Questions You Should Ask Your Advisor About Annuities

It is not uncommon after speaking with a client that they will go and speak with their financial advisor about the custom Safe-Money Plan that I designed for them.  I encourage that because your financial advisor should be involved in the process of your overall financial well-being.  In fact, your advisor should be 1 of 4 people involved in your retirement planning, in addition to a Safe-Money Advisor, a CPA, and an estate planning attorney.

However, when my client comes back to me and says, “My advisor says he hates annuities”, I am never shocked.  In fact, this just happened the other day.  My truthful response is, “I felt the same way before I got into this industry.”  Annuities and other insurance products are the most misunderstood financial products available.  That’s why it took me over 7 years of research to discover them and wonder why more advisors don’t recommend them to their clients. 

When I hear, “my advisor hates annuities”, it’s normally because of one of two reasons:

1. He/She does not understand them or lumps all annuities into one category.
2. They have something to lose by you protecting your money (i.e., their management fees).

I have a profound handout that I include in my Safe-Money Kit titled, “What Your Ex (Advisor) Will Say”, when you tell them that you want to transfer some of your assets into an annuity.  I’m happy to send that handout to anyone, or you can read my newsletter by clicking this link Things Your Ex (Advisor) Will Say

The funny thing is, I already know what they will say.  But what should you say in return? 

Here are 6 pointed questions you should ask your advisor when they discourage a transfer of funds to an annuity:

1. Can you guarantee that you will never lose another penny of my money?
2. Can you give me a guaranteed growth rate? Not a projected rate or an average, but a guaranteed rate.
3. Can you guarantee that I’ll never have to pay more than 1% in management fees, including the internal fees on the products you are recommending?
4. Since you cannot guarantee that I will not pay more than 1% in fees, and you cannot guarantee that you will not lose my money, can you guarantee that I will not pay a management fee when you do lose my money?
5. Can you guarantee that I will have a specific income amount on a specific date in the future?
6. Can you guarantee that I will never run out of money with the withdrawal rate you are recommending?

These questions are not meant to mean, arrogant, or confrontational.  But they are meant to get all the fluff and speculation out of the way so you can have a very clear understanding of what you would be giving up by not allocating a portion of your money to an annuity. 

Things to consider when asking these questions:

You should feel confident and empowered to ask these questions.  After all, it’s YOUR money that you’re talking about.  You are the one who has spent 30, 40, or even 50 years working for it and saving it.

And it is YOUR life that will be negatively impacted without the guarantees of a lifetime income and/or downside market protection.  Your advisor will be just fine because he will still make his fee if the market crashes.  Of course, they don’t want that to happen, but they have no way to guarantee that you won’t lose 30%, 40%, 50% of your money in an unforeseen downturn.  It has happened many times in the past, and it will certainly happen again. 

Please continue to ask these questions until you have received a simple “yes” or “no” answer.  It’s your financial future that hangs in the balance.

Now, if you would like to see my responses to Ken Fisher’s Top 9 Questions to ask about annuities, please read on.  These questions are straight from his downloadable “Annuity Insights”. Here we go:

1. What type of annuity do I own or am I considering?

Great question!  His very first question exposes the fact that he knows there are multiple categories of annuities, but everything he writes about lumps annuities into one category as if they are all the same.    

2. Have I read and understood the contract?

Another great question!  Most disclosure statements on Fixed Indexed Annuities and MYGA’s are only several pages long, with big print, and written in English.  Not Financialeze.  Here’s a better question:  Has anyone ever read the 100–400-page prospectus you have given them on your investment recommendations???

3. What type of expenses does the annuity have and what is the overall cost?

Fisher, you, and I are on the same page.  Great question.  If you are looking for straight growth and protection of assets, then there should be no expenses whatsoever.  If you are looking for a guaranteed income using a rider, you will pay an average of 1%.

If you are looking at a Variable Annuity, your average expense will be around 3.75%.  This is why I do not like VA’s.  High fees and you can still lose money inside of them.

A better question would be, what am I getting in exchange for that expense?  If it’s a guaranteed lifetime income, then 1% seems pretty darn reasonable.

Here’s a question for you, Ken.  What are your fees, including the fund fees, and what do I get in exchange for them?  Answer:  No one really knows.  Because you certainly are not going to get a guarantee of market protection or lifetime income, that is for sure.

4. What conditions must I meet to take advantage of the advertised benefits?

I’m assuming he is referring to a Long-Term-Care benefit or a roll-up period.  Different products have different terms for offered benefits.  They should be spelled out in plain English on the disclosure page which should be read and understood completely.  If there is a term that you do not understand, you need to have the agent clarify it.  If the agent cannot clarify, then he is not a professional and you should seek advice from someone else. 

This is something I harp on all the time.  You should be working with an “independent” or a “non-captive agency”.  You tell them what you want, and when you want it, and they have the ability to find the right annuity to fit you.  Not fitting you into the right product for them.

5. Will I be charged a fee if I withdraw assets from my annuity early?

Not if it was set up the right way with the right plan.  No one should, or is even allowed, to put all of their money into an annuity.  It is a specific strategy to be used for a specific time frame.  Again, this is why you use an annuity professional to help design a plan that uses the annuity effectively.  Plus, almost all FIA’s have a clause that in the case of medical confinement, or terminal illness, that you can withdraw 100% of the premium with no penalties.

Here’s a better question:  If Ken loses 30% of your money, and you need it all back, what is your withdrawal fee?  It’s 30%.

6. How can performance “floors” and “caps” affect my returns?

Well, that’s easy.  Don’t use a strategy with a “cap”.  And the “floor” protects you from losing your money.  This is disingenuous because it is implying that only “caps” are available for growth opportunities.  That is not the case, whatsoever.

7. How are annuity income and principal taxed?

Okay, this is a serious question.  If an annuity is purchased with an IRA, 401K, or any other qualified account, they are taxed exactly the same as any other product would be.  Including, if you gave Fisher your IRA.  You would pay normal income tax as you withdrew the money.  An annuity funded with a ROTH IRA would still be 100% tax-free.

If you purchase an annuity with non-Qualified, or after-tax money, then annuity money follows the rule of LIFO, Last-In-First-Out.  When distributions are taken you will be taxed on the growth first, and then the rest of the distributions are considered a “return-of-premium”.  Meaning, you would not be taxed on that money.  The annuity company will use an exclusion ratio and will do the math for you to turn over to your tax preparer at the end of the year.

But I think he’s probably getting at the point of the benefits of capital gains tax on non-Qualified money.  This is not that, and that is not this.  Apples and Oranges.  We are using annuities for protection and/or guaranteed income.  Not for tax advantages (although all growth is tax-deferred, even with NQ money).  You will have plenty of other money to do that with.  It comes back to the “Purpose of Money” that I harp on constantly.  Plus, no one can predict what will happen with the Capital Gains tax.  We have a very unfriendly administration right now that frowns on the capital gains tax and wants to raise it.  Do not plan your future income based on a tax advantage that could be changed in the future.

8. What impact will inflation have on my annuity income?

The same as it would on any other level distribution.  One dollar’s worth of purchase today will not purchase the same 20 years from now.  Due to faulty monetary policies in our government, inflation is a constant battle that we must fight.  However, if he is implying that you will be safe from inflation because of his investment genius, he is wrong.  If the market does not perform the way it’s supposed to in their projections, and you keep taking more and more money from your account every year, you fall at risk to the Sequence of Returns. 

The best way to use an annuity to help combat inflation is to secure your living expense with a guaranteed income.  Then, use a laddering technique that will give you more and more money down the road.  Or use an annuity that has, not only a guaranteed income with it, but offers continued growth as time goes on.  Meaning, when the market performs well, you get a raise.  If the market does not perform, you stay level, but you did not lose anything due to a market downturn.

The most important point that I can make in regards to this questions is if you run out of money because of market fluctuations, and all you have to survive is Social Security because you did not secure a guaranteed income with an annuity, inflation will be the very least of your problems.

9. When I pass away, what impact will the annuity have on my beneficiaries?

Okay, so another serious question, but with the intent to infer that your family will be somehow better off after your passing if you keep all of your money at risk with Ken. 

This is why we always want to assign a Purpose to Money.  If the purpose of $x amount of dollars is to be left to family, then we need to find the most efficient way to do that.  If every dollar has an assigned purpose, you will get the best benefit for it.  If, however, every dollar is assigned to multiple purposes – i.e., I want guaranteed income, but I also want to leave money behind – then the effectiveness of every dollar gets diluted.

However, when you pass away, 100% of the remaining balance will be paid to your beneficiaries.  Some products offer a higher payout if they take it over a 5-year period.  There are also annuities that are designed to have a guaranteed growth rate on the death benefit, for a fee.  These are excellent choices for people who want to have a guaranteed death benefit for family members but do not qualify for life insurance.

If your main purpose is to leave money to your beneficiaries, then there is no better way to do that than with Life Insurance.  A single-premium life insurance policy to be exact.  You take a chunk of money and purchase the policy.  The money and the death benefit grow every year and the money remains liquid in case you need it.  My policies also include a Long-Term-Care benefit, and all of the money will be 100% tax-free to your beneficiaries.  There literally is no better way to pass money to heirs than with life insurance. 

If you do not qualify for life insurance, although most people do with single premium policies, then you could assign an annuity with a guaranteed increasing death benefit for an inheritance to your beneficiaries.  I’ll get around to doing a whole series on this topic, but reach out to me if you have a situation that you’re dealing with now in regard to transferring money to beneficiaries.

I hope this newsletter was helpful with clearing some of the mud that most advisors will throw to try and convince you not to transfer some of your assets into an annuity.  The debate is over!  There is no better way to protect your money and guarantee a lifetime income than using an annuity.  The right annuity.  If you haven’t already, please take the time to watch the videos below where I go through, in detail, how I use annuities to get 20% more income for my clients in retirement!  It’s broken up into 5 separate videos for easy viewing.  Then take the time to click the “Schedule A Call” button, or reach me directly at 636.926.6500 for a quick phone call, so I can show how I’ll do the exact same for you!

All the best,

Marty