Click the video above to follow along as David Reyes, The Retirement Architect provides insightful information on Annuities
The third act. There have been many revolutions over the last century, but most are not as significant as longevity. The longevity revolution. We’re living an average of 34 years longer than our great-grandparents. You know, think about that for a minute. That’s an entire second lifetime, an entire second life span.
Glad to be with you this week. Lots to talk about. Today, I want to focus on a topic I don’t spend a ton of time on, as far as exclusively giving a segment to. But I think it’s time to revisit annuities. Our firm is an independent registered investment advisory firm and we deal with everything from investment planning, with stocks and bonds – those types of traditional investments – to annuities, real estate. Really use a lot of different investments to help to not only protect capital, to grow capital, but also to create income.
And so I want to talk about annuities. And I’ve done a workshop that I gave for a long time – that we may do again – and it was called “Annuities, The Good, The Bad and The Ugly.”
So let’s start with “The Ugly” annuities first.
A lot of the bad press that is given to annuities is what is called variable annuities. And variable is what it says. It’s variable, meaning the value of the annuity contract can go up and down. And the problem, most of these annuities have fees as high as 3 or 4%. In fact, we have this software that will analyze the fees inside an annuity and will basically tell you what the dollar amount that you are spending per year in your cost for your annuities. And so I was reviewing an annuity – I won’t mention the company, not that it matters but it’s a major life insurance company, major annuity company. Great company, but sometimes great companies have bad products. We were with every major carrier across the United States, so I can kind of tell you the difference. So if you sit down with me, we will talk about these products.
But the fee inside this annuity was about 3.96%. To give you an idea for $100,000 that’s $4000. This client has a $500,000 annuity. Their fees, think about this, are $20,000 a year. That’s what are. Think how much money you need to make just to surpass those fees every year. I mean your hurdle rate is 4%. So if you $500,000, it’s $20,000 of fees. You have to make over 4% to just break even. To be ahead. So one of the things we want to look for is how do we reduce the cost, reduce the fees inside of an annuity.
So variable annuities, you do not want to have. I replace a ton of variable annuities. A client I met with last week, we replaced that annuity. Her fees went from – first off, it was not a variable anymore, it was fixed. Fixed means you can’t lose capital. You can’t lose principal. The fees on that annuity were 0%. So we saved her $20,000 a year in fees. And we, secondarily, protected the principal.
So those are the things that we look to do. Those are the bad annuities, variable annuities. So what are good annuities. Let’s talk about income first. The most of you, as I talked in the opening monologue here, is that our biggest, the biggest revolution, as far as age goes, is the fact we are living 34 years longer than our great-grandparents. And, again, that’s a whole another generation. That’s a whole another life span. So the biggest concern that you have is out living your income.
The number one concern – I sit down with hundreds of you a year, through my workshops that I give, through radio show listeners. The number one concern that you all have is one thing, is running out of money in retirement. And you should. Because most of you have plans that you are going to have problems with that. Most of you are taking income out of assets that I call “that can crash”, like stocks and bonds. So if you’re taking income out of assets that can be very volatile, think what that does to your income. How much confidence can you have in retirement if you’re concerned about the value of the portfolio that you have and the income you can derive from that?
So what we do we call, we buy for KP Asset. We buy income, so we are going to have certain investments for income and certain investments for growth. By doing that I don’t have to worry about the market for my income. I can use that to grow my money but I want to use part of my money. It can be 30%, 40%, 50%, 60% of the assets you use just for income. That way we have the income we need. And I’m talking about for vacations, everything. Not just to pay your bills. So we want to focus on good income annuities, fixed-income annuities that can give us lifetime income.
I’m writing a new book with Jack Canfield called Momma’s Secret Recipe On The Successful Retirement. And one of the chapters I’m writing on is “Increasing Income Annuities.” Now, most of you are unfamiliar with them because if you get an annuity, typically the payouts level for the lifetime of the contract. But what if we could have our cake and eat it. What if we could have a guarantee lifetime income, and we could have increasing income as we go along in retirement?
So a plan I just did for a client recently, they’re a pretty large client. So they have about two million dollars in assets, so we took half of the assets and just used income. That was all income that they needed. And then we took the other half of the assets and we put them in a conservative, growth-oriented portfolio that they could live with the volatility but didn’t have to worry about the volatility because we are not relying on that asset for income.
So the income asset we created we bought 100% of annuity in this. So what we did – they’re retiring at 65, they are currently 60 – so if they wait for five years on the million dollars, they’re going to get paid out 5.75% at distribution rate, which comes out to $69,495 of income, which is awesome. That is almost 6% of the portfolio, over 6% of the portfolio, and it’s guaranteed for life. What if I told you after 10 years that same annuity was worth, in income, $90,000? So you got over 25% increase in your income. That’s awesome.
So we always want to use increase income annuities when we can because they, you know, we have things like healthcare costs, inflation. We are probably, finely moving into an inflationary period. The Federal Reserve is raising interest rates. When that happens rates go up. Simply that coincides with inflation.
So I think we have the Producer Price Index. The Consumer Price Index is touching now almost 3%. First time we’ve had that in a decade.
So if you want to talk to me about fixed-income annuities, and how to have a lifetime income, and have lifetime income that you not only you can outlive, but it also increases in value:
Call our office at (858) 597-1966