5 Reasons You Should Not Buy An Annuity (And When To Surrender One You Have)
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I do not like annuities, and I will be very transparent about that. Now there is a role for them in a retirement plan that I will discuss. But one of the advisers that my parents worked with at one point had recommended in an annuity.

And the problem with the unity was, for my parents, IT was way too conservative, the fees were way too high, and I ended up resulting in significant opportunity cost. Many of they had just instead invested their money into a broken age account, which I call a super here account. They would have much more money today.

So i'm going to explain the five reasons to not purchase in annuity. And if you do have one, how to think about whether that makes sense to surrender IT. Sometimes my feedback is, you know what IT actually makes sense to keep IT at this point. Sometimes it's not certainly still make sense to surrender IT, but we've got to be careful because there could be tax implications. This is just gonna your complete guide to thinking through annuities.

If you don't have an annuities and you just wanted hear and how this is about IT, be my guest and listen to this if you're like, look, I don't have any interesting annuities I really don't like and I don't want to hear more about them, make sure to check out one of the other episodes because this might not be the one for you. I am a podcast listener in addition to a podcast host, and I appreciate when other guests tell me, hey, this might not be applicable to you. Check something else out or note this could be right in alignment with what you're looking force up.

Want to help as many people as possible, which is why I have a wide variety of content. Now i'm gonna a start with a review of the week. Now this review was right after I released my special episode, where I announced that I was an episode two hundred.

So thank you so much for reviewing, letting people know your thoughts on the show. If you have not done already and i've helped in anyway, please do leave a review either. If you're watching on youtube, drop a comment and if you are currently on the podcast APP, you can leave view on apple, but spotify does not let you.

So this comes from compact IT, who says, thank you all. Great broadcast. I'm probably more advanced in financial planning for myself than the average person. Lots of great advice, I believe James, who is my partner, if you're unfamiliar in orin, can have a great business and great values.

I think in today's world, IT is hard to find people that focus on their clients more than their personal gain or as much good information for all from Young people get started to people very close to retirement. Thanks again for the podcast I listen weekly. You're very welcome.

Thank you for the review, and I want to hop right in. So what on earth is in unity? Well, in annuity is someone who is generally a sales person less of a financial advisor. And what they're doing is they're saying, hey john, hey jane, I know markets go up and down like crazy, so trust me, how would you feel if a two thousand that happened in new new year money didn't go down and they'd be like, that sounds great because that was my parents. Now what that sales person is refusing to often be transparent about is how much that is paying them, which I will talk about.

And the lost returns in the years where markets do really well, generally, an annuities might have a cap, which means if markets do, twenty percent IT might only allow you to capture five percent. But on the downside, IT will sound really good because it's like, what if markets go down thirty percent? I'm only down five percent, so it's almost protecting me in that way.

The issue with the nudities are multiple this, but i'm going to start with just here are the five reasons, and i'll go through each for you and what to consider. So if you are considering the purchase and unity, I want you to think about this. Number one, the opportunity cost generally with an annual ity is not just the fees and is not just how IT works.

It's the fact that, that limits your growth. And by you limiting your growth and not capturing when markets do really well, you lose out on significant returns. And i'll shown you an examples that's number one is you can get higher returns elsewhere.

Number two is flexibility with an annuity that is going to guarantee income. IT doesn't always have a cost of living adjustment. So if you're guaranteed five thousand a month in twenty years when you're relying on that for income, the five thousand a month might be worth thirty two hundred dollars a month.

So it's not keeping up with the cost of inflation. So number two is flexibility because not only he is not growing with the cost inflation, it's also not accessible to you, meaning let's assume you pass away. And i'm going to use an example, let's assume you are sixty five and they knew he gets turned on and sixty seven you pass away.

Well, that doesn't go to your ears and might go to a spouse if you have a certain type of annuity that will leave dollars to them. Generally, it's not the same amount, but more often than not, you pass away, just goes away. And that is something you may have paid a lot of money into for many years and you want that to be part of your legacy.

And now that doesn't get to be so IT can be a really crappy return if you put a ton of money into this, and now all of a sudden, in your sixty seven or seventy five or eighty, you pass away. And that's money, three, four hundred, five hundred or thousand, that could have gone to a spouse or a partner or a child. So number two is flexibility, where I want you to be able to tap into those funds if you should choose.

What if you turns out you know a significant health that occur, so you want to help out a kid with a wedding, you can just go, I want more money. There's a schedule that you're being paid out on. So I don't like the lack of flexibility.

Number three is the fees. Most diversified portfolios have a fee. Generally, let's call IT point to the one percent.

I've seen everything up to four percent, but generally point two to one percent. So if you're thinking about what that actually means, think of vanguard. Vanguard is a company with very low fees.

Meaning if you have a var product, the fee is something like point zero five percent, extremely low as A A hole could be point zero one percent. So you could be paying potentially a few hundred bugs a year on a million dollar portfolio now with an annual ity. Generally, I see the olin fees in the range of two percent of cell.

So a few of million dollars in the annuity or you're spent twenty thousand dollars year just in the fees that before the lost market growth. And that's not you don't have any inflexibility. So the fees on annuities are significant, which is my big issue when you see in a newly that has, let's say, four and half percent growth, but with two percent fees and not adJusting for inflation.

Well, now you're just losing money on this product. But the fourth reason to consider not purchasing and annuity is the commission that goes to the actual adviser that sold IT to you. So that is the ultimate question you want to ask.

I'm not against people feeding their family and making a live in, but i'm against IT being unethical. And this bridges on that a little bit for me when someone is recommending an an annual ity for five hundred thousand box, if there is a five percent commission on that, that's significant. If there is a ten percent a commission on that, that's very significant. So I want to make sure that you're not write off the top losing five, ten, fifty, twenty five thousand dollars where I would just take you years Price three, five just to get back to break, given because of the cost that went to the advisor right away. The last reason is annuity is getting the way of tax planning.

If you turn on social security and you've an annuity and you have an array that you're withdrawing income from and there's a pension or rental income or any combination of anything I just said, that is going to interpret tax strategy because now you have income coming in, whether you want to or not, that impacts health care subsidies, that impacts require distributions, that impacts your ability to likely save tens, if not hundreds of thousands of dollars in taxes. So those are the five reasons that i'm not a big fan of annuity. But let me give me example.

So I wrote this out. This was from a client. I tweet the numbers a little bit, but let's assume he is me.

My editor is a good job, but as you can probably tell, i'm a little sick today. I I will always make podcast every single week and sometimes I don't feel the best. And I know trying not funded here on the audio if you hear me make that little noise and my chest.

So apologies for that, and i'm in the mits of a few different things on that end. So more updates to come on that later. Definitely feeling Better, but want to make sure you're getting authentic content.

My ether is amazing. It'll do a good job to make sure that there is noises that are always found here are minimize, but I care that you get the content. So thank you for the delays in between today's little blips of content.

So this is assuming john is fifty five and he buys an annual di. And let's just assume he bought IT on ten years ago, so he bought on on his forty five and he's fifty five today and he put one hundred thousand in. Well, there's a few different figures.

The first figures we won't understand is the surrender charge, meaning what would IT cost if you wanted to leave that? Let's assume it's five percent. So now you're going, okay, if I wanted to leave, i've got I put one hundred thousand in.

Now let's hope it's got value called surrender value. One hundred and fifty thousand, you have to pay five percent to leave. Now, generally, surrender values have a schedule.

So if you were to leave after one year, the surrender charge might be ten percent. If you're leave after two years and might be eight percent. If you're to leave after three years and might be six percent that decreases over time, they are incentivising you to hold onto that annuity.

Now let's assume for john, this would guarantee payout of twelve thousand bugs a year for the rest of his life, from sixty five to ninety five. John likely purchased this because he was scared by markets fluctuating in retirement. He wanted to diversify.

So he's like i've got some maybe real estate. I've got some investment stuff maybe add on in annuity to that. So that may have been his thinking in this example, and this the client I have.

So let's assume he surrenders this one hundred and fifty thousand dollars. He takes a five percent surrender charge. That's a seventy five hundred dollar hit right off the bed.

So now he's left with one hundred and forty two thousand five hundred. If you're listened to the podcast I known numbers can be a lot. And often times you guys are listening to this while you are working out.

So kudos to now i'm gna keep going along with the numbers, but i'll try my best on youtube to make this more visual. So it's easier to follow along. Now let's assume that a newly continues to grow and we don't surrender IT.

Well, generally, that fee is likely the range of two percent. So two percent is three thousand dollars a year of one hundred and fifty thousand dollars. And the fees over ten years will be thirty thousand dollars, just the annuity product.

And assuming four percent growth, which is very realistic, fernery ei after fees, the hundred and fifty thousand is likely worth one hundred and seventy thousand and four hundred nine dollars. That's just me doing basic annuities projections. So what if he instead? So you know what, maybe I do surrender.

This thing doesn't feel good right away. Now you've got a one hundred and forty two thousand five hundred, and let's assume you get seven percent growth. Reality is you could do six percent.

You could do a percent. I'm just picking seven for a conversation sake. After ten years, you would have two hundred and eighty thousand hundred and forty seven dollars. So you would have north of one hundred thousand more dollars because you're not paying as much. And fees in your decreasing the you actually increasing the growth, but you're decreasing the international fees in the lack of growth.

So comparing IT, if we were to take a four percent with raw rate, once again, not a huge fan of the four percent rule because IT doesn't apply to an early retirement, is designed for thirty years and IT doesn't assume you're intentional and spend more when markets do well and spend less when markets don't do well. But just for conversation, let's assume four percent per year, you would turn on income about one thousand two hundred and six dollars. So some of you are like, hate.

The beginning didn't you say that a new would pay out twelve thousand a year, and now you just said to pay one thousand two hundred. So how would I do this? Well, that two hundred and eighty thousand, you can take out more if you would like, you can take out less.

It's a flexible thing. You can move IT as opposed to your number is twelve thousand year every single year. So in three, four years, that two hundred eighty thousand continues grow.

Now you can take out more than twelve thousand a year. So in the first one, two, three years, maybe it's a little bit less, but the next twenty five, thirty years is hopefully a whole lot more. So generally annuity, I will only recommend actually i've never recommend them, but I have a client actually keep IT.

And I told them I agree with that because they were they were a widow. They were never educated on finances. Markets freak them out as a whole despite a vast amount of education.

And they're like, I I know what you're saying. I know I could do Better. I just sleep Better having this sinuous.

And I was OK with that because they had a pension and rental income in significant inheritance. So they were going have way less money by having this annuity. They did not need that.

I told them that they said, I get IT already, but I just sleep Better at night. Having IT. I said, cool because there is a financial answer to this and then there's the, hey, what's going to allow me to sleep Better at night?

The example I like to give here is I have a client who's eighty three in one hundred percent equities, and I recommend that. And some people like, what you crazy another eighty three. Why would you say that? I said, it's horrible.

And they're like, oh, why you just say at them and I said it's horrible for their neighbor that doesn't have a pension and so security and rental income, inheritance and wants to spend you know twenty thousand months and retirement, you have all of these other income sources. So if got forbid you're three million went to zero. You wouldn't like me, I get that, but you would be OK.

So you have the ability to take on more risk because you're income would allow for that. You'd still be able to meet your needs and your financial goals. So that portfolio, I can fluctuate more and you can make you way more money.

But if you would lose sleep over at going forty percent declines at any point, then I wouldn't recommend doing that. Now they understood that and said, hey, I wanna grow this like crazy because I have big legacy goals. Other people would say, yeah, I get that I could take this, but do I need that to meet my goals and i'll be like, absolutely not.

And they were like, well, then maybe I don't do this. So think about IT almost like paying off a mortgage versus investing when you pay off the mortgage and you know no longer have debt, IT just feels good. Let's be honest, IT feels good. You don't have any more debt. And so now you're like, look, I can't quantify this.

I just feel Better versus what you got on, quote, should do is probably if you have a four percent interest, you should pray, pay the minimum and invest the rest because you can probably do Better than four percent and make way more money and you're getting a deduction for mortgage interest and there's probably tax benefits and investment benefits by continuing to pay the minimum and invest. But no one throws a party when their investments go up by one hundred thousand dollars. They celebrate when they go.

I don't have a mortgage. I'm sleep and Better. It's one less expense in retirement. So when IT comes to planning, there's a financial answer and there's a real life answer. If you're unfamiliar with my academy, you can go in and run those same projections.

If you want to see your annual ity versus paying off the mortgage early verses investing differently, you can start to put the financial answers together and then connect IT to the real life answer. Now you can do that by becoming your own adviser or of cause, you know, not for a living, but through the software and learning in that. Or you can hire an adviser and do one on one planning with them.

So I have different options. No matter where you're at in your stage of life, if you're early on in your career and you're like early on could even be ten years. And so doesn't really sound like early on. But let's let me use a Better example because that wasn't clear. Let's assume you are fifty and you have two million dollars in a four one k some advisors would say, hey, you know, you should work with us.

I don't think you should work with them because although you two million dollars and you want to invest well if that's in your four one, kay in adviser could build you want IT, but they're not really able to manage the funds. So IT seems unethical for me. Now other advisers don't like when I say that, and I get IT because they messages after these episodes, but that just how I feel.

And i'm onna. Give IT to a straight. There's other times where IT makes sense to higher advisor, but it's when they actually have the ability to manage funds in execute taxi withdrawal and that the real strategies that add value.

So generally, I recommend hiring an adviser when you're one to three years out from retirement or have a significant concentrate position or or s use or stock options or just a lot of complexity or IT makes sense to higher advisor, if not often times my academy. And the software can be sufficient until you feel you want more help. So there's a ton of different options you can see in the description of this episode different ways we help people optimize their strategy. Hopefully, this was helpful on annuals and just thinking through them in a little bit more detail that's IT for this episode. See guys next time.

Thank you for listening to another episode of the early retirement show. If you have a question that you want answered in a future episode, you can always go my website, early retirement podcast dot com, that's early retirement podcast dot com. And you can go head in in a question that all look to answer in a future episode.

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Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax prepare or financial adviser before taking any action. This podcast is for informational purposes only.