Where Annuities Fit in a Retirement Plan with Victoria Gibbs

Annuities are often misunderstood, but the right strategy can play a valuable role in retirement planning. George sits back down with Victoria Gibbs, CFP®, and Chartered Life Underwriter®, to discuss how different annuity solutions can help generate guaranteed income, manage risk, protect against long-term care costs, and potentially improve retirement outcomes. From fixed annuities and fixed indexed annuities to QLACs and hybrid long-term care options, this conversation highlights where these tools may fit and why every decision should start with a comprehensive financial plan.

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Transcript

SPEAKER_02 0:01

Today we're talking annuities, when they make sense, when they don't, and how to think about using them as part of a smart financial strategy. Stay with us.

SPEAKER_00 0:11

The information and opinions presented in this podcast, including the views of guests not affiliated with Measured Wealth, is for general informational and educational purposes only, and should not be considered investment, tax, or legal advice. Any references to specific securities, products, or services do not constitute a recommendation or endorsement. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Listeners should consult their own financial professionals before making any financial decisions. Measured Wealth Private Client Group is registered with the Securities and Exchange Commission. This registration does not imply a certain level of skill or training. Insurance and annuity guarantees are subject to the claims paying ability of the issuing insurer.

SPEAKER_01 0:57

Welcome to Financial Futures, a Measured Wealth podcast powered by the team at Measured Wealth in beautiful Portsmouth, New Hampshire. Each episode, we're bringing you fresh insights on retirement, investing, and everything you need to take control of your financial future. Whether you're preparing for retirement or already living it, we're here to help you make informed choices with confidence. To kick off today's conversation, here's your host, certified financial planner and chartered financial analyst, George Zacharopoulos.

SPEAKER_02 1:31

Hello everyone, I'm George Zacharopoulos, your host, back with Victoria Gibbs for part two of annuities, and we're talking about strategies today. So we have another exciting podcast. Vicky is a returning guest. She is a certified financial planner, chartered life underwriter, and the go-to person for annuity and life insurance questions here at Measured Wealth. Victoria, Vicky, great to see you back. How are you?

SPEAKER_03 1:54

Thank you. I am well. Always, always a good time chatting with you.

SPEAKER_02 1:57

Yeah, this is gonna be great. We're gonna be talking about where an annuity might fit for different investors depending on their circumstances. And I think there's gonna be a lot that goes into each circumstance. So we'll just kind of start off with the first one. Conservative investor, not very tolerant to risk. Where might an annuity fit in for someone like that?

SPEAKER_03 2:22

An annuity could be a great fit for someone like that who's not looking for risk. Um, if we're looking at a fixed annuity, basically you are transferring all the risk to the insurance company. They are guaranteeing a certain time frame and a certain interest rate. So you're not wondering what's the SP doing, what's AI doing, what's NVIDIA doing? You're locked in. You know that you have this much money, it's gonna grow at this percentage for this many years, and then at the end of this many years, it'll be the decision time again. You know, are you taking that money out? Are you rolling it over? Are you doing something else? But as far as risks go, you're not going to lose it. It's going to grow at that rate.

SPEAKER_02 2:58

You mentioned risk on the insur insurance carrier. Um, can you spread out that risk? Can you ladder those type of annuities?

SPEAKER_03 3:07

Absolutely. And that can be a really good idea. You can ladder not only between different different companies, you can ladder different kinds of annuity products, you can ladder, you know, maybe you have one that you specifically want to provide a a certain level of guaranteed income. Maybe you have another annuity where it has a different rider on it and a pool of money that can be used for long-term care benefits. Maybe you've got something else where, you know, you just want it, you just want it to grow and have the ability to access it if needed, but otherwise you're just in it for the tax deferral. So a combination of different products, different companies, even if we're just talking about a fixed or a myga, you can ladder different, different term lengths. You could have a three-year, a five-year, seven-year, ten-year, and get different interest rates for each of those and kind of have your buckets, if you will. I know we often talk about different buckets in financial planning and especially with retirement. You can stagger those so you have different interest rates for different periods of time and just keep things going in that ladder.

SPEAKER_02 4:08

Yeah. And um can you also, you know, take the interest? So let's say not really part of a maybe part of a just a withdrawal strategy, not really necessarily a guaranteed income strategy, but interest rates today are are relatively decent. You know, we're still looking at what three, five, seven-year interest rates hovering around the high fours, low fives. Is that about right?

SPEAKER_03 4:32

Yeah, you could do a three-year and get something in the you know, the fours to five range. Um, and generally the longer your term is, the higher that rate should be as you're committing to a longer period of time with them. So, yeah, that's definitely an option that can work.

SPEAKER_02 4:48

Okay. And what if we're talking about someone who might not be ultra conservative? They don't want to have all of their money in something that's fixed. You know, maybe the overall household um asset allocation um strategy is more in line with being 50% equities and 50% uh bonds and cash. Where might an annuity fit in to someone like that, you know, separate from the multi-year guaranteed annuity, uh, are there uh any other annuities that might fit into that role?

SPEAKER_03 5:18

Yeah. So you can still, I mean, the fixed is always an option. Uh the fixed index, uh you can s consider that as part of the fixed income component of your portfolio. So instead of it necessarily being in your investment account and being in bonds or whatever, you can take a small portion of that, whatever you have to make sure that it makes sense for your individual situation, but you could put that into perhaps a contract with a 10-year surrender schedule. So you're getting a little more growth out of that ideally. You're not going to lose any money in it. It's not necessarily tied to the stock market depending on what you've invested it in.

SPEAKER_02 5:53

Aaron Powell So what would that look like for choosing maybe allocations? Uh what are some options that you've seen in some annuities out there?

SPEAKER_03 6:00

Aaron Powell I mean, I've seen we've seen things range from you know a client putting in 70% of their entire assets into something that was going to provide guaranteed income, because that was her only concern is I can't run out of money. This is all that I have. My expenses are X and I need this much. This will guarantee it to some people. This is just a small portion of their portfolio, but they like it because they know that that the value is not going to go down. They know they're not paying taxes on it until they actually take something out.

SPEAKER_02 6:30

Specifically, though, with a fixed indexed annuity, how can they allocate within that annuity? Maybe as an alternative to being just in a fixed product. What are some options to allocate within a fixed indexed annuity?

SPEAKER_03 6:44

Yeah. So most of those products, you have a variety of options that you can choose from. They're based on different market indexes, but you can mix and match to what feels right for you. So you could do a portion of the money within that annuity in their fixed bucket. You can have another portion of that that's tied to the SP and maybe it's capped at nine or 10 or, you know, whatever their particular percentage is at that time. Uh, there are other market indexes that you can choose from. So it's still all within the annuity wrapper, but you can choose, you know, is this going to be very secure? Is it going to be just the fixed rate? Is it going to be partially in the market? Um, but again, without the without the risk that it's going to decrease in value. And you can change that generally each year around the time of the anniversary. So what makes sense for when you're starting out with the allocation is something that you could revisit down the road and make adjustments to.

SPEAKER_02 7:36

Correct me if I'm wrong, but I see this as a way for not it's certainly not for everyone. We know that annuities are not for everyone. Um, but for someone who wants to reduce volatility in their portfolio, whether using a multi-year guaranteed annuity or using a fixed indexed annuity, I think there's there's a way to to do that using an annuity product. But w what's the difference between having a point-to-point cap versus maybe an uncapped in index that you're allocating to?

SPEAKER_03 8:10

So if there is a cap. So for an example, there are some products where you look at the SP value day one of the contract, and then one year passes, you look at the SP value again. There's going to be some kind of a cap. It could be, you know, just looking at some that I've looked at recently, it was nine, I think nine and a half percent. So if the SP with that cap, if the SP does 13% growth, you're gonna get the the cap rate of nine point five. If the S P doesn't do so hot and gets five percent, you're only getting the five percent. If the SP does nothing, well, nothing.

SPEAKER_02 8:46

Right. Okay. In addition to the investment component, there's actually a tax deferral component with with all annuities, pretty much. If you're using some non-IRA money for that annuity, for example, just taxable uh cash um that you put into the annuity, you can defer taxes on that earned interest, correct?

SPEAKER_03 9:10

Yes, absolutely. You're only taxed when the funds are taken out.

SPEAKER_02 9:14

Okay, so theoretically that might help someone reduce any taxable interest that they would receive and possibly uh lower their tax burden and maybe open them up for some additional strategies depending on a financial planning situation. So just wanted to throw that out there, one one thing to consider. Um, and maybe a possible strategy might be a Roth conversion. That certainly is a possibility. So and it that really depends on you know the financial plan, what your tax situation looks like, what the other income is gonna look like, where you are in terms of whether you're pre-required minimum distribution stage or post-required distribution stage. But it's important to note that that tax deferral element on non-IRA money. Can annuities be funded with IRA money as well?

SPEAKER_03 10:06

Yes. Again, it'll vary depending on the contract and what it's specifically for. Generally, the answer will be yes. Um, I know that there are some options where uh if it has the long-term care component, then that might not allow for qualified dollars, but products, again, are always changing. So just because something is not available right now doesn't mean that it might not be available at some point in the future.

SPEAKER_02 10:30

So you bring up long-term care. One of the um situations we were going to talk about was for an investor who does want to protect themselves against a long-term care event or have some sort of long-term care protection. Um, maybe they have some cash on the sidelines. What does that look like? What does that process entail if they wanted to investigate a hybrid solution annuity long-term care?

SPEAKER_03 10:56

So I I will say this with a caveat that I'm thinking of one specific product that I will not name, um, since we're not trying to be not trying to force any one product on anyone. But for the annuity with the long-term care, what they can do is it's still a fixed index annuity. So you still have the downside protection if the market goes down, your accumulated value is not really changing. You still have some level of growth, but because there's that long-term care rider, you should expect the growth to not be as impressive as it might be with a regular fixed index annuity. Like you're adding on benefits, so there's going to there's going to be some give and take. You're getting more of this benefit, so you're getting less of that benefit. But it can create a pool of income that is available to you should you need long-term care services. So the pool of money that can be available for the long-term care benefits usually grows at a different rate, or is uh the math behind the scenes is calculated a little bit differently. So it's not just limited to the accumulated value in your contract. There's a separate, sort of like the protected income value that we've talked about previously when someone has an income writer. It's kind of the same thing where there's a separate pool of funds. If you never need it, you still have the annuity contract. But if you do need it, then there's this long-term care money that you can use for qualified long-term care expenses, obviously, up to IRS guidelines. It still requires qualification from a doctor. You know, you have to have a doctor certified that, yes, you need assistance with two of the six activities of daily living. But for someone who maybe couldn't qualify for long-term care otherwise or didn't want to go through all of the medical underwriting that is typically required for traditional long-term care contract, this could be something that provides some base level of funds that, you know, if you never need it, great, still the annuity. And if you do need it for long-term care, it's there.

SPEAKER_02 12:49

Okay, so theoretically, a product like this could solve a couple of different issues. One, you've got cash earning interest uh rates today, probably three to four percent. Some people are getting on high yield savings. So by repositioning that into uh an annuity um hybrid product with long-term care benefits, number one, they can position um taxable interest into uh tax-deferred interest, which just to reiterate, it's not always optimal to defer taxes, but we're talking about a situation where it might be uh optimal in this situation.

SPEAKER_03 13:27

Yeah, and we're speaking broadly. This obviously is not this is not intended as advice to any of our listeners. Please don't go out and just act on any of this. It this all varies based on your specific situation.

SPEAKER_02 13:39

Well said, Vicky. Well said. Um But the other issue this solves is um there's an underlying investment component to it. I'm not sure if I worded that correctly, but as you mentioned, you can use different allocations or then some sort of annuity like that and perhaps earn more than uh what you would be credited in uh by just earning interest in maybe a bank account. Um there's certainly always the option that the markets may go down and you may not get any interest credited, but you know, there is that option for for additional growth. And you know, quite frankly, we don't know where interest rates are gonna go and what's gonna happen to bank interest rates, money market funds, things like that. So but the third issue that it's solving is really having a benefit, a pool of funds for long-term care. But how does that work? Someone has an event, they can't perform two of the daily uh living uh activities of activity. Yeah, activities of daily daily living, thank you. And they need funds for long-term care. Generally speaking, not product specific, but how might something like that work?

SPEAKER_03 14:48

So there are two different options generally when it comes to long-term care payouts specifically. I think they're more going towards indemnity. And what that means is there's a there's a certain number that you get to that's your maximum monthly benefit. That monthly benefit, whenever the time comes that you need to take that money out, that is what you're going to get each month. They're not going to ask you for receipts. You don't have to submit a whole pile of paperwork to prove, hey, I spent this much money on this and this much money on that. No. Once you're past the medical qualification from it, you know, your doctor proves that you're in need of these services, they are just going to pay out that monthly long-term care benefit amount, whether it's more than you needed or less. Okay. So if it is more, then, you know, great, then you're getting that extra money, you can reinvest it.

SPEAKER_02 15:35

If they start using that money, the benefits they're receiving are coming off of the market value of the contract, is that correct?

SPEAKER_00 15:42

Yes.

SPEAKER_02 15:43

Yes. Okay. So they spend down the market value first, and then if there's a need for additional benefits, then the annuity carrier will provide that regardless with a zero balance in the account.

SPEAKER_03 15:59

Yes. So again, I'm referencing one specific contract that I'm thinking of, so it's possible there's something else out there with different rules. But for this one that I am thinking of, your accumulated value in the annuity could drop down to nothing. Say that your fees have uh exhausted it or your long-term care benefits have exhausted it, but that long-term care benefit is still guaranteed. So if this particular product has a five-year maximum five-year payout for the long-term care benefits, so long as you qualify for that medical qualification each year, even if your accumulated annuity value has gone to zero, you still have long-term care benefits up to the maximum of that benefit period.

SPEAKER_02 16:41

So let's say someone's interested in exploring that more. What's typically the process? Do they do they receive an illustration and what does that look like?

SPEAKER_03 16:49

Yeah. So we would look at illustrations to see, you know, how much are you funding this with, what is it potentially growing at, and we'll look at different versions of that. What does it look like based on the guaranteed minimum rates, which in some cases can look kind of dismal? But then you illustrate it also at an approximate average rate as what the market is actually doing. Um so this particular product, the uh they have an SP with a cap option as part of their allocations. It's capped at 9% right now. They illustrate it somewhere around 7% to show what real life might look like as far as the numbers going in that contract.

SPEAKER_02 17:25

And a lot of times on an illustration, you might you might see where's you know what it looks like if 0% was credited throughout the life of the of the contract, and what, you know, an average rate of return would be credited. You can also see what's being pulled uh for the long-term care writer as an expense. Is that correct?

SPEAKER_03 17:46

Yeah, so it should be able to, if the if the initial illustration doesn't have it, please ask your advisor. But they should be able to provide a version that is sort of expanded and breaks down, okay, here's the fee that you're paying for this, here's, you know, just sort of column by column. Here's my account value, here's the surrender value, here's the accumulated value, here's what the death benefit might be, you know, you're paying 1.2% or whatever it is that you're paying for this rider, and then here's what the long-term care pool looks like.

SPEAKER_02 18:13

I think it's important that an investor knows about this option, but they should also carefully compare it to other options out in the marketplace. There's also uh life insurance with a hybrid long-term care benefit, and there's also straight-up long-term care insurance. So we just want to make sure our listeners are aware that uh there are multiple solutions to that. Uh but of course, you know, time is an important factor. So uh the earlier, the younger you are, potentially the better health rating you get on something like that. Um Yeah.

SPEAKER_03 18:46

Generally, yes. I mean, as far as the underwriting goes, the questions are easier to answer. You know, you're you you have things start happening to you when you get older that you never expect. Right. I think we can both agree to that. But also, um, you know, as far as the the math goes, even if you're purchasing this at a younger age, and you're not going to buy this in your 20s, the company's not going to issue it in your 20s, or you're going to be in your 50s at least. Um, but the longer that the insurance company knows that these they expect the values to be able to compound and grow within the contract, uh, that's supporting everything. So the longer period of time before they think you're gonna need the long-term care money, um, the more time that it has to grow and the the better that the rates can turn out for you.

SPEAKER_02 19:29

Yeah. I think it all comes back to the financial plan aspect. So if you're working with your advisor and um you run a situation where there is a long-term care event uh for one of you, and um, you know, there's a whole bunch of ranges of costs out there today, but using something that's you know somewhere in the middle with uh a little bit higher inflation, you know, see what impact that has on your plan, whether you can you can fund that out of pocket or whether you know having um some sort of coverage in that area makes sense, I think is important. So the last uh situation I wanted to talk about, which is a big one, guaranteed income. You know, let's say there's investors out there who, you know, have uh expenses of X, they got secure income of Y, maybe that covers only, you know, 50% of their need. You know, they have all these other assets. Uh what are some options for generating some additional secure income through annuities?

SPEAKER_03 20:31

Well, an annuity is one of the few retirement vehicles that can turn your savings into income that you can't outlive. So that can be a great way with the financial planning if you're running your Monte Carlo tests. You know, even adding a small piece of an annuity to provide that to increase the floor of your guaranteed income can really help to increase the the outcome with those Monte Carlo evaluations.

SPEAKER_02 20:55

Different choices uh someone would have at that point. You could do uh a fixed index annuity, adding on a guaranteed income benefit, there's variable annuities with a guaranteed income component, then there's immediate annuities that pay out right away, or you can defer a payment in the future. Uh wrapped in all that, you can choose level or rising income. But can you expand on any of those, Victoria?

SPEAKER_03 21:19

I mean, there's almost unlimited options as far as what you can do. So it's really going to depend on knowing your client, speaking with your advisor, going through all of the details, you know, go through that financial plan and figure out, you know, how much do you need? Are you in good health? Does all of your family live until age 110? How long of a time frame do you need the income for? And how long is your portfolio going to be able to provide you that income? Like, do we need to start adding in some guaranteed you can't outlive it sources?

SPEAKER_02 21:50

I can actually see this being a way also to be able to maximize legacy to you know children, yeah, family members.

SPEAKER_03 21:58

If you have this guaranteed income coming from An annuity and you don't have to spend down your other assets, that's more that you can leave for legacy.

SPEAKER_02 22:06

And not to go back on the long-term care, but I believe some annuity products might have a chronic illness type of multiplier that uh could apply.

SPEAKER_03 22:14

Mm-hmm. Yep. There are definitely some products that have chronic illness multipliers. So again, you know, we don't want anyone to have long-term care events in their lives, but they are quite common. They're quite costly in general. Um, so there are some products where if you qualify medically, always feel like a broken record a little bit, but I have to say it, like you can't just tell the annuity company, hey, I can't get out of bed by myself or I can't feed myself. Uh, you will have to provide some proof with uh a doctor to sign off on it. Um, but there are products where if you're getting a certain level of income and now your expenses are much higher because you have though you need help with those activities of daily living, it can possibly even double the amount of income that you're receiving from that contract for up to a certain period of time.

SPEAKER_02 23:03

Aaron Powell Talk to us about a QLAC, uh otherwise known as qualified longevity annuity contract. How does that work?

SPEAKER_03 23:11

Aaron Powell So a QLAC, there are plenty of regulations about this. The IRS will only allow you to put in $210,000 into it. So it's not going to be the world's biggest annuity, but it lets you defer your RMDs on that up to $210,000 up until age 85. If you have a lot of um IRAs and 401ks and all of those retirement accounts that you have not paid tax on before, and now the IRS is saying, okay, you're 73 or you're 75, depending on what your situation is. Uh now we're going to force you to start taking these required minimum distributions, which are fully taxable. You can take that $210,000, stick it in the CULAC. It's as if that $210,000 kind of doesn't exist with all of your other qualified dollars, and you don't have to start taking RMDs until you're 85.

SPEAKER_02 24:01

Awesome. Okay. Well, that's definitely a strategy that uh is worth looking at, especially if you have significant RMDs but have very little guaranteed income. Why do you think guaranteed income is so important these days?

SPEAKER_03 24:16

Aaron Powell Well, I mean, the world is, you know, a very volatile place, seemingly more now than ever. Um and people just want to be able to sleep at night and know that they're not going to outlive their income. They need to know that, you know, I can pay for the roof over my head and I can pay for not just my groceries, but you know, maybe a little something fun here too.

SPEAKER_02 24:39

Well, I agree with you. And I know there's a lot of uncertainties out there about Social Security. The way the last 20, 30 years ha have gone, where corporations are migr migrating to 401k plans versus defined benefit plans and pensions really puts the ownerous or puts it all on the investor really to be in control of their own retirement.

SPEAKER_03 25:03

Yeah, you'd better have saved enough or else you could run out. You take your withdrawals from the 401k, you know, it's not guaranteed that it's going to be enough money to last you your lifetime. Whereas if you purchase an annuity and turn on an income stream, it might not be everything that you need, but it's a portion of your income and you know it's coming every month.

SPEAKER_02 25:22

Yeah, and it helps uh with bearing investment risk. You turn that over to the insurance carrier, you know, again, if it's a suitable recommendation. But you know, I want to end with um one more thing. Is there a best time to really buy an income annuity uh in the marketplace? Um is it, you know, a high interest rate environment that says, hey, you're gonna get a little bit higher income from your payments, or does that matter at all? Well, age number one matters, right?

SPEAKER_03 25:52

The age will matter, but it also depends on when you're turning on the income. So you could always just put the funds into an annuity and then it have it be deferred. So it's growing, you're not turning on the income until you decide that you need it. So you could, in that case, start at almost any age. So generally, if we're in a uh fairly high interest rate environment, the insurance companies likewise will offer higher rates on their products because they can they can also they're also participating in those high interest rates. So they're making more interest on their assets, so they can pass that along to you.

SPEAKER_02 26:28

So timing can matter. Timing age, there's a whole lot that matters here. And there is uh, you know, for our listeners out there, there is so much that we didn't actually go over today regarding annuities. There are so many uh complexities or things to understand when it comes to uh purchasing an annuity or or even considering one. So in the future, we'd like to have some deeper podcasts on individual annuities and and go really, really into the micro on that. But we covered a lot today, Vicky. Uh thank you very much for joining. This has been great. Um I'm sure people have questions out there. People are probably likely thinking, you know, uh, how does how do I know whether one of these strategies is right for me? Well, that's where you know you talk to your financial advisor, talk to them about, you know, financial planning.

SPEAKER_03 27:18

Yeah, I would I mean it really all comes down to the financial planning in the background. We don't just want to look at, oh, your income is this, you should buy this an annuity for this amount. Uh we want to look at everything. You know, what's your income, what's your expenses, what's your lifestyle, your household, what are you planning for the future? Yeah. What do you want your retirement to look like? Right. You want to all of those variables matter.

SPEAKER_02 27:38

You want to make sure you're putting the right amount, not overfunding, not underfunding. So a lot of critical um details that go into something like that. But the whole financial planning process, you should be able to have that discussion with your financial advisor, help simulate purchasing an annuity, whether that positively or negatively impacts your plan, uh, what features you're gonna really benefit from. So uh a lot there. If you have any questions, if you're not working with anyone and you would like to call Measured Wealth, um, we'd love to hear from you. Uh with that, uh Vicky, thank you again for joining. And thanks everyone for tuning in to Financial Futures, a measured wealth podcast. If you enjoyed today's episode, be sure to follow or subscribe on your favorite podcast app so you never miss an update. Want to learn more or get in touch? Head over to measuredwealth.net where you'll find prior episodes, helpful financial planning guides, and more. You can also call us at 603-431-1444, or email at info at measuredwealth.net. That's info at measuredwealth.net. Thanks again for listening, and remember the future will someday be the present.