Annuity Payout Rates vs. Interest Rates
Today's topic is a perfect one and so important. Annuity rates versus payout rates. Is there a difference? You are darn right, there's a difference. This is an important topic because many people think they're the same, and they're not. We're going to drill down on what that means.
People are like, "Hey Stan, what are the rates, and what are the best? What type of annuity are you talking about? Are you talking about interest rates? Are you talking about payout rates for lifetime income?" We're going to get into that now.
Annuity Payout Rates
All right, so let's talk about annuity payout rates. When we speak about payout rates, we're talking about lifetime income. If we're talking about lifetime income, we have commoditized the product, meaning we have to shop all carriers for the highest contractual guarantee for your specific situation. Annuities are the only product type on the planet that will pay as long as you are breathing. There's no ROI until you die. If you'll live to a hundred fifty, a hundred seventy-five, a hundred sixty-three, a hundred thirty-eight, the annuity companies on the hook to pay. And yes, we can structure it so that 100% of any unused money in your account will go 100% to your beneficiaries. And the evil annuity company will never keep a penny under any circumstance. Are we clear? Many people call me up and say, "Well, I never bought an annuity because when I die, money goes poof and the annuity company keeps the money." That's one of 40 ways to structure it, and we can structure it like that. That's called life only, but we don't have to structure it like that. If you work and say, "Well, you know what, I've worked hard for my money, I've scrimped and saved, and we've gotten to this point. Yes, the misses, and I won a lifetime income stream. Or the mister and I need a lifetime income stream. We want to do that, but we want to make sure that if we pass away, we want to make sure that 100% of that money will go to our beneficiaries and the evil annuity company doesn't keep a penny."
Annuity payout rates, let's break that down. It's all about life expectancy, and it's all about mortality credits at the time you take the payment. Let me give you a correlation. If you turn on the income stream from your social security annuity at age 70, will the payments be higher at age 70 or higher at age 65? The older you are, the higher the payment. Same thing with annuity types for lifetime income. And oh, by the way, there are four. Well, you say, "I hate all annuities." Do you hate them all? Do you hate all four lifetime income annuities? Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and Income Riders attached to specific policies are the four types of lifetime income products. Meaning they're going to pay you as long as you're breathing. They're all contractually guaranteed that carriers will bid on your business. If you say, "I need $2,000 a month to start five years from now," we quote all carriers for that.
You can go to our annuity calculator without interacting with a human. You can run quotes on SPIAs, DIAs, QLACs, and income riders at your leisure. You can also run a lump sum quote. "How much would a hundred thousand dollars pay?" Or if you say, "You know what, the spouse and I need $2,500 a month," you can reverse engineer the quote and find out which carrier will back up that $2,500 a month using the least amount of money.
A great way to buy annuities is by using the least amount of money to solve for the contractual guarantee. Those are payout rates. Some other sites try to compete with The Annuity Man® but have yet to succeed. They'll put up a 6.2% payout, 5.9% payout, and 4.3% payout, which is unfortunate. And if you see that, look at that and go, that's unfortunate because Stan The Annuity Man® told me that's unfortunate. They're saying this is the numerical representation of your life expectancy. The older you are, the higher that payout rate. Why? Because there are going to be fewer projected payments, which means the payments will be higher. That's what we're talking about. We're talking about payout rates. Payout rates are life expectancy and mortality credits that primarily drive the pricing train. Interest rates are secondary in pricing when we're talking about lifetime income. So don't come in going, "Well, I'm waiting on interest rates to rise before I buy my lifetime income stream," and that's not the way to go about it. You're not going to beat the annuity company in the pricing. There is no arbitrage, and there's no sweet spot. I understand you've been doing that in the markets, and you're a master of the universe. There's no master of the universe in the annuity markets because it's about life expectancy when you're looking at lifetime income streams. So that's payout rates. Now let's talk about interest rates.
Interest rates apply to Multi-Year Guarantee Annuities (MYGA). Now with a Multi-Year Guarantee Annuity, that is the annuity industry version of a CD. It's interest rates, right? They're looking at the 10- year and 30-year treasury on CDs with Multi-Year Guarantee Annuities. There's a more extensive pricing mechanism with life insurance. You have life insurance that's being sold and lifetime income that's being sold, and they have a bond portfolio. They look at current interest rates and then take that combination, which is why they can provide a higher contractual guarantee MYGA than CDs. Those are interest rates, and that's an interest rate-driven product. Yes, interest rates play a minor secondary role in pricing payout rates for lifetime income. You need an interest rate when talking about a Multi-Year Guarantee Annuity like a five-year MYGA. That's interest rates. That has nothing to do with your life expectancy or longevity, and nothing to do with payout rates. It is an interest rate-driven product. Some argue that indexed annuities are interest-rate-driven products because of CD-type returns. I need you to be crystal clear about payout and interest rates. Remember, when you're talking payout rates, if that's the language you're using with me, then we're talking about lifetime income. And remember, the annuity category is the only product category that provides a lifetime income stream.
Regardless of how long you live, as long as you're breathing, there's no ROI until you die. People say, "What's the return on that income stream?" I don't know that until you die. And then, at that point in time, I'll come to your funeral, and I announce to everybody at the funeral, "Here is the return on investment on that Immediate Annuity of Deferred Income Annuity. A QLAC or Income Rider that Chester bought for him and Martha." And If you purchased a joint life with Martha and Martha's sitting over there alive, Martha's going to get the continuation of the income stream. So, look at payout rates as pension. You're buying a pension. Do you ever ask about the ROI on your social security? Do you ever ask about the ROI on your pension? If you're a government worker, a union worker, or lucky enough to be with one of the 9% of the private companies in the country that have pensions, no, you never do that. But for whatever reason, on the payout rate side of the annuity, when you're talking about annuities, what's the return on investment?
Annuities Are Contracts
First of all, annuities are not investments; they're contracts. Don't believe me? You'll get a policy in the mail, which is called a contract. They call it a policy, but I call it a contract. You buy it for the contractual guarantees. It's not an investment. You need to get out of the investment mode and say, do I want to transfer risk? Because that's what annuities are. You're transferring the risk to what software? Either Principal Protection, Income for Life Legacy, or Long-Term Care. That's the pill acronym that I use. But we're talking about payout rates; that's lifetime income. The question is, how do you want to structure it? Do you want to structure it on your life? Do you want it to be joint life? Do you want a backstop like joint life with cash refund, joint life with installment refund, or life with 20 years certain? Those are things that we need to talk about.
I want you to make a good decision with the facts on your terms and your timeframe. I want you as a client, but only if it fits and if it's suitable and appropriate. We'll use the least amount of money to solve the contractual guarantee goals you're looking to solve. It's that simple. Annuities are simple, and I make annuities simple. I'm passionate about one thing, do your homework and take your time. There's never an urgency to buy an annuity. The urgency is for you to understand what you're buying entirely.
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.