The Perfect Annuity Formula
What's the annuity formula? What's the present value? What's the future value? How do we do the formula to calculate the present value? You're making it too complicated, Chester. I’ll strip it down and tell you the annuity formulas that make sense and the only ones you need to. It doesn't have to be complex when discussing annuity formulas.
Do You Need an Annuity?
First of all, do you even need an annuity? There are two questions you need to ask and answer. First, what do you want the money to do contractually? And when do you want those contractual guarantees to start? Keyword contractual. The other proprietary annuity formula I have come up with is the acronym PILL. P stands for principal protection. I stand for income for life. L stands for legacy. And the other L stands for long-term care or confinement care. You do not need an annuity. You do not need an annuity if you don’t need to solve one of those four items in the PILL, principal protection, income for life, legacy, long-term care, or confinement care.
Annuities Are Contracts
How about that formula? That's the formula. Annuities are contracts. They're transfer of risk contracts. Currently, most people who call me need to solve for principal protection or income for life. What are the two primary ones of the PILL that people were talking about? Here's a talk about the formula for principal protection. There are two types of annuities for principal protection. Multi-Year Guarantee Annuities have no moving parts, annual fees, and no market attachments. It's a guaranteed interest rate for a specific period. I have a live rate feed; if you’re interested.
Fixed Index Annuities
Here's another formula for principal protection, Fixed Index Annuities. They're not market products; they’re CD-type products. Protect your principle. That's the formula for principal protection, MYGAs, and indexed annuities. Let's talk about the formula for lifetime income products, Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and income riders that can be attached to, say, MYGAs or index annuities. Income riders are attachments for a lifetime income. Anytime you look at these lifetime income products, let me do it again. SPIAs, DIAs, QLACs, income riders, the formula is the older you are, the higher the payment. The formula is the longer you wait, the higher the payment because you're older, which means your life expectancy's less, which means that there are fewer payments, which means that the payments are higher.
The formula is similar to your social security decision. So what's the annuity formula for social security? Oh, by the way, annuity hypocrites, it is an annuity, social security. So what's the annuity formula for social security that correlates with all other lifetime income products? The annuity formula is the older you are, the higher the payment. "Hey, Stan, if I take income at 65, it's going to be lower than if I take income at age 70, with my social security annuity." You're right, Chester. Why? Because you're older. Life expectancy. Remember, mortality credits. That's what we're talking about. When it comes to annuity formulas unless you're a math professor that enjoys it, the rest of us, annuity formulas come down to the highest contractual guarantee for your specific situation.
People often get caught up in the indexed annuity sales pitch, on caps and spreads and participation rates, and the formulas to determine the potential gains with those products. Just remember, index annuities were put on the planet in 1995 to compete with CD, normal CD type returns, MYGA, which is a CD type of the annuity world. Those types of returns, two to four percent.
Now at the time of this taping, look at the day, there are over 700 index option formulas to look at, and there are over 55 indexes and indices to choose from. The index annuity company carrier that issues the index annuity that you bought on the hopes and dreams and the unicorns chasing the butterfly returns that the guy at the bad chicken dinner seminar promised can change how those are calculated at their discretion. I'm not putting down the index annuities. We love them. We use them as efficient delivery systems for income riders, future income guarantees, or accumulation products that get CD-type returns. If you don't attach an income rider, index annuities have no fees.
But when we talk about formulas, those are the formulas, and most annuity agents can't explain an index annuity formula. I've written a book on it. We go through the formulas if you want to see the formula. But don't get caught up on that. Don't be so analytical. When buying annuities, regardless of the type, you're transferring the risk; remember to solve for four things, principal protection, income for life, legacy, long-term care, or confinement care of the PILL. Remember that acronym? That's the formula.
Market Value Adjustments (MVA)
Let's talk about one more formula you might want to know about. I mean, the formula thing does drive me crazy, but market value adjustment, MVA. You might see that on your index annuity or your Multi-Year Guarantee Annuity. As my CEO says, she's smart, "It doesn't apply unless you cash it out during the surrender charge time period." Let me repeat that from a very smart person. If you buy a Multi-Year Guarantee Annuity, and it's a five-year guarantee, if you don't cash in that Multi-Year Guarantee Annuity during those five years, then the market value adjustment doesn't apply. And, yes, I just hit the podium with my hand, and my hand hurts.
Let's say that again. If you buy an index annuity or a Multi-Year Guarantee Annuity and have a specific surrender charge time period, the market value adjustment does not apply if you hold it to the term; it’s just that simple. Let's just say, you pivot. You buy a ten-year Multi-Year Guarantee Annuity. And at year five, you say, "I'm tired of this. I want to go buy a boat; send me my money." And your Multi-Year Guarantee Annuity has a market value adjustment. Remember that your surrender charges will rise if interest rates rise after you purchase the Multi-Year Guarantee Annuity. The same applies if interest rates go down; okay, after you purchase the Multi-Year Guarantee Annuity, your surrender charges go down.
But once again, it doesn't apply if you hold it to term. So there's no reason to run the market value adjustment formula if you want to hold it to term. Most of the time, you're going to hold it to term because we put it in your portfolio proportionately, and allocated it properly. So don't get caught up in annuity formulas and these people trying to act smarter than they are. You're buying annuities for the contractual guarantees. You're buying the annuity to transfer risk for principal protection, income for life, legacy, long-term care, or confinement care. It's just that simple.
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.