Many people fear the word “annuity” in retirement. They think it’s the most evil thing in the world. Yet through proper education, people will find that it could actually be one of the greatest things to have happened. The Thrive experts break down all the misconceptions about it that make people miss out on their guaranteed income. They also discuss the three types of annuities out there that people have to know and touch on the topic about women and retirement, giving an overview of the challenges and the financial plans they are going to face. Learn about retirement further as they give the retirement checklist, from taxes to health insurance.
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Fear The Annuity!
We welcome everyone, David Bezar, Karen Bezar, and Bret Elam. Flourish, prosper, and success, remember the tagline for Thrive Financial Services. I’m going to give you a phone number. I want you to write it down. This is a number that you can utilize if you read something in this blog, you can call the Thrive office at 1-800-516-5861. Karen, we listened to a story that you referenced about an elderly couple who you met with in terms of a conversation. There were a lot of meaningful bullet points in there. Some of the phone and email conversations were questions about Karen’s reference to an annuity which came out of that meeting with that elderly couple. I want to start with that because there’s confusion when you hear the term annuity. I want to give you the first opportunity to talk about that here in the opening segment.
Joe, there was a flood of phone calls and emails, which is exciting because that’s the whole idea behind what we do. We want to start conversations. Karen was discussing one of the folks that visited us for a conversation related to their retirement. What stemmed out of that conversation is the potential use of an annuity to create some guaranteed income in the later stages of their life. To make sure that they had enough income to survive and cover their expenses outside of Social Security and any pension money. The word annuity, some people think it’s the evilest thing that’s ever been created on the face of the earth. There are people who advocate for it dramatically and think it’s the greatest thing that’s ever been created.
Our show is based on education. We want to be advocates, we want to start conversations, and clear up misconceptions. The first thing I want to say is, we at Thrive are fiduciaries. As fiduciaries, it is our obligation is to make sure that we represent and act in the best interests of the people that we serve. The way our company is structured is we have a couple of companies. We’ve got a company called Thrive Financial Services which is primarily an insurance-based solutions type company. We have a company called Thrive Insurance Group, which is a little bit more sophisticated, estate planning and trust work. We have Thrive Capital Management, which is a registered investment advisory firm and puts us into the scope of being fiduciaries.
When we sit down with families to try to clear the air about what’s the best choices for them, we put our fiduciary hat on. In addition to that, we’re a little indifferent in which solution we ultimately come up with because we earn our money regardless. If it’s an insurance-based solution that makes sense for a client and they feel that’s the appropriate solution for them, then we use that and we earn money. If it’s simply managing assets and developing portfolios from a risk-based perspective, then we are in that way. We don’t have bias one way or the other, but it’s still a good topic to discuss. There is a couple of misconceptions out there about annuities. Unfortunately, everybody thinks that every annuity out there gets lumped under one category. In Money Magazine, there was an article that was put out and it was, Are You Missing Out on Guaranteed Income Because of These Five Misconceptions?
It’s a great place to start. I want to emphasize that Sunday Night Live with Thrive presented by Thrive Financial Services is about that very statement that you made. Everybody in the studio is here to provide education. The more informed you are, the better those meetings occur. When a couple sits down with Karen and they’ve been through a long process and long history in their life, being educated is the correct approach for all of us.
That’s our process. We’ve always embraced it and it’s what we encourage people to go through. That education process does not mean the sales process, and there’s a big difference between the two. At no point do people feel pressure. They can relax for the first time and be open-minded to the conversation and listen. That way they can get all the information to base their decision versus what they’ve been either told by their neighbor or what they read or heard. They can gain all the facts. This is why it’s important. TIAA is an organization that’s very big in the retirement planning side of things. They do a lot of teachers and hospitals. They did a poll that they called the 2016 Lifetime Income Survey.
They said the primary goal for the retirement plan was to provide guaranteed money to cover the living costs in retirement, which we all know is critical. When people were asked whether they owned or planned to buy an annuity, the only investment that can guarantee income no matter how long you live, only 23% of the people polled said yes. A lot of people disregard the concept of purchasing an annuity for guaranteed income because of these misconceptions out there.
The first thing, we agree with this, is that annuities are very complicated. There are three types of annuities out there. There are variable annuities, fixed annuities, and fixed indexed annuities. We’re not going to lean towards any particular thing, each of them have their own kind of bells and whistles to it, but they can be complicated. They’ve got fees that necessarily aren’t transparent. The way they do interest crediting isn’t always clear. We call it the Shiny Object Situation where people who tend to sell annuities as their primary solution, just get people pointed with what they call the Shiny Situation.
Number two is if you die too soon after investing in an annuity, you’re going to throw all your money away. That’s not true. A lot of annuities depends on the type that you buy and have the beneficiary designations to them. If you didn’t utilize all the money, there’s certainly money left over to your heir so you don’t give up control of that. Number three, annuities aren’t appropriate investments if you think you’ll need access to your savings for emergencies. That’s not true. There are annuities that have absolute liquidity options that you can get back 100% of your money, whether it’s in an emergency or not. Number four is you can get higher payment than an annuity offers by investing in a portfolio of stocks and bonds. You’re going to see that that’s not true. You shouldn’t buy an annuity if you want to leave money to your heirs, which we covered. Those are some misconceptions that we’re going to cover a little bit. Hopefully, that can educate people.
Karen, you heard me talking about retirement moves for women. We dealt with the subject the first time that you were available to come into the studio. Let’s start with women preparing for retirement. They have to prepare for longer lives and less years in the workforce. Where do you want to begin?
We can start with some of the challenges that women and working women are facing in general. I’m an example of that. When you start out in the workforce, you have a career and you’re making money. Sometimes you decide that you’re going to raise a family and, oftentimes, it is the woman who does stay home and take care of the children. When they leave the workforce, the Social Security cheque that they will be getting when they retire is going to be less. They’re going to have less working weeks to credit for their income and retirement.The first step to saving for retirement is making sure you actually save. Click To Tweet
Another unique challenge for women is that statistically, women live longer than men. That means that they’re going to have to save more money than their respective male partner. You have to make sure you have enough money stocked away for those retirement years. A little bit we discussed is women tend to spend fewer years in the workplace. Unfortunately, the divorce rate for women over 50 has doubled in the last twenty years. That is a big thing. I spoke with a woman the other day and she said she’s recently divorced. She can’t wait to come in, sit down, and talk with me specifically because she feels more comfortable talking to somebody that is a woman in general. That’s not true for everybody. They have that ability with something that I’ve always been passionate about. The good news is that women can plan ahead for retirement with intuitive strategies, it’s just that women may have to be more disciplined about saving and budgeting. Here are a couple pieces of advice for our female readers.
Karen, let’s do it in bullet point fashion for our readers. Looking at the itemized list of topics that you’ve identified, they are all important. I’ll give you the opportunity to go through that.
This is key for everybody. When you’re looking to start thinking about retirement, you should always have an emergency fund. You should always have at least three to six months’ worth of living expenses set aside. The reason is you don’t want to tap those credit cards if you don’t have to, especially in retirement, because you are going to be living on a fixed income. Credit cards can definitely derail retirement if you have a lot of debt. Always pay yourself first. It might sound cliché, but the first step to saving for retirement is making sure you actually save.
We suggest that approximately 15% of your paycheck, but if you can’t afford that, start somewhere. If it’s too much, start with 6% and then work your way up each year. It’s helpful if you automate your deposits if they go right from your paycheck into some type of vehicle that you have set aside specifically for retirement. If you have a job and where they have retirement plans set up for you, such as a 401(k) or 403(b), that’s something to look into. Also, an IRA and Roth IRA, that’s important as well. If you have a question about IRAs and Roth IRAs, that’s what we’re here to do is to give you guidance on what area it would be better for you to save money.
The bullet point of pay yourself first is that you’re also talking to women who are married, not just divorced. My wife pays herself 24%, before, every paycheck.
We do have children, we have one in college and another going to college, but retirement is our priority because we have children that don’t feel like taking care of us in retirement. They say they will, but I don’t want to put that on them. They can figure out a way to go to school. Definitely, pay yourself first. Getting educated is another bullet point that’s something that we help people out with. There are different ways of educating yourself. Everybody knows the internet, but be careful with what you read. We have the real answers or if it’s not us, please, I urge you to sit down with somebody who knows what they’re talking about.
I discussed IRA’s. There is something called a Spousal IRA. If you are a woman and you’re married and not working, you can still invest in your own IRA. It’s a great option if you’re out of the workforce, but you want to start saving. You can contribute $5,500 and possibly more depending on what age you are and when you start. The specifics depend on how much your spouse earns and how much you list on your joint tax return. That’s important, you have to file a joint tax return. There’s so much information and I’m trying to get it all out there to everybody.
The last thing is to strategize about your Social Security. Since women tend to live longer than men, it’s even more important to make the right choices that’ll make your Social Security less. We met with a couple and the gentleman said he was retiring at the age of 62 because that’s when his Social Security started. I wasn’t going to change his mind until I informed him that if he retires at age 62, I showed him the difference between his full retirement age which was 66 and two months, he was shocked at the difference. He didn’t even know that it was possible and how that would affect his wife if he were to predecease her. It made him stop and take a look at things.
50% or close to 50% of the audience is female. If you’re a woman and you’re more comfortable having a conversation with Karen, call the office. I have one last question for Karen. The five bullet points in retirement moves for women are set up an emergency fund, pay yourself first, get educated and get confident, explore Spousal IRA, and strategize about Social Security. MaxMyPlans.com is an incredible resource for readers to be able to go and take advantage of what you have put into the development of Max My Plans. I’ll give you the last word in the segment. Working women face a lot of challenges, what can you say about that?
When you face a lot of challenges, I urge you to get educated. Don’t be scared of what is out there. If you’re going to get information, please get it from the right person, don’t get it off of the internet. There’s a lot of options out there that you might not be aware of that a financial professional can sit down and help you with. Call our office, we offer complimentary first sessions with us.When you face a lot of challenges, get educated. Don’t be scared of what is out there. Click To Tweet
We bring Bret Elam into the conversation. One topic that we’re going to discuss is the retirement checklist. What do you need to do and what should go on a retirement checklist?
When we talk about that retirement checklist, we’re all getting back to preparation. We were talking about Carson Wentz practicing with wet footballs, getting ready for the 49ers game. That’s what it’s all about, it’s preparation. We don’t want to enter retirement and then figure it all out. It’s doing the necessary steps up front. We’ve alluded to dental pain with the necessary questions to make sure that we have a bulletproof plan when we enter retirement.
There is an article that we found out that was great that says, Are You Ready for Retirement done by CNN. We’re going to use their bullet points and dig into it a little bit different. In terms of the reality points, the first question we have out there is, “Do you have the financial resources you’ll need to support you for the rest of your life?” A study by the Boston College Center for Retirement Research found that 40% of working age Americans had an unrealistic sense of whether they’re on track to maintain their standard of living. Quick question, what day of the week are we spending the most money?
My guess would be Friday or Saturday.
We ask that a lot during our workshops. When you enter retirement, every day is Friday or Saturday. There are a lot of statistics out there. We only need 60% to 80% of the money that we earn while we’re working to live on. We put that cabash where if someone’s making $100,000 and only needs $70,000 to live on, we ask where those extra savings are if you don’t need that much money. People love to plan for that two-week vacation rather than going through that budget exercise. There are grocery budget resources that are out there on the internet. Karen did a great job at talking about women, we need to make sure we’re including things in our budget like getting our hair or nails done, pet food, everything that we think about. We just think about food, transportation, and housing.
Another big thing too is we deal with a lot of people, whether they are from the labor unions or teachers, especially people that have pensions where they’re having money taken out of their paycheck and going into a pension. Money is going into 401(k)s or 403(b)s. People are always thinking that, “I may necessarily need to get to that gross amount that I was making,” but it’s about take-home money. That’s what we’re spending month in and month out, forget taxes. Taxes are typically lower when we enter retirement. If you’re struggling with that budget exercise, at least come up with that net paycheck that we’re getting month in and month out. It’s a great starting point. Obviously, we need to keep up with inflation as time goes on as well. It’s going through those necessary steps of going through that budget.
It’s also understanding that 40% of working age Americans are unrealistic in terms of understanding what they are going to need for the future.
You have to be true to yourself. The next thing is where are those sources of income coming from? It’s going through the different buckets of money. We’ve talked about strategies and the importance of maximizing Social Security. It’s a big bucket that will create the foundation of what we’re going to live on. In our workshops, we talk about how Social Security is almost 65% of normal families’ expenses and retirement. We got to take into consideration pensions and assets. David spoke about annuities out there that are worth looking at like, “Should I have an annuity that’s going to generate income for me?” It may take place in a pension if you will. Giving us some guaranteed income. Are there going to be inheritances that are out there and understanding the micro level of when and where you’re going to be pulling from those different buckets of money.
We believe some misconceptions out there where they say, “Let’s delay taking money from our deferred tax buckets and take it from our tax-free buckets.” We talk about the different combination of putting all those puzzle pieces together to ensure that we have a tax-efficient retirement. Another big question is, “Do we have health insurance squared away?” We see that it becomes a struggle, from that budget standpoint, that our healthcare is taking our paycheck before we receive it. We need to make sure we’re adding that back into our budget. We find that 15% of our budget is made up of healthcare as we enter retirement. Whether we’re retiring at 65 and we can lean on Medicare or we got to go get a supplement on top of Medicare. Typically, we’re planning for $350 per person per month in retirement. We’re fortunate enough to sit down with people that feel like their life is hijacked because they got to pay for health care before Medicare age.
We sit down with people and talk about strategies and how you can do healthcare in the most efficient way too. Again, understanding all the rules that are out there. Another great question too is, “Is your retirement portfolio in shape?” David did a great segment on our last show talking about the Riskalyze analysis and were that sick agita test. In 2007, prior to stocks losing more than half of their money during that financial crisis, more than four in ten 401(k) participants between the ages of 56 and 65 had over 70% of their 401(k) account invested in stocks. What we found, we have plenty of those clients. They weren’t retiring in 2007, 2008. Then the emotions take in for getting off the train as it went back up. It’s making sure that we have the appropriate asset mix. There’s no general asset mix of, “60% should be in stocks,” everyone’s going to be a little different. That’s where that Riskalyze agita test comes in.We’re creatures of habit. Change is unnatural. Click To Tweet
This is the last one, “Do you have a plan for how you’ll actually spend your time in retirement?” People think so much of what to retire from and never spend the time of what they’re retiring to. We find from a lot of people, whether they’re going to spend more time with the grandkids or they’re going to volunteer, are bored in retirement. It’s like, “I should’ve never hung up the cleats,” because they missed that socialization of going into work every day. It’s being mindful of what’s life going to look like. We are creatures of habit, change is unnatural. We’re going into the office day in and day out and all of a sudden we’re not anymore, we got to figure out what we’re going to do with that next phase in our life.
MaxMyPlans.com 0:30:33 is a great website of resourceful information that you can take those bullet points that Bret provided. You can look at the buckets, work through the process, and do it at your leisure. David, as we were listening to Bret’s checklist, I kept hearing how we started this program where the phones were popping at Thrive and your email was buzzing off the hook with questions. There’s confusion in trying to understand and that’s why Sunday Night Live with Thrive was born. We want the questions to come and you’re getting a lot of them.
We were checking our Facebook page and seeing commentary asking questions about annuities. It’s a hot topic for us, financial advisors, on trying to bring clarity to folks about how they work, what they do, and if they’re appropriate. I thought if it’s okay with you that we would maybe save a potential segment about investing errors. We can spend a little bit more time maybe diving into annuities at a little bit deeper level. One of the things at Thrive is we’re very reactive to requests from our client. We get phone calls and emails. One of the things we decided to do at Thrive, we put an additional website together called ThriveUniversity.info. It’s a ton of information of videos and educational classes. They are not as deep as we go in here, they’re shorter vignettes of it, but a great information on many different topics. People can request additional information through that site.
It’s part of the education process. No pressure in the ease of your leisure to be able to go in there, watch and absorb it, and then reach out with questions.
It makes for a better conversation for our folks when they come in because they’ve elevated their understanding and they can ask great questions that way. Back to some of the questions that we received, when it comes to annuities, they’re not evil and they’re not the greatest thing that’s ever been created on the face of the earth. They are appropriate for certain situations at certain times for certain people. I could tell you at Thrive that we don’t love annuities, but we love what annuities can do because there aren’t other solutions that can replicate the same thing.
The other thing too is it depends who you talk to from a financial professional perspective. If you’re dealing strictly with an insurance person, they may lean very heavily on annuities. We don’t think annuities should replace everybody’s assets by any stretch of the imagination. If you’re talking to somebody who’s a little bit more investment-oriented as a professional, they may completely boo-hoo against the annuity. Finding someone who’s got a balanced approach and can give you unbiased feedback about is where you want to go. We don’t love them, but we do what they can do.
There are two things that they can do, one of them is we use certain types of fixed indexed annuities as a bond alternative inside of an investment portfolio. When we are looking at investments and trying to design a portfolio, bonds typically are the safe haven for people to invest. The challenge that we have is we think interest rates are probably moving up. As interest rates move up, bonds go in the opposite direction and the values decrease. We don’t have any confidence of putting people in long-term type bonds, but we liked the type of yields that long-term bonds provide.
As an alternative, there is a particular annuity that we’ve investigated and did our due diligence on. We found it where we can give absolute 100% principle protection. We have liquidity, meaning you can get back 100% of the money you invested at any time with no penalty. It has no management fees and no fees involved that can erode the performance of it. Since it’s for the long end of the bond curve, only the portfolio portion might be 10% or 15% of an overall portfolio and it’s where we would use it so that we can get somewhere between 4% and 4.5% type return. That’s one primary reason we would use an annuity. Bret talked about the other where we try to create guaranteed income.
Guaranteed income for those of us that don’t necessarily have a pension that’s out there. Pensions are an annuity chassis at the end of the day. Look at the insurance company that’s back in our pension that is indeed out there. Actuarially, we have a couple aged 65 and the chances of one spouse living to the age of 95 is now 50%. Understand that we’re in the greatest bull market in United States history. We’re getting ready to see a correction. We don’t know if, but simply when. The worst thing that we can do in retirement is pulling money from a declining asset.
It’s not for every single one of our dollars but to give you some peace of mind that if that market goes on that rollercoaster and we join the emotional rollercoaster is knowing that we have a bucket of money that is guaranteed to last not only your life but maybe your partner’s life. When the first spouse passes away, we’re going to lose a Social Security check, so it needs to fill that bucket. We have annuities out there for a particular situation and for the particular person, that income can last until the day we pass away.
Annuities have their place. Working with a financial professional who has no bias and can make an evaluation if it is a particular fit can be an appropriate conversation to have. Typically, folks that have higher net worth don’t think they have a need for it. We’ve spoken to a number of our higher net worth clients about bond alternative, a placeholder wall, and if the market does correct, we don’t have a loss of principle, and it’s been received incredibly well. I encourage our audience not to instantaneously discount annuities. I also encourage your audience not to jump with both feet into annuities, get the information, get the education and see if it’s appropriate.