Mastering Retirement Planning:
Navigating the Power of Fixed Rates!
Fixed rates with unlimited growth are not a bad idea in today’s economic environment for retirement. Now, I continue to come back to this topic primarily because so many viewers ask me what options are available to generate income and growth now that we are in a higher interest rate environment and they feel uncertain about the economy. Hello again, Dave Dooley here with over 40 years in the financial markets and the fiduciary firm focused on preserving and growing wealth and income.
Now, I’ve said repeatedly IRA and 401K-type accounts are the best vehicles to use for income into the future. There is no argument that these accounts were specifically designed to supplement your Social Security when they were first introduced decades ago. Defined pension plans were becoming the dinosaurs of the industry, and today they even make up less than 25 percent of retirees’ income. Unless you’re a government employee, you’re on your own to create your income in retirement. Annuities like Social Security are designed to help you secure guaranteed income in the future, but I’ve said over and over to use qualified dollars to fund these investment vehicles. This sounds nuts, but again, in the first half of 2023, Limerick reported another 50 percent increase from 2022 in inflows to annuities of over $94 billion. That’s right, billion.
Now, why is this happening? Why does it make Wall Street so unhappy? Of the $94 billion, 44 percent was made up of fixed-rate annuities, an increase of 161 percent last year. People want guarantees of principal; they want lifetime income for not only themselves but their spouses if something happens to them.
Now, there are two major arguments over annuities where the naysayers dig in their heels. One is a long-term commitment, and there will be surrender fees involved if you exceed your withdrawal rate or need to access funds above the allotted 10 percent of the annuity’s value. Let’s take this one head-on to start with. First of all, you’ve got to do planning, dummy. A great planner will make sure you have set aside liquid accounts well into the future so as not to have to tap into these accounts above what is allowed. Remember, as I said earlier, it’s qualified money (401k or IRA dollars) for these investment vehicles. Why remember these are dollars that have never been taxed, so when you take a distribution, it is fully taxable from your 401k or IRA or the annuity. In an IRA, you will only take what you need, and you will do it for the remainder of your life.
The difference between placing those dollars in a managed account with an investment firm versus an annuity, there’s quite a difference. The managed account cannot guarantee your principal; it cannot guarantee income for you or your spouse, and it cannot double your income if you’re confined to a nursing home. The managed account is fully liquid, whereas the annuity is not. You can only access up to 10 percent of your annuity. But who cares? Are you going to cash in $50,000 out of your IRA for a new car? You’d be nuts; it would cost you $70,000 to net $50,000 after tax. So no, you use your IRA and 401k like you do Social Security, an income stream. Unlike Social Security, when you die, your annuity continues to pay your full income for your spouse. With Social Security, once you die, your spouse gets to choose the higher of the two incomes, yours or hers, but you can’t have both.
So if I have a 10-year surrender fee, I don’t care. I’m in the IRA for the rest of my life; I just need to set aside dollars for liquidity for all other aspects of retirement. In my 40-plus years as a financial planner, I’ve never had a client exhaust their IRA. Now, it seems crazy, but it’s true.
The second reason you will hear negative feedback is the loss of management fees. That’s right; Wall Street hates when money flows into annuities because they don’t get to charge you a management fee. Where the insurance companies make their money is on the spreads, margins, or caps they place on the dollars that are tied to indexes that you get to choose. So as an example, if you choose the S&P 500 inside your annuity, and the index is up 10 percent, you may only get an 8 percent return because you have a spread, cap, or margin. That’s right, the annuity insurance companies are in the business of making money.
Now, on the other hand, if your index is down 20 percent over the year in the annuity, unlike your managed account, you lose nothing; your principal is protected against losses. So to understand why over the last year and a half annuities have grown in popularity at an outstanding pace, you can now see some real reasons; it makes logical sense.
So then, I’m crystal clear. Do not run out tomorrow and buy an annuity, nor go throw your money in a managed account. You should get with a fiduciary firm that does both. Get with a firm that has experts in this arena. Today’s annuities are far superior to what they were just five to seven years ago, and they continue to get better for the consumer. That is why Congress is looking to implement annuities as an option inside your 401k as a choice to invest in to build income and retirement. Too many pre-retirees were devastated in 2002 and 2008, leading up to retirement, when their 401ks dropped by 30 to 70 percent just prior to retirement, with no way of protecting their principal.
I hope that this video at least gets you thinking about the options available to you today and answers some questions that you may have. But as always, get with professionals to determine what is the best for your family. If you love the content, subscribe below; you’ll get notified when my next video is posted. If you have questions or need a review, click on my website, take a look around, and reach out. Till next time.