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Cheryl White: [00:00:04] Hey, this is your podcast for the financial and retirement information you need to live the retirement you deserve. On our podcast today, annuities, what they are, how they work, and are they right for you? Before we dive in, a reminder that if you have a subject you'd like for us to talk about on the podcast, reach out to Greg Ramirez anytime at advisorsoncall.com. I'm Cheryl White with Greg Ramirez. And Greg, there are certain words that we hear so much about that we think we know what they mean, but if someone asks you to define it, you might realize that you don't. And I think annuity is one of those terms, so if it's okay with you, can we just start at the beginning? What is an annuity?

Greg Ramirez: [00:00:48] An annuity is basically a tax-deferred vehicle that allows you to put money away. So, for example, let's say you have $100,000. You can put that money away. That money is going to earn interest on a tax-deferred basis. So at the date that you decide to take that money out, you can either take it out as a lump sum. But however, you don't want to do that because let's say it's been in there for ten years and let's say the 100,000 turns into 200,000. If you were to take that money out, you're going to have $100,000 taxable income. So normally what people do and this is something that's not discussed very often, is people do what's called annuitization because annuities are basically like a supplemental form of a pension, and that's how they should be used. And a lot of times today they're not really used that way. They are in a way, but they're not. So I'll explain that. So what should be done is you can take that annuity and take that 200,000 and let's say you want annuitize it and you want to be paid out for a period of five years, ten years, up to 30 years, that will give you a stream of income guaranteed. So let's just say 200,000 divided by ten, you're going to be getting $20,000 a year. And out of that 20,000 per month, you're going to get $1,667.

Greg Ramirez: [00:01:59] Now, the beauty of that is that as you spread it out over ten years, you're only going to pay about $10,000 in income tax because the amount that you invested, it gets stretched out over the period that you choose. Now that's the easiest option. That's called the period certain. There's another one called a life option where you basically can take a stream of income based on your life. Now, what this is based on is they take based on your life expectancy, so the older that you can annuitize, the more money that you're going to get from the insurance company. I have in the past seen people that are in their 70s and 80s want to get an annuity and then they want to annuitize it. Now, the problem is that the companies force you to wait five years before annuitization. In some cases they've raised it to ten years. So if you're thinking about doing a strategy like that, the older that you are, the more money you're going to get because it's based on life expectancy. So if you're 80 and let's say you're a male, you have about seven years left, you're going to be getting a lot of income. But the problem is that when you choose a life option, when you die, it doesn't go to anybody else. So you're gambling with the insurance company.

Cheryl White: [00:02:58] Take me from the very beginning, say I have $200,000 and I'm considering an annuity. What are my options?

Greg Ramirez: [00:03:06] There's many different types of annuities. The simplest annuity is called a fixed annuity or a multi-year annuity rate, which is called a MYGA. So what that means is currently right now in this interest rate environment, I can get you the highest mica that we have is 5.8%. So I can get you a four-year annuity at 5.8%. So what that means is your 200,000 is going to be making 5.8% guaranteed. And I can say that because remember, folks, we're talking about insurance right now. It's a guaranteed rate. It doesn't change. Every year you get at 5.8% and it's going to compound. So you'll be making $11,160 and then that compounds. So in four years, you're probably going to make close to about 60 grand. So when the four years are up, the amount is going to be worth $260,000 because it's compounding. So at that four-year mark, you have an option to either take the money out because the surrender period is over with, which meaning the time that it had to be in there. Number two, you can annuitize it. So if you chose to annuitize it, you can choose a period certain a life option. There's also a life option with refund or a life option with a period certain, which means you would get money back if you died within the period of time. But most people don't use annuitization options. I think they should use them because I think they're very good to have. What companies do though, is they offer guaranteed income riders where you get guaranteed income and those are very gimmicky. They're like annuitization options. But I think you're better off doing an annuitization, to be honest with you.

Cheryl White: [00:04:33] I think I understand now. So say that $200,000, it is illiquid. Then for a period of time it is locked in, not illiquid.

Greg Ramirez: [00:04:42] You can take 10% out per year. You can get 10% plus the interest out a year. And it depends on the annuity product that you have. But when you're dealing with a MYGA--a multi-year annuity--the investment is guaranteed for the four years and you're getting that interest rate. Now there is another one separate from the MYGA, and that's called a fixed indexed annuity. Now the beauty with a fixed index annuity is that it allows you to have the option to have a fixed rate, but you can also get into the market and you can get into the S&P 500, maybe you can get into Nasdaq, you can get into the Dow and they will give you a participation rate. They will allow you 100% participation into the Dow, but then they give you a cap rate. So I'm going to explain to you the difference. So participation rate is how much you get to participate, whether you pick the Dow, the Nasdaq. So if they give you 100% participation, whatever the market returns, you get to 100%. But then this is where they get you. There's a cap rate. Most of these companies cap you at a return of about 10% or 14%. Now, in this present environment that we're in right now, in 2023, the cap rates are very attractive. The average cap rate is about 14% to as high as 25%. If that particular index, the Dow, the NASDAQ, S&P 500, S&P 100, if they return 20%,

Greg Ramirez: [00:05:53] if you have a cap rate of 14%, you're only going to get the 14. The company keeps six. That's how they get you. But right now, the incentive that they want you to invest is they have high cap rates. In addition to that, they also have a fixed component. Current interest rates right now are 5%. So you can get into that product, it's 5%. The minimum you'll make is 5%, but you have the upside. So you really don't have a downside and that's a fixed indexed annuity. And then you have riders too. There's the income riders. That's another podcast that we'll talk about, the different types of riders that they can put on. There's death benefit riders. There's a lot of different things that they can put on there. There's buffers that they can put on if you want to bet against the market. And different companies have different things. It depends what you're looking for. So after a fixed indexed annuity, the next annuity that you have is a variable annuity. Now a variable annuity is basically an annuity that is variable based on the market. You have separate accounts, remember separate accounts in a variable annuity work like mutual funds, but they're called separate accounts. They're not called mutual funds. It allows you to participate. And the variable annuity basically allows you to participate in all different indices. If you want to go with a technology, you want to go with health care, you want to go international, you want to go global, you want to go with resources in regards to gas and oil.

Greg Ramirez: [00:07:07] They have a lot of different indices that they cover. You want to bet that the market is going to go short. They can have inverse to Dow, inverse the Nasdaq, they have two times the Dow if the Dow is up. Now, the other thing I want to explain is that when I'm talking about annuities, there's two types. Here at Advisors on Call, we have advisory annuities. What that means is that we charge you a fee to have the annuity. However, your money is 100% liquid. Now, for some of you that don't like to pay fees, we have the traditional annuities where if you get into the annuity, you're going to be stuck into a five, 7 or 9 year time period. So depending because some people don't like to see the expense ratios taken out, we can do what's called a transactional one. You still get the same benefits. However, it's not liquid. Like right now, a lot of my advisory clients, I'm moving their money to the advisory news because I can give them a flaw guarantee of 5%. I can't do that if I keep them on the advisory accounts. So those are the differences between the annuities. Now I can talk about the different riders on all of them, but I think I've given a lot of information.

Cheryl White: [00:08:06] You have, and I think you've cleared up a lot about annuities today, too, because again, it's something that we hear about, but it's just one word annuity without explanation.

Greg Ramirez: [00:08:16] Yes. Now you can also get an annuity with long-term care. And that's a whole different ballgame. It's a fixed annuity. However, if you get sick, it becomes long term care. And normally what they do with that annuity, they give you three times with the value that you're putting in and there's about seven questions that simplified issue. And so what you can do folks with that is that the money that you had, let's say, in any of these other annuities where you had the gains, if you put it into this long-term care vehicle, when that money comes out and it's being paid for long term care services, you don't pay taxes.

Cheryl White: [00:08:45] Interesting.

Greg Ramirez: [00:08:46] There's lots of different options that we can help you folks. You know, let us know what your situation is and we can identify how we can help you best.

Cheryl White: [00:08:54] Greg, one last question before we wrap up our podcast for today. Is there any right time or right age to buy an annuity.

Greg Ramirez: [00:09:02] In this environment that we're here in 2023? I think annuities make perfect sense because you've got the guarantees, you got the high interest rates. I think it's a really good time, but the older we get, we get more conservative. I'll be honest with you, when I was in my 30s, I was a real risk taker. But as I've gotten older, I want to save what I've amassed. So unfortunately with annuities, remember this you have a 10% tax penalty. If you're under 59.5. If you take that money out of the annuity, you're going to be taxed 10%. So I would say that as we get if we're 55, 60, and then we know we're not going to touch that money for at least 5 or 10 years, I think somewhere in our 50s is a good time to start looking at annuities or if we're somebody that can't stop from spending, I think an annuity is a good place to lock up money. No, you're not going to touch it because, you know, if you do touch it, you're going to be taxed heavily.

Cheryl White: [00:09:49] Oh, great angle. All right, Greg, thank you so much. Greg Ramirez, advisors on call. If you would like to talk more about annuities with Greg reach out at advisorsoncall.com or you can call (562) 269-1007. And if you have a topic you would like to know more about, something you'd like for us to discuss on the podcast, just let us know. And Greg is available 24/7 online. It's advisorsoncall.com.

Greg Ramirez: [00:10:17] Sounds good. Thank you. We'll see you in the next podcast.

Announcer: [00:10:20] We know life is busy, but any time you have a question about your retirement, drop us a message online at advisorsoncall.com Investment Advisory Services are offered through Greg Ramirez at Advisors on Call, a state, Registered Investment Advisor. Advisors on Call and this radio station are not affiliated. The investment ideas and financial vehicles discussed here should not be considered personalized investment advice, nor are these recommendations to buy or sell any particular investment or product. And the information you hear should not be considered tax or legal advice. Individuals should first consult with competent tax, legal, accounting and other professionals regarding the applicability and suitability of any investment ideas. Certain investment ideas contain substantial risk, are illiquid and may only be appropriate for accredited investors. Past performance is not a guarantee of future results. All investments will fluctuate and when redeemed, may be worth less than when originally invested. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not refer in any way to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims paying ability of the issuing company. None are offered or sold through Greg Ramirez and Advisors on Call. Comments regarding a particular client's experience may or may not be the same as another client's experience. Do not guarantee future investment success and should not be indicative that any client or prospective client will experience the same or a higher level of investment performance.