Understanding the Pros and Cons of Annuities - YouTube

Who should consider an annuity and who should not?  Why is there so much confusion and conflicting  

opinions about annuities? Are they good, are  they bad? That is the subject of this video.  

Welcome to another episode of the Financial  Fast Lane my name is Lane Martinsen.  

I am the author of the Holistic  Retirement Planning Revolution,  

and the purpose of this channel is to provide  educational information to those who are 50 and  

over, specifically on retirement planning topics.  Today we are specifically talking about annuities.  

There's a lot of confusion in the world  around annuities are they good are they bad  

there's so much conflicting information so  to get started let me ask you a question  

if you could have your dream perfect investment  what would it be okay let's list out some of the  

attributes of the perfect investment would  certainly like to have high returns right  

no market risk whatsoever that'd be nice tax  deduction tax-free growth tax-free distributions  

would be great basically we want everything  tax-free it'd be nice if it was all guaranteed  

it would also be nice if we didn't have  required minimum distributions to worry about  

no penalties of any kind no fees of any kind  and we had complete liquidity complete use  

of our money anytime in any way that we wanted  that would be a perfect investment would it not  

so does it exist and the answer is  of course it does not exist however  

all of these attributes that are listed here they  are available in different types of investments or  

different types of financial tools or products  and so it's understanding the trade-offs

so before i get too deep into this  just a disclaimer i live in a very  

regulated world right and this information is just  educational don't take it as any personal advice  

i have created a free download it's called  understanding annuities in the 21st century and  

so i've taken chapter 8 and we've we've turned it  into this free annuity guide that you can download  

completely free no obligation so in my  book one of the things we talk about  

is how many different investment options there are  

there's a lot of different financial tools  a lot of different products out there  

and how do you get the right mix and how do  you know what's best for you well to simplify

the discussion i like to categorize them as red  tools or green tools so so in my book we refer  

to red investment tools and green investment  tools so the red tools would be anything that  

is subject to market risk so we're talking about  stocks bonds mutual funds real estate commodities  

okay anything that can depreciate in value as an  investment it has some risk it has market risk  

associated with it right so those are what we call  red tools and then we have green tools that are  

also available in the world today right and these  are mostly provided through insurance companies  

such as life insurance annuities and some bank  products it's just cds and so those would be  

what we call the green tools because they have  no market risk they come with certain guarantees  

where the principle is is protected and guaranteed  against any market loss so which is better well  

it completely depends on your situation right so  one of the important things you want to understand  

is that the licensing requirements for financial  advisors that deal with red tools is entirely  

different than the licensing requirements for  those that deal with screen tools and they have  

different regulating bodies um and they really  are kind of two different worlds different camps  

two different types of institutions that deal with  red tools or green tools and so you tend to get a  

lot of bias so if you're working with an advisor  and he specializes in red tools and only red tools  

he's going to be very biased towards red  tools because that's what he does right  

and and vice versa if you have someone that  deals with and specializes in annuities for  

example or life insurance then that then  they really specialize and focus on those  

strengths that their products have to offer  and so you really get this strong bias going on  

and but what's best what's best for you what  you really want when it comes to looking for  

a financial advisor is you want someone who's  experienced with both and has all of the tools so  

then you you can know if you're truly getting  someone that's non-biased so for example  

i'm a red tools investment advisor we manage  millions of dollars for our clients investments  

but i'm also very experienced on the green  side tools and it's it's typically going to be  

a combination of the two and understanding the  differences that really makes a big difference  

so if we look at traditional asset  allocation it's it's basically a  

combination of stocks and bonds right well  why would we have bonds in a portfolio  

well because we don't want if you have all stock  portfolio then that's going to be too risky right  

you want to head into your retirement years  with 100 stocks um you know that's just very  

very risky and you could run out of money  prematurely with all with a whole variety of  

market turndowns that could could happen and  so using traditional asset allocation red tools  

you're going to have to have some bonds so the  problem is that bonds they ain't what they used  

to be you know it's because interest rates are  so low so when you have a retirement account  

the question is how much of it can you take out  in retirement what is the withdrawal rate well  

the safe withdrawal rate has been for years it's  been around four percent some advisors will say  

between four and six percent depending on the age  in which you retire but new studies show that if  

you use the four percent rule today um 57 percent  of people will run out of money prematurely  

and so instead of it's no longer four percent it's  now more like two percent is the safe withdrawal  

rate well what has changed a couple of things  have changed the key factor being interest rates  

um the other thing that has changed is  longevity we live longer we need our  

money to last longer and now with historically  low interest rates it really creates a problem  

when we're using strictly traditional  asset allocations our model so if we go  

back to 38 years 1982 i was just graduating high  school it's hard to believe it's been 38 years

but interest rates were  really high if you'll remember  

and ever since then the trend with interest  rates has been down and so when interest rates  

are going down that means we're in a bull  market for bonds and so we've had decades  

where bonds have been really great and they've  provided a nice yield they've provided a great

diversification against stocks and the traditional  asset allocation model worked really well  

well things have changed times have changed and  the interest rates now are as low as they've ever  

been in my lifetime and so what does that mean  if you have a low when you when you own bonds  

really low interest bonds and we  start to have any type of inflation  

you're going to lose money bonds do not perform  well at all in an inflationary environment  

and even if there is no inflation you're not  you don't get anything from bonds anymore  

right because the yield is so low here's a quote  from ray dalio investors would be crazy to hold  

bonds right now you might know this guy ken  langone he's uh founder of home depot he says  

who in their right mind would be buying bonds  now and so one of the things that's another  

really important concept here to understand is  that when when you're preparing for retirement  

we call these the accumulation years and so  saving and preparing for retirement to get to  

the goal of retirement is really not the goal the  goal is to get all the way down the other side of  

the mountain right so once you retire you need  your retirement nest egg to get you all the way  

down the other side of the mountain which could  be two three decades in retirement right and so  

most financial advisors they live in the  accumulation side of the mountain and so  

if you're talking about annuities annuities  don't generally fit on the accumulation side  

for a number of different reasons but once you get  start to approach retirement and we and we need to  

plan out our retirement income and we need to make  sure that we have that income that won't run out  

now it's there's a whole different  set of skills that comes into play  

this is what we call distribution  planning and if you just simply use  

like a four percent rule or something you're  going to end up running out of money prematurely

so let's talk about green tools for a minute  okay we're going to talk about annuities that's  

that's the purpose of this video it's important to  understand that annuities have evolved a lot over  

the years there's been a lot of new innovation  and many of the talking points for those who  

are critical of annuities they're using the same  talking points that they were using in the 80s  

and i've watched the progression over the years  and it's the same exact talking points now many  

of them are true and accurate a lot of the  time when they're talking about annuities  

they're talking about certain types of annuities  and they're they're excluding the newer types  

and so you really have to unlearn as yoda  says what you have learned because things  

have changed and circumstances have changed there  are basically three different types of annuities  

you have fixed annuities variable annuities  and now we have fixed index annuities  

there are pros and cons to to all of these the  variable annuities are are basically investments  

in mutual funds they call them sub accounts but  it's you can still lose it's really not a it's not  

it's not a true green tool although they do  have some guarantees you can still lose money  

in a variable annuity variable annuities are full  of fees i don't ever recommend variable annuities  

now fixed index annuities specifically the ones  that have been developed in just in recent years  

it's it's really become a game changer  because you can now get a fixed index annuity  

where you have a guarantee of no loss in  the market regardless of what interest rates  

do regardless of what the stock market  does can't lose but the money can grow  

surprisingly well based on the performance of the  market index or indexes and i know there's a lot  

of information there and i can't go into all the  details but annuity companies use stock options  

in an environment where they can guarantee  you you won't lose but when the market's up  

they exercise the stock options they  they realize gains they're able to  

share those gains with you so it's fairly  complex how it's all done but the end result is

a very very conservative way to invest now  

you never compare annuities with stock  market returns or with the stock market  

because they're two entirely different things  what you want to compare annuities to are bonds  

so we're talking about the bond portion of a  portfolio it's the portion of your portfolio  

that you want it's the safe money it's the sleep  well at night money it's not we're trying to you  

know chase after the highest returns it's the safe  so so the alternative to a fixed annuity would be  

would be bonds low interest bonds well we can  do a lot better with fixed index annuities  

nowadays that have no fees or very low fees  in comparison to bonds when you're in your  

distribution years you have market risk you have  a new risk sequence risk i have a different video  

where we specifically address sequence risk  it's a very important concept to understand  

and we have longevity risk and i'm actually going  to make a new video on that subject but we live  

longer and most people are living longer than  they anticipate living and so that creates a  

financial issue we need our money to last longer  so with a an annuity the right type of annuity  

it can possibly really solve a problem for  you take risk off the table now i haven't  

even mentioned one of the the biggest advantages  to annuity and that is guaranteed income for life  

so it creates a source of income that  you cannot outlive and we can actually  

get more money out of an annuity than we can bonds  a significant amount you would need 200 or 300 000

in bonds to do what you could accomplish  with a hundred thousand dollars in an annuity  

now how's that possible it has to do with  how long you live so if an annuity if you  

put a certain amount of money into annuity and  it's it grows and is is gaining interest and  

whatnot and then you you have this income stream  the income stream is also increasing over time  

and then let's say that you go along  in retirement years and it pays out  

all the money that it has paid you is more  than you ever put in and it's more than all  

the interest that you earned in the annuity what  happens to the income it just keeps on going  

so that is what we call additional money  it's money the term is mortality yield  

sometimes referred to as mortality credits but  it is the additional money that comes from the  

insurance company and how are they able to do that  they do it because they're using actuarial science  

right it has to do with the law of large  numbers they're pooling assets they can't  

do it with one or two people they have to have  thousands of people pooling their assets and so  

that's something that only insurance companies  can do because some people will live shorter  

some people will live longer and so an  annuity with an income stream it becomes  

an income income insurance because  insurance companies guaranteed it  

so coming back to the traditional asset  allocation model if you're going to use  

bonds in your portfolio as you head into  retirement or as you're approaching retirement  

then the safe withdrawal rate is  around two percent maybe three percent  

so you that means you're not going to get as much  income but with a fixed next annuity for some  

people you know that guarantee the withdrawal rate  is going to be higher so we can actually get more  

income out without the fear of running out  if you're using traditional asset allocation  

your bonds you can deplete them down to zero and  you're out of money fixed index annuity you can  

take you get more income out and then it never  stops guaranteed for life so is is an annuity  

an important or powerful financial tool it  is they're not for everyone it depends on  

your age it depends on your circumstances and then  there's a whole other conversation we need to have  

about taxes because taxes are a huge factor  and even even guys who specialize in annuities  

a lot of times they ignore the tax issues and  so ideally what you want is you want to have  

roth annuities translate that into roth income  so how would you like to have most of your income  

or at least a major part of  it ideally all of your income  

completely tax-free in retirement  so tax rate scope in the future

you're completely isolated because your  income is tax free that can be accomplished  

with good planning so i just scratched the surface  of a heavily debated topic there's a lot to know  

a lot to understand and so i want to make it  easy for you i have created a free download  

it's called understanding annuities in the 21st  century so what we did is in my book chapter 8  

is where we we talked about annuities and  the changes and and we go into more depth  

um and so i've taken chapter eight and we've we've  turned it into this free annuity guide that you  

can download uh completely free no obligation so i  hope you really will take advantage of that please  

feel free to ask any questions in the comments  or below or contact us we're happy to talk  

and i look forward to seeing you in the next video