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Best Way to Use an Annuity at Retirement
I'm Stan, The Annuity Man, America's annuity agent. Have you ever asked yourself, "Do I even need an annuity?" That's a great question. You might or you might not, but I'm going to cover today what's the best type of annuity for retirement. Let's get to that question and find out if an annuity fits your specific situation or not.
Do You Need an Annuity?
The best way to use an annuity, if needed, is at retirement. I have an easy to understand and remember acronym called PILL. P stands for Principal protection, I stands for Income for life, L stands for Legacy, and the other L stands for Long-term care. I'll do it again. Principal protection, Income for life, Legacy, and Long-term care. If you do not need to contractually solve for one or more of those four, then you don't need an annuity. Pretty simple, right?
The other two questions I have people ask are, "What do you want the money to contractually do, and when do you want those contractual guarantees to start?" Never buy annuity proposals that are back-tested, projected, hopeful, and agent return scenarios. Those never come true. Those juice numbers never come true. Don't buy the dream because you're going to own the contractual reality because annuities are contracts; they're not investments. Don't believe me? Buy one, and you're going to receive a contract in the mail.
What Are You Trying to Solve?
So, at retirement, you need to ask yourself what you are trying to solve. If you don't need income, it might be principal protection, or you might need supplemental-type long-term care coverage, or you might want to set up some legacy annuities for your beneficiaries. Those might be what you need to do. If you're looking for market growth in retirement, which is fine, if that's your goal, please don't buy annuities. Annuities weren't put on the planet for that. They were put on the planet in Roman times to create lifetime income streams for the dutiful Roman soldiers and their families.
Now you might be saying, but wait a minute, Stan, I went to the bad chicken dinner seminar. Actually, it was a really good steak dinner seminar where they served me this delicious steak, which by the way, stop for a second. You have to ask yourself, "How much were those commissions being paid on that product?" And they're talking about market growth and market upside with no downside and all this stuff. All I'm telling you is, typically, that's an Indexed Annuity pitch. I have nothing against Indexed Annuities. They're good products when they're fully understood and used in the proper manner. But Fixed Indexed Annuities were put on the planet in 1995 to compete with CD returns. If it sounds too good to be true with annuities, it is every time without exception. Don't be the rube at the table. Don't believe some of these sales pitches trying to get you across the finish line so this person can make a large commission.
Let's dig a little bit further. The best way is to use annuities at retirement, during or at retirement, or pre-retirement. Let's go through that PILL analogy again and apply some actual products and examples.
Breaking Down P.I.L.L
P stands for principal protection, remember? The principal protection products out there are Multi-Year Guarantee Annuities, which are actually Fixed-Rate Annuities, the annuity industry's version of a CD, and then you have Fixed Indexed Annuities, which are also CD-type products, both fully protected principal, no market downside, which is a good thing, but CD-type returns.
The I is income for life, which is, most annuities put on the planet were put on the planet for income. During the Roman times, for income for the Roman soldiers, that's where Immediate Annuities started. So, depending on when you want the start date to happen, remember, "What do I want the money to contractually do, and when do I want those contractual guarantees to happen?" If you want income to start now, that's an Immediate Annuity. If you want income to start later, you can do a Deferred Income Annuity, a Qualified Longevity Annuity Contract inside your IRA, or Income Riders. But all of those are primarily based on life expectancy at the time you take the payment. That's what the payment levels are based on. Interest rates play a secondary role. So that's the I part.
L is for legacy, for people that can't get life insurance. Life insurance is still the best legacy product on the planet. I always tell people, life insurance is the best return on investment you'll never see. Why? Because you're dead. It's a great product, but I don't sell it. I have a bunch on Stan The Annuity Man, so my wife is going to be very happy when my Learjet hits the mountain. But some products in the annuity world are guaranteed issue. You don't have to take the test, the blood test, the nurse, or everything else. This is a guaranteed issue, and it's a rider. It's an attachment to a policy that grows for a death benefit. The difference is with life insurance, that death benefit goes tax-free to the beneficiaries. With annuities, it is taxable. So that's the L for legacy.
And then long-term care is the other L. Traditional long care is still the best product out there. It really is, regardless of what you're being told. There are not many carriers doing it anymore because of all the healthcare stuff politically, but some annuities solve for long-term care or what's called confinement care, which means when you get sicker, you get more money. You get your money back quicker. I always say in the South, we always have these rhymes. So, these confinement care riders are, if you get sicker, you get your money back quicker.
So principal protection, income for life, legacy, and long-term care. At retirement, you need to decide which one, if any, you need to contractually solve for. If you need to contractually solve for one or more of those, schedule a call with us, and we can run those quotes for you and quote all carriers. Or you might say, "You know what? That PILL thing's great, Stan, but I really don't need an annuity based on those descriptions." That's okay, too.
Story Time
True story, a guy called me recently, and he's at the finish line. If you take a track analogy, we've all tried to run the mile, the four laps around the football field, he was at three and a half. He's right there at retirement, so he's worried about the markets. The markets were going straight up, and he was just worried about market volatility. He's at the finish line. So, I said, "Hey, you're at the principal preservation stage of your life." Many of you are out there going, "Yeah, I am too. I'm really scared that I'm up here in the market, and if there's a dip or an event, it goes down here." I hear you; I really do.
There's no perfect answer. I told him that five places on the planet fully protect his principal. I know some advisors and people out there will disagree with me because they're selling something, but truly this is the truth, even for the tinfoil-hat people out there. Number one, money market, number two, CDs, number three, AAA municipal bonds, number four, treasuries, and number five, Fixed Annuities. Those are the five categories in the principal preservation stage that you need to look at. I'm not sure an annuity fits for this person. He really didn't need income, so I said, "You need to look at Fixed Rate Annuities, which are Multi-Year Guarantee Annuities, or Fixed Index Annuities, which are both CD products; both protect the principle. But I also told them, "Look at all the others, as well, treasuries, municipal bonds, money markets, and CDs, for principal protection because those are the five safest places to put your money."
But again, there are no perfect answers, just bad sales pitches. And always remember, you can't have your cake and eat it, too. There's just not that perfect product out there. You have to be very specific about what you want to solve for and the goal that you want to contractually solve for, and then we can match you up with the right annuity that fits that goal, or I will tell you that there is an annuity that does not fit that goal.
So, you made it. I would encourage you to look at this video, as well, Annuities as Part of Your Retirement Portfolio, in which I dig deeper into some of the percentages and some of the things that I see people do as well as best practices in correlation with this blog that will probably work. But I would advise you to subscribe to our YouTube channel because I'm putting out a video every single day.
In addition, feel free to book a call with us, and we can get you quotes. We will treat you like a professional. We will not be a pest, and we will not be persistent. We will inform you, educate you, give you the best quotes on the planet, and then leave you alone to make a decision on your terms and on your timeframe, just like it should be. So, with that, I'll see you next time.
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.