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Highlights from this episode include:

  • The #1 reason people get into annuities and how to tell if they’re right for you (5:41)
  • Why purchasing an annuity hastily can cost you a huge chunk of your retirement funds (6:32)
  • The surprising way annuities can protect your wealth if you get sued (9:13)
  • How certain annuities can give you the benefits of the market without the risk (13:38)
  • 3 specific uses for annuities that can maximize your retirement (19:15)
Read Full Transcript

Do you hate the thought of working past 55 or 60? Do you hate not being able to live the life you deserve today? Do you hate not knowing what your financial future looks like? It's time to stop doing what you hate, here's your host, Mr. Harold Green.

(00:20): Oh, hello. Hi everyone. This is Harold Green and it is time to stop doing what you hate. How is everybody doing today? I am doing fantastically well. And today's show is going to be pretty interesting. I'm going to drop some knowledge on you about annuities. And so the title of today's show is the truth about annuities. Over the past have gotten a bit of a very bad rap for a lot of different reasons. And I'm going to uncover some of those for you guys today. We're going to talk about exactly what annuities are, how are they used and who are they primarily for before I get into today's show, I want to introduce you guys to my new assistant. Her name is Kayla Vergara. So shout out to Kayla she's out in San Francisco. She's going to be working with me virtually. I met Kayla when she was in 11th grade and high school.

(01:15): And her parents hired me after hearing me speak. I think it was that Dave and busters was doing an event for college funding and talking to the parents about how to send their kids to college without going broke or spending down their life savings and how to get their kids through college in four years. You know, cause the average kid takes about six years to graduate. So they came in and they hired me. And that is when I met Kayla Gara. She was a pretty bright kid and had good grades in high school and she really wanted to go into business. And so after a couple of years of working with her in high school, she went off to the university of San Francisco out in California, graduated with honors. And the next thing, you know, one thing led to the other and now we are working together.

(02:03): So sometimes you just you just never know how things turn on in life. And so I'm, I'm very thankful to have her on board and working with the clients. And so Kayla welcome aboard and a big shout out to you. She survived her first week of training. It was just kinda like throwing her in into the fire. And she's probably talked to several of you guys or maybe, maybe 50 of you by now, but she's done a good job and thank you very much, Kayla for coming on board. So today's show the truth about annuities. And I first learned about annuities probably about, I want to say 20 maybe 20 years ago. I'm 47 right now. Tell you guys my age, I'm getting kind of old 47. And I learned, learned about annuities when I was about 27 when I was working for a company called Pacific guardian life.

(02:55): And they weren't, they weren't big in the annuity market at that time and or they weren't in the annuity market at all. They decided to bring on annuities and the annuities were underwritten by UBS, which is union bank of California. So annuities are a very interesting asset, you know, inside of the asset class. And because of we're going to be talking about investments today, I've got to read you guys. This disclosure here, all investments, including real estate are speculative in nature, involves substantial risk of loss. I encourage investors to invest carefully. I also encourage investors to get personal advice from a professional investment advisor and to make independent investigations before acting on information that I publish either on the internet or on my show. And I don't in any way warrant or guarantee the success of any action you take and reliance on the statements or recommendations.

(03:51): Again, all investments carry risk and all the investment decisions of an individual remain the responsibility of that individual. In other words, folks take ownership for the choices and the decisions that you make. All right? So there's different types of annuities out there and I'm going to go kind of rapid fire and this process. And so I'm going to start with, with what an annuity is. Basically a, an annuity is a contract between you and an insurance company that requires the insurer to make payments to you either immediately or in the future. And you can buy an annuity by making either a single payment or a series of payments, or you can take your pay out over time or as one lump sum. So there's a lot of different ways you can get involved with annuities. Now, annuities are not for everybody. Primarily annuities are for people that are risk averse.

It means people that do not like loss. They don't like to see their monies go up and down in the stock market. They can't stomach the pain. And so they just want their money to be safe and they want it to grow at a consistent rate over a, a long period of time. These folks are not like they're not in it to win it. It's just, they want to protect what they have. They're used to living within their means or even below their means. And so they just don't like the fanfare of the market or just the whole hype of, you know, getting rich quick or make it, they just look at all of that. What the John does kinda I, so the number one reason why people do get into annuities is for asset preservation. Once you put your money into an annuity and there's different types of annuities, now there's verbal annuities that are based on the stock market.

(05:50): There are index annuities based on the stock market. And then there's annuities that have just simple, straight interest rates or a period of time they're called multi-year guaranteed annuities. For example, you put in $500,000 and they're going to give you three or 4% or a certain number of years. Okay. And then from there you can begin taking income out of that annuity thing. A lot of the annuities do have penalties on them. So if you do cancel your contract within a certain period of time, like say within the first 10 to 15 years, there could be a huge penalty on the annuity, but folks we're looking for asset preservation, they really don't care about that. They just, the only thing they care about is that their money is safe and they can touch some of it when they want. And it's really no big deal to them.

(06:40): Number two, people get into annuities for, like I said, they get into them for income purposes. Now there are several different types of income annuities. There's something called the speed, which is a single premium immediate annuity. And this is say, for example, somebody say you won the lottery and they gave you, I don't know, $10 million. And what happens is you can take that $10 million and then give that to an annuity company or an insurance company create a contract between you and the insurance company. And that money is guaranteed locked away. So essentially the insurance company, he owns that money now, no longer own the money when it's a single premium immediate annuity. Because once you enter into that contract, the insurance company guaranteed you a certain amount of money every single year and you get to choose, okay, you get to choose the terms of that annuity.

(07:38): So I'll give you guys an example, say, aye, I set up a single premium, immediate annuity. And I go in there and I dump in $500,000. And I choose a guaranteed period. What the guaranteed period means is the life insurance company is going to give me back that $500,000 with a small amount of interest for the next 10 years. So when I calculate out the results and I take a look at the ledger, I wish you guys can kind of see this with me. Eventually I will get on a feed where I have a camera where you can actually see the show. And so $500,000 age, 47, starting November 1st, I'll get a check, $50,331 and 23 cents a year for the next 10 years. Now. Here's the interesting thing about that. Once they company owns it, like I say, I no longer have access to that money.

(08:35): So if something were to happen and I want that money right back, I can't get it. Okay. Because I entered into a contract, I gave the money to the insurance company. They're going to pay me back. $50,000 a year contract cannot be broken. So I'm obligated to be in that contract for the next 10 years. So it's extremely inflexible. But the other thing about it is let's say I get into a lawsuit and someone comes after me and they say, I heard you got all this money, Harold. And you know, we're just going to go after that. If the money's locked up in an annuity, they can't touch it because it belongs to the insurance company. The only thing they can try to come after is the $50,000 of income that I'm getting on that every single year. Now, this is very interesting because if you, you can also use this for estate planning.

(09:28): And let's say, for example, you have kids that are not responsible with money and you have $10 million while technically you can put $10 million into an annuity and then give them income for the rest of their life. And that annuity, they don't own anything. So if they get sued or they get divorced or whatever it is, their spouse have zero access to that annuity because that individual no longer owns the money it's owned by the life insurance company. So there are some good purposes for annuities, but the truth is, is people have misused annuities over a period of time and it's on both sides. It's on the side of the consumer it's on. And then it's on the side of the insurance company. And it's on the side of the individuals who are selling the annuities. For example, people want security and they're risk averse. And so the insurance companies will build out these annuities to, to fit that segment of the market.

(10:25): The challenge is sometimes insurance companies give agents and incentive to sell these types of these types of contracts. And sometimes the compensation can be really high. And it's based on the number of years, say that person is locked into that. I knew it. He say there's a 15 year surrender charge the commissioning to be as high as seven to 10%, depending on what company that you know, you place that annuity contract with. So sometimes people that are pushing annuities are not doing it as fiduciaries or in the best interest of their clients. They're pushing the annuity because it pays the highest amount of income. Now that can be a very challenging thing, because again, let's say you're in an annuity. Some of the annuities will allow you to take out 10% of the annuity value every single year without penalty. While if you need to take out more than 10% of that annuity, then guess what you're going to be penalized on the difference.

(11:24): Sometimes it's not that much. Sometimes it's a lot. And back in the early, I want to say the early around 2005 to 2008, there was a lot of lawsuits going on in regards to a particular type of annuity. And it was called a fixed index annuity, also known as an FIA now fixed index annuities. When they came out, they were a very, they were a beautiful thing and I've used fixed index annuities here and there, there, however, I don't use them as much as I used to use them because there's other things that we now have access to that can also fit and solve the need for income and also asset preservation and to some extent, and the market so are still good uses for it. But I want to just kind of go into an index annuity that worked really well for this one client that retired a long time ago, she retired from a job and she brought over, it was $152,000 and this index annuity paid a bonus.

(12:32): And so her bonus was quite quite large at the very beginning. It was 16,700 and a 25 cents. And also in that year, and this was in 2009 and March. Now this is very important. The day you get into an index annuity or the day you get into any type of investment is very important. The entry point and the exit point is very important. So she put in one 52, four 11 gave her a bonus of 16,000 that year. She made $12,000 in index credits. So her ending balance was 180 1005 22. I think that was a pretty good deal that very first year. And she really didn't need to take any money out of that annuity that year. So that year it did extremely well. And this annuity was tied to the S and P a monthly point to point. And what that means is they credit your account based on how the S and P 500 does over 12 months.

(13:25): And so the other benefit of the fixed index annuity is there zero chance of loss in the account. So even if she made zero in that account that year, or say the S and P was down 20% that year, she lost his hero. She would've gotten her bonus. And that one 52 plus the 16,000, she would have had that guaranteed. And then it's guaranteed going into the next year, but in this case, yeah, and it was one 81, five 22, which was a very good year for this. And so in 2012, the account is now down to one 57, five 37. Why is it down? Well, she took out monies the previous year in the amount of 17,000. So now she's taken out $17,000 a year in order to have income to subsidize whatever else she has come in. So she starts taking money out over a period of time.

(14:21): We started with one 51, I'm going to skip down to 2019. And that was like, last year, she started the year with one 49. Now, remember she's been taking monies out of this account for number of years, as a matter of fact, up until that point. And she had taken out 113,005, 36 point 94, and she had gained 88,003, 24.62, and her accumulation value, all that is still one 43, nine six, 4.29. And so this, this annuity had performed extremely well for her up until a certain time point. Now, I can't say at this point where that was, but I want to say it was back at the end of 2019 and 2020. She ended up not making anything on the account because the index was it. And it went down. So when the index goes down, she doesn't make any money. And then also the annuity company changed the strategy, the index credit strategy in regards to what she could now get credited on a monthly basis.

(15:31): And it was extremely disappointing because although the S and P had rebounded the monthly points point index crediting on the account was negative 9.25%, which means she lost. So this is where I, I get into a little bit of concern with the annuities, even when the market is going well, sometimes the annuities don't pay out. So you're going to have to mix up your strategy a little bit. If you want some safe money in an annuity, I'm going to go out on a limb and say, based on a financial plan, it's probably a good idea to look into some alternatives to the annuity, such as I want to say, long term corporate bonds, ETFs, some treasury bond, E T S things of that nature. Sure. And looking at some of the returns and some of the risks scores on these, these ones on ETFs have a risk score of maybe like the 29 and the Riskalyze factor.

(16:31): So they're a considered conservative. And so if you want to have a balanced portfolio with some security of the annuity, then maybe adding some into the short term corporate bonds, long term corporate bonds, treasury ETFs would be a good thing, or example the spider portfolio, long term corporate bonds. Yeah. If year to date, it's called SPLV, it's basically 6.1, 1% year to date and that's with the Corona virus situation. Another one would be the, I shares a seven to 10 year treasury bond. ETF is trading at $121 and 58 cents share today. And it is up 10.3, 1% year to date. So that's not bad for, you know, treasury ETFs. And then one of the lowest performers is the, I shares intermediate term corporate bond ETF trading at about $6 and 96 cents. It's basically 2.5%, and that's not bad for safe money. There's low volatility in these treasury ETFs.

(17:44): And so that's why I do like them in my rapid retire program of the portfolio as part of the short term bucket. And so I do have quite a bit of these types of things in there in the short term bucket mixed in with some traditional holdings of stocks or whatnot. So these can be a good balance to your portfolio. And then I'll jump into another one down here for the aggressive investors who they like taking extreme risk or whatnot. There's also a treasury. I think what is called a it's direction daily 20 plus year treasury bull, triple leverage ETF, and basically whatever the 20 year does this thing does three times that. So if it loses 1% that day, then this thing is going to lose 3%. If it makes three or 4%, this thing triples that so year to date, this thing is up 54.8%, which is extremely weird.

(18:45): Again, considering the circumstances people are poor and they were pouring into the treasury ETFs. And so this made this triple leverage ETF go up even more. So that's something that you can look into to round out your portfolio. So again, the truth about annuities, you use them for asset preservation, there's no losses. And then number two, they generate income. And then number three, you can use them for estate planning. And then in my next show, what we're going to talk about is dividend growth investing. And that's another thing you can add into say, maybe annuity portfolio is building a portfolio of stocks that pay out decent dividends. And so you're using your annuity to guarantee part of your principle, you're using the other part of your assets to generate income. And you're also using part of your assets to generate growth, depending on what you've put those in.

(19:39): So dividend growth investing is a, it's not a new phenomenon. Phenomenon has been around for a long time. And I'll get into that at the next show, in regards to how to build out a dividend growth portfolio and how to look for dividend growth stocks. And so we'll talk about that in the next show. So if you're out there and you're looking for a way to protect your assets, and you're not sure how to round out your portfolio and what to do about it, give me a call five, two one four four zero one area code eight Oh eight, or you guys can go to my website, retire now, retire while.com and then download the brochure for the rapid retire program, click on the game changer form, fill out your information and send it over to me. And we'll be in touch with you to help you stop doing what you hate. So I know today was a little bit of a quick one, but I wanted to just give you guys a little bit of knowledge on annuities. There's more to come on this a little bit later on, but I just wanted to give you an opportunity to learn more. So thanks again for tuning in until next time everybody. One, two, three, let's get it.

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