Ep. 273 – Is Your Annuity Working For You in Retirement? – Key Reasons to Reevaluate Now

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In this episode of the Secure Your Retirement Podcast, Radon and Murs discuss the importance of reevaluating your annuity, especially in the current economic climate. The episode dives deep into scenarios where reassessing your current annuity product can be beneficial, highlighting how both banks and insurance companies have gained from the recent rise in interest rates.

Listen in to learn about the four main reasons why you should consider reviewing your annuity now. Radon and Murs break down the impact of higher interest rates, inflation, and unnecessary riders, and how significant life events can affect your financial decisions. This episode is packed with actionable insights to help you navigate these changes and secure a more stable financial future.

In this episode, find out: 

• Why changing interest rates necessitate a review of your annuity.
• How higher inflation rates can impact your annuity’s performance.
• The importance of evaluating unnecessary riders in your annuity.
• How significant life events should prompt a review of your annuity.
• Strategies to maximize your income and benefits through annuity adjustments.

Tweetable Quotes: 

• “Interest rate changes can significantly impact your annuity’s performance—reevaluate now to ensure you’re getting the best return.” — Radon Stancil
• “Inflation rates have soared, but with the right annuity adjustments, you can still secure a strong financial future.” — Murs Tariq

Resources: 

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:

Welcome to Secure Your Retirement. We are happy to be able to have a conversation with you today on the podcast. And really what this is around, because a lot of folks when they are planning for retirement, maybe 10 years out into retirement, a lot of folks have used annuities with this idea that, for a couple different reasons. One, they might use an annuity for safety. Meaning they don’t want market volatility on some assets, so they’ll use an annuity, typically a fixed annuity. And more specifically, sometimes people will use a fixed index annuity and they’ll do it for that. They’ll also do it for being able to have income possibly. And if you did one of these annuities, say, three years ago, four years ago, it was in a very low interest rate environment. And then very quickly we started seeing interest rates go up.

I mean, if you go back three or four years ago, you could have an interest at a bank where you basically were making nothing on your account and today you can go into the bank and get an account paying 4%. So the interest rate environment has changed considerably. And so the focus of this podcast is really to say, why should I reevaluate or evaluate my current annuity I have, and look at the possibilities? And a lot of times people might go, “Well, I can’t do that. And the reason why I can’t do that is that there’s an early withdrawal penalty.” We’re going to touch on that in a little bit, not yet. But we wanted to talk through ultimately, what’s the four main reasons why you should evaluate your annuity, just to make sure you are in the best place possible currently. So Murs, you want to start us off?

Murs Tariq:

Yeah. So the number one, the most important reason of why you would want to reevaluate is we’ve had a change in interest rates. Like Radon said, you can get four or 5% on your cash in the bank today. So rates are better. In between 2022 and 2023, the Federal Reserve, they had 11 interest rate hikes in that period of time. So rates have moved. We all know that it’s all factor of dealing with inflation. We’re all very aware of that too. And so while inflation has been a negative thing as a result of some of the things that happened during the pandemic, rates have been difficult as well. But we can also take advantage of rates now that they are higher and higher than they have been in a very, very long time. And so evaluating the rates, so what does that mean inside of your annuity? When you purchase your annuity? Depending on what type it was, it may have a rate for how it’s going to grow its income. It may have a rate for how it’s just going to grow its cash value, in the sense of how it earns interest.

And those rates are always moving. But just imagine where you bought it back in say, 2015 or 2017, banks were paying zero mortgage rates were 3%. And so today banks are paying four, mortgage rates are seven and 8%. So you can imagine that the interest crediting within the annuity has somewhat followed suit as well, to where your caps and your different strategies within the annuity are way more effective than they were back then. So I think that we are seeing across the board very, very strong and very attractive numbers in the place where you could potentially earn eight to 10% in a given year within the annuity structure, in a safe place. And that’s all off of where we sit today in the current interest rate environment. So I think it’s a 100% it is worth looking into if you have one. And like Radon said, even if there is a surrender charge involved or a penalty to move away, there are things and things that the insurance companies do to incentivize you to take a look at your current situation.

Radon Stancil:

All right, number two. Higher inflation rates. Obviously that’s something we hear about a lot. Food costs have gone up, other things have gone up as well. But how does that relate? Well, if you took out and you purchased an annuity with the idea that one day it’s going to turn on, in all essence, what’s called lifetime income, income that will last your lifetime, you want to have the best income possible. Well, again, this all relates back to what Murs brought up into number one. Is that, if let’s say, I have an annuity that’s going to pay me X in three years or four years, whenever I’m going to turn on my income, and I could then upgrade that to an annuity today with better interest rates and I might make more money guaranteed for the rest of my life, would I not want it?

We’ve had a few cases where we have been able to get individuals 20% more income than what they were going to have. So again, just think about simple terms. If I’ve got an annuity that’s going to pay me a $1,000 a month and I could just trade it in and get one that’s going to pay me 1,200, maybe $1,300 a month, why would I not want to do that? It doesn’t cost me anything to move it that way net, net. And so I actually end up making more income if that’s what I need. And so again, I want to come back to, if you’ve got an annuity you’ve been in with this idea for, I need lifetime income, you 100% want to do an evaluation because the income rates now are significantly better than they were three or four or five years ago.

Murs Tariq:

All right, number three, unnecessary riders. This one is something that comes across our table every now and then. And so a rider is something that you attach to the annuity product itself. The most common rider that is attached is a guaranteed lifetime withdrawal benefit. Or in a simple way, guaranteed lifetime income stream. That’s a rider. Now, when you attach a rider, there’s typically one of two ways that you’re going to pay for that rider. It’s either you’re going to pay a straight-up fee within the contract and let’s just say that’s 1%. That’s the average as far as how much these riders cost. So it’s 1% that you are going to pay, you’re going to see it every single year on your annual statement and it’s there. But you’re buying this rider for a purpose, in this case guaranteed lifetime income at a future point.

And so that’s one way. The other way could be that you’re not paying a direct fee for it, but how they structure the product is that there’s a reduction as far as its ability to earn interest. So the caps or the strategies may be a little bit lower because you’re getting a free rider in all essence, or you’re not having to pay a direct fee for it. So we can get down the path in our lives. And so maybe when you’re in your early or mid-fifties, you thought, “I need this rider, I want to guarantee lifetime income.” And you get down the road 10 years and something happens. It could be, “Hey, I saved way better than I ever thought I was going to.” Or maybe you came into an inheritance. That’s a very common one. Came into an inheritance and now my financial plan is in fantastic space and now I want to reevaluate and make my plan more efficient.

I don’t really need to pay the insurance company anymore to guarantee this income because the assets that I have today, they’re going to do it themselves if we properly manage it. So I want to reduce my overall cost and my overall exposure. And so maybe dropping an unnecessary rider is part of the reevaluation that you want to think about in your current annuity. And it’s something that I’ve seen with clients that, they bought it thinking they were going to need it. It wasn’t the wrong decision to buy it, but then life happens and things change, and long-term planning happens and we realize we just don’t need it anymore and we’re still paying for it. So if we can, if it makes sense, let’s get rid of it.

Radon Stancil:

All right, number four, and this is our last one on these four things that we want to do. Life event changes. Now this could be a lot of different things. It could be a change in marital status, employment status, significant change in assets, start date or whatever of social security, changing the amount of income for retirement needed, change in your health status. Any one of those life events is a good reason to say, “Let me do a double check here on the annuity.” I’ll tell you what we’ve seen quite a bit of is, folks, maybe… Now this goes back a little bit longer, but they bought an annuity say back 8, 9, 10 years ago, and they were told, “Hey, you need to have this income rider.”

Well, because of the stock market doing well, and because they are really good savers, they actually have now accumulated significant assets that puts them into a place that they don’t need, what Murs was just talking about, that unnecessary rider because they don’t need that security or that insurance about income. And so we can actually relocate the annuity and upgrade that to a position, and not have the rider on there, which allows for better accumulation. So if you’ve had a life change event, a 100% you need to do the annuity review. I just want it to be clear. We’re not saying everyone should change their annuity. We’re saying everyone should review whether or not they actually want to, or whether or not they should replace their annuity.

Murs Tariq:

Yeah. So part of our process in our financial plan strategy meetings is, we have an update on the financial plan. We as advisors need to understand what your situation is, what your scenario is, what are your goals before we can make any types of recommendations. We also are going to look at and see if the investments that you have, do they fit the plan? Do they fit your goals and what you’re looking for? And so let’s say we get to that scenario of an unnecessary rider or a lower interest rate type of annuity. And so we start to evaluate. Radon said at the beginning, one of the most common things that would come up in this conversation is, “Well, I have surrender charges,” Or, “I have fees associated with exiting my annuity.” How is it possible that we’re able to exit and for it to make sense, the key term there is it has to make sense for the client.

That’s what we’re always looking at. So let’s just say for example, I have a $100,000 annuity. It’s worth a $100,000 today. That’s what the cash value is. And to walk away though, I’ve got this penalty, this surrender charge, and it’s going to be 8% or $8,000. So if I was to say, “Let me just walk away and take my $8,000 hit and I walk away with $92,000 with no good reason,” Well, that’s a bad deal. But if I’m going to walk away for a specific purpose, either to drop a fee, like we talked about, or to get a higher interest rate or a combination of the two, well now it’s starting to make some sense. Add on top of that, there are a lot of times today the insurance companies want you to come over to them, and so they’re incentivizing. They’re creating a way for you to get out of your current annuity through in all essence, what they call a bonus or some interest up front.

So let’s go back to my example. It’s worth a hundred, to walk away I’m going to get 92. But if I go over to this other insurance company that’s providing a better rate or saving me the fee that I’m paying 1% a year of a rider, they’re going to give me a 10% bonus. So my 92 that I go to with them automatically becomes 101,200. So 101,200. I had a 100,000 at insurance company A, by moving to the other, I come out slightly ahead at 101,200. Now, I’ll tell you, that’s a nice thing. We make a little bit of money in the transaction, but that is not the purpose. The ideal, we would we break even or we make a little bit, we’re walking backwards. But now long-term planning, we’re in a better product because we’re buying at the highest interest rate we’ve seen in a very long time.

Radon Stancil:

I just want to add one little disclosure there. When we talk about 10% bonus, obviously we’re recording this as a podcast, rates change. We’ve got right now some bonuses with some companies that are higher than that, some that are lower than that. The point here is that, do the numbers make sense so that I’m not going negative. And if I can move from one place to the other. We’re just giving you a hypothetical about what we are seeing right now. And that’s the key point. So for example, right now we see a lot of folks that have caps on their what they can earn. A very common cap, if you bought something three or four years ago is a two or 3% cap. Today, you can get a cap moving it in that example that Murs just talked about with the 10% bonus type scenario, and you could have caps around 8%.

So think about it. I moved, I didn’t cost me anything at the end of the day and I’m able to now have a little bit better earning potential. So that’s the concept. That’s the concept in this picture. So really, if you’re listening to this and you think, “Man, I do have an annuity, I do would like to have a review done on it,” how do you do it? Well, you can talk to whoever you want to talk to, that maybe helps you on that. We do that. So if you wanted to talk to us, for example, you can go to our website, top right-hand corner, click on schedule call. We’ll hop on the call, ask a couple questions, tell you exactly how to walk through getting that reviewed.