My wife Jo had some CDs mature. If we renewed them at the current .4% rate, she would take an 80% income cut. She remarked, “That’s not enough income to pay the bills. We don’t want to tap into the principal each month to make ends meet.”
What would be a perfect retirement plan?
I retired in 2005. We wanted to live comfortably off our life savings for the duration. Here is what we were seeking:
- Enough income to maintain our current lifestyle.
- Protect our buying power from inflation.
- Guaranteed income, no worry or stress.
- Grow our nest egg so we could leave something to future generations.
We put 70% in FDIC insured CDs and the remainder in the market, staying ahead of inflation. It did the job – for three years!
The 2008 bank bailouts changed everything. We thought our FDIC insured 6% CDs were solid. We learned the income was not guaranteed; all the CDs were called in. We could replace them at 2%; a 66% income cut, unlikely to keep up with inflation. We saw what Carter year inflation did to our parents’ life savings.
Building a hybrid retirement plan
Today we have a much smaller percentage in FDIC insured CDs (safe from default) and we have some money invested in metals and stocks to hedge against inflation.
We own some dividend paying stocks; understanding the risk. Common stock dividends are NOT guaranteed, nor is the stock price. Preferred stock share prices are less volatile, and their dividends are guaranteed; however, like CDs they can be called in. Dividend payers handily beat .4% interest rates.
Chuck Butler shared how he built a hybrid portfolio to address these concerns. One item he included was an annuity.
Today I want to interview Stan Haithcock, our expert on annuities. Stan is known as “Stan The-Annuity-Man”. He is an outspoken consumer advocate on annuities. He tells it like it is.
DENNIS: Stan, on behalf of our readers, thank you for your time.
Let’s talk about guarantees. Without a fully funded pension, most people worry about not having enough money coming in each month.
I know there are all kinds of annuities, some tied to stock market performance, etc.
Can annuities properly address the guaranteed income concern?
STAN: Dennis, thanks for inviting me. Yes, some annuities have guaranteed fixed income.
DENNIS: I’ve always been leery about “investing” with an insurance company. They have to be conservative and are in the same market as the rest of us.
How do you address that?
STAN: Annuity companies (i.e. life insurance companies) aren’t smarter than banks, they are just more regulated. That’s why you don’t see the kind of “issues” you write about within the industry.
Annuities are “confidence products.” There is industry oversight to protect that golden goose. Understand that insurance companies have the big buildings for a reason – they know when we are going to die – and price their products and strategies accordingly. Obviously, carrier ratings are important…but there are more layers to the protection you have when buying an annuity of any type.
DENNIS: One of our fears is “not losing money”. When you buy an annuity, you are giving money to an insurance company. What if you died a year later, haven’t you lost your money?
STAN: The monopoly that the annuity category has is “lifetime income.” Annuities are the ONLY product that can provide this transfer of risk to cover longevity; regardless of how long you live.
A common misconception with consumers is that when you die the annuity company keeps the money. This is a “Life Only” structure; one of over 30 ways to structure the payout.
You can contractually structure the policy to pay you (or you and your spouse) for life – BUT – when you die, 100% of any unused money goes to the listed beneficiary(s) on the policy. In other words, the annuity company will never keep a penny of your money if you die before getting all your money back, even though they are on the hook to pay you for the rest of your life.
Remember that ALL annuity income (regardless of the type) is a combination of return of principal + interest. Life expectancy is the primary pricing mechanism…with interest rates playing a secondary role. In essence, “there’s no ROI calculation until you die.” Up until that point it is a pure transfer of risk.
Your risk is the interest you would lose if you bought a CD. At current rates that is fairly small.
Most every US citizen already owns the best inflation annuity on the planet – Social Security. Just like annuities, the older you are when you begin receiving payments; the higher the payment. Your remaining life expectancy drives the pricing train.
DENNIS: Can you share some real numbers? My wife is 72 years old. If she buys a $100,000 CD, she is guaranteed $400 in interest, assuming it is not called in. How would that compare to a simple annuity?
STAN: Sharing a specific quote # in a forum like this makes no sense because annuity quotes are like a gallon of milk. They expire and change every 7 to 10 days.
I would encourage your readers to go to my website and run your own quotes on my proprietary annuity calculators – real time. You don’t have to speak with anyone, just go online and punch in the numbers. I represent most ALL carriers, so you will see the highest contractual guarantees for your specific situation.
| Note: I went to Stan’s website and quickly ran a calculation for Jo. Her monthly benefit would be more than the annual interest on a CD. I understand what he means by return of principal.” |
You should expect monthly payments higher than the interest on a CD as part of it is a return of principal.
Annuities (regardless of type) are commodity products. You shop for them like you shop for a plane ticket. You buy annuities solely for their contractual guarantees – period! Never buy an annuity for market growth or “potential” growth. Own an annuity for what it “Will Do, not what it might do.”
DENNIS: Annuities don’t appear to offer any real inflation protection. Is that correct?
STAN: That is correct…even though many agents/advisors will pitch otherwise. If someone says they have an annuity that fully addresses future inflation, beware!
You can attach a COLA (Cost of Living Adjustment) to an income annuity, but the annuity company severely lowers the monthly payment compared to the same annuity without a COLA.
Some push a Fixed Index Annuity (FIA), misleading people that their FIA addresses inflation. Once again, the annuity company lowers that initial starting payout amount compared to the same annuity without that increase.
The best inflation adjusted annuity on the planet is Social Security.
DENNIS: I’ve received Social Security for 15 years. While I agree, Social Security is the best annuity on the planet, it has shortcomings. Generally, inflation increases are taken right back with increases in our Medicare insurance premiums. Unlike a private insurance company, Big Brother can unilaterally change benefits – they have done it in the past.
An annuity looks like a good component of a retirement portfolio, offering guaranteed income as long as you live. My aunt lived past 100; that is a long time to make your money last.
Like all components, there are trade-offs. It provides guaranteed income, but you need other investments to deal with inflation and passing money to the next generation.
What are your thoughts on this?
STAN: Annuities are in essence, a pure transfer of risk strategy – and there are many types of annuities available.
Annuities contractually solve for 4 primary goals. I’ve come up with an easy to remember acronym…P.I.L.L.
P – Principal Protection
I – Income for Life
L – Legacy
L – Long Term Care/Confinement Care
If you do not need to CONTRACTUALLY solve for one or more of the items in the P.I.L.L. – you do NOT need an annuity. There is no “M” for market or “G” for growth.
| Never buy an annuity for market growth. EVER! |
Another tool to determine if you even need an annuity…and if so, which type…really comes down to 2 questions.
1. What do you want the $$ to CONTRACTUALLY do?
2. When do you want those CONTRACTUAL guarantees to start?
From those 2 answers, and the P.I.L.L, I can determine if you even need an annuity; and if so, which type would provide the highest contractual guarantee for your specific situation.
It’s really that simple. Annuities are commodity products, be sure to shop all carriers.
DENNIS: One final question. Where can people learn more about annuities without feeling pressure to buy one?
STAN: Thanks for inviting me.
Dennis, your Special Report on annuities is a good place to start. I have hundreds of educational YouTube videos (Type Stan The Annuity Man in the YouTube search box). I have a weekly podcast called “Fun With Annuities.” They are also available on my site.
| Disclaimer: I have no financial arrangement with Stan. I am happy to allow him to use this platform for our readers education and benefit. |
On my website you can obtain my FREE 6 Annuity Owner’s Manuals. If you want more help, you can initiate a one-on-one call with me.
Dennis here. Stan is not only an annuity expert, but a consumer advocate and educator.
Like all components of a good, diversified retirement portfolio, investors need to understand what annuities can and cannot do. I know many retirees that sleep well knowing that each month they can count on some guaranteed income.
