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How Annuities Transfer Risk

Stan Haithcock
August 8, 2022
How Annuities Transfer Risk

Annuities Are Insurance Policies

Today's topic is a good one. It's about how annuities transfer risk. Annuities are insurance policies. Insurance companies exist to make a profit. That is correct. Annuities are issued by life insurance companies, all annuity types, and yes, life insurance companies are in the business to make a profit. In a capitalistic world, they are trying to make a profit. I always say life insurance companies and annuities companies are the same; they have the big buildings because they know when we will die.

Here's the second statement. On average, your total lifetime payout will be much less if you annuitize your 401k versus investing it yourself and managing it actively. Well, that's kind of apples and oranges. When you annuitize money for a lifetime income stream, annuities are the only product category on the planet that can pay you for the rest of your life as long as you breathe. You could take a 401k asset and annuitize it for lifetime income to combine with the annuity you already own called social security.

But of course, if you managed it in the markets, so you had a money manager helping you, or you did it yourself, the potential for you to do better than an annuity contract. You're accepting the risk to manage the money in the markets. You’re transferring the risk with an annuity contract.

Annuitize, What's the ROI?

Then, what's the return on investment on a lifetime income stream? I don't know that until you die. You either want to transfer that risk and have that income stream coming in for the rest of your life as long as you're breathing or joint life, the rest of your lives as long as each of you is breathing, or you don't. Do it if you want to manage the money for market returns. But you can't compare the two.

'What I want you to put in the back of your head is maybe there's a combination or a percentage or a proportion allocation for you that makes sense that will give you the guarantees you want and still provide that growth opportunity with non-annuities.'

Are They Secure?

Annuities are also only as secure as the financial institution that issues them. In a banking collapse, you can lose, they can lose, but lose your income and assets just as fast as investing in the market. 100% incorrect. Let's give an example. In 2008, the last little hiccup we had, annuity companies did fine. There were real issues with some banks and brokerage firms, but annuity companies are highly regulated. There were no issues. You can't compare investment banks or brokerage banks to annuity companies. Annuity companies must abide by specific rules, and life insurance companies issue fixed annuity companies. They have to have by law 100% of your money on hand and liquid day one in investment grade bonds. I mean, that's just the law. To look at the risk profile of annuity companies and compare it to non-annuity companies, apples and oranges. Period.

If we have high inflation, which is starting to look like a certainty, the purchasing power of your fixed income annuity will rapidly become worthless. Little drastic. Here's the thing about inflation. Nobody knows what inflation's going to be. There’s on the planet, including the annuity world, that properly addresses inflation because no one knows what it will be. Period.

Don't say markets or stocks or ETFs. You don't know what's going to happen with that either. Those can go up and down. Inflation is something that no product can properly address. Now you can use annuities to address inflation by either having laddered start dates of income or at the time you need to solve for an inflation dollar amount for your monthly income floor; you can; an immediate annuity at that specific time. Yes, immediate annuities or some other annuity types have inflation cost of living adjustment increases, but annuity companies don't give those away. They just lower the initial payment when you add that to the policy.

Purchasing Power

I understand the statement, and I understand that the purchasing power of any income stream, whether it’s an annuity, your pension, social security, whatever those income streams are, will be less with inflation or hyperinflation, but don't just throw it all on annuities. Annuities are just like social security in your pension. They're not going to address inflation properly. You're going to have to do that in a myriad of ways. One of the ways is to buy an immediate annuity and reverse engineer the quote to solve for that dollar amount at that specific time you need the payment. But annuities do a better job addressing inflation than all your other choices.

I believe it's better to stay in the market or invest it in other inflation hedge assets. Those assets could be precious metals or crypto, et cetera. If you don't need to transfer risk, you don't need an annuity of any type. Because remember, annuities are contracts. They're transfer of risk contracts that primarily solve for. I’ve got an acronym for it, the acronym's PILL, principle protection, income for life, legacy or long term care, confinement care, but to throw in inflation hedges and throw in crypto, which I have nothing against crypto or the blockchain technology, but boy is that volatile.

If you can manage your own money, if you have a professional that's good at managing your own money, you don’t need an annuity of any type. I'll be the first one to say that. For do-it-yourselfers, it's easy to disparage contractual guarantees in a raging bull market.

See, I've been around the block. I used to work for Dean Whitter, Morgan Stanley Payne Weber, and UBS. I've seen markets go down. I'm that old. Markets will go down again. Everybody's got a little bit of selective memory since 2008. In 2008, everyone said, "I'm never, ever going to forget this, Stan. This has left a scar." The same people are leveraging themselves to the hill to get in the market, and they might be right. The markets may go up forever, but I don't think so. To make that comparison, you should never look at annuities for inflation; just buy the crypto and the stocks and buy that all, again, apples and oranges. Annuities are contracts. They transfer risk contracts, and you cannot compare a contract to an actively managed investment. That's just common sense.

The Annuity Combo

Some people say you can either manage your money or you put in annuities. What I'm saying is there's a combination. I have futures traders and commodities traders with single premium immediate annuity lifetime income streams as the income floor, and then they invest the risk and be risky. There’s a place in your portfolio for risk and transfer risk. I think you're probably nodding your head. It's not all or nothing.

There are many people out there, the 10,000 baby boomers that are hitting 65 every day; many don't want to manage the money. They agree with these statements that the managed money would do better than an annuity contract. I mean, that's common sense. But many people in chapter two of their lives, which is about lifestyle, which is about them, which is about them enjoying their life, there's no U-Haul behind hearses. They don't want to track it. For those people, transferring the risk make sense, but it doesn't make sense for everybody.

Annuities are not one size fits all. Market products are not one size fits all. What I want you to put in the back of your head is maybe there's a combination or a percentage or a proportion allocation for you that makes sense that will give you the guarantees you want and still provide that growth opportunity with non-annuities.

I think if you ask me, what's the biggest thing I bring to the table as Stan the Annuity Man, America's annuity agent®, license all 50 states, the top agent out here, it's because I've sat on the other side of the table with Dean Whitter, Morgan Stanley, and UBS. I understand the growth part from a Wall Street standpoint, but I also understand the contractual guarantee standpoint from a transfer of risk standpoint. When you talk to me, you're going to find out that you can't be all in with annuities. You might not need an annuity, but annuities from a transfer of risk standpoint, and once again, either solving for principal protection, income for life, legacy or long-term care, or confinement care, can be a good fit in combination with those growth non-annuity assets.

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.

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