hi welcome back to the channel today we're going to be talking about annuities we're going to go through what an annuity actually is we're going to go through why for the first time in my 11 years in this industry they finally make sense for you as the investor I'll go through a real world example and you know me I have to bring a spreadsheet in let's get into it [Music] so let's start at the beginning and answer the question what is an annuity an annuity is essentially a very fancy savings account with an insurance company you sign a contract with the insurance company it's very rarely if ever offered by big Banks so you sign that contract with the insurance company and you exchange a large sum of money for a guaranteed income source for the rest of your either life or a guaranteed period depending on the type of annuity that you're looking at so essentially you are buying an income that is as close to guaranteed as it gets in your retirement that can sound very very appealing so just like anything in the financial services industry there are pros and cons to any decision that you make really the pros of an annuity boil down to two or three things they Shore up your foundational income sources and if you have not heard me talk about foundational income sources all that means is it's the in income sources that you wake up with every year that are reliable and not linked to a market so you'd be Shoring up some of those income sources and you would remove a certain risk and that risk is that you cannot outlive your money assuming you do a lifetime annuity so a lifetime annuity is for your life no matter how long it happens to be there are other types of annuities out there like term certain annuities where it only pays for 20 years for example but on today's video we're focusing on life Annuities that pay no matter how long you live the cons really narrow down to two things uh number one it is absolutely possible for your money to outlive you so if you put in a large sum of money a couple hundred, and you chose not to do a multiple year guarantee which we'll talk about the guarantees a little bit later and you happen to pass away right away the insurance company wins essentially that money for their purposes the other con is that rarely or at least it's very expensive to add this but rarely are they indexed and again we'll go through an example where I look at an index versus a non-indexed annuity option what you may be asking yourself now is why now why are you bringing this up now like I mentioned at the beginning I've been in this industry for 11 years which is crazy to think about when I stop and actually think about that but for the last last 11 years interest rates have been incredibly low and looking at annuities has always been really hard for me to reconcile why anyone would do it from the investor perspective I get why they're being sold because they pay commissions and to be clear if you decide to do an annuity through me I would also earn a commission but for the first time since I've started in this industry the math actually suggests that it's good for you and I have no ethical issues making a commission when I'm helping someone but for the last 10 11 years when annuities really could be outpaced by mediocre investment returns quite easily the commissions that have been being paid have not been helping people I have ethical issues with that and so now and we're going to go through the break even math in a second now they're actually starting to make sense with the increased interest rates and increased volatility it could really make a lot of sense for your scenario to trade some of your invest ments for a guaranteed income source to pull lots of that volatility out of your financial plan which again we're going to go through in the example and the investment returns are actually not that bad when I actually run Break Even analysis so let's get into the actual example so again this is a real scenario a real client that I'm dealing with when we see the software in a minute I will obviously have changed their name for anonymity sake but nothing else has changed and to be clear this person is in a good financial position position they're on the cusp of retirement it's a single woman uh that has uh done 30 to 40 years at a particular organization building up a robust defined contribution pension which is really what we're looking at for annuities as well so this person is ready to retire and in the financial position to do so so it's a great opportunity to look at this type of thing and so what I did is I went to my software so as a broker of different insurance companies which we all are at K4 uh we're able to get quotes across a number of different companies when we put in a quote request so when I put in a quote request I actually get eight to 10 different company numbers and so I decided to pick one for the entire example running through doesn't matter which insurance company it is uh so I'm not going to show the name if you decide to go ahead and look at this I would always show all the different options to give the full picture but I want to just highlight one so this client is contemplating putting $300,000 in a 10-year guaranteed lifetime annuity so what that 10-year guarantee means is that the first 10 years are guaranteed even if the client passes away in year one of the annuity the remaining of the first 10 years is paid out to a beneficiary no matter what that's guaranteed and then lifetime again just means it's over their entire life if they were to put the $300,000 into this annuity if we did not add in in indexing they would be getting $1,616 49 per month if we added a 2% indexing to this annuity quote that number would go down pretty substantially to $1,281 N1 now but of course that one index and you know me I had to do a break even on that so let's jump into the spreadsheet for that so here we are in a spreadsheet that will compare the index to the non-indexed version of this annuity so just a reminder here the fixed income payment $1,616 49 per month it does not increase on the index side you take a big hit at the beginning dropping to $1,281 191 but it does increase at 2% per year so there's actually two different break evens that I want to isolate and see where they are first where does the indexed income surpass the non-indexed income and that's right here for this client at age 74 they go from uh all the way from 15,400 up to 19,500 by 74 that's a reasonable break even and if the cumulative income was on point there I'd probably recommend the index but it's not the index or the cumulative sorry uh does not catch up until age 85 and in this case when I go into the financial planning software later you may notice that I have this client recommended to start CPP and OAS both at age 70 it's rare that I recommend the OAS delay but in this case it happen to fit the case uh pretty well meaning that I already have a lot of delays that are all factored around a break even of around age 83 CPP usually the break even is around 83 so in this case I'm probably going to be recommending the fixed because I already have two things that I'm factoring in that are benefiting her in later life here we're going to hedge our bets a little bit uh without sacrificing too much now of course this exaggerates the further you get into life if we look at like 95 uh it's about an $8,000 Advantage cumulatively uh to uh the indexed version now the website to that argument is these retirement years are odds are going to be the ones that you're spending the most so again I'm beading probably a little bit more to the war towards the fix side so that she has that income to enjoy when she's a little younger and healthier so let's take that math one step further and let's figure out what the actual Break Even is on this investment if I were to have a $300,000 investment taking $1,616 49 out per month if I were to use an average life expectancy of 83 on a client this client is 62 years old in this calendar year that's 21 years that I have to provide income that would be a 3.01% interest rate that would be needed to actually provide that income so that would be the break even so that's not superb I could outdo that with pretty mediocre Investments however when we get to 90 and 95 this This Is Where It Starts looking a lot more appealing if you were have looked out to age 90 for this particular client the break even is 4.7% if you were to look at age 95 you'd be looking at 5.31% so now if you think critically about the Investments that you're in if you think your life expectancy reasonably is somewhere between 90 and 95% you're looking at approximately a 5% break even so do you have Investments right now that are guaranteed to be getting you 5% if so is there risk associated with that is there any other thing that you should be looking at that's that's a a risk to you or anything like that and if you can't confidently say I know this investment is going to be getting me 5% and I have a reasonable expectation that my life expectancy will be into my 90s this may be something that you want to be looking at and with that break even analysis you can see the other parts to the trade yes again you're trading a large sum of money in this case $300,000 but you're getting some stability that may or may not be there and if you're a conservative investor again another reason why you may want to look at that so let's look at actually how that stability translates into the financial planning software all right so here we are in the software and like again this is a real client case I've obviously changed the name I do not have a client Nam Chad at chadster although I will say if your name is Chad at Chad or you know someone I will do your financial plan for free because I think that would be hilarious anyways in this plan I have real spending so that's today's dollar spending of 66,000 a year I have a new car column I have new appliances I have the annuity in here and what I wanted to highlight again was the foundational income sources what I've started actually talking about with clients is I kind of started talking about foundational income sources and renaming it kind of as your January 1 money and January 1 of any particular year you wake up and you know your foundational income is going to be X and that's a very relieving feeling for a lot of clients and that's again one of the reasons why I want to ensure that the foundational income is as robust as possible because I want to take pressure off of you as the client so let's pick a year where OAS CPP and the annuity are all rolling because those are the only three foundational income sources that this client has and they're going to be getting 19398 plus 28733 plus 14539 for a total of $62,000 foundational income source and again they know that as of January 1 8:00 a.m. when they wake up they're getting that 62,000 and if we go across to the spending that 66,000 in today's dollars has inflated in this projection to just over $882,000 meaning that the foundation granted these are pre-tax numbers and the spending is after tax but the foundation is representing 76% of the spending desire for that particular client which is pretty fantastic if I flip over to the exact same scenario except no annuity so the assets are slightly larger here because the annuity wasn't purchased if we go to that same year it's just C PP and OAS which total $43,200 or 54% sorry that's 52% of the spending desire so the annuity added 24% from 52 to 76 of the coverage that foundational income sources bring to this particular client's uh spending expectation again if you're a conservative investor that may be very very appealing the last step though is to actually look at the estate projection as well cuz in that case it actually also goes up if we go to the scenario without the annuity first the estate projection is again it's healthy $371,900 that's future dollars and that's after tax Etc but in this example it jumped by about uh $80,000 about $90,000 actually to $465,000 so not only in this case did it increase the foundational income but it also increased the estate now again if you've noticed if you're if you're taking screenshots and looking at some of my assumptions here I am very conservative my investment returns are very very conservative at 4 and A2 my inflation is also 2 and a half so if you were a more aggressive investor or we had more aggressive assumptions put in here that trade may not be quite as obvious so again every client situation is different but I try to be as conservative as possible within the software so that when the real world investment returns hit hopefully you are better off so there were a few reasons why for the first time in my career an annuity may make sense for you as the investor if it's something you want to explore a little further there will be a link in the description below that'll come directly to me I'd be happy to look at it with you till next time keep planning [Music]
