Payout Rates vs Interest Rates: Shootin' It Straight with Stan®
Breaking Down and Separating Rates
Today's topic is payout rates versus interest rates. This is a big one. I recently did a talk on this to a large audience, and I thought I would bring it to you on my Shooting it Straight with Stan videos so you can hear it. There's a lot of confusion on this in the annuity world, payout rate, interest rate. Hey Stan, what's the payout rate? Hey Stan, what's the interest rate? Two separate questions. They're not the same thing.
When you ask, what is the interest rate? Then my brain is going to go where it should go, which is Multi-Year Guarantee Annuities, which is the annuity industries version of a CD by three years or two years, five-year, four-year, you lock in a guaranteed interest rate that's going to happen every single year, and after that duration, you can get all your money back, or you can transfer it to another MYGA.
It sounds eerily similar to a CD because that's how it works. The only difference is in a non-qualified non-IRA account; the interest rate grows and compounds tax-deferred. That's the interest rate. Payout rates a whole different animal. Some of the people on the Internet that try to, and it's sad to watch them try to compete with me, they'll throw up stuff like 6.7, payout rate, 6.7, 5.3, 7.2. You're like, "Oh, that's great. Look at that, Martha; we can get 7 percent interest." No, player.
The payout rate has to do with life expectancy. We're talking about a lifetime income product, Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and income riders. Those are transfers of risk lifetime income products that have a payout rate. Some sites are trying to get aggressive, 6.7 percent.
What they're talking about, and you've had to be smarter than to believe, well, that's 6.7 percent, that's great, and 2 percent interest rate, well, that's great. No, it's not great; it’s not real. The 6.7 or 7.2 or those high percentage numbers you're seeing is a payout rate primarily based on your life expectancy, i.e., mortality credits at the time you make the payment; the older you are, the higher the payment. Sounds familiar? Nod your head. Social security, anyone? Of course.
Social security, the older you are, the higher the payment; still, little payments on social security are higher at 70, or would they be higher at 65 or 70? Should I make the payments at 70 or 65? Well, no good answer. Just about sales pitches. Suppose you take them at 65, great. You're going to get less guaranteed income. But if you wait until 70, you have to factor in the 60 months of payments that you miss if you took them at 65, and how long will it take to make up for that?
Payout Rates vs Interest Rates
When we talk about payout rates and interest rates, I've got just to stop the nonsense; remember the girl on the TV ads a long time ago that had a cashier like a white Mohawks you like, stopping insanity, and she was selling some diet product. All the older people know who I'm talking about, but I'm trying to stop the insanity. Payout rates have to do with life expectancy. The income you're getting is a combination of the return of principal plus interest.
Now, that percentage is the payout rate. When we run quotes like, for instance, on our income writer, some of our income writers quotes that I send out personally to people when they talked to me and scheduled a call at Stan The Annuity Man®, at the annuity man®.
You can type in either, I guess; yeah, you can get there, and it'll show 5.3 percent. Then beside it, it'll show the actual monthly income number. I always tell people this doesn’t look at the percentage; looked at the monthly income number. With any of this, look at the contractual guarantee. What's the contractual guarantee if you're getting lifetime income, whether it's starting right now, a year from now, six months from now, seven years from now, five years from now,11 years from now, communal life, single life, it doesn't matter. Look at the guaranteed lifetime income monthly amount that you're getting. Forget all the other stuff. Forget the bonus, forget the payout rate percentage, forget it all.
Another thing people said, "Well, do you say what the interest rate on that payout rate is? What's that portion of that interest rate?" Well, it will reflect the ten-year treasury in most cases. Depending on when you're watching this, if you're watching the future, like Back to the Future and you're watching the future and say, and who is that, dude? This is like 2042, talking about payout rates versus interest rates. By the way, in 2042, it will still be relevant. It'll still be timely. It will still make sense.
But when people asked me, "Well, okay, Stan, payout rates a combination of return a principal plus interest. I need to see if I can time that interest rate and make sure that I'm maximizing the interest rate." Good luck, Gecko. It isn’t going to happen. As I say all the time, you can't time this; you can't beat the annuity companies. I know you're saying, "Oh yes, I can, Stan. I've been beating the markets for years. I've been Gordon Gekko in this thing." Yeah, but once you cross over the line and go into the annuity world, you're now into a contractually guaranteed line.
Payout rates and interest rates, both of them, you can't take time. For both of them, there's no arbitrage. Both of them, there's no sweet spot, period. With payout rates, LDRs are the payment. Now, it was like, "Well, okay, Stan. I'm going to break you down a little bit, player. If interest rates, your treasure was at 5 or 6 percent, would my payout be higher?" Little bit. But if you try to time it and wait for that, you've got to factor in all the payments you missed while trying to time it.
Annuity companies price lifetime income, especially for future lifetime income, what I call income later®, they price it so the longer that you allow them to hold onto your money, as it's differing as you're waiting to turn on the lifetime income stream, that means to increase the payments. By the way, I can say that I'm from Stanley, North Carolina. Look it up.
You can't time it; you can't time interest rates; you can't time payout rates. But I want you to go away and walk away with coffee in hand and say that it was a refreshingly invigorating video that Stan clarified things on payout rates versus interest rates. With interest rates, we were talking about Multi-Year Guarantee Annuities. That's the primary thing we're talking about. Yes, they do play a role in the payout rates. But the payout rates are primarily the train driven by your life expectancy or life expectancies, plural if it's joined when you make the payment.
Whereas Tommy Hagman says, my boy, Tommy Hagman, mortality credits, the pooling of risk with all the people of the same age range. Payout rates and interest rates with annuities are two separate animals, apples and oranges. Don't get confused. What are the current rates? Almost like, what rates are you talking about? You're talking about interest rates. Are you talking about payout rates? Because if you're talking about interest rates and protecting the principal, getting an interest rate off of that, and never touching the principal, nod your head.
Are you talking about lifetime income? We're talking about payout rates. What's the payout rate? What's going to be higher? If you're older, you have less life expectancy, which means fewer projected payments, which means higher payments. But it doesn't matter because you're transferring the rest of the annuity company to pay you.
The bottom line is when you cross over into the Rubicon of annuities and remember there's not just one annuity. You already have two; you have social security, which is the best inflation annuity. You're like Stan; I’ve heard you before. I'm going to give you another one. It's called a Forced annuity F- O-R-C-E-D. "What's that, Stan? Forced annuity? I have two?" RMDs on your IRA on your qualified accounts at the time of this taping at 872, the IRS goes, hey, we want our money. We want our money every year. Whether you want it, we will force you to take out money and pay us taxes. That's a forced annuity.
You already own two annuities. Do you need more? I don't know, but give me a call and let’s find out.
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.