MYGA 2 SPIA Income Strategies: Shootin' It Straight with Stan®
The topic of today is MYGA 2 SPIA income strategies. MYGA, Multi-Year Guarantee Annuity, 2 SPIA, Single Premium Immediate Annuity, income strategies. Let's talk about commissions first. All annuity types, Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, Indexed Annuities, Variable Annuities, whatever. All of those commissions are built into the policy, hidden from the client, and paid from the reserves of the annuity company so that you don't see them on your statement. In other words, if you buy a $100,000 annuity of any type, you're going to see $100,000 on your statement go to work for you.
Now, did the agent get paid? Absolutely. Do I get paid? Absolutely. Am I a capitalist? Absolutely. But commissions don't drive the train with my recommendations, and that's important because most agents out there, I'm finding, commissions do drive the train. They're selling the highest commission product on the planet so I always ask people two questions every single time I talk to them. Number one, what do you want the money to contractually do? Number two, when do you want those contractual guarantees to start?
Will Do, Not Might Do®
Now, remember, my whole saying is you own an annuity for what it will do, not what it might do®. The will do® is the contractual guarantees and the might do is the hypothetical, theoretical, back tested, hopeful, projected, unicorns chasing the darn butterflies stuff you see out there. You never buy an annuity for that, you buy it for the contractual guarantee. Going back to the two questions, if your answer to your first question was, I would like lifetime income. The second question, when do you want that lifetime income to start, and you say, "I don't know, three years, five years, seven years, 10 years, whatever that number is down the road." Once you say that, we're down to two products, two products that are packaged products that will achieve that, meaning you buy them right now and then at a future date, to the penny what that contractually guaranteed income's going to be.
DIAs and Income Riders
Those two products are Deferred Income Annuities, which is in essence an Immediate Annuity that you deferred: no moving parts, no annual fees, no market attachments, et cetera. The second way to do it is an Income Rider attached to an Indexed Annuity or a Variable Annuity typically. Historically, Indexed Annuity Income Riders, if you attach it, you know what the future income stream is going to be. But historically, those Income Riders on Fixed Indexed Annuities are contractually higher than Variable Annuities. I have nothing against Variable Annuities. I don't sell Variable Annuities. I don't sell anything that has the potential to go down in value. The other reason is that the attached riders typically are not competitive.
Those are the two products. You say, "Okay, should I buy a Deferred Income Annuity, or should I buy an Income Rider attached to an Indexed Annuity, in this case?” Let's go through the negatives of each. If you bought a Deferred Income Annuity with income starting at a future date, you know to the penny what it's going to be. You can buy it in an IRA, non-IRA, Roth IRA, whatever, and that's going to determine the taxation of the income stream. But the negative part of that is when you buy a Deferred Income Annuity now, number one is there's no growth or trackable interest rate on that Deferred Income Annuity.
What's the Downside?
For example, you said, "Okay. In four years I want a lifetime income stream. I'm going to put a $100,000 in," and you die in a fiery Lear jet crash in year two. If it's structured properly, then 100% of that money's going to go to your beneficiaries, but it's going to be $100,000. In other words, there's not going to be any accrued interest. Now, the annuity companies, the longer you allow them to hold onto the money, the higher the payment's going to be but, for a lot of people, that's a downside.
The other potential downside is when you buy a Deferred Income Annuity the annuity company, they're locking in current interest rates and current payout rates right now, for it to happen four years from now. But don't think that you shouldn't buy one now and wait in the future because annuity companies, they're going to price it so that there's no anomaly or sweet spot or arbitrage that you can take advantage of. Really the negative to Deferred Income Annuity is that it's an irrevocable choice and you don't have any trackable interest.
I just ran one today for a gentleman and we did a MYGA 2 SPIA comparison. It was pretty much the same and he decided to go with a Deferred Income Annuity. That's one way to do what I call income later®. Remember, you answer the two questions, what do you want the money to contractually do and when do you want those contractual guarantees to start? “I want income and I want income later.” Then the other product that's out there that every single jack wagon agent at the bad chicken dinner seminar is going to jam down your throat is an Indexed Annuity with an Income Rider. Nothing wrong with that. We sell more than anybody when it's appropriate, and people understand that Indexed Annuities are CD products and when you attach an Income Rider the Indexed Annuity is nothing more than a delivery system for the income guarantee period.
Down to the Penny
Once again, you know what the future income stream's going to be to the penny, and looking at that product if you draw a line down a blank sheet of paper, the left-hand side of that paper is the index option side, the right-hand side is the Income Rider amount, and two separate calculations and the Income Rider amount always is going to be higher so that you have to stay in the policy to use those benefits. Now, the negative to attaching an Income Rider to an Indexed Annuity for future income needs is there is a fee for that Income Rider that's taken out of the accumulation value for the life of the policy. That fee is going to be taken out for the life of the policy. Doesn't make it bad but you must understand that.
A lot of people come to me and say, "Stan the Annuity Man®, I don't want to pay any fees and I'm not sure I want to lock in annuitization rates right now." Remember, when you get lifetime income from any type of a lifetime income stream annuity, (QLAC’s, SPIA's, DIA’s, Income Riders) the income stream is a combination of return of principle plus interest based on your life expectancy at the time you take the payment. But a lot of people look at riders and say, "I don't want to pay the fee."
What's the Boglehead type approach to lifetime income? In my opinion, the best way to do it is by a Multi-Year Guaranteed Annuity. MYGA is the annuity industry's version of a CD, it's nothing more than that. Don't make it more complicated than that, please don't overanalyze it. There are no market attachments. There are no annual fees. You get a specific guaranteed interest rate for a time that you choose. If you go to my site at theannuityman.com, you can pull up a live MYGA feed of the best-fixed rates for your state. There are two drop downs. You have to click, your state and the duration you're interested in.
But the good part about this is that you know what the guaranteed interest rate's going to be. You say, "Why wouldn't I do an Indexed Annuity like my brother-in-law wants me to do?" Nothing against Index Annuities. These are CD products as well but there's no guarantee on what you're going to get. With MYGAs right now at these current rates, they're going to outperform the vast majority of Index Annuities.
Again, do you want to own an annuity for what it might do? No. You want to own an annuity for what it will do. With the MYGA 2 SPIA strategy, you're saying, "Okay, I want income in five years. I'm going to buy a five-year MYGA. I know exactly what my guaranteed interest rate's going to be because it functions like a CD. I can buy it at a Roth, a regular IRA, or a non-qualified account. I can buy it at any account possible.”
If it's in a non-qualified account, a non-IRA account, that interest grows tax-deferred, but at the end of the five-year term, then we go shop all Single Premium Immediate Annuity companies, for the highest contractual guarantee on the planet, and we do a transfer non-taxable event, transfer from the MYGA to the SPIA. Now, what have you done? You have got a guaranteed interest rate, you've paid no annual fees, and then you're going to shop for the highest guaranteed Single Premium Immediate Annuity payout at the time you need income.
“Why does that make sense, Stan?” Good question. Think about this right now. We all are like, "Well, interest rates might move, interest rates might not move, but I don't want to miss the move, Stan the Annuity Man." Remember, the Immediate Annuity lifetime income price is a combination of return of principle plus interest, and your life expectancy drives the pricing train. However, if interest rates do move significantly that will move the needle a little bit so the MYGA 2 SPIA strategy is somewhat of a no-brainer because, number one, you're stripping out fees for the life of the policy. You're not going to pay any fees and at the time the MYGA matures, then we're shopping all carriers at that time for the best Single Premium Immediate Annuity rates and doing a non-taxable event transfer, so the cost basis transfers to the Immediate Annuity and it's a MYGA 2 SPIA panacea.
No one is going to talk to you about MYGA 2 SPIA income strategies because the commissions are so low. Just remember this, if the commissions are low, it's pretty good for you. I always say, if you can't explain it to a nine-year-old then don't buy it, so let's explain it to the nine-year-old. "Hey, nine-year-old, here's what it is. You're going to buy a Fixed Rate Annuity, meaning that you're going to give the annuity company money. They're going to pay you a guaranteed contractual interest rate every single year and that's going to compound for the duration that you choose, understand?" "Yes, we do. We do, Stan. We understand what you're saying." "Okay then, nine-year-old. After that, we're going to shop for a lifetime income stream because annuities are the only product that's going to pay you as long as you're breathing for the highest contractual guaranteed lifetime income stream at that time." Now, understand we are going to shop those carriers for Immediate Annuities with the structure that you want. If it's life only, great. If it's life with cash refund, life with installment refund, life with period certain, or period certain, we're going to shop for the highest contractual guarantees.
You can structure it so that 100% of the money is going to be paid. As long as you're breathing, if it's joint with a spouse or loved one, as long as one of you is breathing and when you die we can structure it so that 100% of any unused money goes to a list of beneficiaries of the policy, and the evil annuity company doesn't keep a penny.
There really are three ways to do income later. Deferred Income Annuity, great product, no annual fees, no moving parts. It's a pension. Number two, Income Rider attached to an Indexed Annuity. That's fine too. Once you do that, the indexed annuity is nothing more than a delivery system for the income rider and we're going to quote both of those DIAs and Income Riders for the highest contractual guarantee and I'm going to explain the good and the bad, the limitations and the benefits. The last one is pro-consumer, and nobody but me is talking about this. MYGA 2 SPIA. You fully control the asset.
Let's just say on the example I gave that the person needs income in five years, we buy a five-year MYGA with the understanding in five years we're going to shop for Immediate Annuities. Let's say we get to that five-year time period, and they say, "You know what, Stan the Annuity Man, I changed my mind. I don't want lifetime income, send me the money back in full or send it back to the account it came from." We can do that. Isn't that good? Don't you like controlling your money? Nod your head. One strategy that you haven't heard, and you will never hear at the bad chicken dinner seminar, expensive steak dinner seminar, the person that comes to your workplace and talks about annuities, you're never going to hear it because it's pro-consumer and it is low commission.
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.