Business Innovators Radio - Interview with Retirement Consultant James Haass Discussing Fixed Income Annuities

Episode Date: August 3, 2023

Over 40 years in financial services including 20 plus years with Northwestern Mutual Life. 15 Years as a financial advisor with large banks. Started own agency in 2015 with partner/spouse Michelle Haass, Thoroughbred Advisors. Probably the greatest gift I provide for my clients when they retire is a good night’s sleep.Learn More:https://www.BrookeQuinn.comInfluential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-retirement-consultant-james-haass-discussing-fixed-income-annuities

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 this retirement consultant James Haas, and today we're talking about fixed income annuities. James, welcome back to the program. Thanks, Mike, glad to be back. You know, I think that a lot of times people hear a certain word and their mind immediately goes to something.

You know, it's like, hey, what's the first thing that pops your mind when you hear this word, that word? And I think annuities is one of those words. I think that people have preconceived notions or misconceptions. So get us started with what are annuities and what are some of the misconceptions that people have on annuities. Yeah, Mike, there's many misconceptions about annuities. As you know, I've actually been selling annuities for over 40 years, and many people have the misconception about rates and returns, fees, costs, safety, and things such as that. But actually, we don't promote annuities to be a solve-all investment. In other words, you don't put all your money in the annuities.

It becomes a part of your portfolio. and when it's done properly and mixed in with your portfolio of other securities and investments, it really has a use that can serve one well for safety and income. Yeah, I think that's a huge piece that you bring up there twofold. One is you don't put all your eggs in one basket. And so annuities, we're going to talk about some of the benefits of annuities, but you don't throw all your money in that. And secondly, it's about safety.

because if people that are facing or in retirement, they don't have the runway to let the market correct and move through some of the volatility. So I think that's a big thing that people need to have in their mind is where can I put my money that's going to be safe and protected from all of that volatility? Absolutely. So talk about some of the advantages of the fixed income annuity because I know that anytime I hear the word fixed, it makes me think, well, the opposite. of that is, are there kinds of annuities that can fluctuate?

Yeah, that's a good question, Mike. Yeah, we're going to focus in on fixed annuities today, and there's various types of fixed annuities. There is an annuity called a variable annuity, which is invested in securities, and the principle in those annuities is not protected. So on the fixed side, there's what they call a fixed indexed annuity, which is indexed to say the S&P 500. And what it does, it's set up in such a way that the index will determine what the interest rate

you're going to earn is. But the nice thing about it is that if there's ever a negative year or a crash in that index, the lowest you will earn is zero. So it's structured in such a way that the index can never give you a loss but only a gain. and you will get a percentage of a gain of the index, usually up to a certain amount or a cap or a percentage. And it's the way they devise this program that can give you that safety. Now, the other type of fixed annuity I want to talk about is a fixed annuity that pays a certain interest rate. And typically, it's similar to like a bank CD, but it's issued by an insurance company.

and the interest rate could be, say, 5% for five years or seven years or three years. And it's that simple. And the other annuity that actually is connected to these other two is called an immediate annuity, which these other two annuities, the fixed index and this regular fixed annuity, after the accumulation period is done, you can convert it to an income, and it would be guaranteed for life. So they're all kind of connected, and the common core is they all give you a guarantee of your principal, your money, and you can also convert it to a guaranteed income for life, and it's guaranteed. Now that, I want to kind of pause there for a second because I know that everybody's

situation is different. So it's not just a cookie cutter. Here's what I want and everyone gets the same thing. But that sounds like a really interesting aspect where after a certain period of time of accumulation, whatever time frame of years, it converts or can convert to that income stream. So talk a little bit more about that because I think that in retirement, if you've got your Social Security coming in and then to know that you've got another amount coming in just monthly for that cash flow, that would be a comforting feeling. Yeah, you made a good point there about cookie cutter. It's not really a cookie cutter because we have to design these in such a way to match the client. And no two clients are exactly the same.

And as far as setting this up with your portfolio, you know, typically you'll hear some advice. or even some companies say, well, you know, you should have maybe a 50-50 ratio of money into the stock market and securities and bonds and the other half into these fixed type annuities. But what we have to do is really talk to the client and ask them questions about like, well, what's your lifestyle going to be in retirement? You know, how much income are you going to need? And it's also going to be based on their personal risk tolerance because, let's face it, some clients have a lot of risk tolerance. I do actually have some older clients that have 90, 95% in the market.

And I have some clients that have zero in the market. So I guess on average is 50. I don't know. So. Yeah. But that's the truth. So what we do is we sit down with them and we have to determine what their absolute necessary income is to pay their everyday living expenses and then what's their discretionary income,

you know, the wants income. And by doing that, we can determine how much is needed into the plan to provide the income that's necessary. And then by doing that, you know, then you can kind of determine how much money you can actually safely, or not safely, but put into something that does have risk because you've got your basis covered as far as your basic income needed to give you that lifestyle that you want and moving forward from there. Yeah. You know, that's a big piece is you have to know what you want in retirement. And sometimes people haven't thought like that. And when you sit down with them and say, okay, well, let's talk about. about that discretionary. Do you want to travel? Do you want to, you know, give extra money to

charity or start a nonprofit? All of those things. But then you kind of go, okay, if that's the case, now here's what we need to do. And having that fixed safety account in that kind of an annuity product, and then especially one that can convert into that cash flow, that gives you some really great options. And so now these sound really good. So there's some really good advantages of the different types of annuities. In anything in life, nothing's all perfect and rosy, so are there disadvantages to consider with annuities? Well, yeah, like anything,

the annuities do have their cons or their disadvantages. One thing is lack of liquidity in a lot of cases, or a lot of liquidity, you know, unlike a CD or just a, a bond or a stock that you bought that you can liquidate any time. An annuity might not offer that because they typically have surrender fees. And actually, the surrender fees are what allow the insurance company to give you the guarantees because then they're able to invest in such a way to deliver their promises to you.

So it's both good and bad. If we didn't have those surrender fees, then they wouldn't be able to do that. then they would have to sell you a product with risk. Like, let's face it, stocks and bonds offer nice liquidity, but they have risk. So even though it's liquid, you might have to sell your stock, but oh, I'm sorry, you lost 50% of your money. And that's what can happen.

So anyway, yeah, so we have a liquidity feature. And if you do have to liquidate it, you might have to pay fees on it, surrender fees. And typically on annuities or anywhere is from, three to five, the seven can be as much as 10 years, depending upon the type of annuity and, you know,

what the benefits are of that annuity. So there's a loss of flexibility for clients there because they, you know, it's kind of a fixed thing and there's a few limitation. So that's probably one of the biggest disadvantages of fixed annuities. Also, Fixed annuities, remember, they're not a vehicle. They're not set up for growth.

They're pretty much fixed for safety of principle. So that's why they have these limitations on them. But in some ways, I think that's a good thing, too, so they can give you the promises that they made. Yeah, so not necessarily deal killers, but considerations to keep in mind. And it's an aspect of a well-balanced portfolio. You don't put all your money in there. And if you do want some money to be in a growth vehicle with protection, there's other types of accounts to consider.

But I think that's a couple good disadvantages to consider. And, you know, if you realize that, oh, well, I can, you know, access my money, but it's just going to be in these kind of situations. So what if your financial situation changes? Can you sell it and access it? Or are you completely limited? What are some of those aspects to consider when you're setting the situation? up. Yeah, you can sell your annuities. There's actually two ways that you can get the money out

ahead of time. One is you can just withdraw money or you can sell your annuity. And the difference is when you sell your annuity, you're selling it to a third party. And when you're withdrawing it, you're just taking out your own money. So if you do sell the annuity, you can sell the entire thing to a third party and they will give you a lump sum and they basically give you a discount value of what it is worth based on the time that you sell it. You could also sell a portion of it, get a lump sum now, and you can do something like, let's say you're into the income period and say, all right, I'm going to sell for the next four years of income now and take the value now, and then after the fourth year, I'll continue with the annuity, and you still get the same

income, but you just gave up four years of it because you needed the cash now. Or you can sell a portion of what they call the dollar amount of the of the annuity which means like say you're getting a thousand dollars a month from the annuity you could sell three hundred dollars of that and keep seven keep 700 so uh you'll still get 700 for the rest of your life and whatever that 300 for life was worth the discounted value you can get in a lump sum now so yes you can but of course you're giving up future value yeah Yeah, you know, that's an interesting answer because as you were describing that, it made me think of if you won the lottery or if you had a settlement from a lawsuit or things like that or an inheritance, you can go to these brokers that'll buy that. And of course, they're going to buy it at a discount, but you can you can sell your inheritance, sell your lottery winning, sell your stream of income. And I did not know that it was available in this kind of a scenario.

Now again, big old caveat there, make sure it is, you know, all of those discounts and lump sums. You need to be aware of that. But that is really an interesting aspect to know that that opens up some more doors of flexibility for you without, you know, incurring. Let me just liquidate the whole thing because now that's going to incur penalties and taxes. So if you were to do one of those scenarios selling it, how does that impact like penalty or taxes? Because you didn't really liquidated it. You sold it to a third party. Well, yeah, it's definitely going to affect the taxable outcome of the situation.

Keep in mind, too, remember, we're talking about, it depends on when you do it with the annuity, too. because if you're cashing in or selling your annuities during the surrender fee time or afterwards, it's also going to make a difference as far as the cost costs. So it's also going to determine at what stage you're doing the annuity. And the example I just gave there was like assuming you had already started to take the income in the annuity. So, yeah, that has to be taken into consideration. And it's going to really depend upon how much money. money you've taken out of it so far, you know, what point you are in the annuity.

So, and how much, how much of a gain there is on the annuity? And so in other words, don't just hear something or Google something and go, oh, that sounds good and execute it on your own without getting with someone like Jim and saying, hey, take a look at my situation. If I were to do this, what would my outcome be? And maybe you need to bring in a CPA and go, what are the tax? of ramifications. It's kind of like when you play chess and you make a move and you keep your finger on the piece, you know, you still can look around, you still can change your mind,

but keep your finger on it. So don't pull the trigger on any of these things until you've talked to someone to go, is this a wise move? Yeah, absolutely. And we would not give legal tax advice anyway. We would suggest if you're going to do something, make sure you get the final okay from your tax advisor. And remember also another thing I didn't mention there is when you're taking money out of an annuity. If you sell an annuity and you get income, or if you get income from the annuity, it's typically income and it's not capital games. So it's ordinary income. So you got to keep that into account, too, because if you have other assets that you have access to that you want to get a lump sum, you know, you've got to look at your whole portfolio, you know,

do I want to pay regular income on this? Is it worth it? Or do I want to pay capital gains on my stocks, my bonds, my real estate. So, and that's, again, that's where the tax advisor is going to come in, too. So like you just said, don't jump on it. You know, make sure you do some research. Yeah, and I think that's another huge point to think about. It's not necessarily, oh, I'm not going to have a tax consequence because I'm not liquidating the annuity.

But even if you're, as you're taking those streams of monthly income, that is income. And is it taxed as income, ordinary income or capital gains? question mark. Should I take it now later or down the road or should I tap into another source if you actually needed the money? And you know, you might think, you know, in your personal situation, you might think that, oh, I've got money squirled away over here or this or that or this stock or bond or let me just liquidate that. And I think that a lot of times we feel like, oh, I understand things. Let me just make this decision. But maybe there's some aspect that a outside third party like like Jim would look at it and say, you can do it, but here's what to consider.

I think that's a big thing that too many people find out too late. They've made the decision, the penalty or the tax bill comes in, and it's like too late to turn back. Yeah, you know, one other thing I did want to mention because you asked me about taxes and income. One thing you get with an annuity with the income is something called the exclusion ratio. And what that means is when you give money to the insurance company, they're going to pay you an income guaranteed for life. And what they're actually doing is using mortality tables. So they're paying you interest and principle based on how long you're going to live. So therefore, when they're paying that money back to you, you are allowed to take a portion of that income, the percentage that

they will have a formula and they will let you know each year. And you might get back an example. you could get back 50, 60, 65% I've seen of your income that's coming from the annuity, income tax free. And then once you've received back your cost basis, so let's say you put in a million dollars and you get back a million dollars of income, then it will all be taxable as regular income. So even though you are paying regular income taxes on it, you're having that exclusion ratio and you could have 50% of more of your income tax-free from that annuity, which is very

beneficial. Yeah, that's a really big point. You know, and earlier you used the word that's stuck in my mind called immediate. You said there's an immediate annuity. So I want to clarify that and also whenever I hear one type of word, it makes me think of another like the opposite. So what's the opposite of immediate? Well, maybe deferred. So what's the difference between those two? Well, an immediate annuity is basically at the point you're taking the annuity and telling the insurance company, okay, I want to take the income option that you're offering me. And actually, they'll offer a number of income options. But let's just say you're taking a single life income, single life income.

It's an income for life. So you're doing it now. So that's the terminology they use for immediate. So even if you purchase a fixed income, index annuity or a fixed annuity and you're accumulating the money and it's earning interest and growing. When it gets to the point of taking income, you can convert it to an annuity that's called an immediate annuity. And typically there's no additional cost or fees to do that other than you're just exchanging the principal for the insurance company to give you that

guaranteed income for life. And there is the flexibility that you don't have to go to the immediate annuity. You can just leave it in the annuity and let it keep accumulating its interest. And then you can determine how much income you want to take from it based on the growth it has. So you can actually do it manually too. And some people like to do that because your principal could still possibly grow while you're taking out interest. So they do give you that option. Nice. You know, and of course, when I hear income stream for life, guaranteed income street for life, that's always comforting. And so is it true that all annuities have that feature? It's just when you turn it on or is it just certain types of annuities that have that feature that can convert it into a income stream? No, typically all insurance companies will offer you the option of the guaranteed income for life. and they have a formula that they set up based on your age and how much money, and you can turn that on.

But you don't have to. And that's the nice thing about it. You can make the choice. And the other thing you can do is you can do it partially. Let's say you have this million dollars in this fixed annuity and you get to that retirement age and you want to start taking income. Well, you can actually do it in portions and actually ladder. your income. In other words, you say, you know, I don't need all that income right now. So I got a million dollars. I'm going to take $250,000 this year and turn that into an income. Meanwhile, you let the other

three quarters of a million keep growing. And then at some point, at some point, you can take that $250,000 or whatever you want and add it to the income stream. So you're going to have a ladder of immediate annuities. So this way, this is a good way to battle in four. inflation because you can actually have a built-in increase in your income because as you take these immediate annuities, you're going to add to your income. And remember, the immediate annuity is based on how old you are. So you'll be doing it at an older age. So that'll actually give you more income because the payout will be higher. So that's an excellent strategy for individuals that have fixed annuities. You know, I love it. And there's so many, I had asked a question about

disadvantages. And there was a couple things you mentioned just to keep in mind, but boy, those sure don't sound like deal killers because when you compare it to all of these benefits of safety, security, guarantees, income streams, and flexibility within the income streams. When I hear you say things like, well, you can say, hey, give me a monthly income stream or just a portion to let the other portion continue to grow and accumulate. That gives you a lot of flexibility, but the bottom line is, boy, when you can look at the news and hear the stock market going all kinds of crazy and know that your annuity, if you set it up the right way, is not impacted that way and you're never going to lose money and you've got that predictable, you know,

a return. I think that just makes people feel really, really comfortable. Absolutely. And the thing also, it's very important is, you know, if you have money in your IRA and 401k and you have to take money out at a certain age called the required minimum distribution, no questions about it. And if you don't, you pay a 50% penalty on what you're supposed to take. So you're not going to leave it there. If you have just a regular annuity that's not in an IRA of 401K, it grows tax deferred just like the IRA and 401K. But you do not have to take required minimum distribution. So you could be turning 72, 73 and having to take your money from your IRA and 401K, even if you don't need it, but not with the annuity.

So the annuity will give you the flexibility to take it when you want, when you need it. So that's a very important in your portfolio. That's another huge point because I remember hearing that before thinking, oh, those requirement required minimum distributions. What if someone one day goes, one year goes, oh, I'm good. I've got a big influx of money from whatever source and I don't need it this year. And they might logically think, oh, I'm not going to take it because I don't need it. But when you are required to do it, if you don't do it, there's big penalties, big, you know, issues to deal with. So in the annuity side, it gives you that other level of flexibility to know that you're not required to pull money out at certain ages.

So that's another great point there. Yes. Yep. And then, well, I'll tell you, this has been really eye opening for me, just learning different nuances of this. and it's been really educational. So if someone is listening to this saying, Jim, take a look at mine and what options do I have? What's the best way that they can reach out and connect with you? Well, they can go to my website at brookquin.com, and my contact information is on there.

You can call me or shoot me an email, and I will get back in touch with you. Excellent. Well, thank you so much for coming back on, Jim. It's been a real pleasure talking with you. Mike, I was glad to be here and I look forward to talking to you again sometime. 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.