Business Innovators Radio - Interview With Chris Patterson, Retirement Income Strategist Discussing Annuities & Income Planning

Episode Date: September 15, 2024

Chris is a CPA/retirement strategist/basketball coach/husband/father!He is been assisting clients with tax and retirement income strategies for over 25 years, He loves what he does and wants to assist as many people as possible.Learn More: https://innovatemyplan.com/Past performance is not a guarantee of future performance. All strategy recommendations must be associated with a full review of a client’s personal situation.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-chris-patterson-retirement-income-strategist-discussing-annuities-income-planning

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us Chris Patterson, who's a retirement income strategist, and we're talking about annuities and income planning. Chris, welcome back to the program. Hey, Mike. Thanks for having me again. You're welcome. So I know that this is a big topic because there are certain words that trigger people to go, oh, no, I'm good. I don't need life insurance.

Well, maybe you don't, but maybe you need life insurance that is an investment grade contract or people will say annuities. I've heard bad things about it. So I want to talk about, you know, annuities and some of those misconceptions, but then how it ties in to the income planning that you focus on. Because as a retirement income strategist, that's what you focus on, right? So how. How does income planning and annuities work together? Yeah, absolutely. Annuities can play an important role in income planning. You know, an annuity is a tool, right? It's no different than, you know, you go in your garage and you've got some tools laying around in the garage. And, you know, do you need a screwdriver? Do you need a hammer?

It just depends on what the project is, right? What it calls for. And the annuity is the same, right? An investment portfolio is the same. They're tools. So in terms of income planning inside of your retirement plan, what we're ultimately looking at, or what are your cash flow needs and more specifically, what are your net cash flow needs after things like social security, pensions, you know, other things you may have, maybe there's some

part-time work. What are your net cash flow needs? And can your portfolio, you know, can your assets support what the income needs are? And where annuities can come into play, is one, they have the ability to generate guaranteed lifetime income, which is great. Some folks really, really like that. They have the ability to protect your assets against market downturns, and that's great. And some folks really like that. Some don't. Some don't need it. But annuities in terms of your retirement income planning really can play the role of sort of the safe money. or the kind of protected account inside of your portfolio. And it goes back to something that we've talked about before,

which is the sequence of returns risk. And annuities can play kind of a key role in helping us avoid that risk if we feel it's warranted. So, yeah, they can be important. In some cases, they can be critical. But at the end of the day, annuities are just a tool that we have available. Yeah, and I love hearing words like guaranteed, right, and can't lose money. So I want to talk about that.

But I think for the people that in their mind, it's natural to go, oh, I don't need any more insurance. Isn't an annuity actually an insurance contract? Yes, an annuity is absolutely an insurance contract. That's interesting to think about because I'll think a lot of people like, oh, I'm not going to do that insurance. I'm going to do an annuity. Well, an annuity has, you know, different, you know, ways that it works other than, you know, like, whole life or permanent life, but it actually is an insurance contract. So a lot of people have that misconception, I would think. Yeah, they do. And a lot of folks, and honestly, a lot of, um,

advisors for better or worse will sell annuities as investments. And, and it's, it's not. I mean, it really is insurance. It's a, um, there are contractual, um, guarantees and, contractual components, um, you know, inside of those policies. And, yeah, annuities are absolutely insurance. And again, you know, it all comes back to how does it fit into somebody's overall plan. If, you know, a safe money allocation is needed or warranted, annuities can play a nice role. Life insurance, you know, at times can play a nice role.

But, yeah, no, they're absolutely insurance contracts. So let's talk a little bit about that guarantee and can't lose money aspect. Because I think that so many times retirees or pre retirees are used to getting their quarterly statement, opening it up and kind of holding their breath and like, let's see what's going on. I watch the news, you know, every night. And man, it doesn't look good or whatever. So talk a little bit about the can't lose money and guarantees because I think that that is such

a huge thing. It's almost like, you know, help you to see. sleep at night insurance that you're talking about. Yeah, you're absolutely right. And really, it's important to understand some of the differences between the types of annuities. You know, there's an example, there's a variable annuity, which a lot of people have heard of. And I have to be completely honest with you. I would never recommend that any individual put money into a variable annuity. They're expensive. They tend to underperform. They'll go up and down with the market, Right. So variable annuities, I just don't get involved in. There are fixed annuities, right? Fixed annuities are not subject to market fluctuations. They're generally going to have some guaranteed rate of interest for some guaranteed period of time. And then there are fixed indexed annuities. Fixed index annuities are kind of a hybrid of the variable in the fix. But at the end of the day, probably the most important component,

the fixed index annuity has is that the principal is fully protected, so you're not going to lose money due to a market downturn. But you have the ability to share in the upside of the market inside of a fixed index annuity, and those returns can be pretty good at times. And then at times they'll be kind of stagnant. But in terms of the guaranteed income, all of those types of annuities can offer guaranteed income. Generally speaking, within the fixed and next annuity, that guaranteed income is being offered via a guaranteed income rider, R-I-D-E-R, guaranteed income rider. And you're going to pay a fee for that. And you're going to see fees anywhere from, you know, 90 basis points or 9-tenths of a percent up to as high. I've seen them, you know, at, you know, 1.75 percent.

So then the higher fee doesn't necessarily mean the better guaranteed income. So you got to be a little bit cautious there. But that guaranteed income can be powerful because it is guaranteeing that income for your life. And it can also be a joint guaranteed income, meaning that if something happens to the owner of the annuity, that guaranteed income can continue on for the life of the spouse. right so so that's very important it's very powerful um the downside to that guaranteed income is it generally is not adjusted for inflation um right so this again this is a tool it would fit into an

overall um income strategy and obviously we have to adjust for and hedge um you know against inflation but that guaranteed income is going to pay you out that income every month every year however you choose to receive it for the remainder of your life. If something happens to you, and let's just say it's a single income, right? So that income would stop at the owner of the annuities death, right? But if there's anything left in that contract, that's going to pass on to beneficiaries. And that's an important thing to understand because the old school annuities you used to anuitize. and what that means is you would just turn your money over to the insurance company

and they'd pay you out that guaranteed income for some period of time, maybe for your life. But when you pass away, there's no money going to beneficiaries. So that structure kind of changed many years ago and really for the better. But yeah, what a powerful thing to have, you know, guaranteed income stream that you know you can count on in your plan. And you mentioned something about participating in the upside. Like if it's indexed or tied to whatever market, you know, then if that's a great year, then you're going to get great returns. But what if that particular index just tanks one year, then that's where you're capped out at zero.

You can't lose money, right? So you got the benefit of, yay, it increased. So I got a better return. But if the market tanked and your friends come waving their statements at you going, We lost 20%. You're looking at yours going, I was even. I didn't lose a dime. Yep. Yep. That's exactly right. And quite frankly, I mean, we saw that in 2022. We saw that, you know, for stretches, you know, from 2000, 2010. But you're exactly right. Take the S&P 500 as an example, 2008. It's a year we all, you know, painfully remember. You know, but when when the S&P was down, you know, 37, 38%, You know, if you were, if you had a portion of your assets in the fixed index annuity and it was tied to the S&P 500 index, you didn't lose any money in that in that particular year. You know, on the flip side, if the S&P 500 is up, say, you know, 20%, you might only share in 8% or 10% or 12% of that upside.

You know, there's there's a lot that goes into those calculations and we try to walk close. through that and help them understand it. But yeah, that principle protection is key. There's, there's, and I'd say in probably 80% of retirement plans, it's kind of warranted to consider that type of protection. Again, to kind of mitigate something we've talked about before the sequence of returns risk. But yeah, powerful, powerful tools that have used properly can help to

really help retirement plans prosper in the long run. And then you mentioned writer, and I've heard that there's different types of writers that give some living benefits, not just if someone passes away, then it can go onto their airs. Talk a little bit about some of the writers that can be added into these annuities. Yeah, absolutely. So if you're taking a guaranteed income, the most common kind of add-on rider would be something that's called an enhanced benefit or a lot of people just refer to it as a long-term care rider. So what happens is if you take, let's just say you're taking a $20,000 per year guaranteed income, okay? And an unfortunate event happens and you can no longer

perform two out of six of the activities of daily living, which qualifies you for long-term care. Okay. That enhanced benefit will double the guaranteed income for generally for a period of five years. So that 20,000 would go to 40,000. Assuming there's money left in the contract, there's one important stipulation there, but normally there is. But that 20,000 would go to 40,000. And that would be paid out to the owner of the annuity or to the owner of the recipient of that income. for a period of five years. At the end of that five years, that income reverts back to the guaranteed income level, which would have been 20,000 in the example that I'm giving. But that's a really, really powerful add-on kind of protection for somebody in retirement that maybe they don't have long-term care insurance. Maybe they can't afford it. Maybe they don't want it, whatever the case may be, but now there's this kind of built-in benefit that they can have access to,

you know, in the event they need it. You know, the thing that strikes me on that is it's there if you need it, but if you didn't need it, it, it, your, your newity acts like whatever it was set up for cash flow or growth or whatever, meaning like if my, um, uh, car insurance, I pay every month. If I did not wreck my car or make a claim that year, I can't call up my insurance company and send me my premiums back. That's just what insurance does. Well, if you have a standalone long-term care policy,

many times they could be expensive, like you mentioned, but if you didn't use the long-term care, you can't get the money back. So if you have a long-term care policy, two, three, five years and finally use it, great, but look how many years you paid into it that you didn't use. So with this writer, it just seems to me like it's an extra little level of

protection because if you need it, however it distributes out, that's wonderful. But if you don't need it, your annuity is performing the way it was set up. I think that's a really neat aspect that maybe people don't pick up on. Yeah, I agree with you. And, you know, anytime you're building out a retirement income plan or retirement plan, we're trying to find, we're trying to maximize all of the income and all of the benefits that a retiree can get at the least amount of cost possible, right? That's part of our fiduciary role is to keep

fees and expenses as low as possible. So if there is a benefit like that that's available at no additional cost, then by all means, we want to look at it and consider it and make sure that the client understands it. Because again, you know, going back to some of you and I have talked about, you know, fulfilling that fiduciary role, you're really only filling it if you are exactly examining all options for clients, not just the ones that you want to see them, you know, move into or not just the ones that your company deals with. So, yeah, we are constantly scratching and clawing to try to find any added benefit for retirees in their, in their retirement plans. Yeah, I think that is, that's the aspect that people have to keep in mind is if someone is a truth. fiduciary and following, you know, that guideline, they're legally obligated to tell you all the

options and then let you decide and tell you what one is best. And if they leave one out, that's the same thing as guiding you in the wrong direction in a sense. So should all of your money's money be in annuities? Probably not. Just like you shouldn't put all your money in one bucket of anything. So it could be a wonderful option to see how it plays out. But I think the thing that people should also not do is what we're attempted to do. Let me just go Google, set up an annuity, click, click, click. There is so, you get into the weeds there and could get so confused because there's so many different types of annuity. So you have to just find out what one is best for your personal plan. Yeah, absolutely. And I mean, at the end of the day, there's, there's a few things that

we're looking at in an annuity. You know, what, what's the financial rating? What's the financial strength of the issuing company, right? That's really important. Second thing. Second thing would be what are the feeds in the annuity? You know, I tend to lean towards, you know, no fee annuities, you know, when we can. But if we're using a guaranteed income rider and there is a fee, what is the fee? Are there any additional expenses that the client can get hit with? You know, I'm trying to make sure that the fees and expenses are as low as possible. And then number three, you know, what's kind of the history of the crediting strategy? or the index strategies inside of the annuity.

And what's that potentially going to look like for a client moving down the road? So we really try to focus kind of on those three key areas. Yeah, I think that's like the old school. I remember way, way back in the early 90s, you hear like, you know, mutual funds. And oh, that sounds great. But look at the cost. Look at the fees and the load and it bloat. And yeah, you might get X rate of return.

But then when you factor in the fees, you got hardly anything. So if there are fees to be assessed on these annuities, you want to make sure that that's a low amount or a fair amount or it makes sense. So I think some of those things are the ones, you know, like below the level that people don't think about calculating in. Oh, absolutely. You know, I mean, when we're, look, you know, we've talked about this, but, you know, an annuity is a tool, right? And we're looking at it as a part of an overall retirement income strategy, retirement plan. So we're looking at the fees of the annuity if we're using an annuity. We're looking at the fees of the investment portfolio, if we're using the investment portfolio or any other product that's in.

And then we're calculating, well, what are the total fees in the overall plan, right? And kind of laying that out for the client because it's one thing to look at one part of your plan and say, well, this is the fee. Okay, well, then how much money is allocated to that? And then, you know, what's the other part? And how much money is allocated to that? And what's the real fee that you're paying? And, you know, that's, you know, part of that extra step that we have to go through as fiduciaries to disclose, uncover and disclose all of those fees to the client and make sure that they understand what they're paying for as a percentage of their total portfolio, not just, you know, one or two things. Because it reminds me of like when you watch Shark Tank and they're like, oh,

look, you did a million dollars in revenue last year. Congratulations. But if their expenses were 1.4, then who cares about the million? So same as the annuity rate of return. If the rate of return looks wonderful at whatever percent, that's great. And you can, you know, high five and go look at this rate of return. But if the fees bring it down to where it's like, oh, well, that's not all that wonderful because it all gets down to what's net to me. You know, if you get a huge amount, but then the fees bring it down to some paltry amount, then that wasn't a good annuity. And that fiduciary approach, the advisor that is making those recommendations needs to make sure that you're aware of all of that. I think that's a huge point that we've been making in many of our conversations is get all the facts and see what works for you.

Yeah, yeah, absolutely. And things change too, you know, so you get, you know, I try to stress this to clients. It's like, you know, what we set up today may not be what we're, you know, what you have 10 years from now, you know, or five years from now. I mean, things change, markets change. And as your advisor, we've got to explore and examine, you know, all of those options, you know, that are ever changing. And so, you know, it's all part of that process, you know, constantly examining, dissecting and figuring out what's most appropriate for the client. And key word there constantly. This does not seem to me like it's said it and forget it.

No, no, not by any stretch. And, you know, we, I always kind of jokingly, but I guess there's a level of seriousness to it where I, you know, I let our clients know, look, you're required to hold quarterly meetings with me. You know, you might not want to. Sometimes they might only be five-minute meetings, but they're critically important because, things change in your life, things change in the marketplace, things change in terms of products and what you should consider holding in your plan. And, you know, that ongoing input and feedback and relationship, which is probably the most key word in the whole thing is, you know,

we've got to provide that level of service to the clients. And no, definitely not to set it and forget it in an extraordinary. stretch. Well, I tell you, this has been really helpful to kind of think through and talk through these things, Chris. If someone is interested in getting that second opinion or having you look at what their situation is, what's the best way that they can reach out to you? Yeah, absolutely. They can reach me directly via phone at 904-3331960. They can also text me directly at that number. Again, it was 904-331-1960. And then if they would prefer to email, they can email me at CAP at lifeworksadvisors.com.

Again, that's CAP at lifeworksadvisors.com. They can call, text, or email whatever is most convenient for them. Excellent. Well, Chris, thank you so much for coming back on. It's been a real pleasure talking with you today. Absolutely. Thank you, Mike. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, visit www.com.