FRIDAY, FEBRUARY 23, 2018
JIM: Welcome to today’s show as we’re going to talk about the good, the bad, and the ugly of tax-deferred annuities and, more specifically, how they should or should not be used as an accumulation tool. Joining me today is Tim Kiesling, a national speaker and consultant that speaks to advisors all over the country talking to them about different types of retirement strategies as well as risk reduction strategies and, today, we’re going to talk about Annuities 101 using annuities as an accumulation tool and then join us for a future show where we’ll talk about annuities as a distribution tool for retirement planning. Welcome, Tim.
TIM KIESLING: Hello, Jim. It’s a privilege to be with you.
JIM: Hey, I’m really looking forward to today’s talk. We’ve had a past guest on, Tom Hegna, who you’ve partnered with in speaking around the country on various topics. I’m really looking forward to this because Tom’s a dynamic speaker and you’ve come highly recommended and we’re going to be talking about a topic today that I think is one of the most misunderstood, which is annuities. I know in the annuity field, people seem to love them or hate them and I keep trying to tell them it’s a tool in a toolbox. If you’re a plumber and looking for a pipe wrench, a crescent wrench may not work, and a crescent wrench doesn’t work for all jobs, so annuities have a time and a place, sometimes are the right fit, sometimes are not the right fit. It’s a matter of putting them into their appropriate place so, today, let’s talk about annuities as an accumulation tool. Tim, where do you see annuities fitting in in that space?
TIM KIESLING: I think there’s certainly some questions about where they fit in and as you alluded to, there can be this perception and everyone seems to have an opinion on annuities, whether good or bad. I think a lot of times, it’s primarily what they may have read in the media and in many cases, up until the current times, unfortunately, many of that has been bad so the challenge that I think a lot of folks have is a lot of the terminology and where would these products fit within my portfolio. Many times, folks have preconceived thoughts or feedback as to what they have heard about the annuity and that’s probably the biggest challenge. I couldn’t agree more with your introduction that the annuity is simply another product that’s available to help people save for retirement. When used appropriately, it works really, really well but when we try and fit it into a scenario where it’s not the best solution, that’s where we start to hear the horror stories of things gone really, really wrong.
JIM: And I couldn’t agree more. I know in our practice, I’ve found the same thing, and there’s articles where people say they’re the greatest thing since sliced bread and we’ll have world peace if everybody just put enough money in annuities, and then on the other hand, people say it’s the next coming of the plagued. It’s amazing how emotional people get on one side or the other. I said annuities aren’t good or bad, they’re just a tool, and it’s a matter if it’s the right tool, so let’s get into the different types of annuities. Tell us what fixed annuities are and where they’re appropriate.
TIM KIESLING: Certainly. I think the easiest way to begin to explain the different annuity products that are available and the different ways that they can be used is whenever I’m talking to an individual about annuities, I like to go back to the old t-graph that we had in college accounting and we’d just draw a big capital T. On the left hand side of that T, I write the word accumulation and on the right hand side, I write distribution. This helps, I think, to give a visual for an individual to say are we talking about a fixed annuity on the accumulation side or are we talking about a fixed annuity on the distribution side because they’re two completely different products, depending on which phase we’re in as a saver or retiree. For example, a fixed deferred annuity is a product on the accumulation side of our t-graph and that is a product that’s going to allow me to accumulate for retirement in a manner very similar to a Certificate of Deposit. Just like I can go down to the local bank and I can buy a Certificate of Deposit, the bank will tell me what my rate is going to be, the bank will tell me what my term is going to be, and I have an idea what I’m going to get in the way of a guaranteed rate of return. A fixed annuity, very, very similar. I can go to an insurance company, buy a fixed annuity contract, they will tell me what the rate is going to be, they better tell me what my surrender charge schedule is going to be, and I’ve got a pretty good idea of what I’m getting in respect to a rate of return over the next couple years. One thing I would mention is keep in mind that sometimes I might get a rate for the first year and that might be my initial rate and I might get a different rate for the remaining years of that term of that contract.
JIM: Another thing I think listeners should consider as well too and contrasting with CDs, I know a lot of times, people will have CDs, they might be a one-year or a five-year or whatever it might be, and whenever that renews, it renews for the same term again and you have another penalty period perhaps. With the annuities, typically, you have a surrender charge, which means you can access that money during that period of time but you might pay a pretty stiff penalty. Sometimes, they’ll allow you to take a little bit out along the way but it’s really important to understand the contract. One of the beauties of the annuity, unlike a CD, even though you might have a longer period of time upfront with those penalties and the penalties might be much more severe than a CD, once you’ve earned your keep, so to speak, and you get beyond that surrender period, you have free access with most contracts all the time so what’s really important, which you emphasized, is you’ve really got to understand the contract. You’ve got to sit down with your insurance professional and make sure you’re asking these questions and understand that because I think this is where a lot of the misconceptions come in. People are thinking one thing and it’s really something different and they didn’t really make sure that they understood what the features were or some of the restrictions that might be in one of those types of contracts.
TIM KIESLING: You’re exactly right. Most contracts today have some type of liquidity option where, as you alluded to, I can go in and, for instance, I might be able to pull off 10% of that contract value every year and avoid a surrender charge. Now, keep in mind that while I may not be subject to a surrender charge from the insurance company, Uncle Sam isn’t nearly as kind. I’m still going to have to pay income tax on that and, if I’m taking withdrawals prior to age 59-1/2, I might get my hand slapped with a 10% early withdrawal penalty so there’s a lot of moving parts with these, even with a contract that’s as straightforward as a fixed annuity contract. Every company might do it a little bit differently so you’re exactly right. We’ve got to understand the contract. Know what we’re looking at and how it fits our particular situation.
JIM: And that brings up a point. Why is there a penalty draw before 59-1/2? It’s because the tax code allows some significant benefits. It is a retirement accumulation vehicle. It’s a way to add money beyond your retirement accounts, get tax-deferral when you’re arguably maybe in your higher earning years, and maybe be able to pull it out after earning interest on principal, interest on interest, and interest on the money you would have sent to Uncle Sam because it’s tax-deferred and then maybe pull it out at possibly a lower tax rate or more favorable tax rate but you do have to be careful of that 59-1/2 thing.
TIM KIESLING: I agree. This is still a product that’s designed for retirement accumulation. It’s not designed to buy the fishing boat or make the down payment on the home and because it’s designed for retirement, we do get that advantageous tax treatment but there’s always some kind of handcuffs there that we need to be aware of.
JIM: I look at the interest rates that I’ve seen with various companies where they’re offering these fixed annuities and I’d say a lot of them are in that 1% or 2% range, which, I guess when you put all things in perspective, is pretty competitive, but it really doesn’t excite me a lot but for some clients that want that security, that might be the place for them. Tim, we’re going to have to have you back to talk about the distribution tool that annuities provide on another program. Can you come back?
TIM KIESLING: I’d love to have the opportunity to do that, Jim.
JIM: All right. Thank you, Tim.
TIM KIESLING: You’re welcome. Take care.
JIM: Just a final note for those listening to today’s program. We had a brief discussion regarding fixed deferred annuities. There are other types of deferred annuities that might be worthy of consideration that have returns based on market-based components and there are too many complexities and moving parts of these types of products to discuss with a broad audience and it’s something that you really should sit down with your financial or insurance professional to determine if these might be a suitable part of your overall retirement plan.
JIM: Thanks for joining us this week and tune in again next week as we explore another phase of the Real Wealth process and remember, if anything you heard in today’s show you’d like to get more information about, contact your Prism Insurance Agency Advisor. Also, if you feel that any of this information would be helpful to a friend or family member, just click the forward to a friend button.
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