Annuities - Benefits & Pitfalls

Woah! There's another part?! Woah! End of this season? I'm afraid so. We are wrapping up our final episode of Season 5 with finishing out our Annuities section. We talk about things that you may not expect when considering them. What happens if I'm collecting and I pass? Where does the money go? What if I'm already involved in it and want to change? What if I want to get started? 

Join us for our Season finale of Season 5!

And yes. There's dad jokes.

Transcript

Chris Holling: 0:00

This is the truth about investing back to basics podcast where we want to help you take control of your personal finance and long term investments. If you're looking for a way to learn the why and how of investing, then you found the right place. Thank you for taking the time to learn how to better yourselves. That's okay. I forgive you for not having near the quality of sense of humor as I do. As refined as I am.

Sean Cooper: 0:40

Refined, Yes,

Chris Holling: 0:41

yeah, that's that's not, okay. Whatever. Hi.

Sean Cooper: 0:45

I think the mustache speaks to that.

Chris Holling: 0:48

You can't you can't hear the mustache though. So I have to emulate my, my excellent riff refinery.

Sean Cooper: 0:59

I feel like now you need to share a picture with our listeners.

Chris Holling: 1:03

Jeez, yeah, yeah. Go go to go to our page. I'll, I'll share a picture today. I actually that's what I need. I need somebody to request it. I don't even care who it is. Just be like, Hey, where's my picture? There we go. And and then that will prompt a fine handlebar mustache picture.

Sean Cooper: 1:23

Indeed, very fine. Indeed.

Chris Holling: 1:25

If nobody requests it, then that's, that shows how little anybody cares about a good refined mustache. Okay, no, I'm straightening things out. Thank you. Hi. Hello, everyone. Welcome back, ladies and gentlemen, to another episode of The Truth about investing back to basics. My name is Chris Holling.

Sean Cooper: 1:45

And I'm Sean Cooper.

Chris Holling: 1:46

And today we are continuing out our annuities section we we talked on that. Last I almost said last chapter. I don't know why this last chapter of our life. Last, the last episode, we were talking about annuities, the different types, the different ways that you can utilize them if it's your thing, if it's good for you. And today we wanted to touch on I, from what I recall, we just wanted to talk about things to watch out for. I think pitfalls is the word that we used. And I I mean, I guess I don't I don't even know what to watch out for. Because when we talked about it. Last chapter, I talked about how I except for when we discussed it, I'd been familiar with some of it in discussions with other people. But I'd never had a opportunity posed to do it myself or someone saying, hey, this would be a good chance for you to look into something. So I haven't even looked at a form where I could go. Oh, look at that. That seems weird. So what what types of things do you do you think that we should be watching out for I think that's what we're talking about, just like commandeered this conversation without giving Sean a chance to tell us what we're actually going to talk about. So this is what we're talking about.

Sean Cooper: 3:05

No, that was a big part of it. We were also going to talk about some of the places where they they tend to make sense where people typically utilize them.

Chris Holling: 3:14

Oh, sure.

Sean Cooper: 3:14

Because we touched very briefly on both of those last week when we talked about the different types, but not to any great detail. So I was wanting to cover those two subjects a little bit more thoroughly. So people have a better idea of what they're looking for.

Chris Holling: 3:30

Okay.

Sean Cooper: 3:31

So in terms of

Chris Holling: 3:32

Do you want to start with one? Or which

Sean Cooper: 3:34

Yeah, let's start with when they make sense,

Chris Holling: 3:36

okay.

Sean Cooper: 3:37

might make sense anyway. Because it's going to vary person to person. So there are two basic reasons why people might utilize an annuity, the first is going to be the guarantee. So they don't want just to have their money in the market at risk. They want some form of guarantee, guaranteed growth. And that's one of the first reasons people might utilize an annuity. So we talked about a fixed annuity and fixed indexed annuities, both of those are going to have some form of minimum growth rate that is guaranteed by the insurance company,

Chris Holling: 4:14

which just to kind of jump in for a second in case this this listener here that's catching us right now, in case you've never listened to any of our our previous episodes before. First of all, congratulations on diving into the deep end. But also the some reason that somebody might be interested in some of that consistent, but more conservative growth would be to battle something like inflation, which we've covered in a earlier episode, if you want to go and check out inflation is a real simple reason why somebody might want to at least match what's going on in the world around them. Didn't mean to completely commandeer that from you. I just wanted to mention that.

Sean Cooper: 4:54

You're alright. Yeah, they they want to have some form of growth but without the the risk tied to the markets

Chris Holling: 5:02

right

Sean Cooper: 5:03

so, because the market is actually going to be typically over the long term be a better offset to inflation than

Chris Holling: 5:14

sure,

Sean Cooper: 5:14

most fixed rates of return. But yes, it still provides that to a certain degree and without the risk associated, or at least not the same level of risk.

Chris Holling: 5:24

Sure.

Sean Cooper: 5:26

Whereas a variable annuity, again, people can still buy it for the guarantee. But typically speaking, you're going to have to pay extra to put a guaranteed rider on top of the variable annuity. So it's not typically standard with the contract. But that is one of the first reasons people might purchase an annuity of any kind. So and then the other would be the guarantee. And this is still that first concept and of guarantees, but the other end of it would be guaranteed income for life to offset basically the opposite of life insurance, where you're actually offsetting longevity risk. And so that would be the the, not the accumulation phase, but the distribution phase, the income phase, where you actually annuitize the contract. And if you were to take a lifetime stream of income, the insurance company is going to guarantee it for your life. So you're purchasing it for the guarantee on the income side, to offset some of your longevity risk. Or potentially, you know, a joint joint income or income plus period certain, again, to offset some longevity risk, if you take it just for a period certain, or you take a lump sum, or you choose to take the cash flow at your discretion, that's not going to be provide the same type of guarantee, at least not for your entire life, the period certain would provide a guarantee, but only for the period that you select. So again, it's it's purchased for the various guarantees that you can build into it, or that it comes standard with. The other main reason people will often look at annuities is for tax deferral. So obviously your retirement accounts 401k, IRAs, 403B's, etc. Those are going to have some sort of form of tax benefit, either when you make your deposits or when you take your withdrawals. But they also grow tax deferred with an annuity because they are viewed by the IRS as a retirement vehicle. They also grow tax deferred, there's no tax advantage when you deposit the money, but the funds still grow tax deferred, which can provide a benefit. Net over the long term that you're invested, it can also provide some form of tax benefit on the income phase, if you annuitize. So again, assuming you don't take a lump sum, you don't pull the money out at your discretion, you actually take some form of either period certain or life income, that when you annuitize, the contract is slightly more tax favorable in that instead of recognizing all of the gains when you take your money out initially. So the capital gains being the the first portion that you withdraw, and all of it being capital gains, it's actually distributed proportionate to the cost basis, and the capital gains as you take the income so it gets spread out over the period that you're taking the withdrawals. So that can be somewhat tax advantage as well.

Chris Holling: 9:02

And, and maybe maybe I'm misunderstanding the way you're describing this, but when you're talking about that, and you're talking about pulling from the capital gains, first, does that have? How do I how do I word this? It? Does that mostly affect the process of say, say while you're gathering from an annuity and you pass away, then that amount gets passed on, through you and your will to your heirs at that point or why? Why? Why does it matter that it's pulling from your capital gains first, if if the numbers are all kind of the same? I see

Sean Cooper: 9:44

you're mixing a few different you're mixing a few different things here. So first off, I want to address the the beneficiary side of things. So if you've annuitized an annuity contract, there, for the most part are not going to be any beneficiaries.

Chris Holling: 9:57

Oh, okay. Okay. I didn't know that.

Sean Cooper: 9:59

It provides income for your life. Unless you've selected a period certain, or some kind of joint life, if you've selected an income stream just for your life alone, it doesn't matter how much money is left in there. The annuity company essentially keeps it if you die early.

Chris Holling: 10:19

Okay, yeah, no,

Sean Cooper: 10:20

which, yeah, so, so not like life insurance, we're not dealing with the beneficiaries, for the most part. Now, if you pass away, before you've even started taking income, or you've, you know, taken if you have taken income, but at your discretion, so there's still money in a, like a separate account, then that might pass to a beneficiary, or like I said, when it's still accumulating that'll pass to pass to a beneficiary. But if you've already elected to annuitize, the contract in retirement, and you elected your life only, then there's no beneficiaries at that point.

Chris Holling: 11:01

Okay. No, that's, that's important to know, I just, I had absolutely no idea.

Sean Cooper: 11:04

Yeah. So in terms of the capital gains, so if, if you were to take, let's say, you start taking withdrawals at your discretion, so you don't annuitize you just say, Hey, I'm going to take this much this year, and next year, I'm going to take some out, or I might not, they're going to assume you're taking capital gains. First,

Chris Holling: 11:27

okay,

Sean Cooper: 11:28

there are a number of other investments out there that are going to be the same with stocks, for example. So investing in equities, depending typically speaking with your, whatever platform you're using to trade, you can choose your tax treatment. So LIFO, last in first out or FIFO, first in first out. And you can choose which which securities you're selling first, are you selling the ones that you purchased? So if you own, you know, 1000 shares of Apple and you sell 10? Are you selling the shares? Or you sell 100? Whatever? Are you selling 100 shares that you purchased in, you know, night 2000? Are you selling the shares that you purchased in 2015? Oh, just as an example,

Chris Holling: 12:32

the difference between the two of those purchase prices,

Sean Cooper: 12:35

correct? Exactly, because the ones that you purchased earlier, would most likely have the most capital gains

Chris Holling: 12:44

sure

Sean Cooper: 12:44

on them. So you can, so when you're trading securities, you can elect how that affects it, like, are you going to sell the last ones that you purchased, or the first ones that you purchased, you can elect that with the annuity, if you just start pulling money at your own discretion, they're going to assume everything you pull initially is capital gains, until you get back to your cost basis. However, if you annuitize, they automatically assume a proportionate amount. So let's say 50%, say 60% of the account is capital gains. And the other 40 Is your cost basis, the money that you put in, so you withdraw $1,000 600 of that is going to be capital gains, and 400 of that is going to be cost basis, where in the form if you've annuitize. So you get$1,000. Every year, whatever it may be, whatever percentage is capital gains, that's what you recognize as capital gains, whereas if you just start pulling money out, it doesn't matter if 60% or cap of your overall account is capital gains, they're going to assume until you pull all the capital gains, it's all capital gains.

Chris Holling: 13:58

Okay.

Sean Cooper: 14:00

And when you pull out cost basis, there's no tax liability for that.

Chris Holling: 14:04

Okay.

Sean Cooper: 14:05

So that's why having that ratio there, as opposed to just all capital gains up front can be advantageous?

Chris Holling: 14:13

Sure.

Sean Cooper: 14:14

Because you're spreading out you're spreading out the tax burden over time, potentially reducing your your net income, your annual income, so that you stay in lower tax brackets, things of that nature.

Chris Holling: 14:27

Okay. Okay, yeah, I could do that.

Sean Cooper: 14:30

So it's not huge, but it can help depending on your situation. So those but those are the two biggies. Number one, you might buy an annuity for the guarantee. Number two, you might buy it for the tax deferral, and the tax deferral tends to be a lot bigger draw for those who have already capped out their retirement accounts. And they have a lot of assets. So there are a lot of income so they're in a much higher tax bracket,

Chris Holling: 14:57

which is why this conversation tends to happen at the same In Time is life insurance.

Sean Cooper: 15:03

You're talking about like whole life insurance. Yeah. Yeah.

Chris Holling: 15:06

Right. Cuz that's, that's what we discussed previously, as we discussed that normally when you start to hit that bracket is when whole life insurance starts to become a more common conversation.

Sean Cooper: 15:15

Correct

Chris Holling: 15:15

And you are maxing out a lot of your assets. Okay. Got it

Sean Cooper: 15:18

you got it

Chris Holling: 15:19

I'm following I'm with you.

Sean Cooper: 15:20

Yep. Now the guaranteed side of it that could be appealing to anybody potentially all it all depends on your, you know, willingness to assume risk and your financial ability to assume risk. That sort of thing. So, yep. But those are the those are the two biggies.

Chris Holling: 15:37

Okay. That makes sense. Well, then, then, what about, what about pitfalls? I just like saying the word that's that's mostly why I'm saying. What about

Sean Cooper: 15:47

It's a good word

Chris Holling: 15:48

What about the pitfalls? the pit off despair! Do you like that? That was a pretty good impression

Sean Cooper: 15:55

No, that was a good. It was good one. Have you read the book?

Chris Holling: 15:59

You know, I haven't actually is it? Is it good? Is it different?

Sean Cooper: 16:03

Oh, yes, it is. Oh, it is? The movie does a very good job of following it. And they are both hilarious. The book has an entire, like, extra chapter on the pit of despair, though.

Chris Holling: 16:20

Oh, cool. Okay. Yeah.

Sean Cooper: 16:21

Yeah. So like when Indigo and Fezzik go into the pit of despair. There's like an entire chapter about them going in?

Chris Holling: 16:30

Oh, wow.

Sean Cooper: 16:30

Yeah.

Chris Holling: 16:32

I'll have to check it out,

Sean Cooper: 16:32

I won't ruin it for you. But yeah,

Chris Holling: 16:34

I'll look into that. Maybe, maybe our maybe our next venture. Our next podcast is going to be Movie Reviews.

Sean Cooper: 16:46

We'll probably have about 100 times more followers for that.

Chris Holling: 16:50

Yeah. And then that way, we'll have 100 followers.

Sean Cooper: 16:58

Alright, so pitfalls, pitfalls, pitfalls. I like the word because it, it describes it because they're, you know, they're something potentially unseen that you need to watch out for. And that's what we're gonna help you do is uncover em so you you can see him?

Chris Holling: 17:17

It's a trap.

Sean Cooper: 17:20

It's a trap.

Chris Holling: 17:22

Sorry. movies.

Sean Cooper: 17:23

We switched to another movie? Yes. Okay, so first off, as we've mentioned, annuities are designed to be retirement vehicles. That is how the IRS views them. So any withdrawals taken prior to age 59. and a half typically will result in some tax consequences and penalties, just basically the same way your retirement accounts work the IRS is giving you some tax benefit for, you know, in this case, tax deferral for investing in your retirement. And if you don't use it for your retirement, they're taking that benefit away and assessing a penalty. It's basically what it boils down to, but it's something to be aware of.

Chris Holling: 18:06

Okay.

Sean Cooper: 18:08

Additionally, annuity companies typically have, in some cases, some rather lengthy surrender periods to prevent you from taking anything more than just a small percentage, most of them will have some kind of liquidity in the first few years of say, maybe 10% annually, but some of them lock it up completely. And the penalties or the surrender periods can be anywhere from three and I've seen up to 15 years.

Chris Holling: 18:37

Oh, wow, okay.

Sean Cooper: 18:38

Yeah. And typically, that's right, around seven to nine years, but yeah, three, three to 15 years, depending on the type of annuity that you're purchasing. And the penalties typically start out around can be upwards of 9%. So if you withdraw funds that exceed whatever minimum small liquidity feature they have, they will assess a penalty in potentially around 9% of your total withdrawal.

Chris Holling: 19:11

Okay, wow,

Sean Cooper: 19:12

so you definitely want to understand the surrender periods and the surrender penalties, that of the annuity that you are purchasing.

Chris Holling: 19:22

Sure.

Sean Cooper: 19:23

And, again, it goes back to the concept this is they're designed to be a retirement vehicle. So if you're putting your money into an annuity, it it's designed to be in there long term. So the surrender period shouldn't be an issue, but it is something you should definitely be aware of, because they can ding you really hard.

Chris Holling: 19:44

Yeah, we can see that.

Sean Cooper: 19:48

On the outside of that, some of the pitfalls to watch out for a more specific to different types of annuities. So, for example, we talked a little bit about fixed index annuities previously. And the fact that they're the index that you're tied to the your growth associated with that index is limited or hampered by caps, participation rates, or spreads. They basically handicap your growth prospects. So you want to fully understand what caps, participation rate,s or spreads or any newfangled con contraptions they've derived might be tied to your growth. And make sure you understand that and apply it when you're assessing the growth prospects of that index annuity. And if you you want more examples of that, jump back to last week, I actually, we go through some specific examples to give you an idea of what that does.

Chris Holling: 20:57

Right. So it's nothing unexpected, per se, but it's just making sure that you're you're looking into what that range is and how that fares for you. Right?

Sean Cooper: 21:07

Correct. Yeah, you you want to make sure you understand that with an A fixed indexed annuity. If you're tied to like the s&p 500, for example, you're most likely I've never seen a fixed indexed annuity that allows you to get the full upside of whatever index you're tied to.

Chris Holling: 21:25

Sure

Sean Cooper: 21:25

there's always some type of restriction so that the annuity company can essentially make money.

Chris Holling: 21:32

Right? I mean, they forgot to offset that somewhere if there's a for when they have their their lower times. It doesn't suprise me.

Sean Cooper: 21:40

Correct, yeah, with a fixed annuity, it's straightforward. They're getting a fixed rate from someone else. And they're offering you a lower fixed rate. It's pretty, pretty straightforward. They're they're they're taking the spread. With an index annuity, it's a little bit more convoluted. And they either cap your your rate of return, put on a participation rate. Or they again, take a spread, like I talked about in the fixed annuity.

Chris Holling: 22:08

Right.

Sean Cooper: 22:09

Yep. And then on variable annuities, the biggest thing you want to be mindful of are the fees. So when I'm talking about fees, a variable annuity is going to have its own fee. So the annuity contract itself will have a fee. Any riders so guarantees, other features that you tack on are probably going to have their own fees. And then your separate account, your sub accounts in the variable annuity, whatever you invest in, those will have their their own internal expenses.

Chris Holling: 22:49

And then, and then they'll have their fees to explain to you how the fees worked. And then the

Sean Cooper: 22:56

right, the point being, these can actually add up to be being fairly substantial. We're talking in the range of three to 4%. Potential

Chris Holling: 23:04

Oh wow,

Sean Cooper: 23:05

yeah, it's it's not a small, insignificant amount that you can just ignore. There, there are some annuity contracts out there that have become much more fee conscious. Most of them, a lot of them do not have riders associated. So if you're buying it for the guarantee, that's if you're buying in a variable annuity for the guarantee, most likely, you're going to have some pretty hefty fees. It's it depends on the type of guarantee, it depends on the type of variable annuity, but for the most part, you're going to be on the higher end of fees. If you're buying it for the tax deferral, then you can potentially purchase a variable annuity contract that has some lower fees. Either way, you still want to be cognizant of what your total fee is. Because it's going to greatly hamper you, potentially greatly hamper your return. And if you did purchase a guarantee, again, you're paying for that guarantee. So it's going to be even more expensive. But it also means it's going to be that much harder to receive a step up in basis like we talked about last week.

Chris Holling: 24:13

Right?

Sean Cooper: 24:14

Yeah. To give you an idea, let's say you're, you know, you got the low end 3% for the annuity itself, and the the riders that you tacked on and then 1% for the underlying investments.

Chris Holling: 24:32

Okay.

Sean Cooper: 24:34

If you have a 3% guarantee on that contract, that means the market has to return at least 7% in order for you to receive a step up in basis.

Chris Holling: 24:47

Wow,

Sean Cooper: 24:47

because you have to overcome the fees of the contract,

Chris Holling: 24:50

right

Sean Cooper: 24:51

The fees of the underlying the sub accounts that you're invested in, and then you have to beat your guarantee. In order for you to To get a step up in basis as opposed to just receiving that guarantee.

Chris Holling: 25:04

Right? That's a that's a lot of extra work.

Sean Cooper: 25:09

Yeah. So and then if you take into account the fact that most annuity companies, insurance companies that offer annuities also have investment restrictions, say around only allowing you an 80/20 allocation. So 80% equities 20% fixed income. If you look historically, at the rates of return of those of an 80/20 allocation, your odds of receiving a step of basis of exceeding that 7%, or approximately 47%. In any given year.

Chris Holling: 25:41

Oh, geez.

Sean Cooper: 25:42

So you're less than 50%?

Chris Holling: 25:44

Yeah, which is an F in case in case nobody listening to this has ever gotten one of those in school? It'd be an F. Okay, so in case case, you're curious, Sean, I know you, you probably don't know what happens below that, like 92% In your world, but that'd be an F.

Sean Cooper: 26:03

Thanks. Thanks. Um, yeah, so and then the thing is, if you, let's say, so in the first year, that's basically what your odds are. If you're stuck in that 80/20 allocation, now, if you have a little bit more free rein, you can go more aggressive, it will actually improve your odds of receiving that step up. Obviously, if you're if your fees are lower, that's going to improve your odds of receiving that step up as well. But if you miss the target in that first year, so you receive the guaranteed rate. Now in the following year, you have to not only surpass the fees of the contract the fees of the internal expens of the sub accounts, the internal expenses of the sub accounts. And the guarantee in that year, you also have to make up whatever you missed the guarantee buy in the prior year, in order to receive a step up mathematically. So anytime you miss, your odds of receiving a step up going forward are reduced.

Chris Holling: 27:06

Wow, okay.

Sean Cooper: 27:08

If we look at the higher end expenses, I've seen expenses as much as 4%, plus higher expense sub accounts. So if you look at potentially needing a total return of 9%, to receive a step up, and your odds of doing so with an 80/20 portfolio, roughly 38% In any given year. Now, that's not to say that it can't happen. That's not to say that there aren't good variable annuity contracts with good guarantees out there. But you have to understand what what your total expenses are. And not just the the ones that are clearly disclosed in the annuity contract, but understand the internal expenses, the fees of the extra riders that you're tacking on all of that. Because the more expenses you tack on, the more guarantees the more whistles and bells, the more expensive it gets, the more likely that all you're purchasing is the guarantee.

Chris Holling: 28:15

Right

Sean Cooper: 28:15

You're basically losing the variable side of it unless you happen to invest in a banner year. So the point is, understand it going into it

Chris Holling: 28:28

sure

Sean Cooper: 28:29

know what it is you're purchasing and why you're purchasing it. If you're purchasing it for the variable, the upside growth, then be very cognizant of those fees. If you're purchasing it just for the guarantee, then you might not be as worried about those, those total fees.

Chris Holling: 28:46

Right.

Sean Cooper: 28:49

Let's see here. Any questions on any of that so far?

Chris Holling: 28:55

No, I don't think so. I mean, it's, it's similar to things that we've talked about before, not not specific to this, this item, but lots of just make sure you're doing your your reading and your research and in what you're going over, because, you know, sometimes something that might look like a good deal might be kind of a wash, especially if you need to do extra things to it, like you're talking about with the variable and it's yeah, that's it all. It all makes sense, I think.

Sean Cooper: 29:19

Yeah. Okay. Then the last thing that I would add to all this is something we touched on before and that is when you actually start to take your withdrawals. And if you elect some kind of lifetime guaranteed income, then you do so at the cost of having little to no flexibility with your withdrawals. So in the case of annuitization, you're going to receive a specific amount based on whether you did it for your life, your life and a spouse, or your life in a period certain etc. They're going to do the math on your life expectancy and say okay, well provide you with this amount of income based on the the rate of growth that we can assume on our end. And the only the only reason that income is going to change is if you've elected a some kind of inflation protected protection or a reduced payout for your survivors. So you assume that, you know, after I pass away, some of our expenses are going to go away. So my spouse can live on a little bit less than I did. So you elect a reduced payout for for your spouse, which gives the two of you a little bit higher payout while you're still alive. But those are the only real reasons why that monthly income would change outside of that you really have given up your flexibility on your income stream. So you you've you've given up control of your money to the annuity company in exchange for that guaranteed income for your life or whatever you've elected.

Chris Holling: 31:00

I can see that. I mean, that's that's also part of the reason why it made me think of the reverse mortgage last time when we talked about it. And I know that that's not what we're discussing. But when I when I referenced it in the previous episode is what made me think of it because it's, it's similar to that because people are hinging on on that often when they are utilizing it.

Sean Cooper: 31:21

Correct. Yeah. So again, it's a trade off. And it's based on what's important to you what risks you're willing to take on. If you do, if you have annuitized it and you something comes up and you need more money, there's no way around it, you have to take more money out of your annuity, there's a very good chance that if you do so it will completely blow up your benefit your your lifetime income, it'll end up resulting in a recalculation of it. And it'll often be down to whatever your your balance, it'll be recalculated based on your your balance at that time, after you've taken the withdrawal, as opposed to anything else. So it most of the time when that happens, it's a very ugly recalculation, at least in my experience. So be sure that you can handle additional income needs elsewhere outside of the annuity, if you're going to go that route.

Chris Holling: 32:29

Then that being said, if somebodies listening to this, and they're they're involved in an annuity, like they're already collecting on an annuity right now, and they're saying, Oh, I haven't considered these things before. And maybe I don't want to be a part of it anymore. Is that something that they can back out of? Or is it a long process of recalculation and stuff? Or how, how would that work?

Sean Cooper: 32:49

It really depends on the stage they're in, they'd have to, you know, if they've already started the income, their options are pretty limited. At that point, they have to basically go into their contracts specifically, and do the math to figure out what what type of liquidity they can generate, how much of a hit they're going to take, if they just decide to pull extra money out. Or surrender the contract entirely. So it's going to be on a case by case basis. And completely.

Chris Holling: 33:24

What about what about maintaining it and then adjusting it like say you're, you're on a, a fixed, but then you decide I'd rather be variable? Is that just a matter of, of them pulling a couple of levers? Or does it? Does it also cause different issues? Because it's a long term thing?

Sean Cooper: 33:42

Yeah, once you've annuitized it, you you can turn off the income and hopefully get some growth again, maybe. But as far as changing your income stream from them after the fact, again, most likely, it's going to be not working your favor.

Chris Holling: 34:04

Okay. I can see that. Just curious.

Sean Cooper: 34:08

Yeah. And then the other thing, unless you have tacked on an additional rider, that has a death a death benefit, or a some sort of stream of income for someone other than yourself, once you you pass away. The contract, like we talked about early, earlier, terminates, any funds remaining. Any additional balance, typically was the annuity companies ends up keeping at that point.

Chris Holling: 34:42

And is that only done at the time of the contract? Or can you can you say, Oh, wait, by the way, I need to add this person as my beneficiary.

Sean Cooper: 34:49

Benefit. Again, you're

Chris Holling: 34:53

mixing things?

Sean Cooper: 34:54

Yep. Yeah. So yes you typically name a beneficiary to your annuity contract, however, if you've started a stream of income, a guaranteed stream of income for your life, unless there is a specific death benefit rider on the contract, or the contract has a built in death benefit. Once you've started that income, there is no beneficiary for practical purposes.

Chris Holling: 35:28

Okay. Understood. That's why I'm asking these things. Like I. Because I think one of the big things that we try to cover in this whole this whole season, process podcast, everything is, you know, the, the more tools for the toolbox, and you talk to a lot of people that say, Oh, well, clearly, I know the way, this is the way, and we try to educate people on on saying, hey, you know, understand what you're, what you're doing, understand what it is, and maybe it is best for you, maybe it's not. And if you choose that you want to get out of these things, or you choose, you want to get started with these things, then this is how to do it. I think we try to cover all those things. But that's that's why I'm asking these questions, because these are, these are things that sounds like you have to sign pretty large, lasting contracts.

Sean Cooper: 36:16

Correct,

Chris Holling: 36:17

to me means that it would be more complicated to get out of, and that's that's why I wondered how easy that was. Or not for that matter.

Sean Cooper: 36:26

Yeah. So the if you decided you want to wanted to get out of annuity annuity contract, your optimal window is going to be after the surrender period has ended. So you've you've passed those however many years that is, but before you annuitize, the contract,

Chris Holling: 36:45

okay?

Sean Cooper: 36:47

That would be your optimal window. Any, if you do it before the surrender period, then you're going to get hit with those surrender charges, if you take it out of an annuity. So you instead of going, you know, you surrender it and you move it to a non qualified account, or you just take the cash, in addition to any potential surrender charge, you're also going to get hit by the IRS for taxes and penalties. If you're pre if you're pre 59 and a half after 59 and a half, you could do so you can also move between annuities. So from one annuity to another, it's a 1035 exchange, I believe. So that would allow you to avoid the the IRS, the taxes and the penalties from them, you'd still have to potentially deal with the surrender charges from the the annuity company. And then on the income side, if you've annuitized. That's when you face all the potential recalculations based on balances and that sort of thing. And, again, that doesn't tend to work in your favor. And by by way of example, you going back to the beneficiary concept, if say somebody had $100,000, annuity had grown to $100,000, they decided to annuitize it in retirement, so they're going to take income on it for the rest of their life. And they elect their life only. And the annuity contract has no death benefits on it. If they died a month later, so they took one month of income. The annuity company keeps it

Chris Holling: 38:24

Wow. Okay,

Sean Cooper: 38:26

so yeah, there's a definite risk, you're buying it to offset the chance that you would otherwise outlive your income. And that's the the risk that the annuity company is taking. So if your life expectancy is 80, and you live to be 105, they've said, Okay, we will guarantee to pay you this amount every month until you die. So they've in that scenario, they've paid you for an extra 25 years. So they've probably come out way behind in that scenario. But again, if you died a month after annuitizing for your life only. They keep it they come out ahead and that's how it all balances out that's why it's an insurance contract.

Chris Holling: 39:08

So if you only eat kale every day, then get an annuity contract is that, is that what you're saying,

Sean Cooper: 39:15

if you only eat kale every day, no you should probably probably buy a life insurance contract cause you're going to die

Chris Holling: 39:23

I once had a patient that she's 104 completely with it able to still walk around with a cane which at that age is is unheard of especially

Sean Cooper: 39:34

that's awesome

Chris Holling: 39:35

being cognitively there on top of all that, yeah, and I remember asking her one time like how do you how do you do stuff like how are you the way that you are how do you function so well when others just don't go Oh honey, the only doctor I go see is Dr. Pepper this lady pounded down five Dr. Peppers a day and I'm convinced the preservatives in a Dr. Pepper

Sean Cooper: 39:57

Holy cow kept her alive this now keep in mind everybody this is a this is an investing podcast and not a nutrition and health that's that's it that made me think of so if you're gonna play a game, you know, get some get some kale and some Dr. Pepper and roll the dice and see how you do. Or Don't,

Chris Holling: 40:22

Or don't just don't do that. I'm sorry, I took us way off track.

Sean Cooper: 40:28

The only doctor I see is Dr. Pepper. That's awesome.

Chris Holling: 40:32

Okay. What else what else we got that now that I've completely derailed us.

Sean Cooper: 40:38

It's like an apple a day keeps not just a doctor, but anyone away if you throw it hard enough.

Chris Holling: 40:49

Oh, I thought you were talking about like, Have you sat next to Frank lately? He's only eating apples for the last 30 days and they are moving through him.

Sean Cooper: 40:59

Oh, yeah.

Chris Holling: 41:00

I thought that was okay.

Sean Cooper: 41:01

My parents had a dog that anytime they they got into the apple orchard, and they would just eat all the apples that had fallen on the ground. Her breath would be so bad. Anyway, yeah, we are way off base. But that's that's all I had to add to annuities. They

Chris Holling: 41:20

okay,

Sean Cooper: 41:21

there's there's reasons you might want to look at them. And there's reasons you want to be cautious and make sure you know what you're signing on to

Chris Holling: 41:30

That's totally reasonable. Got it?

Sean Cooper: 41:33

Yeah,

Chris Holling: 41:33

reasons. Reasonable. Alright. That's Enough. Okay, well, let's, let's wrap this up. Thank you, everybody, ladies and gentlemen, for joining us on wrapping up this season of life insurance and annuities. And the truth about investing back to basics. Oh, you know what, actually, we, we do have one more season. But we might only have one more season. To be fair, we we've got one more written out. And we don't know exactly where it's going to take us or what happens after that. But we're, we're working on it. And I'm amazed we're, we're pushing through I'm I'm kind of amazed how far we've come and in a way how fast it's gone. In a weird, bizarre kind of way. So

Sean Cooper: 42:19

yeah, no, that's true.

Chris Holling: 42:20

So coming up into the future, we're looking at more long term stuff and including some, maybe some social security, maybe some estate planning, maybe maybe maybe some interesting stuff. I don't know. It's more stuff I have no idea about. But there's your there's your information for the future. So thank you, again for continuing to listen to us and continuing to want to take the time to better yourself on the truth about investing. Back to Basics. My name is Chris Holling.

Sean Cooper: 42:49

And I'm Sean Cooper,

Chris Holling: 42:50

and we will catch you next season. Podcast disclaimer disclaimer. The disclaimer following this disclaimer is the disclaimer that is required for this podcast to be up and running and fully functioning and moving forward. This is going to be the same disclaimer that you will hear in each one of our episodes. We hope you enjoy it just as much as we enjoyed making.

Sean Cooper: 43:21

All content on this podcast and accompanying transcript is for information purposes only. Opinions expressed herein by Sean Cooper are solely those of fit financial consulting LLC unless otherwise specifically cited. Chris Holling is not affiliated with fit financial consulting, LLC nor do the views expressed by Chris Holling represent the views of Fit financial consulting LLC. This podcast is intended to be used in its entirety. Any other use beyond its author's intent distribution or copying of the contents of this podcast is strictly prohibited. Nothing in this podcast is intended as legal accounting or tax advice and is for informational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This podcast may reference links to websites for the convenience of our users. Our firm has no control over the accuracy or content of these other websites. advisory services are offered through Fit financial consulting LLC an investment advisor firm registered in the states of Washington and Colorado. The presence of this podcast on the internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute, follow up or individualized responses to consumers in a particular state by our firm in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. For information concerning the status or disciplinary history of a broker dealer, investment advisor or their representatives. The consumer should contact their state securities administrator.

Chris Holling: 44:58

Hey, did you know Sean, that there are a lot of similarities between Iran and Iraq but there is one. That's it's very, very different. See, Iran has a fear of spiders, whereas Iraq, they do not. So I ran. Phobia. Iraq No phobia arachnophobia. Sean, come on. I laughed at that for like five minutes yesterday.

Sean Cooper: 45:37

I'm sorry.

Chris Holling: 45:38

No You're not You're just you're just judging me.