What’s Really Changed with Annuities Since 2010.
Updated: Mar 8
There have been so many new innovations in this market that I thought I could share some of those with you. Since so many investors and policyholders we see have older contracts, I thought it would be worth highlighting the newer solutions. Here's my chapter from an upcoming book, "Resilient Retirement Roadmap." I'm excited to share this with you and I hope you find it beneficial to your retirement planning research. ~Tom Vick
In 2010, my dad and I wrote a book that tore the cover off fixed indexed annuities and showed people who doubted their purposes and goodness exactly where they fit into a portfolio of assets. It helped so many Wall Street brokers actually see where they could fit into their bond portfolio. Then later it FIA’s got highlighted by an industry giant, Roger Ibbotson on how they can actually outpace bonds on returns over the next ten years. It’s actually impressive research that got the attention of so many registered investment advisory firms.
So why write about them again? Well the FIA space has changed a great deal since we last heard about them in the previous books “Your Dream Retirement and Bat Socks.” Those books really got them right the first time to be sure, but I think the changes on indexing and the rider additions since then should definitely be highlighted in this book.
If you’re considering yourself to be a more resilient investor than the conservative investor, I’d say annuities, especially fixed indexed annuities could be a great tool for you to build an income that’s not only guaranteed but income that paces with inflation through the power of indexing.
Where do we start? I think we ask the same question as Bat Socks which we did in our previous chapter of the new ABC’s of Resilient Investing, but now let's add to this question. Where can I get increasing income from my portfolio? How does this money actually happen for me to protect against one of the biggest and baddest of the four, inflation?
I like it when people challenge me with my worries. I’m an ACA member and I guess you could say I’m this way because I worry about members in my family who are addicts, I constantly worry about myself being an addict. Having addiction in your family doesn’t mean it will happen to you, it just creates the para versions of addicts. The people who worry about the ones who are killing themselves every day.
I loved listening to this podcast done by Dax Shepherd and Hank Azaria. The interview really struck me and brought on this realization that I’m kind of in the same boat as Hank. He asks would you rather be right than happy? See being right about stuff happening can have this tendency to make me mad that I was right. So you gotta wonder about this question.
Every one of the advisors building a retirement income plan with our resiliency built in, meaning the ability to weather any market correction, tax hike, or inflation shocker, will their clients actually stay retired? In this case, are they doing the right thing?
I mean think about it. There’s a long list of stuff you’re right about that just makes you mad. Being mad is what triggers addicts to use. It makes me want to sleep and eat. I guess those are my vices. Every time I think about this list and I go yep, I’m right and it stinks because those people will lose out on a lot of retirement years they thought they’d get but won’t. It’s kind of sad. I mean think about that bonus check you thought you’d get for being the number one sales guy in the company and then come to find out that check doesn’t come your way. I guess we can say Amor Fati, another resilient practice of the Stoics. I love that I just got screwed because I’m going to have a bigger comeback anyways. That’s what true resiliency is all about, getting thrown to the wolves and being able to come back leading the pack.
So having an increasing income, gets you exactly that. The coverage about the shit you knew you were right about so you don’t get mad when your income annuity isn’t paying the bills anymore.
So what’s new with annuities?
Ability to Increase their Income Payments
That last sentence probably just made you want to upgrade your indexed annuity. Allianz came out with a product that could increase income right when I got into the business. I remember marketers in every single cubicle talking to their advisors about this in the IMO I started to work for. They were running through illustrations on join.me, showing exactly how the new illustrations worked and what to watch out for when explaining this new "too good to be true" feature.
It did seem too good to be true. It was the only carrier to figure out how to do this and be able to pay for it. It’s as if the US president solved the debt problem and killed it with a new program. Too good to be true. I remember hearing that as a business coach for a few years about this product, but eventually, other carriers picked up how to do it and produce a variety of products in the industry. For a while, people were writing only one contract during the new days of increasing income, which isn’t the smartest thing to do if you’re a financial advisor.
Here’s how it works. On a normal fixed indexed annuity that comes with a guaranteed income rider, you would receive a benefit based on the pay-out factor of your income account value. This is known as either a shadow account or phantom account. It’s used to base your income stream on the amount of money you invested and the amount of money you will get back over the course of your life. You make some money back, but then you lose out on that investment ever getting any growth, hence it’s for protected guaranteed income.
Well, like I was saying before I get capped on my gains, and then what’s actually helping me outpace inflation? Nothing. Another thing to add to my list of stuff I'm right about that I wish I wasn't.
Instead of giving you a steady payment every month, what if I told you you could take the index credits of your annuity and stack those on top of your income payment. So last year's payment times this year’s gains equals this year’s income. That’s a pretty compelling story, right? So it’s based on your index performance, just keep this in mind. What does that mean for your annuity purchasing right now?
Indexes are now everything when it comes to purchasing an increasing income annuity. That’s why I would sign up for a carrier that has consistent returns, great rate renewals, and a track record for increasing income payments.
The indexes my dad had on his old annuity contracts would give folks a 10% cap on a 100% participation in the S&P 500. That’s exciting stuff for the 2000s, but when the 2010s rolled around they offered a 7% guarantee growth on the phantom account money for ten years and their pay-out factors based on a different mortality table provided some very high-income payments.
Buying options contracts on the S&P 500 index or the Russell at that cap and par rate eventually got expensive as the indices started to come back at the time Bat Socks was published, 2010. The insurance companies dropped rates without a backup plan. But then insurance companies started researching alternative indices. Ones that weren’t the major indexes of old, but newer ones that could deliver returns.
Why? It’s a more affordable option to deliver to your actuary and say hey build me a product based on this index. It can be done and it is. This allowed companies to purchase better options contracts on the indexes and used them to deliver gains on top of their increasing income features. This gives the client better chances at income increases. Especially when you combine both traditional indices and the newer indices.
Then the caps came off. They started offering uncapped accumulation potential on FIA’s. It's actually something we often get wrong about annuities is that the gains are capped. The principal is locked in, yes, but the gains are not capped. Think about it, they still deliver a 4% return on average which is better than most 30 year or 10-year bonds.
The other plus side is that the indexes with the ability to lock in their gains thanks to annual reset, will deliver consistent performance year by year. Do you know what that means? Your paycheck doesn’t decrease with inflation, it can actually have a shot at pacing with inflation. So now you might get an index with an option of 80% participation rate and a 3% spread. The spread comes off your gross and the net interest credits go to your cash account value and your benefits. Wonderful.
Volatility Control Indices for Consistent Returns
There’s so much speculation around this I can’t even tell you. This is why I think the DOL started coming down on the insurance industry since the Obama administration. I remember when the first volatility control indices came out. The illustrations were really outrageous and financial advisors who love variable annuity-like returns started selling these annuities like hotcakes once they could show the fixed indexed, “protection focused” product like it was a growth fund. This bothers the crap out of me and I remember firing agents from our marketing firm who would get a chargeback from the client and then tell me how they didn’t get their 20% year one return. That’s nice. I’d like to see them churn out those returns, but then the SEC would regulate the industry if that happened. That and it’s not realistic for the indexed annuity. The renewal rates will never stay as high as the index’s launch. It’s great for the first strategy series, like years 1-5, but then we are going to get a lower renewal rate later.
I remember building retirement plans for financial advisors who signed up a contract or two with these types of insurance products. They tout outrageous returns on their illustration and then show that illustration to their clients.
Can I just caution you for a second? Looking at these illustrations will not do you any good. When I look at an FIA with guaranteed or increasing income I always pay attention to the stuff that matters and throw away the stuff that doesn’t.
Remember the three green money rules? Protect your principal, protect your income, and protect your gains. There’s nothing in the rulebook about getting returns with your green money. Other than, 4-8%. That’s it! So when I get a client who scores over 10% I get to thinking immediately about the rules and remind them why they made this decision to invest in an FIA with increasing income. You don’t need to get these ridiculous returns, because the annuity will always be for payment of your retirement income paychecks. Nothing else.
So when you see an illustration, I’ll show you exactly how to break one down if you’re a client, you can check this out on your youtube channel, Resilient Wealth Club. I’ll walk you through tons of annuity products, popular life insurance strategies, and other stuff that will build your resilience in retirement or the very thing that could end it sooner than you wanted it to.
Fixed Indexed Annuities are not as bad as what Wall Street says they are. There are only bad advisors with bad advice, or you might have worked with a bad insurance agent with bad interpretations of the insurance companies illustration. It's funny how much the annuity perception has changed with spokespeople like Tony Robbins getting on board with them and not to mention several pro golfers using them as their retirement income plan. If you have black and white thinking around products, you will never dive deep enough to actually see the benefit to them. For instance, I'll confess that I don't like variable annuities, but once in a while, there's a contract I see that just makes sense for the client! We might suggest letting an active money manager manage the sub-accounts, but they might have already received a great income rider with decent benefit base growth. Just keep an open mind all right? That's how you build a resilient retirement from resilient wealth.