Is A Fixed Annuity Worth It In Retirement?

have you ever heard you want all the market upside and no downside let's really look into what people are talking about with [Music] that hey it's eric with jazz wealth managers let's talk a little bit about all the market upside no downside man that sounds good sounds almost too good to be true doesn't it so that's what i want to talk about uh it's it's actually referring to a fixed annuity there are variable annuities fixed annuities i'm just going to tell you something these things get crazy confusing i actually started in the financial industry and when i did i worked for a company that sold annuities and life insurance and all this stuff and there was a big incentive for selling that's one of the biggest issues with this um not trying to take a dig at anybody that sells these things but the fact is is that companies these massive insurance companies are always profiting off of others and their fear that's what insurance ends up being yes it's nice if something happens and the insurance gets paid out but if you were to take a little bit more risk with your portfolio portfolio and be comfortable with it is it worth actually trying to do this annuity instead so there's a lot of uh talk right this second with all the market volatility people are coming out of the woodworks and telling you crazy things just like you know hey let me get you into something that you get all the market upside and no downside nobody wants to see their money go down everybody wants to see it go up so i mean the the saying makes sense but unfortunately it's not all factual so let me break this down a bit for you i'll talk a little bit on fixed annuities today because variable annuities also are another thing that's out there that oftentimes gets sold and are you know trying to take a little risk off the table but in reality uh may not be the best thing for your dough but with the fixed annuity the thing about this is is that with these and the way they work is you're actually giving up a little bit of your return so that the insurance company gives you some kind of guarantee such as i'm not going to let your money go down that's the kind of things that happen with a fixed annuity they'll give you either a guaranteed rate this could be just an interest rate that comes into play or they could say hey you know what let's actually put you in the stock market and play it against the stock market now you're not actually in there but what they're going to give you is something called a cap rate so check this out because i was actually looking at one of these policies this is just a random website that i pulled up here that talked about it so sorry for all the ads there with this but the idea with this one is uh it is pacific life index foundation five now i don't i'm not sitting here trying to go into all the nitty gritty details because honestly there's some of this that uh you don't know unless you you contact the company but there's all kinds of writers there's all kinds of things what i wanted to find was a pretty cut and dry policy and that's what i'm finding here with this one the way it works you got to put at least 25 000 in um it's actually it doesn't show right here but it's a 7.25 cap so what a cap is is when you're looking at the stock market if the stock market goes up 10 the cap is the most they're going to give you so they'll give you 7.25 um that's the way that works and that's uh for if you're getting a fixed annuity that is based on the market returns so that's what we're looking at with this um as far as everything else goes uh you know there's there's a lot that comes into play it's an index annuity is what it's often called surrender charges surrender charges are a big one when it comes to any kind of annuity you have to realize that oftentimes these companies are going to sell it and they're going to lock your money up the reason they're locking your money up is because they know if they're going to give you a guarantee they're going to have to invest for the long term to make sure that they're making money on you they're running everything against you know basic averages in the stock market to say okay you give me this money for five years on average we're gonna guarantee your money will never go down we're gonna cap it at 7.25 they're hoping to always make more off of that because not only is the insurance company now taking a risk on things now they're also paying out an advisor to sell this policy so there's a lot that comes into play they want to make sure they're making money off of you when they do these um with this as far as it goes uh the surrender period uh oftentimes is gonna be for the life of the contract if it's a five-year annuity then that's what that looks at you can take out 10 percent per year off of these but you can't take out the whole 100 or you're going to have a huge penalty the penalty continues to go down as you get closer to the surrender or the end of the contract is often how it works so looking here again at this this one's going to benchmark based on the s p 500 so they have different types of index annuities that are out there annual point to point or performance triggered so what this means is basically if an annual point-to-point what you're looking at is you know if the s p 500 did 7.25 then you get 7.25 if the s p 500 did 5 you get 5 if the s p did negative 10 the nice thing is is the annuity won't go down that's what they're oftentimes sold on now you have the cap rate there or declared interest rate declared interest rates are more uh of along the lines of a fixed annuity that is just with a guaranteed rate uh the cap rate is if you are putting this against like the s p 500 so now let's get into the actual research of this and what i did and what i broke out now i do want to give you one thing that that i noticed on this i'm looking at a great period in the stock market for sure when i'm comparing this there are times that i can look at things where i could say you know what i i could spin it any way with the numbers and that's what oftentimes the annuity people do so i'm not trying to spend anything i'm trying to just give you the facts here if you look from 2000 to 2010 basically the market as a whole was a horrible market because you incorporated in the dot-com crash you also incorporated in uh the global market crisis of 2008 all of those combined if you were in a fixed annuity you might feel a little bit better about your dough but how can we combat that and how do we do that as fiduciaries without selling products is we could talk about if you're wanting to go super conservative you could have a lot of cash in a portfolio so let's just say and what i did with this is i actually modeled it as though you were 70 in the stock market and 30 in complete cash nothing else so the idea there is what people do when they sell the annuity is they're gonna tell you all right well this is the bucket of money that's going to be over here to pull from when the market does go down why do i know these kind of this lingo because i worked in that remember and i got out of it i hated it it wasn't for me uh i wanted to work in your best interest that's what a fiduciary does and so the bucket idea of pulling from it when the money goes down it works if you're not in a surrender charge period but if you are you're locking your money up you can only get 10 percent of that money that is in that account what if you want to go do something you may not want just 10 you may need more than that you can't do it so you got to remember you're giving up a lot of liquidity for this as well but just to break this down what i did was i looked at it as though if we are actually incorporating in 70 in the stock market 30 in complete cash nothing else i also put a one percent management fee uh to be honest with you depending on where you're at with us that fee may actually be a little high we try to shoot lower than the average industry average which is generally one percent sometimes the management fee could be even higher i just wanted to model that to give you a snapshot so if we're looking here to 70 30 this is the returns for the past 10 years as of august 23rd of 2022. so looking at the average returns there this is what we have to take into consideration so if you're looking at this and you look at the total return if you combine everything through those years and the down years as well after those 10 years your money would be up 100.9 percent so if that's the case you put a hundred thousand into this account and you rode that what you would have is 200 nine thousand two hundred thousand nine hundred dollars that's where this is going to end up now yes you are taking a little bit more risk because you're putting the money in the markets but you also remember have that 30 cash that's where we have to look at in the down years maybe using some of that cash if that's the case the up years you want to make sure you're capturing upside now what would happen if you put it in that same annuity for those 10 years because it's a five-year annuity but oftentimes what people do is they say you know what i'm gonna go another five years with this so let's just look at 10 years so if we're looking at 10 years here with this what i looked at was actually taking everything and you look right here at the returns i actually said okay this was eight point three two percent well that annuity only pays seven and a quarter again again seven and a quarter this one you get six point eight two percent uh this one you're not going to lose any money yeah there's nothing there um as far as everything else goes five point five eight percent uh that's what you're going to get seven and a quarter so you get what i'm saying here all the way down to year-to-date where we're at because the fact is is that we haven't finished out the year so we're looking at from uh back in august of 2012 when this started so if we did just that what does your money actually come to if you did that fixed annuity well right here you would make 55 900 so it would be 155 9. now for some people that are completely conservative that just are scared of the markets maybe that feels really good and you're okay with that that's fine but for a lot of people in retirement years you're pulling too much off the table you haven't done a financial plan you don't really know even how much risk you need to take that's the kind of stuff that we like to look at with our software with our planning with nest egg to be able to make sure that we're accounting for the amount of risk you need to take and maybe your scenario is we pull back a little bit more maybe we have more cash in a portfolio that's your comfort level we're able to customize that here at jazz but just looking at this this just gives you a snapshot of uh the differences there and if if you think it's really worth it i'd say you know you're going to miss out on what's up 45 000 um by just trying to uh lock your money up versus having everything liquid thanks for watching if you want to watch more fin tips videos click here be sure to like and subscribe also [Music] you

Channel: Jazz Wealth Managers

Views: 13,210

Keywords: retirement, retirement planning, financial planning, personal finance, retirement annuities, fixed annuity, what is an annuity, annuities explained, retirement income, annuity basics, real estate, annuities 101, how to make money, credit card, passive income, life insurance, stock market for beginners, annuity investment, stock market analysis, personal finance 101, personal finance management, tax planning strategies 2022, estate planning basics

Id: RZ5apKKVonA

Length: 10min 46sec (646 seconds)

Published: Wed Aug 24 2022