Annuitization Can Be Your Last Resort: Shootin’ It Straight With Stan®
Today's topic is, annuitization can now be your last resort when it comes to income. Let me explain that to you. Most people think incorrectly and even some advisors and financial journalists think there’s only one type of annuity; lifetime income, Immediate Annuity, and if you die, the annuity company keeps the money. That is ridiculous.
There are many types of annuities. There's a Multi-Year Guarantee Annuities, the industry's version of a CD. There are Indexed Annuities and Variable Annuities. There are Deferred Income Annuities, Qualified Longevity Annuity Contracts, and Single Premium Immediate Annuities. There's more and more. Buffer Annuities, Income Riders attachments, and all kinds of different machinations out there. Annuities were put on the planet in Roman times, you can trace it back there to when the Roman Empire was giving lifetime income pension-type payments to the dutiful Roman soldiers and their families. That's where the whole annuity game started.
Annuities are the only product type that provides a lifetime income stream while you are breathing, there's no ROI until you die. I laugh when people make correlations to investments. It's apples and oranges. But when it comes to income, we're at a point where interest rates allow you to buy a Fixed Rate annuity, whatever that gives a fair interest rate. The point is, if you have enough money, you can just protect the principal, take the interest from that guarantee, and never touch the principal. And that's a good thing.
So, now we have pivoted at The Annuity Man®, the top seller of annuities on the planet when we talk to people about lifetime income, there are really two ways to go about it. There are buying products that are lifetime income products, and there are three major types of what's called annuitization products; Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity contracts. Think of going out to the water faucet in your backyard and South Carolina ripping the knob off the water faucet, water is flowing. Annuitization visually, the income is flowing. It's an irrevocable contract that's going to pay you as long as you're breathing and you can structure it so that 100% of the money will go to somebody in your family, not the evil annuity company even though the annuity company is contractually obligated to pay you for as long as you live even if there's no money in the account, that's the transfer of risk-benefit proposition.
Income riders are not annuitization products in most cases. Those are what's called drawdown products for a lifetime income. Drawdown in English means subtraction, which means they're subtracting that amount from the total of that accumulation value, whether there's a variable, annuity, or an Indexed Annuity. But we're at a point now where you don't have to lock into a product for a lifetime income. You can, and is it a good thing? Yes, for a lot of reasons. If you're planning to live a long time and you know eventually that you're going to have cognitive issues and we all are and to have a turnkey income stream that we do not have to worry about. And if we have a spouse that doesn't care about markets or money or managing money, it's very good for them as well in combination with Social Security, which is the best inflation annuity on the planet. But at this point in time, I really believe annuitization, buying an Immediate Annuity, or buying a Deferred Income Annuity, it might be a last resort if you can live off the interest from the principal that you have. Now, obviously, you have to have a large lump sum to peel off the interest and live off that, but a lot of you out there have done that.
You know, what I'd like for you to do is go to my site at theannuityman.com, pull up the live Fixed Rate feeds, live MYGA feed for your state, and pull up three years or two years or five years or four years, and see what that percentage is, and then look at your total and see if you could live off that if you got that kind of percentage just off your total dollar amount not touching the principal. Now, obviously, you can't put all your money in annuities, but in combination with CDs, maybe very good corporates, and then Multi-Year Guarantee Annuities, never touching the principal and just peeling off the interest and living off the interest. Jimmy Carter, anyone? Sounds good. Yeah.
I keep hammering home that you might have already won the game so why are you still playing? Why are you still chasing markets? Why are you still chasing yield? Why are you still trying to find the next Tesla or crypto or whatever? Are you addicted to the markets or have you actually reached the finish line? You might want to look up from all this hard work and dedication to investments, you might want to look up, take a breath, look around and go, "Huh, I think I have enough money just to live off the interest."
Got a call the other day and a gentleman wanted to buy an Immediate Annuity and I said, "That's fine, let's run the quote." And we ran the quote and again, you can run it so that 100% of the money when you die goes to your family, not the annuity company. So get that out of your mind, please. All of you advisors out there that think that's the only way, would you please stop? Financial journalists, call me and interview me instead of writing about it making yourself look stupid. Anyways, we ran the Immediate Annuity quote and I said, "Okay, great." Obviously, it's going to be more than peeling off the interest from the MYGA because SPIA, Single Premium Immediate Annuity income is a combination of return of principal plus interest. In fact, all lifetime income products, which are SPIAs, DIAS, QLACs, and Income Riders are a combination of return of principal plus interest. Even if the accounts are at zero, they're on the hook to pay. So, if you're peeling off interest from a Multi-Year Guarantee Annuity, Fixed Rate Annuity, obviously it's not going to be as high of a guarantee as an Immediate Annuity.
My question to him was, "Okay, it's not as high, but is it enough?" And he ran the numbers without me on the phone and goes, "Actually it is. Actually, it is enough in combination with the Social Security." I think his wife had a pension and he goes, "We don't need to annuitize. We don't need to irrevocably lock in a contractual guarantee." Now, I love Immediate Annuities, I sell tons of them. The biggest advocate for those because they're so simple you can explain them to a nine-year-old. But the point is, he realized that annuitization didn't have to happen. So, I said, "Here's the thing though. We're going to buy the MYGA, we're going to peel off the interest from that, you're going to take the rest of the money and buy CDs, do the same thing," because you can't put all your money in annuities. “But if interest rates go drastically down again, we might be forced to buy an Immediate Annuity.: And he was okay with that. He goes, "Well, if they force our hand to buy the immediate annuity in order to achieve that income stream, that income floor that he and his spouse needed, then great. But I said, "Until that point, until they force us to do that, let's keep our powder dry, and peel off the interest."
Now, I love Indexed Annuities. I have no problem with Indexed Annuities, they're CD products, and we use them primarily as a very efficient and cost-effective delivery system for Income Riders for future income needs. But when you're doing a peel-off the interest strategy and protecting the principal, that is not Indexed Annuities. Because with Indexed Annuities, there's no guarantee that there's going to be a return. There are a lot of great hypotheticals and theoretical, and backtest, and unicorns chasing the butterfly at the bad chicken dinner, very expensive steak dinner seminar that they show you, but that's not guaranteed. When you're doing a principal protection peel off the interest, you need a contractual guarantee. Not some pie in the sky, not some agent saying, "Well, look, I own it, my mother owns it, my uncle Bob owns it." Crap. Nonsense. That's garbage. You need to buy short-term 2, 3, 4, 5-year, maybe even up to a seven-year MYGA. You might want to ladder it too so you don't have to time interest rates. But that's the way to do it because those yields with Multi-Year Guarantee Annuities are contractual. They're going to happen. They are the will do®. Remember, you own an annuity for what it will do, not what it might do®. The will do, is the contractual guarantee part.
So, annuitization at this point in time, I'm happy to say for a lot of you out there that have large lump sums of money, it's the last resort. And we will go there if forced to if rates move down. But until they do, if they remain at these levels they go up from here, then you're going to be able to potentially, hopefully, depending on what your income needs are, take the interest and never touch the principal. Can we say an annuity Hallelujah on that? Hallelujah. That's a tent revival speech right there. So, income can come in two forms: Peeling off the interest or annuitization. Annuitization now is the last resort.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.