Animal Spirits Podcast - Talk Your Book: Lifetime Income

Episode Date: March 4, 2023

On today's show, we are joined by David Blanchett, Managing Director and Head of Retirement Research at Prudential to discuss how advisors should think about incorporating annuities, what annuities make sense for clients, income strategies within 401Ks, and much more!   Find complete shownotes on our blogs...  Ben Carlson’s A Wealth of Common Sense  Michael Batnick’s The Irrelevant Investor  Like us on Facebook  And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.    Annuities are issued by The Prudential Insurance Company of America, Newark NJ, and its affiliates. You should carefully consider your financial needs before investing in annuity products and benefits. (Wealthcast Media, an affiliate of Ritholtz Wealth Management, received compensation from the sponsor of this advertisement. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.)  Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Prudential. To learn more about Prudential's lifetime income strategies, go to prudential.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions.

Clients of Ritthold's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Michael, you worked in the insurance game for a while, and how long is a while? I don't know, two years, a year and a half. Worked in is a bit of a, it's taken liberties with the English language. You went to the office. I went to the office. That whole industry is guided.

by math. There's actuaries and there's formulas and tables and the whole thing is it's a lot of spreadsheets. The investment products. That's what I mean. The sales products, believe you me, the sales process is guided by nothing resembling math. But the investment products are guided by math and spreadsheets. But the way people use them are guided by behavior and psychology. And so we talked to David Blanchett today, formerly of Morningstar now at PGM, who does a lot of retirement research and he looks at annuities and generating lifetime income. and all these different things. One of the things that we didn't get into today was when I started the insurance company,

it was 2008. And so you could imagine that, I guess probably this was after I left, but annuities were probably, well, in whole life too, the guaranteed dividend was pitched particularly hard. Why would you ever risk money in the stock market when you could guarantee a stream of income with this? People like that stuff. There's an advisor in West Michigan who has billboards all over the place,

and he sells a lot of insurance products. And he always is holding like two safes in his arms, actual safes. People want that. You're right. But in times of down markets, people are probably more attractive. And that's the behavioral component I'm talking about is having that fallback. Annuities have gotten a bad rap by advisors over the years. And there are a lot of companies and people out there changing that perception or trying to change that perception. And I think David is one of them who really digs into this stuff and looks at the pros and the cons and the good and the bad. And it's not all or nothing, as some people would want you to believe. His way of looking at it is certainly interesting. And I'm not an expert in this space at all. Just hearing him describe the different types of annuities out there and the different kickers and rules and guidelines, it's a lot. If you're doing this, you want to work with an expert. You don't want to go into this on your own. There's too many flavors, too much complexity, too many acronyms. So David Blanchett broke it down for us wonderfully. So here's our conversation with David Blanchett from Pigeum. We are joined today by David Blanchett.

David is the head of retirement research for PGM. David, welcome to the show. Good to be here. So a lot of your work focuses on income-based strategies for retirement. Before we get into all that, I just wanted to start off with. How refreshing is it to finally be able to have some strategies that actually can earn income? Yield is finally here for the first time in what feels like forever. Does that make your job easier?

What fascinates me about people in life is that in 2021, you've had super low yields. People didn't want things. It's complicated, but the value of longevity income is actually higher when interest rates are lower, but nobody wants it. Now or into 2022, into 2023, we've got rates are a lot higher. And so I think to me, what's exciting is that it makes a lot of things more viable behaviorally versus maybe what made more economic sense in past years. We're going to get into a lot of your work and some of the math side of it. But how much of retirement income and I guess planning in general is driven by math versus the behavioral side of what people can reasonably stick with?

It's mostly behavioral. If you assume that you start from the place that you're using high quality products, high quality portfolios, it's about finding strategies that let people enjoy what they've done. And so I think that I've spent a better part of my career thinking about the math stuff. The math is important, but who cares how good your portfolio is if you can't sleep at night? And so I think that understanding the behavioral stuff is really important. The problem is it is hard to quantify people do it differently. But I think that you start with behavioral, then you focus on the math. You've performed a number of studies that deal with annuities. that provide some sort of lifetime guaranteed income.

And before we get into the details of the work, this is the type of product that has a lot of extreme viewpoints. Some people say it can save you. This is your savior. Forget about the stock market and all the volatility. Annuities are the only thing you should have. And then other people say, I hate annuities because they're complex and the fees and all this stuff. How does Ken Fisher feel?

Obviously. We love the annuities. Usually the truth in finances somewhere in the middle. It's rarely black or white. Maybe you could just share with us some of the common misperceptions. then maybe some of the pros and cons of using these products. So I think that one thing that really hurts the term annuity is the fact that it means so many different things.

There is no other word in the financial product dictionary, in my opinion, that can do so many things at once. It can be solely accumulation focused. It can be solely decumulation focused that require irrevocable elections, revocable elections. It can be fixed in variable. So it's kind of a hot mess in terms of what it actually means. And to your point, they can be incredibly complex. They can be incredibly expensive. They are often sold by individuals who aren't fiduciaries. So I think it all makes sense. I mean, obviously, like, there's a dateline special on annuities. That's never a good thing. When Chris Hanson pops out, good things don't happen after that. So I think that acknowledging one, that there's different types of annuities. But I think the key is that the strategies involved when it comes to income have been around for over 2,000 years. So what I don't like is individuals who just dismiss products and categories, at large. A lot of advisors will say, well, all annuities are expensive, I'm not going to use it.

And I'm like, SPIA is an immediate annuity. Adia is a deferred income annuity. They've been around for a long time. You can buy those online pretty easily. You shouldn't just dismiss the entire category because certain products are good. You don't dismiss mutual funds because some of them are terrible. You've got to figure out what can work for you based upon what you want to use, what your clients would accomplish, all that. One of the things that people maybe will poke at annuities is that it is a return of your own capital. You're being paid by yourself, to which I would say maybe there's some truth there. But is that such a bad thing? Because getting back to the behavioral side of it, this is done for you. So obviously there's a lot of math on the optimal

strategy. But again, just coming back to the behavioral component, I think there's a lot of value in that, even if there is some truth that some of it is just return of principle. Can you talk about that a little bit? let's zero in on the annuities that provide lifetime income. That's technically a smaller subset of total sales, but it's a form of insurance. Insurance is not designed to be wealth maximizing. I hope to not make money off of my life insurance, my homeowner's insurance, my car insurance, all that. You buy it to effectively hedge a risk. Now, a lot of the products that exist today combine investment attributes with the insurance aspects, but I think that you have to use your capital to do something. Either you're going to utilize your savings and you're going to deplete that to fund income or you can do other

things. One of those is to buy an annuity. I think this notion that you're spending your own money doesn't make sense in the context of what insurance is what you're trying to accomplish. You've looked at all these different types of annuities. What are some of the main types that people should be aware of and what are some of the similarities and differences that people should understand when they're trying to figure these out? It's kind of a hot mess of a category. So I've been doing research on annuities that provide lifetime income. Again, caveat that for at least the decade. And I used to talk about maybe three main types of annuities. The oldest type of annuity is what's called a spia or a single premium immediate annuity. This is effectively you give

a lump sum irrevocably to an insurance company and they give you a check every month for as long as you're alive. The second type is what's called a deferred income annuity that can also be called longevity insurance if it kicks in older ages or it can be called a QLAQ, which is a qualified longevity annuity contract, where you make an irrevocable transfer of a amount of money, they start paying you 15 years in the future. Those are the two simplest forms of lifetime income annuities where you trade some amount of money for a known amount of income for life. Those are not very popular. If you look at total annuity sales in 2021, they were less than 3% of the total-ish. Other strategies that allow someone to create lifetime income that are revocable,

where you can take the money back, are a lot more common. So the most common, example there is a product that provides a guaranteed lifetime withdrawal benefit or GLWB. So if you go back before like the global financial crisis in 2008, they were radically mispriced, insurers lost a ton of money on them. And over the last, say, 15 years or so have really moved away from offering them. The benefits have changed significantly. The fees have gone up. They just aren't what they were 10 or 15 years ago. An emerging category that I've been maybe talking about off and on for the last three or four years, even back when I was at Morningstar, are those strategies that create income for life where the income is going to vary over time based upon the

performance of the account. I call these PLIBs or protected lifetime income benefits, but structurally it's just a different way to create income where the income is going to evolve based upon how things change. And so what it is, it's effectively a form of risk sharing where you think about like a SPIA, which is the immediate annuity, where the insurer and companies on the hook for everything, there's effectively some sharing of the risk between the insurance company and the individual annuitant that can result in effectively more lifetime income. What's driving the shift into this new income structure? Well, a lot of popular annuities that provide lifetime income, the ones that are getting assets, in particular products that are called

guaranteed lifetime withdrawal benefits or deal WBs, they become really expensive for insurance companies to issue. And so I think what insurance companies are trying to do is actively pursue strategies that involve longevity pooling, which they're good at, require less capital and therefore can be kind of issued more efficiently because they aren't as risky from the insurer's perspective. Do these products really make sense? Why would somebody buy an annuity with no guarantee? You know, technically there is an amount that's guaranteed in that the person is guaranteed to receive income for life. The question is what the amount is going to be. And that sounds kind of backwards, but there is a guarantee, right? But structurally, the guarantee isn't known ahead

of time. And I know when you talk about that, people will say, oh, you know, I want to know exactly how much I'm going to receive as is some fixed amount. Well, again, I think that that doesn't necessarily reflect how retirement actually works. And I think that we actually don't do a very good job sometimes modeling retirement. And this can cause this kind of misalignment between what a retiree actually would benefit from and what we have to offer as an industry. And so, you know, one example right is that is that if you do a financial plan, you're going to assume that, you know, someone wants $100,000 a year for a 30 years increased by inflation. Well, right, that doesn't track reality. Right. In reality, that person has an income goal that could

be $100,000 a year, but it's some combination of needs, once, and wishes. They have different levels of, I like to use the fancy word elasticity or flexibility, but the key is, is that your entire retirement income goal isn't quote unquote needs, right? There's some portions that are flexible to varying degrees. And while it's true that you want income for life, that you're going to get bright no matter what, I'm just not convinced it needs to be certain. And people will say, well, David, you know, you need to have that certainty. I would say, well, if you think about a lot of the existing structures out there, they provide benefits. that are nominal, right? So I'm going to receive, I'm just going to pick a number, $10,000 a year every year for as long as I'm alive. That's not going to increase. Well, what happens if inflation is a big deal, right? What happens if you retire and you've got double digit inflation for the first two or three years? Well, all of a sudden, there's this kind of interesting environment where, you know, having a benefit that could be responsive towards inflation, all of a sudden is a lot more valuable. Now, there's lots of ways that you could possibly kind of get that exposure here,

implicitly, implicitly, the key that is acknowledging that people have this level of flexibility. And when you model that flexibility along with the uncertainties of retirement, I think it makes this notion of a lifetime evolving benefit a lot more palatable. Is there a certain demographic that tends to favor annuities? Is it people that have, call it, I'm making up a number, $200,000 and they're relying on that pool of money as well as Social Security? or is it for people that have larger sums of money? Where does that shake out?

First, I think that a lot of folks don't need annuities. The first place you should always check for lifetime income is delay claim to Social Security. There's a very strong longevity effect with income and wealth. And so the more stuff you have, the longer you're going to live, the more income, the more wealth you have, also the less you're getting replaced of your income from Social Security. So I think that individuals that, without a doubt, benefit the most from allocating more to annuities that provide lifetime income are those that have. have high levels of wealth, high levels of income. For the PLIB annuities you're talking about,

oh, they have some variability. How exactly does that work? Does trading some of the stability for a little more variability to lead to higher returns potentially, or is it like this is going to be invested in a 50-50 portfolio or whatever it is, and you're going to see some ups and downs depending on the markets do? How does that work? What I enjoy most about them is the personalization. If you think about like a GLWB, usually there's pretty significant constraints on how you can invest the portfolio. And that's just based upon capital costs, things like that. Well, with this structure, insurance companies really don't care. It's a pure longevity play for them. So it has to be like a hedgible asset. You can't put it in crypto. But you could put it in stable

value. You could put it in a fixed index annuity. You could put in a balanced portfolio. It could be all in stocks. It's up to you to figure out how you want that income to evolve during retirement. And so that's obviously very different than, say, again, a SPIA that provides this kind of fixed, known amount of income every year, it's not linked to inflation. Well, with these, you could invest in cash. You can invest in whatever you want to kind of better calibrate the risk of the income with your desire for income volatility. Can we talk a little bit about where the money is coming from what the insurance companies are doing with this? So I started my career at an insurance company and I asked when interest rates were very low, where they were getting the additional yield from.

And one of the answers that I got that was not satisfying that maybe you could help shine some light on was insurance companies have certain tax benefits that the average investor does not have access to. When they're getting this money, where are they deriving yield from? Because if they're giving you a spread above what you can get in bonds, like it has to be coming from somewhere. So where is that somewhere? I think one of the best examples is migas. I don't know if you guys know about migas. Migas are multi-year guaranteed annuity. So a miga is just like a CD, but it's issued by an insurance company for a fixed period between. two in 10 years. I've been looking at these actually for about three years now. And they offer returns that are well in excess of historically cash, but also government bonds. And insurance firms can do this through a variety of things. One, they have longer duration. The second is there's somewhat regulatory arbitrage here in terms of they can invest in things that you or I might consider risky, but given the structure of the account, the general account, they can increase their yield there. There are ways that they can do that. And one of the people always say that I don't know that I agree with,

is this notion that owning products from a single insurance company is risky. I think it can be. I think it definitely can be. But I think people to understand the way that insurers are regulated. If you think about the way that insurance companies work, not only do the assets have to exceed liabilities by some margin. They're highly regulated. But there's also state guarantee associations.

And this isn't like the PBGC. With state guarantee associations, every insurance company that does business in that state is liable for making whole other annuitants in that state should a company go under. by definition, every other insurance goes to the board. And then on top of that, it was the fact that if guaranteed products stop becoming guaranteed, it would absolutely destroy the insurance industry as a whole. So there's like three tiers of protection for individuals who own annuities. There's the assets and the insurer. There's a state guarantee association. Then there's just the implicit safety net

of the insurance market. We sold like an AIG in 2008. And so I just kind of point that out because people are always saying, oh, like they're super risky, bad things happen. I think that there is this kind of advisors poke, oh, we want to put your money with one insurer. As long as it's a well-known insurer, it's not that risky, in my opinion. You mentioned that on a relative basis, at least, maybe the yields you get from some of these products are probably better in a low-yield environment. So how has that changed now that yields are higher in the bond market? So it's fascinating how, let's just talk about SPIA. Speed has been around for 2,000 years. Okay, so the income that you receive from an immediate annuity is based upon two key factors. There's the longevity pooling aspect, and there's

the investment aspect. When interest rates are lower, insurance companies are buying the same low interest rate bonds. There's a huge benefit to the mortality pooling. So the lower interest rates are, the better, relatively speaking, an annuity is going to perform because it's providing that insurance component. As interest rates have increased, technically, the marginal value of buying an annuity has declined because interest rates are going to drive a larger portion of the payout. Everyone can buy those. But the fascinating thing is that people, all of a sudden really win annuities. And so to me,

it demonstrates that, yes, there's this interesting academic perspective about why to buy them, but we've seen this massive increase in purchases and quotes and all that over the last, say, six months because they do offer so much higher payouts

and they did a year ago. But here's the thing. You can get like 4% now just put money in cash. It's just a very different marketplace where, in theory, an economist would say, oh, you should put all your money in annuities when it's a traditional low.

People don't want to do that. But now that rates have gone up, we're seeing the reverse, where technically they add a little bit less value than self-annuitizing, but they're a lot more behaviorally attractive because rates are so much higher. And the spreads that investors can expect to earn an annuities relatively constant through different regimes and environments? No, I mean, it's going to be driven by a whole host of factors. What are the differentials in bond yields across certain premiums? I think it's going to change over time, but it's definitely not going to be constant. So is that something where a super-sophisticated

annuity expert might talk to their clients differently at different times, because this is obviously a lifetime obligation, but it sounds like it does matter when you buy them. I would be careful with lifetime obligation. One of the hottest products, if you can call it that, that's being sold this annuity. Again, are these migas. Megas are multi-year guaranteed annuityes. It's like a CD. It's guaranteed by an international company for, say, two to five years. And so I've got some research I'm doing now with Michael Fink of the American College looking at the yield on these going back 15 plus years. What you see is the premium or the difference in the yield on these products over say treasuries over different rated bar cap indices varies over time. So it isn't always a lifetime

commitment. It can be a product with a certain term. And there's very clear evidence that the yield that you could achieve by buying, even these products that are very plain vanilla varies a lot over time. So I just want to follow up to this. What I meant by the lifetime obligation, talk about what the surrender charges might be. Let's say that you want to get out of the contract. What does that look like? So surrender charges are both good and bad. And I'll walk you through what I mean here. So insurance companies, they effectively want to immunize the risk for the investments.

If they were going to sell you a policy of some sort of lifetime, a SPIA. Well, those speas are so easy. They're going to issue you a SPIA last year when rates are so low, okay? What they're going to do is they're going to go out and buy a bunch of bonds as best that they can to kind of immunize those payments based upon your future expected mortality. What they're at the risk for is the mortality stuff. they have to kind of pull that together so it lowers the risk. That's kind of how a lot of other products work. Some of the products are revocable so I can go in and I can change my mind. Well,

what happened now, for example, if everyone who bought a product two years ago could go in and say, hey, I want my money back. Obviously, that would destroy the insurance company because everyone that follows this knows that long-term bonds were down over 30% earlier this year. The value of their securities are way down. Insurance companies couldn't or can't necessarily provide the same kind of guarantees if there's that capital risk, if someone's going to kind of go in and grab them. So one, people say, well, surrenders are bad. Well, surrenders allow people to access an illiquity premium. So that isn't necessarily a bad thing. Now, my guess is what you're talking about, though, are the really intense surrender charges you see on certain types of policies, where I buy

this thing and if I cash it out in year one, there's like a 10 or 15 or 20 percent year surrender penalty. I don't like those. That's not what a normal human being should buy. You should be aware of the cost there, but one way to do that is thinking of it kind of like an A share to the extent that the insurance company bears cost for distribution. I've got to pay an agent, whoever, to sell this. There's cost of distributions. I'm then going to kind of load them into the contract over a 10-year time horizon. And if that person cashes out in the first year, I have to make those back. So typically, that's what surrender penalties are for, but why this is important about, well, what are surrenders? Well, like, we're moving to a space where there's going to be. be more fee-friendly products. I was listening to your all's interview of David Lau and Wade Fowell you had on early this year. As we're moving towards more fee-friendly products, even those products that don't have that initial commission or load to an advisor, there could be still some kind of market value adjustment because insurers need that to immunize their risk and ensure that if rates move against them, they don't have everyone

redeem the policies at the same time. If you're an advisor out there and you haven't dipped your toe into this water yet. What's a good litmus test for understanding the types of clients? We've talked about the math and behavioral side of things, but is it just a risk tolerance kind of thing? Is it the kind of client who really is worried about running out of money before they die? What's the type of client that makes sense for these? Because as you said, it doesn't make sense for everyone, but there's certain clients where this can be a real good solution. My general recommendation for individuals is you want to have the amount of money that you would deem to be essential or needs, non-discretionary, lots of fun words there, covered with

with income that is protected for life. People would say, well, David, I've got a client that is radically overfunded. They don't need an annuity. And I would say, well, to me, the reason to do that is not the entire economic stuff. It's that individuals approach how they spend money, how they enjoy retirement, so many different things

when you know that what you need to have every year is taking care of. If someone says, well, David, what should I do? I'm an advisor, I would say, well, ensure that your essential expenses are long protect it. Because if not, I think it really will change the way that your clients perceive market downturns or they experience certain things. They're going to underspend their savings because as good as you are as an advisor, you by yourself cannot insure them income for life. You can make

adjustments over time and all that. But ensuring you have that protection, I think is so valuable because it lets someone know that, hey, no matter what happens, I'm going to have income, even if I live to 100,5, 110. So it sounds like the portion of somebody, assets that they might want to think about directing to an annuity should less be like a percentage of your net worth and more focused on, well, what do you need in order to cover those essential bills? I think the way to think about it is like an income map. The problem we have, I can spend an hour on this alone, is how we model retirement. Everyone does Monte Carlo, which is okay, but retiree expenses are not 100% non-discretionary. Almost all these models assume that I'm going to

spend this fixed amount every year for 30 years or I'm just going to lose my mind. Well, in reality, retire expenses are this combination of needs, once and wishes, it varies. Okay. So what you should do is you think about your retirement spending goal. What is the needs amount, the once amount, the wishes amount, whatever? And then how is the income that I'm creating for that person stacking up? So maybe you already have lots of Social Security. You've got a great pension benefit. You've got other stuff. And that more than covers the needs. It goes into the once. Well, then there's still more questions. How do you feel about having an income that's protected? I don't want to need. Well, that's fine. To me, it's more about thinking about the income part of the equation of the assets, because

Social Security is the largest asset for most Americans, but it's not an invoice balance sheet. One of the bigger risks with annuities that I think people might point out is, okay, if I give the insurance company money and then I quirk a week later, my family is out that money. If somebody wants to turn on some sort of life insurance benefit, does that completely negate the benefits of the annuity in terms of cost? So let's be clear, no one buys annuities that do not provide some kind of return or premium. So less than 10% of immediate annuities that are even quoted are life only and less than 5% are even sold. The only lifetime income solution that has that penalty is Social Security. So Social Security, you delay claiming there's no money back. No one buys annuities

of almost any shape or form where if I die, the money is gone tomorrow. What's really neat. So I actually just released a paper, what will be a few weeks ago today for Think Advisor, is talking about that. So there's really important differences in the mortality rates for individuals who buy life-only annuities and buy other products. So your question gets too like, whoa, does attaching these provisions that provide money back if I die hurt payouts? Well, think about like how crazy abnormal you'd have to be to buy like a life-only spiel. You've got to believe you're going to live forever. When you start attaching these provisions, whether it's a term certain or cash refund, you can really change the pool of folks who are willing to buy it. Collectively,

if the group of folks that buy the product that has that cash refund are a lot less healthier on average, you can actually possibly increase the payout for that annuity because it has different mortality attributes. What's so important about this topic in general is just that there's been a lot of focus on this academic perspective of like what is the most efficient form of annuity. Well, in reality, for like normal human beings, it's about how do I structure payments and income to accomplish a goal that gets the most people interested in it provide like the overall best pricing. This isn't purely like an academic exercise. It's like, how do you incorporate this behavioral stuff in the product design actually create the highest possible

income? Most of those normal people, and a lot of them maybe probably don't have an advisor, have their money in 401K plans or some sort of defined contribution. You mentioned to us that you're working on a paper about providing some lifetime income strategies in those plans. How exactly would that work? Because I do think that that is a subset of people. The majority of Americans, that's their retirement plan besides Social Security and maybe their house, how exactly would that work inside a 401k plan? I'm a huge fan of the idea of more people in America staying in plan post-retirement. I'm a huge fan of advice. I've been doing research on the value of advice for more than a decade. I worry, though, that a lot of, especially mass affluent Americans, won't get

high-quality advice from a fiduciary advisor. They leave the plan. Giving them the ability to generate income and retirement in a DC plan can help them accomplish better out. outcomes. And so one way to do that would be to provide them access to some kind of guaranteed income solution like an annuity. There's lots of ways to do it. We're still very early in the game. I do think we're going to see a lot more. There's going to be secure 2.0. There's already the Secure Act. I think that we're going to see more products and solutions introduced that are very different than the average product that exists in the retail space. So the earlier question about surrender penalties, a lot of the retail products have a lot of expenses that you won't necessarily have

to see in institutionally priced 401k-friendly annuities. So I think that as solutions, they really can't help the folks that want more of a one-off a way to achieve a better retirement outcome. Can you talk about the way the advisor landscape has changed over the years with respect to using annuities? I don't think it's changed that much. I think that a lot of advisors either use them more often than they should and other advisors use them less often they should.

I think that it's effectively a very binary outcome where certain groups might overuse them, certain groups I don't use them. I do think it's changing, though. I think that we are seeing a lot of innovation in the space in terms of products, companies that offer free-friendly solutions. I'd like to think that as we move into 2023, 2025, and we keep going, more advisors are actively asking this question. I give presentations every week to advisors, and I asked this question, I was like, how many of your clients who are retirees have you recommended that they purchase an annuity? And if that answer is zero, you're not doing your job. There's no way

that not a single one of your clients would have been better off allocating to annuity. Now, I am not even close to suggesting that all of them should own it. Maybe it's just a third, maybe it's 5%. But if it's zero, I just have a hard time believing that they're truly exploring all the options to help their clients figure out how to solve retirement. So then what are the biggest misconceptions that advisors who don't use annuities might have? It's very easy to dismiss them for lots of reasons. There's the single insurer fear.

There's the, if you die, you lose your money fear. Advisors have compensation biases against them. I can charge 1% to manage a portfolio. If I have you allocate to this immediate annuity, half the portfolio is gone on and get paid on it. So I think that there's lots of ways that each camp can paint a picture about why to do it. I just called someone out on LinkedIn last week. It was suggesting that like a Monte Carlo failure is like an airplane crash. I'm like, that is absurd.

That's not what it suggests. And he was using it to suggest that someone buy an insured product. I'm like, hey, as a heads up, you can still fail if you have an annuity. There can still be inflation. There can still be other bad things that happen. I think that each camp picks the worst of the opposing view. And they don't think about it in a balanced nature. I'd like to think that, I don't know, in five or ten years, there will be more advisors

that say, hey, Mr. and Mrs. client, given your preferences around income volatility, your lifestyle, your longevity, we should consider allocating part of your portfolio to a product. And that could be a lot of different things. But I just think that more advisors should be having that conversation without the end in mind, not I'm going to put all the money in annuity or none, more of that. balanced conversation where there kind of is some discovery. You mentioned our conversation with David Loud from DPL. Are companies like his and other companies, has there been sufficient advancement in technology

to make the advisor's job easier to allocate to annuities? I think that's actually still a huge issue. I think that they're working on it. I know that within Prudential, we're working on it. I'd like to say that, yes, there's like a seamless process. There's not. The one thing we have seen, though, is interest in the space will obviously drive change there. If you go back three to five years, you didn't see a lot of the name brand,

insurance companies offering thief and robots, that's changed. I do think we are seeing improvements in the technology aspects of allocating annuities. It would be wrong for me to say that that puzzle has been solved. The one annuity that does have an inflation kicker, which Social Security, I think, would I get a 9% kick this year or something close to it. A lot of our younger listeners are asking us all the time, can I even bank on this for my retirement strategy at all? I think that a lot of the fears people have of Social Security running out someday or being insolvent don't make a lot of sense, but I'm curious your thoughts on that and how young people should think about that in their future. I think the notion that we're not going to have a public

pension system in America is about zero. One, like, even when they introduced the changes 30-ish years ago, no one's benefits who received them were affected. I'm 41. I think there's a really good chance that the benefits that I receive, let's say in 20 or 30 years are less generous than what someone who is trying right now will receive, but it's going to be there. I don't think it's a reasonable though to say, hey, let's go ahead and think about what the benefit might be. It will reduce it by 60%. Or we'll assume we've got to work an extra three to five years before it starts. But I've been doing financial planning for 20-plus years.

If you run a financial plan without any Social Security, it dramatically suggests you should save more. And some folks are okay with that. But, I mean, if you know about the life cycle model and all that, don't save a ton of money when you're 30 thinking it's not going to be there. Just maybe give it a haircut. Don't just assume it's going to be gone. A Michael haircut or a Ben haircut because that's two different types of haircuts.

I don't know Michael needs much of a haircut for what I'm seeing right now. I have one more question. You said a couple times that annuities have been around for 2,000 years. Your job as an insurer had to be way easier 2,000 years ago because people lived until they're like 35. How did an annuity work back then, 2,000 years ago? And how do you know this? What's the story there?

Technically, the previous versions were issued a lot by governments. One of the newer, cooler ones that are out now are like taunting, where people individual would get together without an insurance company. They would pull their money. Oh, that's right. That was like the original annuity, right? the ton team. That's one of them. Back in Roman times, there were, I'm going to say it wrong, like Annua, which was a form of annuity. Tontines are made a comeback now. There's one available

in America. There's two in Canada, Australia. The key is just you have a pool of individuals, and then you're making a payout. So annuities, or there weren't actuaries back then that did the same calculations. There's always folks that will say, hey, if you give me some money, I will then give you a payment as long as you're alive. Obviously, we are much better now about the math involved in figuring out things like mortality. But even last week, there was a a study released from the site of actuaries in Lemra looking at mortality experience among actual individuals who buy these policies. And they're actually dying faster than expected. So even actuaries get it wrong, I think, but what's important to some extent is when you pull that risk

among millions of people, that's where insurers are so valuable. People will say, oh, what happens if we have this massive improvement in mortality? All the insurers are going to broke? Actually, no. Like people have said, if we have a cure for cancer, maybe life is increased by three to five years, insurance can handle that, how will your financial plan handle that? So I think that a lot of the things that people talk about in terms of risk for retirees is very real when it's idiosyncratic when it's your individual retirement. But when you pull the risk with large people, it can just radically simplify things. David, annuities are not the most exciting topic, but you made this a fun one. So thank you for coming on. Follow me on LinkedIn. Thank you very much for coming on today. We appreciate

the time. Thank you to Dave. Also check out Prudential.com for more annuity information. Send us an email Animal Spiritspod at gmail.com. Annuities are issued by the Prudential Insurance Company of America, Newark, New Jersey, and its affiliates. You should carefully consider your financial needs before investing in any annuity products or benefits. Wealthcast, media, and affiliate of Riddle's wealth management received compensation from the sponsor of this advertisement.

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