Michael Finke: Why Annuities Make Sense Right Now (TAM Classic)

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welcome to fun with the nties where

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it welcome to fun with the anties I'm

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your host danan the nity man America's

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want to welcome every single person on

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man sweatshirt that's been

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tie-dyed just incredible the fashion

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statements that I make every single day

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and then over one shoulder you see four

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Flying V Gibson guitars which is the

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reason is it's it's uh it's kind of me

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saying we're getting ready to rock and

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roll and when I say that I have a rock

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star on with me today a repeat guest

1:06
host I I mean every time I'm looking

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something up on annuities I see an

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article he's come up with and um you

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know uh as I say I've got a new saying

1:16
for him if it's time to do some annuity

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thinka let's bring in Rockstar Michael

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thinka hey man how are you I'm good how

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are you Stan where's my swag I I know

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want a tie dyed Stan the anity Man

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t-shirt the question is before we get

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started is if I put that up on eBay how

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much would it

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fetch uh yeah I'm thinking thousands I'm

1:43
thinking there would be an absolute

1:44
bidding war right right well there's two

1:47
people that bid on it first people that

1:49
actually like the brand and those are

1:51
consumers and then you'd have a bunch of

1:53
agents that would bid it and then burn

1:55
it like have a

1:58
ceremony

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and that's okay that's okay good to talk

2:02
to you again Stan as always thanks man

2:05
tell me what's new with you Michael faer

2:07
what are you looking at other than the

2:10
conundrum that we're in of large debt

2:13
Rising rates and a retirement semi

2:16
crisis yeah well so let's not start on

2:19
that negative foot let's let's move to a

2:21
more positive aspect of what's going on

2:23
in this crazy market and that is that

2:26
near retirees can lock in 5 . 2% on

2:31
migas on fiveyear migas for the next

2:33
five years at the time of this taping at

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the time of this taping U you may go up

2:39
may go down now let's talk a little bit

2:41
about interest rates because I think

2:42
yeah let's do that uh if you look at

2:46
what's known as the yield curve which is

2:49
the interest rates that you get for

2:50
investing in two years and five years

2:53
and 10year bonds what you see is that

2:56
the market thinks that these high

2:57
interest rates are not going to last

2:59
forever there's what's known as an

3:01
inverted yield curve on bonds corre so

3:03
what that means is that once you go 10

3:05
years out markets actually think that it

3:07
the interest rates are going to be lower

3:09
than they are for the next two years

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yeah um and this presents a conundrum I

3:14
think for a lot of investors right now

3:15
which is it seems like we've been

3:17
waiting forever to get high rates of

3:20
return on safe

3:22
Investments and as we know annuities are

3:25
a very efficient wrapper for safe

3:28
Investments because safe Investments are

3:31
very tax inefficient so your bond your

3:34
CD Investments they get whacked that

3:37
your tax at your ordinary income rate

3:40
State Plus Federal so for some people

3:43
you know if you live in California that

3:44
can be 50% uh of all of your gains

3:47
you're paying in the form of

3:49
Taxation but if you house them within an

3:52
annuity you're not taxed on the gains

3:54
every year now when annuities were maybe

3:56
2% that was no not a huge deal but when

3:59
they're when they're 5% that all of a

4:02
sudden becomes a bigger deal so if you

4:04
put in $500,000 and you're making

4:07
$26,000 of interest on it um that's a

4:10
significant amount of tax savings that

4:12
you can get over the course of a

4:14
fiveyear Time Horizon I mean that's

4:15
that's over 1225 $130,000 in interest

4:18
that you can expect to earn and then at

4:21
retirement so this is the play that I

4:23
think a lot of people are not giving

4:25
enough thought to if you're 62 63 you're

4:29
the peak of the baby boom right now

4:31
you're planning on retiring between 65

4:34
and 67 you buy one of these things you

4:37
pull the money out after five years

4:39
you're in a lower marginal tax bracket

4:43
uh than you were today and you the

4:46
interest may or may not be enough to

4:48
push you up into a higher marginal tax

4:50
bracket if that's the case you can roll

4:51
over part of it into another type of

4:53
annuity you can be very strategic about

4:55
your tax planning in a way that you

4:57
can't be if you're saving is not within

5:00
the annuity structure so you know a lot

5:02
of us are thinking also of locking in

5:06
those High rates on future income so

5:09
again if you're 55 60 years old right

5:13
now and I just had a conversation with a

5:14
friend of mine who works for a big

5:16
brokerage company and he gets these

5:18
quotes in on annuities every day um and

5:21
he's a smart guy like he understands the

5:23
benefit of annuities and we're both like

5:26
you know he's a little bit older than I

5:28
am and he's thinking I need to just take

5:30
money and buy one of these things like a

5:32
10-year deferred so that I can get 10

5:35
years of deferral at a really shockingly

5:38
high interest rate correct and that'll

5:40
buy me a very high income in the future

5:43
so if I can you know a great example of

5:45
this is like QX QX is so inra sensitive

5:48
that it used to be that

5:50
$145,000 might buy you 35 or $440,000 of

5:53
income now it'll buy you $50,000 of Inc

5:55
at the age of 85 that's right all of a

5:57
sudden it's like I can buy future

6:01
lifestyle pretty easily and uh it's it's

6:04
we're in a situation today where it's

6:06
far more attractive than it was a year

6:07
ago and we just don't know where rates

6:09
are going I mean it it it's looking like

6:13
the FED is potentially going to inrease

6:16
increase rates none of us know exactly

6:18
what's going to happen in the future but

6:20
there is also this possibility that

6:24
we're going to enter into some kind of a

6:25
recession the FED is going to very

6:28
quickly start pulling back on those

6:29
rates because it's going to it's seeing

6:31
that the economy is starting to cool

6:33
significantly sure in which case locking

6:35
yourself into today's high rates I mean

6:37
it's possible they could go up a little

6:39
bit but it's also possible that they

6:40
could go down the bill do ring at the

6:43
top the bill didn't ring at the top man

6:45
you and you know how quickly those

6:47
things get repriced sure you know once

6:49
things start falling then insurance

6:52
companies are very aggressive about

6:54
raining in some of the generosity uh if

6:57
interest rates start going down so

7:00
that's and I think that probably right

7:01
now the biggest story for me is that tax

7:05
deferral benefit that you get from an

7:06
annuity that you don't get from CDs and

7:09
a lot of people are feeling like I don't

7:11
want to deal with all this Market

7:12
volatility I want safety but the thing

7:14
that you have to remember about safety

7:16
in a high interest rate environment is

7:18
that you pay for it you pay for it in

7:20
the form of higher income taxes so

7:22
you've got to give some thought to using

7:24
an annuity I think the annuity rapper on

7:26
safe Investments the single most under

7:29
used strategy in financial planning

7:32
today sure that's because people when

7:33
they they hear the word annuity they

7:35
think it's one product they don't know

7:37
that there's multiple products and so

7:41
there's High fees you know and then that

7:43
on a multi guaranteed annuity it is what

7:45
it is like you get your 5.2% there's no

7:48
extra fees on top of that right right

7:50
and um you know I'm a big proponent of

7:53
what I call MGA to spia I did this video

7:55
on it that kind of went viral that's

7:57
that you know let's strip out all the

7:59
fees you have control over the asset you

8:01
can pivot at the end of the duration or

8:03
you can transfer it and shop for the

8:04
highest contractual guarantees to that

8:06
time with a immediate annuity instead of

8:08
buying a deferred income annuity or an

8:10
income Rider you know a lot of people

8:12
were looking at that the other thing the

8:14
other thing I would tell always tell

8:15
people you know Michael I'm from the

8:17
Deep South so I think differently you

8:19
know if you won the game why are you

8:20
still playing I always tell people yeah

8:22
you know if you got a million dollars or

8:24
$2 million dollar whatever it is

8:25
whatever the money amount of money is

8:26
and you multiply it by five or four if

8:29
you're going to you know pepper it

8:31
around with cs and treasuries and never

8:34
touch the principle can you live off

8:35
that interest it's really that simple

8:37
we're we're at the point now where

8:39
people can actually live off the

8:40
interest is it Jimmy Carter years no but

8:43
we haven't seen this in a long long long

8:46
long time you know so it's a different

8:49
and I think a lot of people are looking

8:51
at at migas multi-year guarantee

8:53
annuities which is the annuity

8:54
Industries version of a CD and they

8:57
never ever heard about it before which

9:00
is

9:00
interesting it is interesting but Stan

9:03
they've become a lot more popular I just

9:04
looked at the sales data in 2022 so far

9:09
those fixed annuities they're dominating

9:11
there half of that was me Michael just

9:13
letting you know um I'm not

9:17
surprised we ton that and we've been

9:19
doing that for a long time uh what

9:21
people have to know is the commissions

9:23
for all annuity types are built in my

9:25
good commissions are just very very very

9:27
low that's the reason the bad chicken

9:28
dinner seminar isn't given on migas

9:31
because they don't have that what else

9:34
is you wrote an article recently about

9:36
wealthy people in annuities I forgot the

9:38
title but I read it and it was pretty

9:40
interesting what drove you there to talk

9:42
about those Rich evil people Michael

9:44
well no what I was actually talking

9:47
about is a new study came out from

9:49
Morning Star and when Morning Star comes

9:51
out with a new study I a lot of people

9:53
pay attention to it and one of the

9:55
things they said was that for uh richer

9:58
people you know udes don't really

10:00
provide that much value and but we got

10:03
to Define Rich what's that mean well I

10:06
mean for them it was you know people

10:08
whose assets are maybe 25 times what

10:11
their income is but that includes Social

10:13
Security more but the thing is the the

10:17
problem that I had is the methodology

10:19
and uh you know just pointed the first

10:21
one out I mean some people think they're

10:23
rich and they have X amount and other

10:25
people would think that's poor you know

10:26
it

10:27
just the custom of it all and the

10:31
question is U you know is what is the

10:34
welfare benefit from and it's it's kind

10:37
of a economist word like how much

10:39
happier do you does it make you is that

10:41
what welfare benefit means because

10:43
that's a horrific phrase it is a

10:45
horrific phrase but it's used by US

10:47
economists all the time you know we

10:48
don't have need to up your game man

10:50
y'all need to bring me in and give you

10:52
southernisms like Southern Saints

10:54
because we would never use the word

10:55
welfare benefit

10:58
man hey you're getting a welfare benefit

11:00
and people like I'm never gonna be on

11:02
welfare my life son let me tell you I'm

11:05
a working man son I mean you gotta you

11:08
got to rethink this

11:10
stuff you are absolutely correct our

11:12
marketing skills are not that great

11:15
horrific but the idea is that that a lot

11:17
of times in financial planning what

11:18
people use are what's known as a failure

11:20
rate analysis they use what Amman Carlo

11:24
and what ammani Carlo does is it gives

11:27
you it spits out this number which is

11:30
the probability of success which means

11:33
it's the probability that you can

11:34
successfully from an Investment

11:36
Portfolio withdraw a certain amount of

11:39
income so let I like Monte Carlo as a

11:42
place and as the race that's kind of

11:45
played out though isn't it all these I

11:47
mean seriously well you know that's why

11:49
economists don't use it is is that it

11:51
gives you information that is not

11:53
complete so what it tells you is let's

11:55
say you've got a million bucks and you

11:57
want to pull out what what's a spia rate

12:00
right now on bad bad question has to do

12:03
with your age you know that that was a

12:05
setup question don't don't do that don't

12:06
even try to play me Michael you know me

12:08
better than that well most econom start

12:10
at like 65 let's so so 65 year old

12:15
male I'd have to run the quote I'd have

12:17
to run the quote pick a number pick a

12:19
pick an arbitary number $660,000 a year

12:22
from a million Bond okay and okay so

12:25
let's let's compare that to an

12:26
Investment Portfolio with stocks and

12:28
bonds and let's say what is the

12:30
probability that you can successfully

12:32
withdraw $60,000 from a portfolio of

12:35
stocks and bonds um and then let's use

12:38
like

12:40
historical stock return data from the

12:42
United States from back during periods

12:44
when stocks really dominated bonds which

12:47
by the way has not happened since

12:49
1990 um here's a stat for you since 19

12:53
since 1990 a dollar in the S&P 500 has

12:58
never grown to more than $7 over 20

13:01
years between 1934 and 1953 a dollar

13:06
never grew to less than

13:08
$7 every single year during that time

13:12
period between 1934 and 1953 $1 never

13:16
grew to less than $7 over the next 20

13:19
years but since 1990 that has never

13:22
happened once so we're using a lot of

13:25
people who use a money Carlo are using

13:27
these data from nice a period where

13:30
stocks really dominated other types of

13:32
Investments and then they project the

13:35
likelihood that you can withdraw $60,000

13:38
from a million dollar portfolio using

13:41
those historical data which are probably

13:42
not relevant going forward um but and

13:46
then it gives you a it spits out well

13:47
there's a an 80% probability of success

13:51
what does that mean there's an 80%

13:52
probability using historical data that

13:56
are not relevant that you're not going

13:57
to run out of money

13:59
what that doesn't tell you is that when

14:00
you do run out of money the 20% of the

14:02
time using these simulations you got to

14:05
live off Social Security Yeah Toast yeah

14:10
and that that's what economists say is

14:12
wait a minute let's let's look at how

14:14
bad things can get when you actually do

14:16
run out so you know if if you buy an

14:18
annuity and let's say you got two people

14:21
you know one of them has $2 million of

14:22
savings they use a million dollar to buy

14:24
$60,000 of income the other one just has

14:27
$2 million and they try to pull out an

14:29
income and the one with $2 million tries

14:31
to match the same income when they run

14:33
out they got to live off Social Security

14:35
the one who used a million dollar to buy

14:37
$60,000 of an annuity they've got

14:39
$60,000 plus $30,000 of Social Security

14:42
their worst case scenario is that

14:44
they're living on $90,000 a year but

14:47
they mo they might both have the same

14:48
failure rate where the one who bought

14:50
the annuity might have a lower failure

14:51
rate depending on how you model it out

14:53
or a higher failure rate but even if

14:55
they do what's the consequences so when

14:57
you buy an annuity especially if you

14:59
take part of a chunk of your savings and

15:01
buy you're talking about when you say

15:02
annuity you're talking about lifetime

15:04
income annuity a lifetime income anity

15:07
okay and and let's say you know you take

15:09
a chunk of your savings you use it to

15:10
buy an annuity you're essentially buying

15:12
yourself a minimum standard of living

15:16
forever no matter how long you live and

15:18
so if we model out a thousand different

15:21
potential retirements the ones who will

15:24
have an annuity will on average be

15:27
happier but the ones with an Investment

15:29
Portfolio might have a slightly higher

15:32
probability of success but there's no

15:34
information about what failure means the

15:37
Community College version of what he

15:38
just said was you either want to

15:40
shoulder the risk or transfer the risk

15:42
one of the two it really comes down to

15:44
and yes community colleges are great

15:46
because they teach trades Michael I mean

15:48
they we need plumbers we need plumbers

15:50
and electricians and things like that

15:52
what's the probability Michael of me

15:54
having six-pack abs my wife wants to

15:57
know

15:59
can we run a Monte Carlo on my abdomen

16:03
muscles it's not good isy

16:08
here I have to man listen you come on

16:11
this on the program you know I'm gonna

16:14
push the envelope man and I'm thinking

16:15
myself can you run a Monte Carly there's

16:18
no chance that this person here in this

16:22
nice red tie-dyed thing isn't going to

16:25
have six-pack abs but that's all I care

16:27
about Michael can I have sixpack eyes um

16:30
that's that's why I when people call me

16:32
and they'll say well this guy told me

16:34
that this and new to do this and this

16:35
and this and this I'm like listen you

16:37
have a better chance of having six-pack

16:38
apps and I don't know you but you're not

16:40
gonna

16:42
have that's my analogy to the good too

16:45
good to be true sales pitches that are

16:46
out there so um what else is new in the

16:49
annuity industry Mr faer um what are you

16:53
working on what's the super secret

16:56
double secret probation project you're

16:58
on well gosh so one of the things that

17:01
we may or may not have t talked about in

17:02
the past is um how having greater

17:06
guaranteed income actually allows you to

17:08
take more risk with the remainder of

17:10
your Investment Portfolio I think

17:11
something that not a lot of people give

17:13
thought to first of all when you buy an

17:15
annuity an income annuity that's part of

17:18
the bond portion of your portfolio and

17:20
again I was mentioning before that you

17:22
can use an annuity as a substitute for

17:25
part of your CDs or your bonds sure um

17:28
and and you get that additional tax

17:29
deferral benefit um but something that

17:32
that I like to think a lot about is okay

17:34
you're you're close to retirement you've

17:35
got this asset allocation you have some

17:37
of it in qualified some of it in

17:38
non-qualified you start moving the chess

17:40
pieces a little bit and how does that

17:43
impact the optimal allocation outside of

17:46
those chest pieces so I have $2 million

17:49
of savings I use $500,000 to buy myself

17:52
um an an income annuity what does that

17:55
entail in terms of what the rest of my

17:57
portfolio should look like like and what

17:59
it should look like is if I'm if I got a

18:01
50-50 portfolio then I can actually

18:05
continue to invest a million dollars of

18:07
my $2 million in stocks I now have

18:10
$500,000 in bonds and in fact I might

18:12
even be able to go to $1.1 million of

18:14
stocks and $400,000 of bonds again

18:17
because my safety net that I've built is

18:19
bigger uh the the worst case scenario is

18:22
better so I mean what risk in retirement

18:24
means is spending volatility and if you

18:28
take more risk you're going to have more

18:30
volatility of your spending you're going

18:32
to have a higher probability that you're

18:33
going to have to cut back that's really

18:35
what risk means it means that um let's

18:38
talk also about 2022 because I don't

18:41
think we've done that and if you would

18:43
have started out the beginning of the

18:45
year uh with a million dollars and you

18:49
would have you have done the 4% rule say

18:51
you got two retirees they each got a

18:53
million bucks one follows the 4% rule

18:55
they think they can spend $40,000 a year

18:57
plus inflation $43,200 next year um the

19:01
other one decides to wait 9 months to

19:04
retire and they had a million bucks now

19:07
they've got

19:07
$800,000 and the financial advisor tells

19:10
them no you know we're going to follow

19:11
the 4% rule you can spend $32,000 a year

19:14
right plus inflation that doesn't make

19:16
any sense this this guy over here

19:18
started with a million bucks he's now

19:20
down to $800,000 minus whatever he spent

19:22
over the last nine months he's got even

19:24
less money and you're telling him or her

19:27
that she can spend $43,200 next year and

19:30
the other one you're telling you can

19:32
spend you know 32,000 plus inflation

19:34
next year um you have to be willing to

19:37
be flexible when it comes to spending if

19:40
you take investment risk and I think

19:42
oftentimes people don't really fully

19:44
understand that and I think people are

19:45
beginning to become aware of it in fact

19:47
when I look on the boards of

19:50
retirees what I'm seeing a lot of people

19:52
talking about these days is I did not

19:55
know this could happen I started at my

19:57
advisor said I was going to be fine I

19:59
started out with his nest egg I reached

20:01
my goal you know a lot of people hit

20:03
their goal number in 2021 they decided

20:05
they were going to retire sure now they

20:07
got a lot less money and they're saying

20:08
I gotta go back to work or my advisor's

20:11
stupid you know they put me in these

20:13
things and they didn't like my I like

20:15
the my advisor stupid broad brush

20:17
because that's pretty good of course

20:20
that doesn't include me um but yeah I do

20:23
like that now I go ahead it's the market

20:27
right you know all everybody that was in

20:29
the market lost that money I lost that

20:31
money you lost some of your money I mean

20:33
we all lost money I don't do markets

20:35
come on man I only do contractual

20:36
guarantees but I will tell people that

20:37
most advisers today I have cowboy boots

20:40
that are older than them they have only

20:42
seen bull Marcus they have not seen

20:43
people walk out in the front yard and

20:45
vomit you know and I started in the

20:47
Securities industry in ' 87 uh if you

20:50
that that that year rings a bell there's

20:52
a reason um you know markets don't

20:56
always just historically go up and up

20:58
and up and up quickly over time they do

21:01
but I think for the baby boomer the

21:03
conundrum the head scratcher is what do

21:05
I do here do I have enough money to win

21:07
the game and just peel off interest or

21:09
create an income floor or do I still

21:10
want to play the game my opinion Michael

21:13
is you know the the whole people saying

21:16
to everyone well you got to go to

21:18
college you got to buy a house you gotta

21:19
you gotta gota get it all you got to be

21:21
in the

21:22
markets do you if you have enough money

21:25
and just want to peel off interest or

21:26
create a lifetime income stream do you

21:28
really need to be

21:30
there it's a great question and I think

21:33
most of us who have T I have friends

21:35
obviously we're this group of retirement

21:38
dorks who talk to each other about uh

21:40
what we hope to do with our own

21:42
retirement retirement

21:44
dor.com yes

21:46
uh it needs to be it's a special Club

21:49
you're invited by the way St are you

21:50
calling me a dork is that wait a bit

21:52
swallow

21:53
down it's a it's a term of endearment

21:57
it's an exclusive Club oh thank you very

21:59
much but we all I mean when it comes to

22:00
our retirement that's how we want to

22:02
play it like we we we can take risk

22:05
during the accumulation stage but when

22:07
we get close to retirement we I just

22:09
want to lock it in I don't have to think

22:10
about it I don't have to worry about

22:12
what's going on in the markets when I'm

22:14
deciding whether or not I can go on

22:15
vacation next year I don't have to say

22:18
well wait a minute you know the markets

22:19
are down I'm not going to be able to do

22:20
that I want to be able to lock in as

22:23
much as I can lock in without the fear

22:25
and I know the older I get the more it's

22:26
going to bother me and that actually

22:28
shows up in the data that we do get

22:30
you're like you're like 32 right Michael

22:32
absolutely yes how did you know I don't

22:35
know I just took a stab at it just your

22:37
voice no I'm kidding um you know I

22:39
always tell people there's no U-Hauls

22:40
behind heres I'm trying to I'm trying to

22:42
figure out how to quantify that with a

22:44
formula um but you know I do think that

22:47
people and I'm pounding the table a

22:49
little bit out here for the Baby Boomers

22:51
to consider and look at their situation

22:53
that you might not only want to retire

22:54
from your job you might want to retire

22:56
from the markets

22:59
um if you can a lot of people can't but

23:02
if you can um and I think that these

23:05
choppy markets and and I think we're

23:07
getting at the time of this taping I

23:08
think people are listening to standing

23:11
NY man because you know it's lifestyle

23:14
in chapter two of your life so what are

23:16
you and the dorks doing to get this

23:19
message

23:20
out retirement dorks I've got to go get

23:24
that domain um to get the message out in

23:26
English to people not you know I I'll

23:29
let you finish that question here's a

23:30
great comment guy was calling me the

23:33
other day and he was looking at an nity

23:34
product a very complex one we won't

23:36
mention it and his comment was in

23:38
southern he goes you know I didn't know

23:40
mathematical formulas had letters in it

23:43
I'm like it does okay and that's not a

23:46
good thing so so what's the

23:51
messaging that we're trying to get

23:53
across other than just hiring me and

23:55
paying me a huge retainer to do it right

23:57
what are you guys is doing you know one

23:59
one of the things that I'm a big fan of

24:01
is telling people if you try to do it

24:04
yourself first of all you have to pick a

24:06
failure rate a probability that you know

24:10
what's what what age do you want to run

24:11
out now by the way this is all prefaced

24:14
with a discussion that

24:16
begins you're gonna die so I have a

24:19
friend of mine a research beautiful yeah

24:22
he's a researcher who studies this idea

24:25
of people's unwillingness to accept

24:27
their own mortality and whenever anybody

24:29
brings up anything I mean there's a

24:31
reason why it's called life insurance

24:32
and not death insurance and even though

24:34
it is death Insurance uh it's because

24:37
people don't want to acknowledge the

24:39
fact that they're going to die but as if

24:42
you're going to do retirement planning

24:43
right you've got to acknowledge the fact

24:45
that you're not going to live forever

24:46
hopefully you're going to live a really

24:48
long time but none of us know so there's

24:50
only two places your money can go your

24:52
money can either go to other people you

24:54
know when you die your money gets all

24:56
that all that fun that you could have

24:58
had get spent by someone else my

25:00
daughter showing up to my funeral in a

25:01
Lamborghini that's what's going to

25:03
happen it is and it's actually the

25:06
research is so much fun because when

25:07
people get these inheritances it's

25:10
always the ones who like having a whole

25:12
lot of fun who spend it down the fastest

25:15
and they're the ones you know every

25:16
generation has those people who who

25:18
didn't really accumulate much money in

25:20
their lifetime but when they get the

25:22
money they know how to spend it like

25:23
they know how to live um so either

25:25
either the money goes to that kid who is

25:28
really good at spending money or it goes

25:31
to your lifestyle and and if it's going

25:33
to go to your lifestyle you got two

25:34
choices you can uh you can try to spread

25:37
it out or you can buy yourself some sort

25:40
of a guaranteed income product that

25:41
allows you to spend we've talked about

25:43
this before the birthday cake problem it

25:44
allows you to spend more every year

25:47
without having to worry about

25:48
potentially running out that's why you

25:49
do it that's why economists say it's a

25:51
puzzle that we're not buying more of

25:52
these things but I think the big the big

25:54
thing you have to overcome is

25:56
recognizing that you're not going to

25:58
live forever and you either have to cut

26:00
little little slices of the birthday

26:02
cake or you can spend more with less

26:04
worry so why not just do that what

26:06
worries you Michael FAA other than

26:08
waking up in the morning and just

26:10
continuing to be vibrant and

26:13
young what worries me you know frankly

26:17
uh right now and it's probably the same

26:20
thing that you mentioned at the very

26:21
beginning of the podcast which is one of

26:23
the consequences of really high interest

26:26
rates the Fed raising these rates is

26:29
that it's crowding out everything in the

26:31
federal budget and absolutely you know

26:34
that makes me worry about spending

26:37
austerity which is another one of those

26:39
funly crap love to use you know that

26:42
sounds like an Affliction like the fact

26:45
spending austerity means that I've got

26:46
money but I don't know what it's for

26:49
that's what that means to me I don't

26:51
need the federal government only has so

26:54
much money it can spend and if it's

26:56
spending a ton of money on interest

26:57
payments then it's not going to be able

26:59
to spend as much money on things like

27:02
generous Medicare and social security

27:04
benefit increases over time that's good

27:07
that's good I love your pH you guys need

27:09
to come up with these phrases and then

27:11
sell t-shirts on retirement dor.com you

27:14
know spinning austerity what was the

27:16
other one

27:18
welfare welfare I've got I've got just

27:21
like what in the world are y'all talking

27:23
about Economist jargon and then I'm over

27:26
here doing all the southernisms like you

27:29
know squeezing oil out of a brick that's

27:31
what we're doing right here we're trying

27:33
to get the highest contractual guarantee

27:35
we're squeez all lot of a brick but you

27:37
know I think that's part of the annuity

27:39
industry's problem is we have not

27:41
messaged it right to people in their in

27:45
English that they fully understand

27:47
because the way that we talk about it

27:49
seems complex but truly annuity types

27:53
are very simple if explained properly

27:56
this isn't complex it really couldn't be

27:58
any easier it really I mean yeah I mean

28:00
I always say if you can't explain it to

28:01
a nine-year-old don't buy it no offense

28:03
to nine-year-olds it really is that

28:05
simple I mean because everyone well

28:07
they're expensive and they're I can't

28:10
understand them you know and I'm like

28:12
you know I told a guy the other day and

28:13
I was trying to explain my because and I

28:15
told him I said I'm a little frustrated

28:17
I feel like I'm showing a painting to a

28:18
blind person you know because they just

28:20
didn't understand the correlation

28:21
between CD and M I'm like it's really

28:23
that simple don't don't make it any more

28:25
difficult than that right and so um

28:28
so that that worries you but what makes

28:30
you get up in the morning put on the

28:32
running shoes you know you you run seven

28:34
to 10 miles every morning as you know

28:36
after that run what what makes you want

28:38
to just go get it every day I got to

28:40
keep up those sixpack abs s yeah man I

28:42
mean you know you're you're my yeah

28:44
you're kind of the idol that I'm looking

28:45
for so what I mean what what motivates

28:47
you what keeps you going Michael well I

28:50
mean first of all U we have this huge

28:53
Baby Boom cohort and I worry about them

28:56
frankly I I think think that it's the

28:58
first generation that's going to have to

29:00
rely entirely on savings to fund their

29:03
lifestyle I think they had a really

29:06
great time back in 2021 the markets were

29:09
doing fantastic all of them felt really

29:11
rich uh but I I was really worried then

29:14
and and I'm worried that they don't have

29:17
the right information about what they're

29:19
supposed to do with that money after

29:21
they retire I think we've we've really

29:23
dropped the ball as a society on those

29:26
retirees don't have any moment where we

29:29
sit down with them and say all right you

29:31
got this pot of money what do you want

29:33
to do with it what's your goal U how do

29:35
you want to live like let's start with

29:37
the lifestyle that you want to lead and

29:38
then let's build that plan around it and

29:41
to the extent that I can educate people

29:43
on making some of these choices I see it

29:47
as an opportunity to help people live

29:49
better um but I think they just have no

29:51
idea they don't understand what these

29:52
trade-offs are again to an economist it

29:54
seems pretty easy you know you've got

29:56
these very easy easy to understand

29:58
tradeoffs that are all about welfare

30:00
maximization but to the average retiree

30:02
they have no idea what it's all about

30:05
welfare maximization so it's our job to

30:08
try to to try to

30:10
use Concepts to help people put together

30:13
a plan that's going to make them

30:15
happier I could get elected running

30:18
against the phrase welfare maximization

30:21
just just bringing it up and saying I am

30:23
totally against welfare

30:26
maximization because I'm tired of giving

30:28
this stuff away you know what I'm saying

30:30
and then you step and like Stan that's

30:32
not what I'm talking about that's not

30:33
Ware maximizations all about I am not

30:37
running on the welfare maximization

30:41
platform that's a loser but you know

30:43
messaging that usually works that's

30:45
pretty but people always talk about fake

30:47
news and political fake news and all

30:49
this stuff Financial fake news is as bad

30:52
it's as bad because what and I want you

30:55
to think about it from a party

30:56
standpoint you have the party over here

30:58
of contractual guarantees and the curse

31:00
word of annuities then you have the

31:02
party over here of market growth and

31:04
potential and just gonna go up and both

31:07
sides Hammer each other both sides say

31:10
things about each other that are

31:12
unfounded to get the sale from the other

31:15
guy similar to a politician saying what

31:17
they have to say to get the

31:19
vote that's the problem the problem is

31:22
is the master of the universe Financial

31:24
architect wealth architect financial

31:26
advisor all all annuities are bad I'm

31:28
just telling you right now son and

31:30
that's that's stupid as if I said all

31:33
mutual funds are bad that's stupid um

31:37
and I think I don't know how to cut

31:38
through that noise but other than you

31:41
know the annuity industry is notorious

31:43
for sponsoring the Rolling Stones tour

31:45
which is I don't understand that unless

31:47
I'm opening for them um we need to do a

31:50
better job of buying airtime I would

31:53
think you know I see some I've s I've

31:55
seen some stabs at that

31:57
I know you sit in the big boardrooms

31:59
with big marble stuff and they feed you

32:00
all these really nice food and stuff has

32:02
anybody talked about actually marketing

32:04
to the Boomers other than what I'm doing

32:08
well Stan I I have to say that's why I

32:10
recently I mentioned to you uh before

32:13
this interview that I actually used your

32:15
name in a very important group early on

32:17
in this week did they just tell me the

32:19
truth because I can take it all right

32:21
they didn't they they hadn't heard of

32:22
you stand what they don't know to hate

32:25
you you got to be kidding me but then

32:28
again I don't Market to the financial

32:30
industry no you don't so but no this was

32:33
this was more like policy folks from Big

32:35
Fin companies and I'm saying like you've

32:38
got this is how you need to present this

32:40
information it's it's simple it's

32:42
straightforward I used examples of the

32:44
way you present information on the

32:45
website because that's what the consumer

32:47
needs to know is they need to know you

32:49
know the quality of the different

32:50
insurance companies they need to know

32:52
the quotes that they're getting um you

32:54
focus on very simple products that are

32:56
very easy to explain that are providing

32:58
the kind of Lifetime income that people

32:59
actually want um that you know it's it's

33:03
uh it's something that I think others

33:06
could learn from I'll say that that's

33:08
that's the ultimate compliment by the

33:10
way Stan that that you I think your

33:11
marketing skills are are exceptional I

33:15
need to go speak in front of this group

33:17
now I would do it with a drummer behind

33:19
me you know doing like a hip-hop drum

33:21
beat as I'm talking and maybe a gwn

33:24
guitar but the point is it would be neat

33:26
for me to talk to these I did it one

33:28
time at like the association of

33:30
financial

33:31
planners in Chicago and they brought me

33:33
in they paid me and it was like thousand

33:35
people in the room it was like a fist

33:37
fight the whole time of course I won

33:39
everyone but factually but you know it

33:41
was it was it was bizarre it was it was

33:44
interesting but I think that's what

33:46
needs to happen we need to go into the

33:48
belly of the Beast as they say and fact

33:51
Hammer them on what this is all about

33:53
and have the people step up to the mic

33:56
and and try to you know Stump Michael

33:59
and Stan and we just go uh sit back down

34:02
chump because we're getting ready to

34:03
kill you right here with facts you know

34:06
I actually I don't see the same level of

34:08
antagonism towards annuities come on

34:10
that's what makes it fun just let me go

34:12
let me have it okay I hear you I hear

34:14
you you know why though I'm G tell you

34:16
why in general and and that is great to

34:19
see because I think especially in the

34:21
investment world people were not as open

34:22
to having these kind of conversations

34:24
maybe four or five years ago but there

34:25
is a general acknowledge

34:27
yeah these things actually have a place

34:29
let's think about how we can position

34:31
them to Consumers well there's a

34:33
demographic tial wave and I've got a

34:34
feeling that a lot of people are walking

34:36
in whether it's from a bad chicken

34:38
dinner seminar or just life saying I'm

34:40
really tired of the volatility do you

34:42
have anything else for me yeah um I I

34:45
think I think as like everything that's

34:47
good the consumer drags the industry

34:50
across the Finish Line oh I want to talk

34:52
about one more thing St before we stop

34:54
this this so first of all what we

34:58
annuities

35:00
um it is but but let's think about this

35:02
for a minute S no I read Jason I read I

35:05
read his article no no no the the option

35:09
first of all the option budgets are

35:10
getting pretty generous in which means

35:14
the Caps are pretty high they're higher

35:15
than they have been in the past but

35:17
let's also think about you know those

35:19
those guarantees the insurance company

35:21
provided that you wouldn't lose money on

35:24
your investment as a bond

35:27
substitute so the insurance companies

35:30
reminder about how fixed index annuities

35:32
work wait stop I can't make I'm gonna

35:35
argue with you here you

35:37
cannot put fixed index annuities in the

35:40
same categories as a bond you just can't

35:42
Michael come on man well I mean if you

35:44
look at the Historical long-term

35:46
performance they're they're pretty close

35:48
to a corporate intermediate term bond

35:51
over time but but you get this downside

35:56
protection

35:57
of the principle now the thing I want to

35:59
talk about here Stan is that with those

36:01
products the insurance company has

36:04
actually lost the money so you're right

36:07
they invested in their general account

36:09
portfolio they assumed it was going to

36:11
provide a five% return so they have you

36:15
know they took $95 of your money they

36:18
are going to give you a $100 back next

36:20
year they invested the rest in a

36:21
financial option which lost did not pay

36:24
off this year sure sure but of your Bond

36:27
portfolio you're not going to lose any

36:29
money on that and the assumed rate of

36:32
return was 5% the insurance company is

36:35
now holding all of these intermediate

36:38
term corporate bonds they saw this

36:40
tremendous loss in their general account

36:43
portfolio that they cannot transfer to

36:45
you so this is one of those years where

36:48
a product like a fixed index annuity

36:51
that provides you with protection

36:53
against loss um it's it's become very

36:57
apparent that you've transferred a lot

36:58
of risk to the insurance company of your

37:00
bond portfolio um and that's that is and

37:04
I agree with you and you said something

37:06
on a previous podcast with us that I've

37:08
attributed to you since I mean and you

37:10
probably said it by mistake it was so

37:11
good Michael that's what I mean you is

37:13
that good and you said let the annuity

37:16
companies buy the bonds for you yeah

37:18
with these products and I thought that

37:20
was genius and it still is genius and

37:22
you still get the props and you still

37:23
get the royalties because this is a

37:25
great example they're buying the bonds

37:27
for you and you're not suffering in the

37:29
volatility of the underlying principle

37:31
of those bonds yet you're got you have

37:34
the contractual guarantees in place so

37:37
and I think this is something that a lot

37:38
of people had forgotten about that

37:40
agreed agreed you know at the beginning

37:42
of the year some people thought well

37:43
wait a minute you interest rates are so

37:45
low I'm GNA try to get I'm gonna buy

37:47
bonds that have a higher yield I'm GNA

37:49
buy bonds that are longer term I'm going

37:51
to buy bonds that are uh riskier you

37:53
know lower quality bonds sure and those

37:56
people thought well you know how how

37:58
risky could bonds be and by the time we

38:02
get to

38:03
October the the Vanguard long-term

38:07
corporate bond ETF is now down more than

38:10
30% like who thought that that was even

38:13
possible listen I was there in the 90s I

38:15
was at Morgan Stanley when that happened

38:17
I was I was a bond guy at those big

38:20
firms and I always tell people you know

38:22
bonds aren't always a safe

38:25
haven all you know from a standpoint of

38:28
underlying value we're definitely seeing

38:30
that this year oh my gosh I and I think

38:32
we are in a bare market for bonds and I

38:34
hope I'm wrong and I'm who knows I mean

38:36
that's from my past but um I don't know

38:39
tell me about inflation Michael you wake

38:41
up in the morning after the workout and

38:43
then you start thinking about inflation

38:45
what are you thinking

38:47
about well okay so inflation has been

38:51
really spotty so that means that you

38:55
know when I look at the numbers what I

38:57
see is not that everything is going up

39:00
by a lot I'm seeing that some things are

39:02
going up by a lot and and obviously the

39:05
war in Ukraine has impacted energy costs

39:08
that's gone up a lot uh there are supply

39:11
chain issues that are you know partially

39:14
a carryover from the covid era that are

39:17
affecting prices a lot some things like

39:19
healthcare that seniors pay a lot of

39:21
money for I really have not gone up at

39:23
all over the last couple of years so if

39:25
you can be more Flex ible then like

39:27
which most retirees can be more flexible

39:30
then the impact of inflation is not as

39:33
big of a deal one of the things I worry

39:36
about with those retirees is that there

39:38
is such a thing as inflation sequence of

39:42
return risk and what that means is that

39:44
if inflation is really high early on in

39:46
retirement the prices of stuff you buy

39:50
throughout retirement is going to be

39:51
more expensive so it's worse if

39:54
inflation's High early than if inflation

39:56
is high late because if inflation's High

39:58
early then prices go up and they stay up

40:01
forever and if inflation's High late and

40:03
you pay a really high prices later on

40:05
it's not a big deal because you were

40:06
able to buy cheap stuff for the first 10

40:08
years of retirement and you're gonna

40:10
die well don't remind people because

40:12
that freaks them out as a good friend of

40:15
mine that does life insurance he always

40:17
says one out one of us is g to die I'm

40:18
like thanks mathematician appreciate

40:20
that Tony

40:22
Robbins um but it but it is true and

40:25
inflation I always tell people if you

40:28
have enough money like if you call me

40:31
and you have multiple millions of

40:32
dollars and you ask me let's Sol for

40:33
inflation I will call you

40:35
arrogant um and I will start yelling at

40:37
you at the top of my lungs because come

40:40
on man you can you can afford the eggs

40:43
and the bread and the gas you know

40:44
obviously inflation hits people at the

40:45
low in it always

40:47
does um and I always tell people there's

40:49
no perfect product to solve for

40:51
inflation you know you already have

40:52
social security and you can buy ibonds

40:55
but you know annuity companies have the

40:57
big buildings for a reason there's no

40:59
floating product out there that

41:00
addresses this even though every a lot

41:03
of people will say they have it they do

41:04
not in your Round Table of retirement

41:07
dork Geniuses with Advanced

41:10
degrees what are you guys talking about

41:13
from the standpoint of future products

41:16
that you see coming down the pike that

41:17
should be

41:18
developed well okay so one company has

41:21
developed a fixed index annuity with an

41:24
income payment that is actually allowed

41:27
to float up with inflation up to 5% per

41:30
year I understand don't mention the name

41:32
don't mention the name please don't

41:34
mention it don't mention it do not

41:35
mention

41:37
it they they lower the initial but they

41:40
lower every one of these firms that have

41:42
that and there's there's actually five

41:44
or six of these products out there that

41:46
they lower the initial payment to make

41:48
up for that potential increase so you

41:50
have to factor in the break even point

41:54
if you bought a static payment versus

41:56
the potential hypothetical theoretical

41:58
projected unic cornation the butterflies

42:00
increases that's being sold out there

42:02
it's not as pure as you're pushing

42:04
because um Social Security is best

42:07
inflation annuity on the planet because

42:08
there's no actuaries involved there's

42:10
only politicians St and that is the

42:12
bottom line is like if you're worried

42:14
about inflation just wait to claim until

42:16
you're 70 that's that's the best way to

42:19
deal with it beyond that yeah that the

42:21
options are limited well I always tell

42:23
people you want to s for inflation

42:25
reverse engineer

42:26
a an immediate annuity for the exact

42:28
dollar amount that you need to fill in

42:29
the income gap period that's it

42:32
everything else is a sales pitch you

42:35
know and and so the other thing too is

42:37
is inflation's

42:40
customizable um so some people it

42:42
affects differently than others my two

42:44
daughters have left the building and I

42:45
don't have to pay for dance classes and

42:47
drive them back and forth so there's no

42:49
not as much am I allowed to mention that

42:51
you can even use a qac as a way of

42:53
dealing with later retirement inflation

42:55
you are allowed to say that because you

42:57
know I did write the first book on the

42:59
planet about CX in 2014 as you know and

43:01
so well documented um but you know it's

43:04
not for everybody it is a future income

43:06
payment that can hedge against inflation

43:08
why because you have you have income

43:11
starting at a future date no different

43:13
than buying on the immediate annuity at

43:15
a future date there are some tax savings

43:17
Etc do you see CAC do you see our

43:20
politicians who we both love trust and

43:23
understand do you see them you're suppos

43:26
to laugh at that Michael come on no it's

43:29
beyond laughter at this point do you see

43:32
him raising it to where it's real like a

43:34
200,000 or 250 where people can actually

43:36
whack it pretty

43:39
good so I mean I the the reason that

43:43
they would do that is to develop some

43:47
sort of a

43:49
workable default in a retirement account

43:53
so all what what is happening right now

43:56
is qacs have been considered by some

43:58
companies as a default solution to

44:02
protect against longevity risk in your

44:05
401k and if you have a high enough

44:08
income then you're going to go over that

44:11
$145,000 limit are we gonna pass first

44:13
of all you're asking are we gonna pass

44:15
secure two I don't know it's like 5050

44:17
shot um and second of

44:20
all is that going to be an issue i i

44:24
people have tried to beat me down on Q

44:26
stand to be honest that nobody really

44:29
cares that much about them and you know

44:31
making significant policy changes Beyond

44:33
increasing it by the rate of inflation

44:34
is going to be tough unless it's coupled

44:37
with some sort of a qdia solution like a

44:41
Target dat fund

44:43
solution are you a fan of Target a funds

44:46
I am I think are oh yeah the reason is

44:50
I'm just doing a paper on give me the

44:51
reason you sell me on that because you

44:53
and Paul marman who good good friend of

44:55
the show show are Target date fund I

44:58
mean you I mean he you probably have a

45:00
tattoo like Target date fund on your arm

45:02
I mean I don't know well no that's just

45:04
just KAC um

45:06
just why Target dates sell me um because

45:11
I've seen what people do when they try

45:13
to invest on their own so oh it's it's a

45:16
loving handcuff is what you're saying it

45:18
is and and and you I just doing a paper

45:21
I was talking to a reporter this morning

45:22
about it where I look at for those who

45:25
have a dat fund how many of them phoned

45:28
up their um Record Keeper with the

45:31
recordkeeper is the one that they need

45:33
to phone up to make a change in their

45:35
right Investments and half the

45:39
percentage of those who have a target a

45:41
fund versus those who were managing

45:43
their Investments on their

45:44
own half of them called up their

45:47
provider when the markets fell in early

45:49
20120 and one tenth of them their on

45:53
Tenth is likely to make a change and by

45:55
the way the the ones who did make a

45:56
change were all pulling money out of

45:57
stocks at exactly the wrong time in

45:59
March 20 so you're dummy so what you're

46:01
saying is a target day fund is a dummy

46:03
proof investment absolutely you know

46:06
that is its biggest strength is that

46:08
people it's a set it and forget it kind

46:10
of investment and people don't touch it

46:12
and they actually outperform the experts

46:15
over time in these things it's magic

46:17
it's really great now the problem is

46:19
that it's you know it's not customized

46:21
it's not tailored for every person uh

46:24
everybody gets the same thing it's uh

46:27
you know and the amount of money that

46:28
you save nobody ever like figures out

46:30
whether that's appropriate for you

46:32
somebody with a high income is saving

46:33
the same percentage is somebody with a

46:34
low income that's not right either so

46:36
probably the best kind of default is

46:39
something that's a little bit more

46:41
customized than a Target dat fund but I

46:42
tell you target a funds are infinitely

46:45
better than where most workers were back

46:47
in the early 2000s they were either

46:49
investing in money market accounts

46:51
something like 70% of the money was in

46:52
money market accounts or they were

46:54
trying to invest in in stocks and they

46:57
are so bad at investing in mutual funds

47:00
they they buy more mutual funds after

47:03
they've gone up in value you know they

47:05
they look at the quarterly statements to

47:07
see what outperformed last quarter and

47:09
then they shift all their money into

47:10
that and then it underperforms so I'd

47:12
rather people just leave them alone the

47:14
best thing they can do is just leave

47:15
their Investments alone so if I'm a bad

47:17
financial journalist which I'm not my

47:19
quote would be Michael FAA quote Target

47:22
date funds are for low IQ overly

47:25
emotional investors unquote yeah like me

47:28
so I have my retirement invested in a

47:33
Target dat fund now I'm I'm lying

47:36
actually half of it in a Target Aid fund

47:38
half of it I invest on my own and I was

47:41
really clever when I put together my

47:43
portfolio on my own I you know did the

47:46
right asset allocation I I I did you I

47:49
was very very thoughtful s how many

47:52
times have I readjusted my allocation

47:55
since I did did that seven years ago

47:57
50 I haven't touched it I haven't looked

48:00
at it which means it's all out of whack

48:02
right now you know the stock market have

48:03
gone up so now it was really stock heavy

48:06
which means I lost a bunch of money when

48:07
the market went down recently I'm

48:09
supposed to be a finance Professor who

48:12
is constantly readjusting my portfolio

48:15
but the thing is there's always

48:16
something that's more important to do

48:17
that day and I never get around so

48:18
you're a disinterested Economist is what

48:20
you're trying to tell me I am I'm not

48:22
I'm not very good at practicing what I

48:24
preach um and it's you know I I just

48:26
don't want to have to think about that

48:27
stuff which is one of the advantages of

48:29
automating

48:30
it I hear you you know we've talked for

48:33
a long time this has been good this has

48:35
been good so you know I'm waiting for

48:37
you guys to fly me in on the lar jet to

48:40
uh to take this thing to the next level

48:42
you know the annuity thing to the next

48:44
level because I'm gonna do it on my own

48:46
by the way yeah I've got a couple I'll

48:47
let you borrow one anytime okay now

48:49
that's cool that's cool yeah I was

48:50
looking at that Professor oh yeah you

48:53
guys are rolling in the cash you know

48:55
you guys rolling so uh no it's good I I

48:58
appreciate you joining me kind of out on

49:00
a I read your article there like man I

49:01
got to call him um because I was

49:03
wondering where that was coming from and

49:06
um you said Morning Star but that's good

49:08
but we always want you back on the show

49:10
and we really appreciate you working on

49:12
this for the Baby Boomers all of those

49:15
people you are doing Yan's work we just

49:18
have to shout it from the rooftops you

49:21
know do we really I appreciate what

49:23
you're doing as well Stan we're trying

49:25
you know we do a few videos we do a few

49:27
podcasts um you know we try to get it

49:29
out there the best we can um and I think

49:32
we're making an impact because people

49:34
are starting to look at it in a in a

49:35
serious way and the way they should from

49:38
the contractual guarantees standpoint of

49:40
these of these products I just hope that

49:42
the industry continues to be push or

49:45
push themselves to create better and

49:47
better products not just you know

49:50
repolishing up the old stuff but you

49:52
we'll kind of see I I put that on you

49:54
that's that's what you need to do

49:56
okay I'll work on that put it on my

49:58
to-do list listen I appreciate it I

50:00
appreciate every single person on every

50:02
major podcast platform and on the fun

50:04
with the nties YouTube channel yes you

50:06
can email me about those four flying be

50:08
Gibson guitars in the back that you see

50:11
and about the my ban which by the way

50:13
Michael at the end of this an nudy man

50:15
thing I will go on tour uh just to let

50:18
you know so with that being said we had

50:20
a lot of fun we will see you next time

50:22
on fun with

50:24
annuities

50:29
[Music]