a lot of ways. And so a lot of times people, depending upon the conversation, people will focus on needs versus wants, but very rarely do people live a lifestyle of needs only. And so, the beauty of planning is we can try to kind of build some of those scenarios in, but ultimately, and we’ll kind of say it to people up front is like, “Don’t you want to live the same sort of lifestyle, so why don’t we budget and plan for that?”


John: Yeah. And we see a lot of people when they go to retire, a lot of those kind of bucket list of vacations happen, and I’ll tell you those aren’t cheap. So it’s kind of it’s… we call them what? The go-go years, where it’s time to really start doing things and if you plan correctly, you do want to spend the same amount of money if not more, to really start enjoying your Saturdays every day.


Marc: Yeah. And if you think about the go-go years John, in that respect, you’re doing more in the first couple of years of retirement, but you’re starting… Yeah, maybe there’s some trade offs like I think there’s some statistics, like people go out to eat more in their thirties, forties and fifties. As you get over 60, you start going out a little bit less and less. And we’ll just take COVID out of the equation for right now. And even with that’s the case, you’re going to start trading that off for other things. So yeah, you might spend less than this category, but you may spend more in another category. So just the general assumption that you’re going to spend less in retirement is typically a false one, especially if you are having some dreams and some lofty things that you want to do again, COVID aside or not right? So that’s one classic one to ponder. Another one that goes right along with it guys is the taxes will be lower. Typically, we think our tax rate will be lower in retirement and maybe that used to be the norm when the tax rates, there was a wider range in them. I mean, I’m talking 20 or 30 years ago, but I don’t know that that’s the case anymore. What do you guys see?


John: When we do planning for the most part, I’ll say we see taxes drop a little bit, but Nick and I really try to kind of build a worst case scenario and we’re historically in very low tax brackets. So when we’re doing planning for our clients, we make sure that even if the plan showing lower taxes, that we adjust their plan to taxes do go up. At some point they’re going to go up, I’m assuming with all the spending the government is doing, that they can adjust to that. So although we have seen that, we definitely do not make plans based on that and when we run some numbers, we kind of stress test to say, “Hey, what if taxes do go up into retirement?” So one of the big things that we’ll see when people retire is they do have a little bit more deduction. You have that deduction of, once you hit 65 on your taxes, and then also you’re not paying social security tax anymore because there’s no more earned income. So that tax does get lowered, but from an income tax standpoint, maybe a little bit, but again, not enough to really say, “Hey, I’m going to be spending a lot more because my taxes are lower.”


Nick: It can also very much be a production of how you have saved over the years. So for example, if maybe you’re eligible for a pension and you have a pension which is going to be fully taxable when you receive it plus the money that you saved has gone all to pre-tax accounts, to pre-tax 401k, pre-tax IRA and you don’t happen to have any Roth accounts or any accounts that are what we would refer to as non-retirement non-qualified accounts, that can have a significant impact as well. So it’s not as simple as a total income number. It can also be, “Where is the income coming from and how does that impact the overall situation?” And just like John said, the probability of taxes going up in the future is fairly high with the debt levels and those sorts of things.


Marc: Yeah. I mean, just some quick numbers. Right now, I think it’s around 75% or so the federal budget is allocated towards entitlement programs. I mean, think about that. So what’s it going to be 10 years from now? And that’s not factoring into your guys’ point, some of the stimulus stuff. So it’s going to continue to be a situation where I think everybody’s in the same agreement that it’s going up. It’s just a matter of when, when they’re going to do it or whatever the case is. So being prepared and not just making that assumption again, that you’ll be in a lower tax bracket. That’s the goal if you’re working with a good team and working with guys like yourself to get to plan, to keep your taxes as low as possible. That’s always the goal, but just don’t assume it’s going to happen.


Marc: Let’s talk about the college conversation, guys. We’ll try to stay away from those, “Should it be paid off or should it not be by the government,” well, if we can. But just in general, the thought from a retiree standpoint, especially for people who’ve had kids later in life and they really want to help them with retirement… or excuse me with college, that’s great. We all love our kids. We all want to do things, but at some point, do you guys see a situation where people can put themselves behind the eight ball for their own retirement and now they’re becoming a burden on their kids later in life because you’ve sacrificed your own retirement to help them get started? That’s a slippery slope.


John: Yeah. So actually oddly enough, I just had this conversation today where a client had some money that was freed up and their kids are young and they’re in daycare. So there’s some extra money now that they’re going to school. I mean, the question is, “Hey, what should I do with that?” And part of the conversation was, let’s start looking at your overall retirement plan to see what that looks like before you start socking away all this money into a 529 plan or any other college savings plan because there are loans for college. There’s no loans for retirement.


Marc: Right. Maybe a reverse mortgage will be about the only thing way you could finance a retirement. Maybe right? But that’s totally another conversation for another day.


John: Yeah. And when the kids get to that point of school, depending on how you structure your retirement assets, there are some ways that you can access those retirement funds to help them pay for school. And kind of the way I view it is that you can tap those funds to pay for school and still kind of maintain your retirement. So it’s always something you really want to take a look at and just plan for and be prepared.


Nick: Yeah. I would say that our default is, typically save first for yourself and for your retirement and then we can build in strategies and structures for saving for college expenses for the kids. We really don’t know what that space is going to look like 10 or 15 or even 20 years from now, whether college will be fully required for everything or what sort of programs will be put in place, even the ways that students will be able to qualify for things like financial aid and those sorts of things. And so, anytime a plan is too heavily focused in one area, we oftentimes see mistakes. And so it’s difficult with this conversation because it can be a very personal conversation. Oftentimes, it’s based upon the client’s experience when they were children, whether or not they had to go through it themselves.


Nick: And that can go both ways like, “Hey, I don’t want this burden to be on them,” or, “Hey, I learned a lot by having to do that and I’d like my kids to do the same sort of thing.” And so just like so many other topics, we really try to talk about the financial side of things and help them understand the impacts in that space and then get their feedback on their personal feelings about it, and then try to find a way to kind of mold those two together to make it make sense from both a preferential and personal standpoint as well as a financial standpoint.


Marc: That’s a great point. Yeah, exactly. Because it can be, and everybody [inaudible 00:10:29]. it’s almost like the same conversation around legacy planning right? Some folks say, “I don’t want to leave anything to the kids because they’re doing just fine,” and others say, “I want to leave as much as I can.” So yeah, it becomes a very personal conversation, but just be careful because what we’ve seen over the last couple of years is people sacrificing a little too much. And then again, like I said, it comes back around and you wind up being a burden. You’re in your seventies and you need help with retirement and now you’re trying to lean on your adult kids who are maybe just starting their own families. And so it’s just a slippery slope. So just be careful.


Nick: Yeah. And one other thing on that. You pointed out the legacy planning and that’s kind of a good point because, and we consider that factoring in the overall throughout the whole planning. But a lot of times what we will see are, “Hey, we paid for school so we are going to spend our money in retirement and use our money in retirement,” or the vice versa where it’s like, “Hey, we didn’t help out with school so we’d like to make sure that we leave some money.” So again, it’s a multi-tiered sort of conversation. And ultimately, we always try to focus on control. Be in control of your own money, be able to have as much of an impact as you can on your own personal decisions. And so, sometimes knowing like, “Well, hey. If I can help them out down the line afterwards, that may be a way to “make up” for not having put away as much money for their education or whatever.”


Marc: That’s a good way of looking at it. And again, it’s all very personal things. So just, again, the topic this week on the podcast, it’s just not making the assumption that you have to help your kids through college before you worry about retirement savings because they can get you into a bit of a pickle. One more here, guys, on the main topic this week, and that’s the classic “I’ll never be able to retire” kind of assumption. And I think what we find, and you guys tell me what you see in your practice is many people just assume that and they never take the time to sit down and go through a planning process and find out if they’re right or wrong because they are just terrified and they’re assuming they’re going to be wrong. And more times than not, they’re actually not. People find that they’re in better shape than they thought they were when they go through the process typically.


John: Yeah, I would agree with that. Nick and I do the classes and a lot of those people are kind of in that position, it’s time to start looking at it. And we’ve had a lot of scenarios where people feel that they haven’t done enough. And when we do the plan, it’s, “Hey, you’re on track and it looks really good,” and it produces a nice kind of sense of relief for some of those individuals. I definitely will say, never assume that and it’s better to take a look at it sooner rather than later because if it’s vice versa where you need to start saving more, we do find that people in their fifties, kids have moved out. They’re kind of off the payroll. And now if there’s a time to really catch up, it’s going to be in your fifties to sixties. So it’s really important to build that plan, see where you’re at and if you’re on track, great. Let’s enhance that to give you more flexibility down the road and if you’re not on track, now is the time to really… it’s better to start planning sooner rather than later versus, “Hey, once you hit 60 and it’s like, your working years-“


Marc: It’s going to be harder right?


Nick: Yeah. And just like so many things in life, we’ve had conversations with people like this. And the reality is, is that we can’t change the past. So we really try to emphasize the present and the future and decisions that can be made moving forward. It can be difficult for us as advisors sometimes because ultimately, we tell clients, “We can’t care more about your money in your retirement than you do.” So the number one factor in this whole thing is that it has to be an important thing for you and you have to be motivated to make changes if you are behind the ball and we’ll absolutely help you get there, but I would say one of the biggest mistakes that we’ll see is that people get paralyzed by the concern about mistakes that they’ve made in the past, and then all of a sudden, it’s five years, 10 years later and they’ve just really doubled up on the mistakes. And so the sooner you can make changes the better and less focused on the past and more focused on the present and the future.


Marc: Absolutely. So some good points to ponder there as we’re talking about not making assumptions for retirement. And of course, if you’ve got questions or some concerns, you need a little bit of help, you want to get a second opinion on a plan you might have, or even the first opinion if you’ve never taken the time to do so, reach out to the team, go to the website, pfgprivatewealth.com. That’s pfgprivatewealth.com. You can click on the podcast link right there at the top of the page. There’s a blog. And there’s a contact section where you can send us an email to the show if you’d like to do that as well. You can find all those goodies at pfgprivatewealth.com. And like I said, if you want to send an email question, feel free to do so. And we’ve got one this week, we’re going to toss out to you guys. Bo sent one and he said, “Fellas, I need about $5,000 to live on each month in retirement and my social security and pension is looking about to be $5,300 a month. You think that means I can leave my 401k behind to my son? What do you guys think?”


So there’s a couple of things with this question. Ultimately backing up a little bit, we’re always concerned when people provide flat numbers like this. I think I’ve been doing this since ’07 and John you’ve probably been doing it at least as long, I think an an extra year. I don’t know if I’ve ever seen anybody come in with $5,000 a month flat on expenses. It’s an awfully convenient number. And so first thing-


Marc: Well, he does say, “I need a [inaudible 00:15:58],” I guess, so we’ll give him the benefit, but yeah.


Nick: The first thing that we like to do is kind of peel back those numbers and make sure one of the things that we’ve learned kind of throughout these years of doing this are that sometimes when people post questions like this, some people think pre-tax and some people think net of taxes. And so first backing up to see in reality, depending upon how they’re calculating the numbers, that $5,000 expense number might actually be closer to 6,000 or 6,500. And then the social security and the pension numbers may be net versus gross. So the first things that we’ll make sure that they understand will be, from a cost of living standpoint and projecting out the numbers for the social security, are they using a cost of living and which number are they using it? And then for the pension also, the same thing. I would say at this point, depending upon where the pension’s coming from, if it’s coming from a private company, typically we don’t see cost of living’s built in. If it’s coming from some sort of like state or a municipality employee, then there will be some cost of living’s built into that.


Nick: So making sure that they calculate inflation on both income and expenses is going to be a huge deal. So as far as being able to leave the money, the first conversation that we’re going to have with them about specifically, “Hey, am I going to be able to leave my 401k money behind?” We’ll be making sure that they understand how required minimum distributions work and what that looks like. So as an example, making sure that they understand that starting at age 72, they’re going to have to start pulling money out of their account so that the government can tax that from an income standpoint. And that doesn’t mean that the client has to spend that money. It means that they will pull it out so that they can pay the taxes and then either they can save it or they could spend it.


Nick: So just like so many other things, it’s a pretty nuanced… it’s a question that on the surface seems super simple like, “Hey, I did the math. My income is 5,300. My expenses are 5k. I look great. Let’s just plug along. And my goal is going to be to leave my money behind for my son.” So kind of diving into making sure that they first understand how those factors are going to work from a planning standpoint with things like inflation, how they understand that the required minimum distributions are going to work, pulling that money out and then really focusing and drilling down on if it’s very important for them to leave money, for Bo to leave money to his son.


Nick: Let’s figure out what might be… is that the best way to leave the money or are there other things that we could do to leave that money? Like for example, does it make sense for him to start doing conversions to convert his traditional money to a Roth account, which can be a much more effective tool to be able to leave? What sort of income bracket is his son in? If he leaves pre-tax money, is that going to be a tax bomb for him? Those sorts of things. So on the surface, it looks like a very kind of basic question, but in reality, we’re going to have to peel back and look at kind of the other factors and then really strategize to figure out ultimately what’s the goal and can we find more efficient ways to accomplish that goal?


Marc: Yeah, exactly. I think the first thing that I thought when I read that was 5,000 now, what is it going to be in 10 years? So with inflation, I mean that 5,000 might be 10, so who knows? So some good thoughts there for Bo to consider. Thanks so much for the question. We certainly appreciate it. Nick, thanks for handling that one. And that’s going to do it this week here on the podcast. Again, if you’ve got questions or concerns before you take any action, you should always check with a qualified professional like John and Nick at PFG Private Wealth. Give them a call at (813) 286-7776 or stop by the website, pfgprivatewealth.com. Don’t forget to subscribe to the podcast, Retirement Planning Redefined. You can find all that information at the website. Of course, you can also just search it out on Apple, Google, Spotify, or whatever platform you like to use. And for John, Nick, I’m your host Mark. We’ll see you next time here on the show. And this has been Retirement Planning Redefined.

Ep 29: Understanding Annuities – Fixed Index

On This Episode

This is the final installment for our annuity mini-series. We will wrap things up by diving into fixed-index annuities. We get more into the finer details of some properties of annuities and also take a look at how these contracts are typically structured.

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More Episodes

Check out all the episodes by clicking here.



PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:


Speaker 1: Back here for another episode of the podcast. Thanks so much for listening to Retirement Planning Redefined with John and Nick from PFG Private Wealth. They are financial advisors serving you here in the Tampa Bay area. 813 286-7776 is how you get ahold of them if you’ve got some questions or concerns about anything you hear on our show, or really any others when it comes to your retirement plans.


Speaker 1: And this week on the podcast, we’re going to continue on with our annuity session. This is part three, and we’re going to talk a little bit about indexed crediting strategies as well as indexing methods. And that sounds fancy, so we’ll let the guys break it down. But first, we’ll say what’s going on. John, how are you, my friend?


John: I’m good. I’m good. I was, this morning, just getting some quotes on artificial grass. It was-


Speaker 1: Oh, that sounds fun.


John: … very interesting to look at the different samples of them.


Speaker 1: The different samples of artificial grass. All right. Who would’ve thought, right?


John: Not me.


Speaker 1: It’s a strange thing you can do. That’s for sure. Nick, how are you doing, buddy?


Nick: Definitely not looking at artificial grass, but doing pretty well. Staying busy.


Speaker 1: Good. At the time we’re taping this podcast, your Bills won a playoff game, yeah.


Nick: Yeah. Yeah. First time in quite a while. And they continue to take years off of my life, but at least it’s a lot more enjoyable to watch now.


Speaker 1: I totally forgot to ask you, because as a Bills fan, you finally get rid of Brady in your division, but he moved to the town you’re in.


Nick: Yeah, it’s pretty interesting. I mean, I’ve been in Tampa Bay since ’03. I moved down the July after they won the Super Bowl, so they were pretty popular. And then Florida is such a different town from a sports perspective, and Tampa Bay, specifically is obviously all I have experience with. But there’s so many people from other areas that it’s just different. Whereas, the Bills, in Western New York, are kind of like a way of life. It’s been an interesting… The Bucs have a chance, we’ll see, to be the first team to play a Super Bowl in their home stadium, which would be kind of interesting. And then if it ended up being against the Bills, that would be double interesting.


Speaker 1: Yeah. Some of those ghosts could be haunting them, so they’re probably hoping to not see him once again. But, anyway.


Nick: Yes. Yes.


Speaker 1: We’ll get into financial topics and we’ll talk sports another time, but I just wanted to ask you about that. So good stuff, indeed. So guys, what am I talking about or what are we talking about here today on this annuity session? What are some of the features and some of the things we need to be thinking about?


Nick: Yeah, this will be the last in the series of the annuities that we talk about. And just like anything else, we view ourselves as informational and educational. And because annuities are such a topic that there’s so much information out there about, there’s plenty of positives and plenty of negatives, that we want to make sure that we go through these different things.


Nick: And so this session is going to be focused on what are called fixed index annuities, which can be confusing, just like anything else. There are some more moving parts, but we have found over the years that for those people that are pretty conservative and risk averse in looking for opportunities to have some sort of upside from the market, but are not comfortable having much downside, that these are something that can make sense for them. So we’re going to spend the session kind of going through and talking about them.


John: To compare these to the last session we talked about, you can expect a higher interest rate than a fixed annuity, over a long-term period. And comparing it to the variable annuity, it doesn’t have the same potential because you’re tied to a specific index and there’s some restrictions to it, which we’ll go through.


John: So this is really a good hybrid in between, if you’re looking for, like Nick mentioned, you want some principal protection. But the negative to a fixed annuity is, hey, I’m locked into this rate, I can’t really get much more. How can I get more? And then this fixed index would actually accomplish that because if the market does go up, there’s potential to actually go up with the market to a point.


John: Something to understand with these, again, important in all annuities, understand the fees that you’re in. And while typically… Again, I hate using the word, but we have to. Older contracts, we haven’t seen fees in these, but there are some newer ones where they are having some fees within the contract. And the way that they explain that is, hey, if we put this fee in here, well actually, there’s more growth potential on your crediting methods.


John: So just understand if you’re looking at any of these, like anything, you want to look at the surrender period, you want to look at the surrender charge, you want to look at the fees. I mean, those are three important things to look at in any annuity contract, and especially with these.


Nick: So in general, the term index annuity really comes from the structure of how they credit growth inside of these contracts. One of the most popular indexes that are used in these sorts of contracts is the S&P 500. And the way that the contracts essentially work is they will offer different indexes that they will provide crediting towards, and use that index as the barometer for how it works.


Nick: So just to super simplify it, what’ll happen is they’ll say, okay, there are different rates and John’s going to different sorts of structures and John’s going to kind of get into that. But they’ll say, okay, between the time that you open this contract and a year from that period of time, we’re going to track the index. In this case, we can call it the S&P 500. We’re going to track the performance of that index over time and then we’re going to give you a percentage of the performance of that index. And that percentage can change for year to year, and they declare it on each anniversary.


Nick: And so that’s what provides you with the upside within that contract. However, and this is the reason that many people will use this sort of contract is, if the S&P 500, in this example, let’s say it drops 10 or 15% between now and 12 months from now, you’re not going to participate in that down portion, that downside, you’re just not going to get credited anything. So essentially what ends up happening is that you’re flat for the year.


Nick: So when these things talk about not having the downside or protecting your principal, that’s what they’re referring to. So if the S&P 500 is up 10%, you’ll get a percentage of that growth and John, we’ll talk a little bit about how they may credit that. However, if it’s down 10%, you’re just going to not lose any money that year. It’s going to be flat.


Nick: So that’s the general principle of how it works and which index is used, how much they credit, that’s all the due diligence that happens when people choose which contract to go with, but in a very basic sense, that’s how it works.


John: Yeah. And to really explain it, I think, let’s give an example of that. So if you’re in a participation rate, and let’s say you start with $100,000, and like Nick said, the most popular one is the S&P 500. And by participation rate, let’s say it’s 50%. So what that means is you’re going to get 50% of the S&P 500 on the upside. So if you’re in contract January 1, 2021, they’ll look at the S&P 500 on January 1, 2022. If the S&P 500 has gone up let’s say, 20%, your contract is going to credited 10%. Again, that’s 50% of the 20% gain. So if you start out with 100,000, your account is now at 110, okay?


John: A benefit to this is that actually your 110 now is your new floor. So when you get credited, that’s actually your floor moving forward. So, example, let’s say year two, you’re still in a 50% participation in the S&P, S&P goes down negative 10. You’re year two, basically what’s going to happen now is the 110 is now your floor, you stay at 110. Now you move on to year three to see what the S&P 500 does.


John: So that’s one crediting method, participation rate. They also have a cap rate. So, that’s kind of like a ceiling. So, you could have an S&P 500, again, index that you’re monitoring or are kind of shadowing. And your cap is 6%. So what that means is, you’re going to get up to 6% of the S&P 500 growth. So same example, 100,000, let’s say you have a 6% cap. The S&P goes up 20%, in this scenario, you only get 6% because that’s your ceiling, okay? So basically 6% your cap, that’s all you’re going to get that a hundred thousand now, after the one year, it’s going to be at 106, because you got 6%. Year two, again, S&P drops, you stay at your 106.


John: So, just important to understand the different crediting methods. There’s one more called a spread. This is kind of like a fee, but it’s only taken off if there’s gain. So a spread could be like 1.5%. And again, let’s use the S&P 500. If it goes up by 7%, they take 1.5% off of that gain. In the same idea. You get the credit for that year, it locks in your balance at that point in time, and that’s kind of your new floor.


John: So important just to understand you have participation rate, cap rate, and a spread. Those are the most popular, they’re not the only ones. There’s actually a lot more, but those are the three that we typically see. We don’t have enough time today to really go through each one, but those are the most common. And I’d say kind of when we’re using these strategies, those are typically the ones that we use, because they’re just simple to understand.


Nick: Yeah. And some of the other things to look out for, if let’s say you already have an existing contract and because these insurance companies, they can change those rates that John walked you through from year to year, maybe one year your cap was 6%, but they drop it to 3% on the S&P 500, it may make sense to look at another index. So most contracts have a menu of indexes that you can choose from, from year to year, and they allow you to change your choice on an annual basis.


Nick: So what we’ve seen is people may get complacent and they’ve had the same index for a couple of years and because they know that there’s not really market risk per se, they just leave it. And they haven’t realized that those rates have changed and what they’ve been in, their potential is much lower. And, usually what ends up happening is that they may lower some, but they may increase others or there may be other opportunities and other portions.


Nick: So it’s important to look at it on an annual basis, take a look and see what changes they’ve made to the contract and if it makes any sense to make a change. And some of the options aren’t just a one-year option, they may offer a two year option. That could have much better rates and that could be an opportunity as well.


Nick: So even though it’s a vehicle, a tool that can be used, sometimes there’s complacency that kicks in because there isn’t perceived risk and just like anything else, doing your due diligence each year and adapting to what’s happening within the contract can really, really pay off for people and they can try to maximize or take advantage of the opportunities that are within the contract.


Speaker 1: It sounds like any financial product where sometimes people just want to set it and forget it. And that’s not always the best strategy having. And that’s where you can do with reviews and things of that nature, but just kind of checking on these things is certainly a good idea is what I’m hearing.


Nick: 100%. 100%. And I will say too, that in our last session on variable annuities, we talked a little bit about some of the riders that are available that can provide people with guaranteed income. And many times there are those writers available on these fixed index annuity contracts as well. So they can be a tool that provides future guaranteed income, but maybe provides options with less fees than a variable contract or higher guarantees than a variable contract, which is something that can be used from a comparison perspective.


John: Yeah. And to jump into what Nick was saying about the indexing methods changing, it’s important when you’re looking at some of these companies that you go with a quality carrier and look at their track record. Because the last thing you want to do, and we’ve seen this where, one company might be offering a very competitive cap rate, let’s say 8% or something like that. And then once you’re in the contract with them, they all of a sudden lower their cap rate to four. And it’s like, Whoa, now I’m with this company for the next seven years, because that’s my surrender period and they’ve just lowered their rates on me, you know?


John: So that’s where doing your due diligence on what company am I going with, what’s their ratings, what’s their track record? Are they a good company I want to be with for the next five, seven years? And that’s where it’s important, if you’re working with an advisor that they’re doing their due diligence, and you’re doing your own to make sure that if you’re going to be with this company that they’re going to do right by you, if you’re going to be with them for that period of time.


John: It may sound like we harp on it quite a bit, but the pitfalls are important to understand. Make sure that the company that you’re looking at is a reputable company and has strong financial ratings. Pay attention to the surrender charge period with these contracts, where people have that and tripped up is we’ve seen people locked into contracts that are 15 years long, 18 years long, which really can be pretty tricky. So making sure that you understand how that’s structured. And then, like John said, getting some historical background on how often they change their indexing rates. And if they’re really just kind of using teaser rates to get people locked in.


John: So just like anything else, it can be a piece of the pie. And oftentimes where it’s most appropriate would be for people that are pretty conservative investors looking for a little bit more potential, especially in this current environment where rates for CDs and money market accounts and that sort of thing are so low.


Speaker 1: Yeah. Again, when we talk about these things, it’s always important to remember and realize that like anything in life, you should always do your own due diligence, as well as when you’re working with an advisor, or when you’re looking for an advisor to work with. Make sure that you’re going through the proper steps, do some of the homework, and then take the time to find out is this product right for you? Don’t just jump into anything because it’s something you hear on any particular show or a talking head or whatever the case is without seeing how it might relate to your specific situation.


Speaker 1: And if you need help with that, whatever type of annuity it might be, or any other financial product, because annuities can be a bit polarizing, have those conversations reach out to John and Nick, they’re here to help in the Tampa Bay area 813 286-7776. If you’ve gotten this email through a newsletter or a blast or something like that, or whatever the case might be, and you haven’t yet subscribed to the podcast, feel free to do so, certainly would be appreciated. If you’d like to get more content as they come out, you can simply go to pfgprivate wealth.com. You can find the podcast page there, pfgprivate wealth.com.


Speaker 1: You can also find a lot of good tools, tips, and resources, and reach out to John and Nick. You can also subscribe through your favorite app or whatever that might be. Just search out retirement planning, redefined, and hit the subscribe button. A lot of times it’s a heart or a thumbs up or something like that, search the type retirement planning redefined in the search box, or just call 813 286-7776.


Speaker 1: John, Nick, thanks guys for your time in this series on annuities, a lot of good information. They do get a little complicated sometimes, so again, it’s really important for people to understand and have a good working knowledge of this, especially if they’re considering it. So I appreciate you guys sharing some of your knowledge.


John: Cool. Thanks Marc, have a good one.


Speaker 1: John, appreciate it, bud. Take care of yourself and we will talk next time here on Retirement Planning Redefined with John and Nick from PFG private wealth.

Ep 28: Understanding Annuities – Variable and Fixed

On This Episode

This is part 2 of our annuity mini-series. We focus on two types of annuities on this episode which are the variable and fixed deferred. John and Nick explain what are significant about each of these and how they may fit into a retirement plan.

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More Episodes

Check out all the episodes by clicking here.



PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:


Marc Killian: Hey everybody. Welcome into the podcast. Thanks so much for hanging out with us today as we talk investing, finance, and retirement with John and Nick, once again, here on the airwaves with me on Retired Planning Redefined.


Marc Killian: We’re going to pick up with our conversation on annuities. We are doing this series, or this session, on annuities and we’re going to talk about fixed deferred annuities, as well as variable annuities today on the show. But before we get into all of that, let’s say hey to the guys. Nick, what’s going on, buddy? How you doing?


Nick McDevitt: Good. Good. Just we’re in the new year now and things are off to the races for sure. It’s been a hectic start to the year.


Marc Killian: What races? We don’t know, right?


Nick McDevitt: Yeah. Yeah, yeah. Yeah, that’s true. Been a hectic start to the year, but looking forward to the new year.


Marc Killian: John, how about yourself? You’re doing all right?


John Teixeira: Yeah. Doing good, just busy. And like Nick said, it’s been an interesting three weeks to start out the year to say the least.


Marc Killian: I don’t know if you guys saw that meme that says, “I’d like to cancel my subscription to 2021. I tried the seven day free trial and I’m not happy with it.”


John Teixeira: Yeah.


Nick McDevitt: Yeah. I’ve seen ones too where it’s like, “This is week 54 of 2020.


Marc Killian: Something like that, yeah. Pretty interesting times that we’re continuing to live in.


John Teixeira: Actually, my wife, I got the vaccine, first one, yesterday.


Marc Killian: Oh, did she?


John Teixeira: She’s a nurse, so she was nervous a little bit, but also excited that she could just not have to think about it once she gets the shot. I think it’s six months to a year, roughly, that they say the immunity from it… To be determined, but I think six months at least [crosstalk 00:01:36].


Marc Killian: I hear depending on which company you get it from, it’s a series of shots and they say maybe you might feel bad for a day or two after it. How’d she do?


John Teixeira: Not too bad, although last night we were putting one of the kids to bed and she comes in and she’s like, “Hey, where’s your EpiPen?” I’m like, “EpiPen? What do you need that for?” Her throat started feel like it was tightening up, but it went away within 30/40 minutes, so that was it. Honestly, shes doing well and-


Marc Killian: Good.


John Teixeira: She’s doing good.


Marc Killian: Good. Good to hear. Certainly interesting. Obviously, the virus itself affects so many people different ways and then apparently the vaccine does the same. My business partner, his wife’s a nurse and same thing with her. She got the shot a couple of weeks ago and had a really bad headache was her side effect from it, but I think that was about it. So, you just never know how it’s going to affect everybody, so I’m glad to hear she’s doing well and be curious to keep an eye on that, as we move along, how the vaccines and all that stuff’s going.


Marc Killian: But for now, like I said, let’s talk about annuities. Let’s get into part two of this. I mentioned at the top of the podcast kickoff, we’re going to talk about two types today: fixed deferred and variable. So let’s start with fixed deferred, guys.


John Teixeira: Yeah. So, fixed deferred annuities, recapping what we went through last time, anytime you get into an annuity, you really got to look at the company you’re going with because the guarantees are based on the issuing company and how strong they are. But just go over a fixed deferred annuity.


John Teixeira: It’s very simple, similar to a CD issued by a bank, just issued by an insurance company. You have a guaranteed rate. There are some that just give you a minimum interest guarantee where they’ll say your minimum interest is 1%, but it can fluctuate based on some factors. The most popular ones that we typically use are where there’s a multi-year guarantee where it will say, “Over five year period, you’re getting 2.5% or 3% over that five-year period.”


John Teixeira: Typically,… I say typically because there’s always some outliers… typically, no fees, again just comparing it to a CD, no fees on it. You’re just getting your 2.5% for that five year period or three year period, whatever you pick. We typically find that these rates are normally a little bit higher than CD rates, so it’s very competitive in that space. “Just looking for something just very simple. Let me just get a fixed rate. I don’t want to worry about any of these other moving parts. I just want a fixed interest rate with no risk.”


Nick McDevitt: Yeah. And I would add to that from the perspective of… from a functionality standpoint, as far as how the rates are fixed, there are some similarities with CDs. But it is important to understand that CDs typically have FDIC coverage or insurance because they are issued from a bank up to the limits that the FDIC provides, whereas the guarantees and the CD are going to be from the insurance company.


Nick McDevitt: So, we know that that’s a concern that people have when they bring it up or talk about it, so we always like to point that out. And then, on top of that, from the perspective of keeping in mind that annuities, by rule, by default, they have limited access to money until 59-and-a-half or after. So, if it’s money that somebody is using that is a non-retirement account and they’re younger than 59-and-a-half, it’s important to make sure that they remember that rule, that 59-and-a-half rule.


Nick McDevitt: But the positive is that it does provide tax deferred growth. In other words, you don’t get a 1099 from the bank or from the insurance company every year on your interest like you would in a non-retirement account if it was in a CD. So, the rates, the taxation, and the protection side of things are some differences between those.


John Teixeira: Yeah. And also, and just going back to what we talked about in the first annuity session, there are surrender periods on this. There are surrender charges, which will make them different than CDs. So just, if you need a recap of that, just go to our last podcast and we went through the basics of annuities, which is going to apply really to the fixed, the variable, and the index, which we’ll be going through.


Marc Killian: All right. A lot of times when people think about different financial products, we often hear about the three qualities of money where you’re looking for growth, safety, or liquidity. And every different kind of vehicle provides different things. Often, when we think of annuities, we think of maybe the growth and the safety aspect, but without some of that liquidity you guys were talking about.


Marc Killian: But again, since there’s different kinds of annuities, you want to check and see really what the pros and cons are going to be for your specific situation. So, a fixed deferred might be something that worked really well for you and your situation, but again, you want to go through that with an advisor. And then, the variable, this tends to get more of the bad rep, I suppose, so break down some of it on the variable annuities for us, guys.


Nick McDevitt: Sure. Essentially, what a variable annuity is and what it does is it combines the structure of being able to invest in mutual fund-like investments, where in a variable annuity they’re called sub-accounts. So it combines that with the chassis of an annuity, which provides tax deferred growth on the growth of the account.


Nick McDevitt: So, these became a little bit more popular back in the 80s where you would have high-income people that were looking to save additional money; maybe they were maxing out their 401k plans, or their retirement plans at work. They are in a high income, maybe a high income state or just, in general, high federal tax bracket, and so they were looking for additional ways to invest their money and they would use the variable annuity contracts to provide them with that tax deferred growth on the dollars and not get a 1099 each year on their investments. And so, over time, as tax rates changed and really became a little bit more favorable over the last 20 or 30 years, the popularity of the contracts became less than less.


Nick McDevitt: And then, what the insurance companies did was they started to add different riders and different guarantees onto these contracts, almost like an additional layer that comes over the top, that provided some additional guarantees to really just incentivize people to use them. And so, John, if you want to talk a little bit about some of those guarantees, and really the reason why many people that really have owned them over the last 10 or 15 years own them?


John Teixeira: Yeah. I’ll start with some of the less common ones and we’ll end with probably the most common, and Nick does a good job expanding the income ones. But they have somewhere, basically, your principal’s guaranteed and not so popular anymore, but I’ve seen some contracts where you might get in today and they’ll guarantee your principle payment over a 10 year period.


John Teixeira: So example, you put in 100,000, they guarantee you over the next 10 years if the market goes down, you’ll at least walk away with your $100,000, so you get a principal guarantee and they’ll have a term period where they’ll put that guarantee. So example, year nine, your account’s at 80 grand; you put in 100. Once you’re at the 10 year anniversary, they just give you your 100,000 back.


John Teixeira: There are some death benefit guarantees to it where we’ve seen some contracts where, again, your principal payment has a death benefit, so if the market drops, you at least get what your principal payment was. And then, there’s actually some riders where the death benefit will increase automatically irregardless of what the market is doing. What’s very popular maybe about 10 years ago was long-term care riders on this where they’d put, if you qualify for long-term care insurance… so, lose two of your six ADL’s… the annuity would kick in some type of income for long-term care expenses. Those have really dwindled down over the last few years because of just the cost for facilities.


John Teixeira: Nick, I’m not sure if you see too many of that nowadays. I know I haven’t seen any good ones, but I’ll let you talk on if you’ve seen any good long-term care riders on these contracts.


Nick McDevitt: No, I haven’t seen that that much and really the main rider that we see on the different contracts are what are called guaranteed withdrawal benefits or guaranteed income benefits, sometimes referred to as GMIB or GMWB. When we do our classes, we really try to harp on these from the perspective of just explaining how they work. And really, in this sort of venue, this sort of avenue, what we would just recommend to people is that if it sounds familiar that you have a variable annuity, and/or a variable annuity with some sort of income rider that you know guarantees you some income, it’s good to have somebody help you review that contract and make sure that you understand how it works.


Nick McDevitt: So essentially, there’s just like anything, there’s both sides, and then the truth is in the middle somewhere. These sorts of contracts, they can be good and, just like anything else, some are better than others. There are some contracts that have really held up over the last decade, 12/15 years, that have been beneficial, even to the extent where insurance companies will offer incentives to the contract owners to essentially try to buy them out because the guarantees are good.


Nick McDevitt: So essentially, what happens and just to use an example, let’s say that you have a deposit of $200,000 into the contract and the insurance company is going to go ahead and offer a rider that has a guaranteed appreciation on that initial deposit. Usually, it’s either a simple interest or a compound interest, so that’s important to know. Because some companies might say, “Hey, we offer 7% growth on the rider,” but it’s simple and over time a 5% compound could beat that. So, it’s important to understand how that works.


Nick McDevitt: And then, at a certain point in time, they offer a guaranteed withdrawal amount off of that guaranteed appreciation amount. So just to use basic numbers and try to help people understand how it works, let’s say you deposit that 200,000 and over a 10-year period, which is usually the maximum growth period of those riders, that goes ahead and it doubles over the 10 years. So the guaranteed appreciating amount on the rider goes to 400,000 and then maybe they guarantee you a 4% withdrawal rate on that. So, it’s the 4% on the 400,000, so that’d be about 16,000 a year.


Nick McDevitt: Normally, the way that those will work is that that 16,000 a year is guaranteed for your lifetime; so even if the underlying account balance goes to zero, the income is guaranteed for your lifetime. Some of them also will offer a guaranteed income for both lives, so if you are a married person, for you and your spouse.


Nick McDevitt: So, where people will get a little bit confused is that they may assume that that 400,000 number is their money, is like the real money, and if they wanted to cash out in year 10 or 11, that they can actually cash out that 400,000 number, and that’s usually not the case. Usually, it’s the underlying value, which inevitably because of expenses and things like that is going to be lower. So in this situation, it could be something like 300,000, which is the actual… what we’ll often call real money. So, just like anything else it’s really important to… We really just emphasize and harp on the fact that it’s important to know what you have; it’s important to understand how it works; it’s essential to know how it impacts your overall plan.


Nick McDevitt: So with these contracts, we do think that they can be a fit in many people’s plans, especially if maybe there’s not a pension or something like that. So it’s important to understand how they work; make sure that the guarantees that you thought are built into it; and make sure you understand how it factors into your plan. I would say, from the standpoint of pitfalls to avoid where we’ve seen people really get into trouble are if they put too much of their nest egg into it. We typically recommend a maximum of 20 to 25% of investible assets into something like this. If you’re going to do it because of some of the negatives. John, if you want to jump in on just some of the negatives overall, so that people understand the things to look for?


John Teixeira: Yeah. Devils are in the details on these things. You just need to understand your limitation to your money in some of this, where some negatives we’ve seen is where someone’s doing their withdrawal benefit and they try to take extra money out, more than what the guaranteed amount that’s on the contract, or what they’re supposed to. It could really mess with how long the money’s going to last at that point, or what your minimum pension benefit’s going to be: your income withdrawal. So that’s something to really understand. That’s why Nick was saying, “You don’t want to put too much into this because if you need access to money, this is not where you want to go.” You almost want to set it up and if you’re going to do the income withdrawal, just forget about it from a accessing standpoint, more than what your income withdrawal is. So, that’s something to be aware of these.


John Teixeira: Why these typically get a bad rap and Mark, I know you mentioned at the beginning, it’s really the fees. When you put a income benefit on this, you can look at anywhere from 3 to 4% overall in fees. So there’s a mortality expense fee, [Jim’s 00:15:22] throwing out some averages, could be 0.95%. There’s an admin fee, could be 0.2. The investment you’re going into could range anywhere from 0.3 to 1%, and then the rider itself, which is that guarantee, can range from 0.5 to 1.4.


John Teixeira: So you could see that when you start adding all that up, it really makes a big difference, or really adds up a big amount in the fees. Not saying that’s necessarily bad; it’s just important to understand what you’re in and how it works for you.


Nick McDevitt: Just to follow up on that, the fees are usually coming out of the performance, not out of the riders, so that’s important to understand. And again, just like anything else, it’s important to understand how things work and how it fits into your overall plan, and just get an analysis on it, and making sure that it’s working how you expect it to.


Marc Killian: Yeah, exactly. At the end of the day, we’re doing a little session here on annuities, a couple of episodes on this, but like any financial vehicle, you want to make sure it’s the right fit for you by working with an advisor. You can learn some information and certainly get a good working knowledge. Many folks do not want to understand the complete nuts and bolts, and that’s why they turn to an advisor. But finding the right one for you and the right product for you is paramount really in anything that you do.


Marc Killian: So, as always, before you take any action, you should check with a qualified professional like John and Nick at PFG Private Wealth. You can call them at (813) 286-7776; that’s (813) 286-7776; before you take any action. If you’ve got some questions, you can also go to the website: pfgprivatewealth.com. Shoot them an email that way; contact them that way at pfgprivatewealth.com.


Marc Killian: Don’t forget to subscribe to the podcast. We’ll be doing another episode on annuities here, coming out very soon. So, subscribe to the podcast on Apple, Google, Spotify, whatever platform you’d like and that way you get new episodes as they come out, as well as can check up on some past episodes. It’s Retirement Planning Redefined. Search that in any of the boxes or any of the apps… excuse me… as you’d like to, whether it’s Apple, which is probably on your phone already. Apple Podcasts or Google Podcasts, already pre-installed on your phone most of the time. Just open up those apps, type in Retirement Planning Redefined. You should be able to find it that way, and that’s another way you can subscribe.


Marc Killian: And that’s going to do it for us this week here on the podcast around annuities. Again, we were talking about fixed as well as variable. If you’ve got questions, reach out to John and Nick: (813) 286-7776 for John, for Nick. I’m Mark. We’ll see you next time here on the podcast.

Ep 27: Understanding Annuities – The Basics

On This Episode

There are a lot of strong opinions on annuities. Some people heavily advocate for them, while others claim they are a bad investment. Today John and Nick will break down the basics for us by discussing what an annuity is and some important terms to know.

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More Episodes

Check out all the episodes by clicking here.



PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:


Speaker 1: Hey everybody. Welcome into the podcast. Thanks for tuning into Retirement Planning Redefined with John and Nick from PFG Private Wealth. We appreciate your time as we’re going to get into understanding annuities, we’re going to do a series on annuities, several podcasts coming up but we’re going to start out with the basics, annuity basics. So, stick around for that, we’re going to get into that in just a second. But first, let me say hi to the guys. What’s going on, Nick? How are you?


Nick: Staying pretty good, just waiting for the weather to cool down a little bit here in Florida. We are ready for, I guess what we would consider our winter or fall one.


Speaker 1: Do you get fall? Isn’t it just summer, winter?


Nick: I feel like when I first moved here, there was some fall back in ’03, ’04, ’05. But the last few years, it feels like it’s just kind of jumped from one to the other. But whatever it is, where it’s not 90 plus and sticky out, I’m ready for it.


Speaker 1: Right. Yeah. John, how you doing my friend?


John: I’m good, I’m good. I’m with you. I was thinking we’re just chatting about the weather and it’s still 87 here and it feels like 92 and I’m ready for a low 80s and no more humidity.


Speaker 1: There you go. Yeah, the humidity can be the bear, that’s for sure. Well, good. I’m glad you guys are doing well since our last time chatting here on the podcast. So, we’ve got a lot to cover, we’re going to try to keep this into our timeframe. We’re trying to keep this into a digestible amount of time for folks here. So, let’s jump in and start talking about annuities, understanding them and again, as I mentioned, we’ll start with the basics.


Speaker 1: It’s just really important to understand them because they can offer some things to people, it can be a vehicle that some may find useful. There’s risk reduction, retirement income, tax deferral, death benefits, so let’s just get into some of this stuff. What is an annuity to kind of start off with guys?


John: When you break it down, it’s a contract with an insurance company. So, that’s kind of the premise of it all and what that contract, typically, you’re getting some type of guarantee and we’ll dive into that a little later but it could be some type of a principal protection guarantee, income guarantee, death benefit guarantee. So, that’s what you’re looking for. And it’s really important again, kind of going back to understanding it because it is a contract with an insurance company, so you need to understand all the details of it, just because it could come back to bite you. And we’ve seen that happen quite a few times as we’re doing some reviews with clients. They just don’t truly understand how it works because these are pretty complex vehicles and there’s a lot of moving parts.


John: So, it’s just important to understand how, going back to the overall plan, how does the tool work with everything else? And then one thing that we, again, being a contract, the guarantees are based on the paying ability of the company that you’re with. So, one of the things that we always kind of look at is what’s the rating of the company you’re going with because if you want to set the contract for some type of guarantee, you want to make sure that they’re going to be around to actually give you that guarantee.


Speaker 1: Right, yeah. Yeah. So, Bob’s insurance is not necessarily the best idea, right?


Nick: Yeah. And I will say one other thing that we like to preface this sort of conversation with and part of the reason that it is so confusing for people is that there are many different subsets or different types of annuities. And so, oftentimes people have heard the term annuity but they don’t realize all of the different types and that their experience may pertain to one of 10 different types. So, as we get into the differences and kind of the nuances, we’ll kind of joke sometimes in our classes that we almost wish that they were called different things. It’s like saying, “Hey, should I buy a vehicle? Well, do you want a car? Do you want a truck? What are you trying to do? Is gas mileage important to you? Is off-roading important? What is it?” And that same sort of mentality is important when you are talking about it.


Speaker 1: Well, you could think about that analogy Nick with and just leave it at cars because many people would just say, “I need to get a new car.” Even when they’re looking at like an SUV or something like that, they don’t really refer to it that way. So yeah, that’s a great way of thinking about that. And we will cover, we we’ll get into, like I said, we’re starting with the basics today but we’ll get into some of the different types, their names, what they are, so on and so forth. So, John gave us kind of what the gist of it is. There’s a couple of phases to think about, what are the phases?


Nick: As we get into it and when we’re talking about deferred annuities, there’s essentially what’s called an accumulation phase and a withdrawal phase. So for the accumulation phase, what that is referring to is, between the time that you initiate or deposit money into the annuity and between that starting point and then the period in time in which you start withdrawing money, it’s called the accumulation phase. And that’s important to know because there’s different rules, which we’ll sort of get into but that accumulation phase is important to understand because by itself, an annuity does provide tax-deferred accumulation or tax-deferred growth during that phase.


Nick: So, if somebody says an example of that is the easiest way to compare it is, client has $100,000 in a money market account at the bank and they get to collect, when they get interest on that account, they get a 1099 at the end of the year, they pay taxes on the interest in the year that the interest is incurred. In the annuity, in its own chassis, it’s going to provide tax-deferred growth, which means that that growth just compounds without having to pay any taxes on it until the point that you start taking it out. That’s a pretty big deal and could be a really useful tool for higher income earners that are looking to put money in places that are more tax beneficial especially if we do enter into a higher tax bracket, phase, which we may in the next four to eight years.


Nick: And then for the withdrawal phase, it is that money starts to come out. So, the first thing that people need to understand is that when you take that money out, if it’s non-qualified or non-IRA money, there is going to be some form of taxation. It’s going to be ordinary income, which means whatever tax bracket they’re in, those withdrawals, as long as they’re part of the gains that have happened in the contract, those earnings are going to come out first and they’re going to be taxed at ordinary income.


Nick: So, understanding how that works is kind of an initial importance. There is a term and a methodology of taking out money inside of an annuity via what’s called annuitization. Again, this is one of those things where you wish that they would just come up with words that aren’t confusing, annuity, annuitization, et cetera. So, annuity is basically like a noun, it’s a type of account. Annuitization is an action essentially. Annuitization is when the company liquidates your lump sum of money and starts paying you in it whether it’s a monthly or an annual payment. And one of the benefits of annuitization is that they can actually spread out your gains over a longer period of time and it can be a more tax-efficient way and can guarantee you payments over a certain period of time.


Nick: And so, in one of the other future series, we’re going to get into that process a little bit more. But the easiest way for people to think about it is kind of like a pension payment, a fixed amount of money that’s going to be paid out over a certain period of time. And then, there are guaranteed withdrawals and we’ll talk about that a little bit where you can kind of structure how you want to take out withdrawals. So, it is confusing, there’s a lot of moving parts and it’s a good example of why we’re going to have in-depth series on this.


Speaker 1: Yeah. That’s a good example of why to work with an advisor as well to help you go through some of these things. And John, there’s definitely caveats that go with it. There’s things you’ll want to know, some big bullet points if you will. Give us a few of those in the basics of an annuity.


John: Yeah. Important again, any contract you go into important to understand what the rules are and these are things you want to consider. So, similar to an IRA where there’s that 10% penalty if you withdraw before 15 and a half, annuity has the same scenario. So actually, this just came up with some advisors I was working with and we were doing some planning and the client needed money in a four-year period and really needed to, they wanted to make sure there was some guarantees to it. So, it was discussed of kind of an annuity to provide some type of principal guarantee. But by the time they would need the money, they would have only been 58. So, it was decided, “Hey, this isn’t a good vehicle for you because you can’t touch it ’til 59 and a half due to do that 10% penalty.”


John: So again, important when you’re going into anything, just understand the rules because had they put that money into it and then in four years when they needed it, they wouldn’t be able to access it penalty-free. So, just important to understand that one. Another one that we see a lot of people mistake or not understand how it works is the surrender period. Some of these contracts basically, when you give the money to the insurance company, there’s a period of time where you actually can’t get access to all your money full and clear. And this is separate from the 59 and a half but the surrender periods can be as short as three years. So, let’s say you give your money to XYZ insurance company, they give you these guarantees and they tell you, “Okay, for a three-year period though, you can’t get full access to your money. We’re basically keeping it.”


John: So, it can be three years and we’ve seen as high as 16. And that’s one of the things you really want to understand what you’re getting into because unfortunately, we’ve seen some people where they’ve gotten to the 16-year period, is that they had no idea they we’re getting into it and they have limited access to their funds. And we’ll go through … There is a piece of money you can get at but you just want to make sure how long has this contract going to be before you can get out of it. And with that is what we call the surrender charge. So, let’s say your surrender period is seven years and in year five, you want to pull out money. Well, there’s actually a descending surrender charge. So in year five, if you decide, “Hey, I can’t do this anymore. I need to get access to my money,” the insurance company might charge 4% of your principal for you to actually get out of the contract.


John: So, an example of that would be seven-year contract. First year surrender charge could be 8%, second year would be 7% and so on. So, that’s where you really want to understand exactly, “What’s my surrender period? And if for whatever reason, I need to pull out of this contract early before the surrender period’s up, how much am I going to get charged to do so?” Again, it’s all about reading the fine details in the contract.


Nick: And within that, many contracts have a 10% free withdrawal amount that will avoid you having to pay a penalty even that surrender charged during that surrender period but that can be confusing as well. And sometimes, that’s used to oversell or kind of force people into not necessarily force, but convince people to put more money than they feel comfortable with into something like that. But many of them do allow for a 10% withdrawal each year.


John: Yeah. So an example of that, so I’m glad you brought that up, Nick is, let’s say you had $100,000 in an annuity and you’re in year three. And you don’t necessarily need to cancel the whole contract but you do need access to some funds, you could pull out. Typically we see a max, they allow up to 10%. We’ve seen some as low as 5%. But in a 10% scenario, you could pull out 10 grand in that year free and clear of any charges. So, that’s important to understand exactly what’s your free withdrawal amount. And then, one thing to understand is once the surrender period is up, so if you’re in a seven-year contract, once that seven years is over, you can move your money wherever you want or you can keep it in the current contract. So, once a surrender period’s up, it’s 100% liquid at that point in time.


Nick: And just one other thing on that surrender period, if somebody out there is evaluating them, a good question to ask is whether or not the surrender period is what’s called rolling or not on rolling. So, what that means is that if it is a non-rolling surrender period and it’s a seven-year contract like John explained or kind of detailed, the seven-year period starts when you first deposit the money and it never extends. So, you can make an additional deposit down the road, say in year five and that new deposit does not have its own seven-year surrender period, it only has two years left just like the rest of the money.


Nick: So, that can be a really useful tool for somebody that’s trying to sock away some money, make ongoing contributions to it but still maintain access to their money. Whereas a rolling surrender charge period, each deposit has its own seven-year surrender period which can get really squirly and hard to keep track of. So, that’s an important thing to look out for.


Speaker 1: And so, you mentioned some of those bullet points there, John, to think about, you mentioned guarantees and the insurance company and so on and so forth. Are there protections in there? A lot of times people wonder what kind of creditor protections are there?


Nick: So, creditor protection tends to vary from state to state, which is actually a good kind of segue. So, one thing that people may notice, especially we’re in Florida and we have a lot of people that live in different states, et cetera, or at least part of the time. Insurance companies are regulated state by state. So, even though XYZ insurance company may have contracts in 50 different states, the rules and benefits that they provide in each state can be different. So in Florida, and this is always something where you want to, before you make any major decisions, you want to check in with an attorney, especially in estate planning or asset protection attorney, somebody that really works in that space.


Nick: But in the state of Florida, annuities fall into one of the categories that have a level of asset protection via loss, kind of joke that it’s the OJ Simpson rule, why he became a resident here many years back after he was found liable in court for the murders back in the ’90s were because the State of Florida provides asset protection on annuities for their residents. So, that is an area where we’ll have people that are high income earners, maybe physicians, specialists in medicine, things like that, where they’re very worried about asset protection, they may use annuities as a place to put money for growth but also provide them with a level of protection.


Speaker 1: Okay. And does that apply to a probate things of that nature in some protections, wills, so on and so forth? Is that caveat also?


Nick: So, probate typically is the process of essentially the court system, implementing the direction of a will or your estate and there’s a fee for probate. So, because an annuity is considered an insurance contract, you can actually list the beneficiary in the insurance contract, which will allow that process after a death of the funds to transfer directly to your beneficiaries and avoid them having to go through probate to get those assets, which can be a savings of somewhere from three to 5% of the assets in there. And not only that, it keeps it private instead of a public process, which probate is, but it just is a much cleaner way to be able to leave assets by listing the beneficiaries in the insurance contract, which is the annuity in this case.


Speaker 1: Okay. So, let’s talk about some more basics here. We often hear the term riders, make sure you get something with a rider and this has that so on and so forth, different options. John, what’s a rider?


John: So, a rider’s basically an additional piece to the contract that you can add, some type of guarantee or some type of benefit. And let me preface it by saying, most riders will have some type of cost associated to it. So, an example of a rider would be like a death benefit. You could put a death benefit rider on the contract where your initial principal payment, that’s your guaranteed death benefit. So, if you were in a, we’re talking about variable annuities, but if you’re in a variable annuity and the market dropped, you put in 100,000 and the market dropped to 80 due to market fluctuation, your death benefit stays at 100 or there could be a rider where the death benefit could potentially increase each year by a guaranteed rate.


John: Some other riders could be like a principal guarantee where you can’t lose any of your initial purchase payment amount. And then, the most popular one that we see is a guaranteed income rider, where it will guarantee income throughout the life of the contract similar to, when Nick was talking about what the pension and we’ll dive into this a little bit deeper on how this works in some of our future sessions, but when people are asking questions like, “Hey, what is this rider?” It’s typically some type of benefit or guarantee within the contract. And there is more often than not some type of fee associated with it and it’s important to understand how that fee works and then how the rider works on your contract if you like that type of benefit.


Speaker 1: It kind of goes into the factor of, is it worth it or not for that purchase that you’re making for what it is you’re trying to accomplish, right? What you want that vehicle to do for you.


John: Yeah and with the annuities, it really all comes down to the guarantees and if that’s what you’re looking for. Are you going to be guaranteed against some type of loss, guaranteed some type of income and is the cost of that guarantee worth it in the annuity contract? And for some people it’s great, it really gives them peace of mind and for other people, they don’t want to pay that extra fee or any type of cost on their money. Anything I missed there, Nick?


Nick: No, I would just say the way that you want to view any sort of, really any sort of investment vehicle itself, but especially annuities are through the realm of yourself, your specific situation, your plan. Because there are so many different variations of annuities and there are lots of bad ones and there are a bunch of good ones. Oftentimes, where we see the biggest mistakes made are when people implement a strategy that was good for their friend, their neighbor, their brother, their sister, but not good for them. And so because of that, and because of that decision it’s like, okay, these are bad,” where instead it should have been, well hey, you used the wrong strategy, you used the wrong type, this wasn’t something that made sense for you because X, Y and Z.


Nick: So, when you kind of evaluate these sort of things and as you kind of listen through the upcoming sessions and we talk about the positives, the negatives, some of the features and the benefits, et cetera, you really want to look at it through the realm of yourself and your specific situation because your brother, your sister, your neighbor, your friend, they may have different tolerances for risks, for expenses, their income levels may be different, they may have a pension where you don’t. So, every situation is different and I think that gets amplified by a significant amount when it comes to annuities and it’s part of the reason why they’re so often misunderstood.


Speaker 1: Well, and like any financial vehicle you already said that you want to make sure what’s the right fit for you. There’s so many vehicles out there, so many different financial products, there’s pros and cons to everything. And so, it’s finding the right balance, the right fit for you. Well, we’re going to wrap this up here in just a second. So, you mentioned, actually John mentioned variables, there’s basically three types. So, what are the three types we will be covering on the future conversations?


John: Yeah. So, we’re going to jump into fixed annuities and breaking down those and the pros and cons of variable annuities and then also fixed index annuities. We’re really going to try to do a good job of giving people details so they have the education and the knowledge to have good conversations, whether with their advisor or for themselves to really figure out if it’s the best decision for them.


Speaker 1: Makes sense. And so, we’ll finish it off by saying, make sure you subscribe to the podcast if you haven’t done so yet, they’ll also send this out for those folks if you’re getting that already. You can do a couple of things. You can either just go to the website, pfgprivatewealth.com, that is pfgprivatewealth.com or you can type in retirement planning redefined on whatever app you’re using like Apple or Google or Spotify. You can find it on all the most popular apps as well, just type in retirement planning redefined in the search box and you should have that pop up and you can subscribe to it that way.


Speaker 1: If you’ve got questions or before you take action, you should always call a qualified professional like John or Nick at PFG Private Wealth. They are financial advisors here in the Tampa Bay area. So, give them a call at (813) 286-7776, it’s (813) 286-7776. And we’ll also address guys that we’ll find a little bit here, it’s just a bias. You kind of alluded to it. People, they hear things and it’s like, “Oh, I don’t even want to talk about them because I know they’re all bad.” So, we’ll also discuss a bit of the biases for them and against them.


John: Yeah. So, with the biases, we find a lot of people based on stuff they read and articles and things they’ve listened to, they really come in with a bias, whether for them or against them. And one of the things that we like to just say is say, “You have an open mind and just learn about it and figure out if it works for your plan because if you’re reading an article and it’s telling you that annuities are bad, all the stuff,” and I’ll say like, “Fisher Investments, they’re really dog annuities,” but when you look at it, what they do is asset management. So, their primary focus is getting money, going into stocks, bonds, mutual funds, things like that. So, they’re not really offering annuity so they’re basically, they’re going to be against them.


John: And vice versa, we’ve seen some advisors that aren’t actually licensed but they have an insurance license and all they can offer is an annuity. And guess what’s the greatest thing out there? It’s an annuity for you because they can’t do anything else. So, whatever you’re reading, you got to kind of look at it from a perspective of, “Is this person open-minded to it?” And that’s where Nick said it’s really important to look at the tool, the annuity, the pros and cons to it and does that fit with your plan and what your goals are?


Speaker 1: Well, that’s a great way to end the podcast this week. Thanks so much for your time here with John and Nick as we were talking about understanding annuities on the podcast. This has been Retirement Planning Redefined. We appreciate your time. Make sure you hit that subscribe button on whatever app you use or reach out to John and Nick at pfgprivatewealth.com and we’ll see you next time.