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Strategic Evaluation of Annuities in Retirement

Jan 18, 2024

This webinar will help those considering annuities gain valuable insight of the benefits and pitfalls of purchasing annuities to supplement their retirement income.


Daniel Gibson: Thank you, Astrid. Before we get started, when we do such a great job, I think most of us for most of our careers were busting our butts gathering assets and furthering our career and getting to that retirement age. And we do a great job in producing documents to preserve legacy for spouses and children. But I wonder sometimes that people really spend the time really planning their retirement out as they should because it is, it could be a 30, maybe even a 40-year period for which people need to be able to plan for. And I wonder whether people spend the time to even do it. I mean do you have a plan? Do you look at optimizing social security benefits? There is a strategy to that and that's lifetime income. Again, that could last 30 to 40 years.

Medicare options, are you looking at that from the standpoint, do I pick original and a Medigap strategy or do I do an advantage program? By the way, both of those topics, we've covered those in the past year or so and are posted on our website or prior webcasts with specialists that I did it with for both of those topics. Going into retirement, are you taking into consideration inflation? It's a big money eater as you're going into retirement. Long-term care, long-term care could be if you're in a nursing home, could come up close to $10,000 a month in a nursing home. Yes, it's long-term care insurance, expensive, it sure is, but try to see how expensive it is without it. So there was some strategies there also to look at long-term care.

And finally securing guaranteed income, knowing what your number is, and you see those commercials, a lot of times people ask, "What's your number for retirement?" And they talk in terms of assets. I think you really need to turn that around and really say, we've accumulated the assets, we're going into retirement, and the accumulation of those assets are going to come to pretty much of a halt. And it's how do we use those assets? So what is our number? Our number is what we need to provide a healthy lifestyle going forward. So it's extremely important. I think this topic that we're covering today with annuities, it's a strategy that folks need to be able to take into consideration as far as plugging up holes in their income gap that they may have for what I call, again, what's your number?

And your number is the number that's unique to everyone as far as what they need on a monthly and a yearly basis to maintain a sufficient lifestyle. So a couple of things we're going to cover today with respect to annuities. We're going to get just a basic understanding of annuities. We're going to talk about the different type of annuities, the taxation of annuities, and bring up some annuity awareness and do some planning for ideal goals as it pertains to annuities. And just so we're clear here, the annuities that we're covering today are primarily for retirement, there are other annuities that are out there that are used for other different situations. But these annuities that we'll be covering today are pretty much what you would be faced with going into retirement. Astrid.

Astrid Garcia: Polling Question #2.

Marc Scudillo: Dan, I'll chime in here as we're looking at this question because it's one of these topics when you discuss annuities, it's that A word for some people. Some people love them, some people hate them. There's companies out there that actually have a whole marketing campaign, why not to use annuities and so on. And there's others that that's all that their marketing is, is around just fully utilizing annuities. Some of the reasons people might not like annuities because they have longer time horizons that they might be illiquid, there's considerations that you have for potential penalties for getting out in certain periods of time. There might be higher fees and so on. Those are some of the reasons why some people might not like them or they might not understand what they're getting into alone.

Daniel Gibson: And I think one of the things also that bothers a lot of people and maybe a misconception is that once you're giving... we're going to explain this a little bit more in the presentation, but you're giving the insurance company money to provide you with this annuity in thinking that, "Okay, if I give the annuities or if I give the insurance company a hundred thousand dollars today and tomorrow I get run over by a bus, what happens to that a hundred thousand dollars?" It goes away. And a lot of people will say, "Well, I'll never get that money." Well, yeah, that's one way of setting it up, but there's 40 other different ways to set it up as well so that your spouse, your beneficiaries, your grandchildren if you want in those cases to configure the annuity to provide you with what you want. Again, it's a contract with the insurance company and there are different ways to set that contract up.

Marc Scudillo: All in the design.

Daniel Gibson: Yep.

Astrid Garcia: Great, thank you. I will not be closing the polling question. Please make sure you've submitted your answer. Back to you.

Daniel Gibson: Okay, that's good to see. And I'm glad some people think there's some value to it and hopefully we can provide some value. I know it could be a tough topic because of some of the bad publicity the insurance companies got, especially back in the '80s and '90s, but we'd ask that you just keep an open mind as we go through this topic. So the basics of the annuities is that it's a contract between the insurance company and the holder. It's essentially you're giving up a certain amount of money to provide you with a monthly payout for a period of time. It could be a period certain which would be a certain period of time. It could be for your lifetime. So the way that I often like to think about it is that you provide the insurance company... Let's go back to my hundred thousand dollars, you get back to the insurance company, give them a hundred thousand dollars, it goes into a bucket that the insurance company keeps.

And I'm going to try to keep this simple. Over the next number of years, usually your life expectancy money is taken out of that bucket. You're basically getting your own money returned to you maybe with some interest, some mortality credits, but you're getting that money back out. So by the time you reach your life expectancy, which for most of us is probably in our early to mid '80s, that bucket is empty. Well, if I live till I'm a hundred, the insurance company is on the hook to continue to pay that money out to me until I'm a hundred years old. If I die when I'm 75 and there's money still in that bucket, depending on how I've set up the contract, that money, it could go poof.

But in most cases you're going to set it up so that it continues on with your spouse and if there's money left in the bucket at the time you've passed away, that money could be going on to your beneficiaries. So again, a lot depends on how you set up the contract. These aren't really meant to be investment products. Again, you're signing a contract for what it will do, not what it could do, which is what you would do in an investment product. You're buying this to pay you over a certain period of time or for your lifetime. And you determine whether or not you need to have an annuity by what I call an acronym PILL, which is you want to protect principal, you want to provide income, a income stream over your lifetime, preserve a legacy, and in some cases set up a long-term care care.

Typically, as I said, the money is usually... you're buying an annuity, you're paying it upfront. The money is being paid back by the insurance company to you once you've turned that contract on and once that money is paid, the insurance company by contracts will continue to pay that amount over your life or that term certain. The annuities, they're a commodity product. There's annuities that are provided by a myriad of life insurance companies. You want to get comparable life insurance companies that are rated well. And once you have that, it's like buying a gallon of milk. It's like buying airplane tickets. As long as you're comfortable with who you're buying it from, you're really looking at whose giving you the best deal, who's giving you the best monthly payouts for the money that you're putting into the product.

Marc Scudillo: And Dan, what I would like to add to that too is that what we want to do is make sure that it's all things being equal. And some of those all things are looking at, there's four major rating agencies that are out there that rate the quality of the different insurance companies that are out there that are providing the annuities. So you wouldn't want to just go with one rating agency, you'd want to take a look at all of them to make sure that you're comparing apples to apples type of a comparison so you're not getting something that you think that is a higher paying out. But the insurance company doesn't have as much assets to back up the future payments because that is one of the requirements is that the insurance company needs to be in business still to continue to pay you out.

Daniel Gibson: And the insurance companies are pretty much pretty regulated is my understanding. And unlike a bank where you'd have money, there's really no teller window to run to when you want to try to get your money back. It just doesn't work that way. And from what I understand is that the insurance companies pretty much look out for one another. If one is not doing very well, it usually will be taken out by someone else in the industry because the industry in general doesn't want to have a bad name when it comes to annuities. They want to make sure that these things do get paid off.

So again, just to repeat myself here, the two questions you want to be able to ask when you're discussing annuities is what do you need that annuity to do? In most cases, it's to provide some sort of an income stream over a period of time or for my lifetime. And what's my time horizon? When do I want that to start? Am I working until I'm 65? Am I working until 70? Am I working until 75? When do I need to turn that annuity on? And in some cases when you set up the contract, you're pretty much stuck with when you want to turn it on, but in other cases you can turn it on basically when you want. But again, it's all a matter of setting up, structuring that contract. So polling question number three.

Astrid Garcia: Polling Question #3.

Daniel Gibson: I guess we could mention here, Marc, I mean all three of these are essential I think to any portfolio going into retirement. I think as a matter of a practice actually, when you look at the different percentages that you want to have in these various buckets, you don't want to have more than one. You don't want have everything in annuities. You don't want to have everything in a investment portfolio. You want diversify it so you have different various buckets of income that you can tap into during retirement.

Marc Scudillo: That's right, and it depends on the individual's goals, which we'll touch base on in a little bit as well.

Astrid Garcia: Perfect. So I will be closing the polling question now. Please make sure you submitted your answer.

Daniel Gibson: Okay, good. So the annuity income is the best answer because that does provide you with the contractual guarantees. You can be conservative with the other two and say it's going to provide us so much income in retirement, but the only guarantee that you're going to have is with the annuity income. So there's a few types of annuities that are out there and the first one is what's called a single premium immediate annuity. This is an annuity that's funded, that's basically going to start as soon as 30 days after the policy has been issued up until 13 months. And again, it can cover specific periods or be a lifetime stream of income that you've never outlive. There's not a whole lot of moving parts to the thing, it's a period certain. Despite what Dave Ramsey or Ken Fisher may say, you can set these things up and people do set these things up in IRAs, non IRAs, and in Roth IRAs. There's usually no market attachment.

Again, you're buying a stream of guaranteed income over a period of time no matter market's up, the market's down, you're still getting that same stream of income each month that's hitting your bank. You can get cost of living adjustments, but the insurance companies don't give that away. So if you buy an annuity with a cost of living adjustment, you have to compare that with what it would be without. And in most cases it makes more sense to buy it without and maybe do a laddering of the annuities over a period of time, which you can do. We're going to talk about the deferred annuity, which is the SPIA, which you can have it triggered in later years. It can be on your life or a joint life. It can be used as a legacy income tool. Talked about the laddering, which also can address the inflation issue. You can have annuities laddering into future years to increase your income as you go into retirement. And these premiums are paid and they begin usually no later than 13 months.

A deferred income on the other is very similar to the SPIA, but the difference is that these start after the 13 months period, SPIA is usually done prior to the 13 months. Both of these products, again, you're transferring longevity risk here. You could live in today's world and who knows within 20 or 30 years or 40 years into the future, if you're nearing retirement now, the health and medical products that are out there that could extend life even more So to be able to provide you with a steady income for the 30 and 40 years, that's what these products are meant to be. And as with most of these annuities the SPIA is contractually structured so that if there's any unused money... Again, remember the bucket concept. If you still have money in that bucket that hasn't been paid out to you yet, you can have that as a death benefit to your beneficiaries. So these can provide some growth for benefit purposes. Again, you can use these in a myriad of accounts.

IRA Roth, non IRAs, set up as a joint payment with your spouse so that if you pass away and it's a joint annuity your spouse would take over, those payments would continue with your spouse. It can be set up as lifetime income streams or period certains. You usually are getting those with large and high rated carriers. Again, there's COLA adjustments that are available, but they don't give that away. That does cost you, your monthly amounts would be less with COLA adjustments. You can defer these up to 40 years if you'd like. And the thing with annuities, the further out, you put those into the future before you turn those on the more monthly income because again, it's all built and triggered on your life expectancy. These can be designed with or without investment or stock market type risk. Options to add money during deferral periods.

And the deferred annuities is basically a spear that is turned on after 13 months. Next topic is QLAC, the QLAC is for those that say that LQAC or say that annuities can't go into an IRA account. A QLAC is specifically set up by the IRS or the congress is to set up annuities in your IRA recognizing the fact that social security is only going to cover 40 to 50% of individual's retirement income. They set up a QLAC, so it allows you to take qualified money and invest it into a QLAC, which you can keep in your IRAs and not turn it on until it's until you're 85 years old. You could put up to $200,000 per person. So that's 400,000 for a married couple. And the nice thing about that is when you put your $200,000 into a QLAC, which isn't going to be triggered until age 85 for RMD purposes required minimum distributions, it takes that money off the table when you're calculating your RMDs. So it's an annuity strategy, but it's also somewhat of a tax strategy as well.

It can help reduce the required minimum distributions and the same thing, you could structure the QLAC so that any unused money that you would have in there, if it's not used up, it's going to go to your beneficiaries. And you can ladder it to start it at various dates and times. You don't have to go out to 85, but you can ladder that to start at various times throughout your retirement. The QLAC is very similar to a deferred annuity or an immediate annuity, and again, it allows a couple to set up IRAs that can be used and they can name each other as beneficiaries. So it doesn't get lost if one of the persons in the couple passes away, that can be passed on to the other couple. Okay, so the income rider is a product that's out there and it's really not a product itself but it is a wrapper around other annuity products.

And most of the times the products are indexed annuities and they wrap around these annuities and they basically take a product which is probably more, maybe it's more investment in nature. But by wrapping this income rider around, it becomes effectively an annuity and it's used to pay out an annuity over a person's lifetime. It's very flexible. The times that the annuity can start, you're not locked in most cases. A lot of times you can start it when you want to. So if you had figured that you were going to retire when you're 70, but when you reach 70, you're like, "I'm continuing to work, I'm pretty healthy and maybe I'll turn it on when I'm 75." It will allow you that flexibility to turn it on when you're 75. Annuities in general, these are also good products to take a look at if you're having trouble getting life insurance coverage, long-term care, issues or also things that are addressed by the long-term care events that may come up.

In some cases, the contracts may allow you to accelerate payments, again, out of that bucket that we've talked about before, maybe accelerate it quicker than it would've come. If you run into a long-term care event, which is usually not being able to conduct two out of six daily living activities. These can be set up in IRAs, Roth IRAs, non IRAs, again, structured to be single joint. There are confinement care benefits, also some death benefits. There are some rider fees here, but they come out of the accumulated value, not out of the payments that are made. And some of them can actually be stopped and started at different points. Again, maybe you have a big income year and you want to pull back on some of it for a year or two and sort of back up again. Again, you have that flexibility when it comes to the income rider. Marc, you want to talk about any alternatives?

Marc Scudillo: Sure, sure. And what we've seen, these riders, again, like you said, could be wrapped around certain types of annuities, whether it be a variable annuity or a fixed index annuity. And have that income rider to convert it to give that, I'll call it in quotes, "pension" like type of income stream that you've been discussing for individuals and give them the option. Well, what are some of the other things that you could consider that could give you some type of pension like income? Well, that polling question that we just went through, certain individuals are thinking that the dividends and interest in a diversified portfolio can do that. Well, they're accurate. The difference is that it's not contractually guaranteed of what the amount is going to be at a minimum for the rest of their lives. It is variable based upon the performance of a diversified portfolio or the underlying dividends and interest of the portfolio.

People that were getting interest off of their bonds 10, 15 years ago were... actually a little bit longer, 15 plus years ago was a lot higher. Recently we've had a spike in interest rates and so some people are pleased that their bonds could pay you more interest now, which is great. But is that going to continue? We don't know. So there's some variability in that income stream. But that is something to consider that if there's enough value, enough balance sheet that you could create that income stream from just the dividends and interest, that is an option. You could also enhance some of the income by utilizing different strategies. As an example, writing covered calls. These are an ability for you to increase the income that you could potentially derive off of the equities that you hold in your portfolio. And that is a strategy that is designed to enhance income. Again, these are different considerations that people should think about to say, "Where can I get my pieces or my building blocks to the income that I need when I'm faced in retirement?"

Daniel Gibson: Okay, good. And then some of the disadvantages you'll hear about maybe even annuities in general, but specifically for income riders, they're expensive. There's high fees involved. At the end of the day, as we talked about before, what's the product going to do for you and how much is it going to pay when it does get turned on? That is the important question. The fact that I might be expensive, [inaudible 00:30:39] there may be high fees involved shouldn't really affect your decision. Because your decision in retirement is how much income is this product going to pay me and how does that compare with other products that may be out there? So yes, should it be something of concern? Absolutely, there always should be some concern. But remember, at the end of the day you need to know how much am I getting paid on a monthly basis? And again, how much does that compare with other products that I may be paying for at that point. So Marc, you can take over from here.

Marc Scudillo: Sure. Thank you Dan. So Dan, you've been going over and discussing when we think of the concept that you laid out a PILL, right? The annuity could provide some protection for the principal, could provide a certainty of income. Let's touch base on and you focus more on the income, the I in the PILL. Let's think about some of the principal protection that could be put into place and what's becoming more popular.

Daniel Gibson: Looks like Marc's frozen here. So what I will do is I will advance this a little bit, talk about some of my, unless you want to... Astrid, if you wanted to do-

Marc Scudillo: Can you hear me?

Daniel Gibson: ... the polling question while we're waiting for Marc to get back in?

Astrid Garcia: Polling Question #4.

Astrid Garcia: A, very concerned. B, somewhat concerned.

Daniel Gibson: Why don't I move forward here and talk about a topic of taxation for the annuities and the taxation for annuities, the way you handle that, if you have a non-qualified non IRA account, meaning the SPIAs and the DIA contracts, it's a combination of return of principal and interest as we talked about before.

Astrid Garcia: Hi Dan, can you hear us? Okay. Marc are you still there?

Marc Scudillo: Can you hear me Astrid? I am. Can you hear me?

Astrid Garcia: Yes, I can hear you. Yes, I'm going to go back to the four polling question just to give the audience a chance to answer.

Marc Scudillo: So Dan, I'll continue here. I could-

Astrid Garcia: Yes. Let's just go back to polling question number four and give the audience a chance to submit their answer.

Marc Scudillo: Okay. So when you're looking at this poll question-

Astrid Garcia: You guys can continue.

Marc Scudillo: Yep. Astrid, you can hear me still, correct?

Astrid Garcia: You're good.

Marc Scudillo: All right, great. So for most people out there, there is a concern between somewhat and very concern, that's typical for everyone, is they just don't know. And again, how long are you going to live, for example, that makes the concern even greater. So when we look at again, some of the different choices of what does that mean, and I'm going to go back to some of the different strategies and as long as you can still hear me Astrid, just let me know. Let me know if you could hear me or not. But when we're looking at this-

Astrid Garcia: Yes, you're doing good. We'll continue.

Marc Scudillo: All right, perfect, perfect. So when we're looking at how you could create protection around your principle. So buffer annuities have been designed so that it gives you some of the upside potential of the markets while also protecting or buffering on the downside to protect for some losses. So it shifts the risk, it shifts some of the strategy investment risk back to the insurance company. So that really from a psychological point of view allows individuals invested in those types of programs to stay invested. Some people go into the markets, they feel very comfortable going into the markets when the markets are going up and then others feel very uncomfortable going into the market when the markets are going down. But when you think about the finance 101 strategy, is that you want to buy when the markets are going down if you can and sell when things are going up.

Well, it doesn't always work that way. Motions get involved. So some of this helps prevent some of those knee-jerk reactions to getting in and out of the market at inopportune times. So an example of a buffer type of strategy would be something like where if you put money in, you would have the opportunity for the potential based upon typically some type of an index or a series of indices and it might give you a cap. Let's say for example, here is a cap of 11%. If the index returned 9%, you would get 9%. If it returned over 11%, let's say 20 or 30% or more, you would get capped out at 11%. But what are you getting for that cap? You're getting the opportunity to have protection on the downside. So for example, if a buffer annuity had a 10% decrease buffer, an index loses 10%, well you'll get your principal back and all of that 10% loss is absorbed.

However, if the index goes down 25%, the first 10% gets absorbed, your portfolio will go down 15%. So again, it's buffering some of the downside. Now are there certain strategies that could be put into place to help provide a similar type of protection? Yes, actually the annuity insurance companies are actually utilizing strategies typically revolving around options. They're more complex, they package and bundle them inside of the annuity company structure. But you could create that with sufficient amount of funds and sophistication. You could create that same option strategy for yourself around your own annuities, equities, excuse me. But also what prevents some of the downside though to keep in mind is creating an appropriate diversified strategy. So you're not going to be subject to the downturns in the markets as great as just being a hundred percent inequities.

So these are things that need to be brought into the picture, into the fold as to when designing a plan. So that's part of the P in the principal protection and there's other principal protection strategies built into annuities as well that give you principal guarantees along the way, but this is something that's becoming more popular out there. Then let's touch base on the two Ls in PILL, the long-term care and the legacy planning. So Dan had mentioned that some of these annuities provide you an income stream and that income stream could help supplement your retirement plan needs. And if you elected to add, and some of them have them built into the contracts themselves where you could add a long-term care rider, which would come at a cost.

But it would enable you to enhance that income that you're getting should you qualify for needing long-term care. So it adds a qualification, it adds some additional enhanced income if you become in need of long-term care, preserving some of your principle of your other assets along the way there. The legacy planning also allows for you to think about it that you could spend down knowing that you have this annuity in place, this cashflow of certainty in place that you could actually enhance some of your investments. Take on a little bit more risk outside of the annuity on other pieces of your balance sheet that could help grow for the benefit of your heirs because we know we have this one building block of income being met.

And so these are different strategies. You could also take the income coming off of an annuity and we've seen clients as part of their plan that they wanted to use that income coming in to help pay for the legacy planning that they built around their estate such as insurance. And so that they know that that piece of that cost of their lifestyle to pay for the insurance for the benefit of their heirs is going to be met by the annuity that they purchased and the guaranteed income that's going to be paid out for that for the rest of their lives. So there's lots of different strategies that can be utilized. And I know we just went through this polling question and as part of this polling question, we said that, well, income is of a concern to most of us.

Well then we should then understand the taxation along the way because that will eat into some of the income that we would be receiving. So how are annuities taxed? Dan had mentioned the single premium immediate annuity and a deferred income annuity. When you turn those programs on, when you start receiving the cashflow, you'll be getting a cashflow that's considered both part return of principle as well as part interest. So as long as there's cash inside of that, a cash balance, a market value still inside of that annuity, part of that income that you're going to be receiving is going to be considered principal and you would not be taxed on it. Only the interest is going to be taxed of what you're receiving. Once all of your market value is depleted and you're still receiving that income, that income will then all be taxed because you have no cost basis basically left inside of that contract.

Now if you added one of those flexible riders, the income rider, it takes on a different characteristic. It's not a return of principle and interest. It works more like a traditional distribution of a regular annuity where it's what we call LIFO, last in first out. The last pieces of what is inside of a contract typically starts seeing the interest or the market appreciation. When you start taking that money out, any money out, that's going to be the first money that comes out. That was the last thing added to the contract, was interest or market appreciation. So you'll be taxed on that as ordinary income. Once you've depleted all of the interest, all of the market appreciation, then all the rest of the money is going to be a return of principle and there'll be no taxation on that.

And if the market value goes down to zero and it still has that income rider that's guaranteed to pay you for the rest of your life, then you're back to where all the money is coming from is going to be treated as income that's coming from the insurance companies. So pretty interesting that you have that. Now there are some abilities to think about the flexibility for exchanges within the annuities. So they call it 1035 exchange, that allows you to be able to switch from one annuity to another annuity. We're seeing that a lot while the interest rates have come up recently. Because the insurance companies are utilizing some of the interest rates that are out there to help support the guarantees that they're providing so they can afford to give you a higher income stream. Well, if we have an older annuity that's paying a lower income and we can move it into something that's paying a higher income, we should be doing that.

We call that an annuity audit and taking a look to see if that makes sense for you. And there's no taxation in switching from one annuity to the next annuity. You also have the ability from an estate planning point of view. Let's say that we've accumulated enough resources inside of our balance sheet that we don't really need the income from the annuity any longer or the annuity as a whole. Or you could convert that annuity into a life insurance, excuse me, excuse me, into an income stream that would pay for the life insurance. But what happens if you had life insurance now that you thought that, "Well, I want more income, I need more cash and that's more of a concern for me today than the death benefit." Well, you could convert a life insurance into an annuity and not pay any taxes on the gains of the cash value when you do that conversion. So again, there's choices, annuity to annuity or life insurance to annuity. You defer and continue to defer the taxes.

The last benefit really that the IRS is providing is that you have the opportunity to actually exchange an annuity to a long-term care product. Dan had mentioned that also in saying that there's advantages not only from an income stream that annuity can provide. But what happens if you accumulated assets inside of annuity and you're really more concerned about long-term care now? Well, the embedded gains can be distributed if you convert it into a qualified long-term care product. That those gains would actually be tax-free, not tax deferred, but tax-free if it's used for long-term care purposes. So again, there's some advantages and things that people should be aware of that should be built into the plan and understanding how does that impact them in the net cashflow that they'll receive.

Now when it comes to retirement accounts, think of it as the retirement account bucket taxation still continues. So what does that mean? In a traditional IRA account, you put money into an IRA account and receive tax deductions for it. When you take the money out, you're going to be paying taxes on it as ordinary income. That's regardless if you put it inside of an annuity or any other type of investment. And then you have the Roth IRA. Well, you put money into a Roth IRA, you did not get a tax deduction for it. But when you take the money out, all that growth and principle that you are taking out, there is no taxation on that and it's tax-free. That's regardless if you put it into a traditional investment or you put it into an annuity, that characteristic still follows through with an annuity.

Daniel Gibson: But the nice thing about the Roth, Marc, and it probably doesn't pertain to what a lot of us boomers who have most of their stuff probably in traditional. But any of the Gen Z, X or millennials that are listening, it is more an incentive I think to putting money into these Roth accounts. Because if you can think about it, an annuity that's paying out over, again, a 30 or 40 year period and you're not paying any tax on it. It's a pretty nice benefit to get.

Marc Scudillo: Absolutely, absolutely. Good. So some of the questions to keep in mind, right? So we spoke about it right from the beginning. Annuities, one, is not right for everyone, but it also should not be excluded for everyone. That PILL concept, whether we need the principal protection, whether we need the income that needs to be guaranteed, if there's a concern for legacy or long-term care, there may be an opportunity there. But it's limited in what you could invest in when you're buying annuities, right? You can't just go into the general markets in its totality with an annuity. So there are some limitations on the investment growth. We mentioned it before, you should do the due diligence on the carriers, right?

You want to have quality ratings, you want to get the best rates, you want to get the best rates subject to the quality of the insurance and the annuity companies that are providing these guarantees, they need to be in place. You're on the balance sheet basically, you're a creditor of that insurance company with an annuity. You don't want to buy the hype. There's a lot of programs out there, there's a lot of marketing that goes out in these annuity programs and platforms. We like to say, "Well understand what the downside is, what's the worst case scenario?" It's principle protection, and that's the worst case scenario you need to keep in mind is that you'll get your principal back. If you're saying, "Well, I'm looking for that 8% growth rate."

And it could happen. Well, if you're looking for higher growth, it probably would not be the best alternative to use the annuity for that, but you'll have the risks associated and you won't have the principal protection. So there are several ways that you can construct the insurance contract, the annuity contract to make sure that you understand how to design it. Some people want to make sure that the cash flow is going to continue for both spouses lives. Well then we should make sure that the contract stipulates that. Some want it to be passed on to heirs in a certain mannerism. Well we should make sure that the contract is stating that as well. The one significant risk that we kind of touched upon but really doesn't get fully addressed is the inflation risk. When you turn on these income streams from the annuity, that income is pretty much fixed.

You could add a rider or you could add... it may have built in an inflationary hedge, but then the income that you're going to receive in the beginning is going to be less. So they understand that and built that in. So if we want the highest income, that higher income is going to be consistent on a going forward basis. There's no longer any inflationary hedge increase in those contracts typically. So when you look at, well, am I concerned about inflation? Do I have other assets to help offset inflation? That's a caution that we want to take into consideration. Higher fees, depending on the annuity type and the associated riders, you should understand what your fees are that you're paying. None of them are nonprofit. Even when they say there's no fees, there's fees, you should just understand them. It's not right or wrong, and the income that you're going to receive is contractually guaranteed. Whether the fees were extremely high or low, you're still getting that guaranteed income amount that Dan had mentioned earlier.

And there's also the need to take into consideration that there's higher surrender charges, meaning that you might need to stay in the platform for a certain period of time, let's say 10 years. Some of them actually could even go beyond 10 years. If you want to take all of your money out, you could be subject to pretty steep penalty. Most of them give some type of flexibility that you could take 10% or the growth out as an example every single year, that kind of liquidity. But if you want to take the whole amount out, you just need to understand is there a surrender charge that's going to be exposed when you take the money out?

We say that it's not right to have all of one thing or another. Take everything into consideration. Who are considerations, still need to fully vet out? Can you accomplish what you need, whether it be through an annuity or adding a diversified portfolio? Long-term historical performance of a properly designed stock and bond portfolio from an investment return perspective has outpaced those of pure annuity programs. The combination however may not. Various asset classes we know that we could pay for and get some income certainty, not contractually guaranteed, but pretty certain that we have a comfort level that we're paying these certain dividend rate. That we could be confident that we're going to receive that on a going forward basis when it's properly designed to do so. And that dividends and interest that are paying off the portfolio could be sufficient enough to meet your income needs.

A diversified portfolio also enables us to make sure that, again, we're outpacing inflation over a longer period of time. Properly diversified portfolio helps mitigate some of the losses on the downplay. And having a mix of the assets, whether it be between stocks, bonds, real estate, alternative investments, and annuities, we should be designing it as a whole. What's going to make the most sense? So that's where most people are saying, "Well, how do I know what's right for me? How do I know what's the appropriate type of strategy that I should be looking into when designing the investments?" Well, we always say the first priority is that you should be understanding what's most important to you. It's not a one size fits all. Most companies out there they say, "Well, this is our model and this is the reason why you should be utilizing it." Fitting you into that model.

We say, "Well help us understand, help understand what the priority is for you, whether it be income security, you're worried about longevity risk or not. You want to make sure that that income's going to be there for the rest of your lives. Is that most important to you? Is it providing a lasting legacy that's most important to you, protecting your lifestyle and so on and so forth." Some people just want to make sure that they know that they can spend the money on the things that are most important to them, and that's it. Well, we need to define that. Once you understand what your priorities are, then you could add to that the understanding of what and how you think about investments. Some people just sleep better at night knowing that they have protection in place. They know that they might be giving up some of the opportunity cost of better performances, but they sleep better at night knowing that they have the certain guarantees in place for their income stream.

Well, others are saying, "I want to capture as much as possible, the upside of the market." Well, we need to understand that. You need to understand that. So when you're designing your investments, that helps in deciding whether strategy like investments would make sense or not. And then lastly is just understanding the types of investments and products that are out there. There's not one insurance company that says, "All right, well, they're the ones that are best at the income with long-term care riders and a buffer." The insurance companies that you're going to utilize, the products that you're going to utilize, it varies. And they go through cycles. Some might appear better in one timeframe and then another might come up and say that they're going to look better because they're using different interest rate assumptions going forward. So there's not a one size fits all from the insurance side, nor is the investment strategy a one size fits all. It really should be dependent upon the underlying individual investor. And then with that, I think we have our last polling question.

Astrid Garcia: Polling Question #5.

Daniel Gibson: Hey, Marc, Rich has a really good question here. Let's see what your response is. If insurance companies back each other up, then why is it important to go with one that is financially strong or the insurance companies contractually obligated to back each other up? If not, when was the last time an annuity contract wasn't honored?

Marc Scudillo: That's a great question. I think it's been a long, long time. I think for the most part, I mean if we think about the most recent concern with insurance companies, you think about AIG when they went through the issue in 2008 and the too big to fail concept there. That was the closest that we've had. But there are other companies actually that were lined up to, again, as Rich has mentioned, to back it up, or actually to buy out that piece of the AIG's company and continue the contractual obligations of AIG. I would have to look back when was the last time that an insurance company went under and was all of their contracts fully obligated. That I would have to do some research on Rich, and I'll get back to you on that.

Daniel Gibson: See, the one thing about the insurance companies, you've got life insurance companies and you've got the casualty insurance companies. The one nice thing about the thing in the life insurance space is that the life insurance companies know when you're going to die, not you specifically. But if they put a thousand people in a room, they can pretty much tell on an average when the people are going to die and they can structure their products accordingly. And plus with a life insurance policy and an annuity policy, aren't they playing both sides of the transaction?

Marc Scudillo: They do. They do. And based upon those actuarial assumptions that you're just mentioning, that's just the law of large numbers that they're playing with here. To know that, well, on average they'll be okay and have enough cashflow coming in, revenue and profitability for even those tranche of people that might go beyond their actuarial age. The challenge is that any one of us individually, we don't know if we're going to be that party that's in that tranche that we're going to live longer. And it gets a lot easier if we knew exactly when you were going to pass away, but that's just not reality.

Daniel Gibson: Exactly. Alan has a good question here too, Marc. He says, how do you find a list of companies that sell annuities? Any suggested companies? And if people want to reach out for me, that's fine. I know of a site that actually has an online product that you can use to get a listing of... You could put in your specifics as to when you're married, if you're married, when you were born and all the other stuff, it will give you a choice of contracts that are out there, that are available. I don't know if [inaudible 00:58:44].

Marc Scudillo: Yeah, and we use that. That's exactly, we use that to be able to compare because not all insurance companies can go direct. So we're able to compare the direct and then those that need to go through a financial intermediary to see which is going to be best for the client. And it also is, I think one step before that should be, "Well, should I be buying an annuity first?" That should be going back to the planning. The planning starts first. Then you can go into, "Well, let's do the research as to which one's going to be most appropriate."

Daniel Gibson: Yeah, again, it goes back to the annuities are in essence, at the end of the day, they're a commodity product. Not much different from buying a gallon of milk or buying plane tickets. Once you've found a good provider or a list of good providers, it's a matter of just picking the one that gives you the best deal.

Marc Scudillo: Correct.

Daniel Gibson: I saw Delta ask... Okay, I guess we're running up against the class.

Astrid Garcia: Yeah, we are out of time, so I'll be closing on the poll question now. If you want to go over one last question to end this webinar, feel free to do so and then we'll wrap it up.

Marc Scudillo: Terrific. So any of those that want to find out more, you have Dan and my contact information, that's on the next slide here. One more, I think it is there. One more, too fast. There we go. And so anytime you want to reach out, have any specific questions, those that sent us questions that we couldn't get to, we'll make sure that we follow up with you individually just so we can get those questions answered.

Marc Scudillo: Thank you everyone.

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