Latest / Money In Motion with Klaas Financial / Annuities: Solution or Sales Pitch?

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Annuities: Solution or Sales Pitch? · Money In Motion with Klaas Financial

0:03
Speaker 1: And if you have questions for our retirement planning professionals
0:06
Speaker 1: from Klaus Financial, you can get on the air with
0:08
Speaker 1: them right now. All you got to do is dial 608-321-1310.
0:14
Speaker 1: That's 608-321-1310. Anything related to retirement and retirement planning, love
0:18
Speaker 1: to get you on the air. Again, the number 608-321-1310.
0:19
Speaker 1: That's 608-321-1310. 321-1310, joined this week by CJ Kloss and
0:26
Speaker 1: Eric Schwartz. Of course, they are our retirement planning professionals
0:29
Speaker 1: from Kloss Financial. You can learn all about Kloss Financial
0:32
Speaker 1: on their website, klossfinancial.com. That's spelled Kloss, K-L-A-S, financial.com. You
0:38
Speaker 1: can learn all about the team at Kloss Financial. You
0:41
Speaker 1: can listen back to this and previous shows, podcasts. You
0:44
Speaker 1: can learn about the separate divisions at Kloss Financial, how
0:46
Speaker 1: they can help you, or if you're an employer as well.
0:49
Speaker 1: All that information available to you at klossfinancial.com. You can
0:51
Speaker 1: also schedule a complimentary chat right from the website, or
0:54
Speaker 1: you can call the office right here in Madison at 608-442-5637.
1:00
Speaker 1: No charge for that initial get-to-know-you appointment at Kloss Financial.
1:03
Speaker 1: It will be complimentary to you. Again, their number is 608-442-5637.
1:08
Speaker 1: And joining us this morning are CJ Kloss and Eric Schwartz. CJ,
1:11
Speaker 1: how are you doing this week?
1:13
Speaker 2: I'm doing great, Sean. How have you been?
1:14
Speaker 1: I'm doing really well. Were you excited for the Brewers
1:18
Speaker 1: last night?
1:19
Speaker 2: Oh, my goodness gracious. I was ecstatic. What an incredible
1:23
Speaker 2: series and incredible game.
1:25
Speaker 1: What a great feeling this morning as well. Eric, how
1:27
Speaker 1: are you doing this morning? I am doing great, Sean.
1:31
Speaker 3: I'm glad you brought up the Brewers. I was going
1:32
Speaker 3: to say, we have this little team right down the
1:34
Speaker 3: street that finally won a championship.
1:36
Speaker 1: Yeah, that is really exciting. And I know for a
1:39
Speaker 1: lot of folks this morning, they're looking at our traffic cameras.
1:43
Speaker 1: Looks like we got another morning of backups on the Beltline.
1:46
Speaker 1: And I know a lot of folks listening in their car.
1:48
Speaker 1: I've got to mention to you, if you miss any
1:50
Speaker 1: part of the program, if you're new to the show
1:52
Speaker 1: as well, welcome to the program. You can always listen
1:54
Speaker 1: back to the podcast at KlossFinancial.com. That's Kloss, K-L-A-S-S.com. financial.com.
1:59
Speaker 1: We're talking this week, a question that I think a
2:02
Speaker 1: lot of us have had, which is about annuities. Are
2:04
Speaker 1: they a solution or are they a sales pitch? And
2:06
Speaker 1: we're going to get the details from Eric and CJ
2:08
Speaker 1: in just a moment before we get rolling on this
2:10
Speaker 1: week's topic. One of the cool features of the program
2:12
Speaker 1: is the Kloss quiz question of the week, your chance
2:14
Speaker 1: to win a fantastic prize. This week, our friends from
2:17
Speaker 1: Kloss Financial have provided a $ 25 gift card to Amazon.
2:20
Speaker 1: I'll tell you a little bit later on in the program,
2:22
Speaker 1: how you can win that gift card. A little tip though,
2:25
Speaker 1: listen to the program because just about every week, the
2:27
Speaker 1: question and answer to the Kloss Quiz Question of the
2:29
Speaker 1: Week comes up during the show. I'll give you a
2:31
Speaker 1: bit of a leg up on everybody else when it
2:32
Speaker 1: comes to the Kloss Quiz Question of the Week. Before
2:34
Speaker 1: we start talking annuities, Eric, let's actually look back at
2:37
Speaker 1: last week's show and get the question and answer to
2:40
Speaker 1: the Kloss Quiz Question of the Week.
2:43
Speaker 3: Yeah, last week we were talking about the rules of
2:47
Speaker 3: financial planning that don't change in a world where it
2:50
Speaker 3: feels like everything changes all the time. And One of
2:54
Speaker 3: the things we were talking about was the importance of diversification.
2:57
Speaker 3: So our question was true or false. If your investments
3:00
Speaker 3: are properly diversified, you should never experience a significant decline
3:05
Speaker 3: in your portfolio.
3:06
Speaker 1: And the answer to that was false.
3:08
Speaker 3: Diversification does not guarantee that your portfolio won't decline, but
3:11
Speaker 3: instead what it does is reduce the amount of our
3:15
Speaker 3: financial future. That depends on one prediction being correct, right?
3:18
Speaker 3: We're spreading out our risks, so we're not eliminating loss,
3:22
Speaker 3: but we are doing the next best thing.
3:24
Speaker 1: We talked about going to the website, KlossFinancial.com. That's KlossFinancial.com.
3:28
Speaker 1: You can listen back to that and previous shows, podcasts
3:30
Speaker 1: as well. It was a really, really informative, great show there. Again,
3:34
Speaker 1: just listen back at KlossFinancial.com. We'll be talking this week
3:37
Speaker 1: about exploring the benefits, risks, costs, and complexity of annuities
3:41
Speaker 1: so folks can make informed decisions. And CJ, this week's
3:45
Speaker 1: show is about annuities, isn't it? Yeah, it is.
3:49
Speaker 2: And I have to admit, whenever we talk about annuities,
3:52
Speaker 2: it makes me a little bit anxious because it makes
3:55
Speaker 2: people think that we're out there selling these things. And
3:58
Speaker 2: that's not the case. We're actually a fee-based retirement planning firm.
4:02
Speaker 2: We do not sell products. We do not get paid commissions.
4:05
Speaker 2: But I think there's a lot of misinformation about this product.
4:10
Speaker 2: The beauty for us is that we don't have the
4:12
Speaker 2: conflict of getting paid a commission for selling something. For us,
4:16
Speaker 2: it's more academic. It's what What is this thing and
4:20
Speaker 2: why is it out there and how does it fit
4:21
Speaker 2: and how does it not fit? Now, don't mishear me.
4:23
Speaker 2: As you'll hear as we go throughout the show, we
4:25
Speaker 2: do think these products can be kind of filled with
4:29
Speaker 2: conflicts of interest, but we're going to give you a
4:31
Speaker 2: little bit deeper dive on how the products work today.
4:34
Speaker 2: So let's begin. At their core, annuities are simply contracts
4:39
Speaker 2: with an insurance company. In exchange for either a lump
4:42
Speaker 2: sum or a series of contributions, the insurance company is
4:46
Speaker 2: agrees to provide certain guarantees, benefits, or income payments under
4:51
Speaker 2: the terms of their contract. The challenge is that the
4:54
Speaker 2: word annuity can describe a wide range of products that
4:58
Speaker 2: function very differently from one another. Some are fairly simple
5:03
Speaker 2: and others can be incredibly complex and expensive, which is
5:07
Speaker 2: why we always encourage people to understand exactly what type
5:11
Speaker 2: of annuity they're considering before making any decisions. I'll admit
5:15
Speaker 2: to you all, just in this last week, even though
5:17
Speaker 2: we are a fee-based retirement planning firm, I had two
5:19
Speaker 2: clients reach out where family members had died and they
5:21
Speaker 2: were inheriting annuities and they were trying to understand these
5:25
Speaker 2: complex products. What's this non-qualified stretch thing that you talk
5:31
Speaker 2: about and require distributions? And I thought this wasn't a
5:34
Speaker 2: retirement account. And I'll tell you... Hold on to your hats.
5:38
Speaker 2: This is a fun show to kind of understand these
5:40
Speaker 2: products at a deeper level.
5:41
Speaker 1: Great information well laid out there from C.J.
5:44
Speaker 2: Kloss.
5:44
Speaker 1: Of course, talking this morning with C.J. Kloss and Eric Schwartz,
5:46
Speaker 1: our retirement planning professionals from Kloss Financial. Again, the website klossfinancial.com.
5:51
Speaker 1: Their telephone number is 608-442-5637. No charge for that initial
5:56
Speaker 1: Get to Know You appointment at Klaus Financial. It will
5:58
Speaker 1: be complimentary to you. Again, their number is 608-442-5637. And
6:02
Speaker 1: if you want to get on the air with Eric
6:04
Speaker 1: and CJ, we'd love to have you join us this morning.
6:06
Speaker 1: Telephone number here at the station, 608-321-1310. That's 608-321-1310. So, Eric,
6:07
Speaker 1: let's define some of these different types when we talk
6:10
Speaker 1: about annuities.
6:18
Speaker 3: Yeah, I think generally speaking, you could say there are
6:21
Speaker 3: like four major categories when it comes to annuities. And
6:26
Speaker 3: I'll go through each of them here, but just keep
6:28
Speaker 3: in mind as we go through these, CJ just mentioned it,
6:31
Speaker 3: what you're doing when it comes to an annuity is
6:33
Speaker 3: you are creating a contract with an insurance company, right?
6:36
Speaker 3: So the reason that people are sometimes drawn to these
6:40
Speaker 3: products is they provide certainty in a world where it
6:43
Speaker 3: doesn't feel like there is a lot of certainty in
6:45
Speaker 3: the investment world. So The first type we're going to
6:48
Speaker 3: be talking about here is a fixed annuity. So these
6:51
Speaker 3: are kind of the simplest ones. The insurance company just
6:54
Speaker 3: guarantees a stated interest rate for a period of time.
6:58
Speaker 3: So sometimes people compare these to like a bank CD
7:01
Speaker 3: because they're providing a known rate of interest for a
7:04
Speaker 3: period of time. The difference is that they are issued
7:07
Speaker 3: by insurance companies rather than banks. And you'll often see
7:11
Speaker 3: these in like the, you know, maybe three-year or five-year contracts.
7:15
Speaker 3: These got more popular back when interest rates were really
7:18
Speaker 3: low and CDs weren't paying very much. So this is
7:21
Speaker 3: where people ended up with some of these. The second
7:24
Speaker 3: type would be a fixed indexed annuity. So this is
7:27
Speaker 3: getting more complicated, but essentially the returns on these annuities
7:33
Speaker 3: are tied to a market index. So think of like
7:36
Speaker 3: the S & P 500 or the Dow Jones, right?
7:39
Speaker 3: We're linking the performance of this underlying annuity to the
7:43
Speaker 3: performance of that index, which is a stock index in
7:47
Speaker 3: most cases. So they generally offer downside protection against market losses,
7:52
Speaker 3: but they place limits on the upside growth through what
7:56
Speaker 3: are called caps, spreads, and participation rates.
7:59
Speaker 1: So think of it this way.
8:01
Speaker 3: What this fixed index annuity is doing is essentially If
8:05
Speaker 3: the market can do three things, go down, stay the same,
8:08
Speaker 3: or go up, they are essentially trying to eliminate that
8:11
Speaker 3: go down and say, well, we'll at least keep your
8:15
Speaker 3: balance level. Or, hey, we might even give you some
8:19
Speaker 3: upside if the market goes up. The difference is that
8:23
Speaker 3: you're giving up a lot of that upside potential. The
8:27
Speaker 3: third type here is a variable annuity. Now these allow
8:30
Speaker 3: investors to participate directly in market investments through what are
8:34
Speaker 3: called sub-accounts. These are very similar to like a mutual fund,
8:38
Speaker 3: for example. You have much higher potential growth with a
8:42
Speaker 3: variable annuity, but the market risk is also higher. So
8:47
Speaker 3: this is moving back a little bit more towards traditional investing.
8:51
Speaker 3: And then the final type is what's called an income annuity.
8:55
Speaker 3: So these are designed primarily to, as their name suggests,
8:58
Speaker 3: create income, right? So an individual is essentially taking a
9:02
Speaker 3: lump sum, giving it to an insurance company, and the
9:06
Speaker 3: company is agreeing to provide them income for a specified period.
9:11
Speaker 3: In many cases, it's actually for life, but there can
9:14
Speaker 3: be shorter timeframes. So each of these could have a
9:18
Speaker 3: role in certain situations. We're not saying they're good, bad,
9:21
Speaker 3: or otherwise. but they shouldn't be viewed as interchangeable products.
9:25
Speaker 3: They're not all, you know, sometimes people say, well, you know,
9:29
Speaker 3: this product can work for anybody.
9:31
Speaker 1: Not necessarily, right?
9:32
Speaker 3: We should be looking at these for their value and
9:36
Speaker 3: what they can actually provide to the underlying client.
9:39
Speaker 1: It almost feels, Eric, like we could do an entire
9:41
Speaker 1: show on each of these, if not many, many entire
9:43
Speaker 1: series of shows on each of these different types of annuities.
9:46
Speaker 1: Fascinating stuff this morning as we talk with Eric Schwartz.
9:49
Speaker 1: And CJ Kloss, our retirement planning professionals from Kloss Financial.
9:52
Speaker 1: Their telephone number is 608-442-5637. Don't forget, no charge for
9:57
Speaker 1: that initial. get-to-know-you appointment at Kloss Financial. It will be
9:59
Speaker 1: complimentary to you. Again, their number is 608-442-5637. You can
10:04
Speaker 1: also schedule that complimentary conversation right online at klossfinancial.com. That's Klaas, K-L-A-A-S, financial.com.
10:11
Speaker 1: Talking this week about annuities. Are they a solution or
10:14
Speaker 1: a sales pitch? So, CJ, do annuities, why exactly are
10:18
Speaker 1: they there in the first place? And kind of what
10:21
Speaker 1: problem are they trying to solve here?
10:24
Speaker 2: Yeah, good question. You know, linking back to what Eric
10:27
Speaker 2: was just talking about there, often we'll have people say
10:30
Speaker 2: to us, well, I have an annuity. We go, no,
10:33
Speaker 2: I know what kind of an annuity. And they go, oh,
10:36
Speaker 2: it's just an annuity.
10:37
Speaker 3: We go, well.
10:38
Speaker 2: As you just heard from Eric there, this definition of
10:41
Speaker 2: annuity can range from CD-like assets, so very boring fixed
10:47
Speaker 2: interest rates, to very volatile stock-like performance, to lifetime income
10:54
Speaker 2: that sounds more like a pension, right?
10:56
Speaker 1: It's like, so you get the idea.
10:58
Speaker 2: Is the term annuity very descriptive? And the answer would be, hmm.
11:04
Speaker 2: it describes that you're connected to an insurance company that's
11:06
Speaker 2: giving you some sort of base guarantee, but what that
11:11
Speaker 2: base guarantee is can range greatly. So I would encourage everybody,
11:15
Speaker 2: kind of the, there's a theme on this show outside
11:18
Speaker 2: of the conflicts that these products can potentially, you know, create.
11:23
Speaker 2: There's a second theme, which is, Annuity is not very descriptive.
11:27
Speaker 2: No more about the annuity world. And if you own one,
11:32
Speaker 2: no more about the type of annuity that you own
11:35
Speaker 2: and the benefits it provides along with the drawbacks. So
11:38
Speaker 2: you asked the question, you know, what problems are these
11:41
Speaker 2: annuities trying to solve, Sean? And if you were to
11:44
Speaker 2: like go to the dictionary and look up the word annuity,
11:47
Speaker 2: annuity is most closely linked to what Eric mentioned, insurance.
11:51
Speaker 2: But then income. So if you actually look at the
11:55
Speaker 2: background of how the Internal Revenue Code kind of developed
11:59
Speaker 2: these annuities, it's all around at some point creating a
12:01
Speaker 2: guaranteed income stream for somebody. So annuity is linked to
12:04
Speaker 2: insurance and annuity is linked to income. The biggest problem
12:08
Speaker 2: annuities attempt to solve is what is called longevity risk.
12:12
Speaker 2: So in simple terms, that's the risk of living longer
12:16
Speaker 2: than your savings can last. Many financial risks can be
12:20
Speaker 2: managed through diversification, proper investing, and spending discipline. We've actually
12:24
Speaker 2: done shows very recently on this very topic, right? Diversification,
12:27
Speaker 2: that really helps. But one risk that is very difficult
12:32
Speaker 2: for individuals to manage on their own is the uncertainty
12:35
Speaker 2: surrounding how long they will live, right? Somebody comes in
12:39
Speaker 2: and says, hey, CJ, can you model out for me
12:41
Speaker 2: a distribution rate along with other income sources, along with
12:45
Speaker 2: market risk, and tell me probabilities of getting to 80%
12:49
Speaker 2: The answer is actually, yeah, we can. It's pretty amazing.
12:51
Speaker 2: We can do a lot of really cool math to
12:53
Speaker 2: kind of help people get an understanding of that. And
12:55
Speaker 2: they say, how about if I live to 105? And
12:57
Speaker 2: I go, that's hard. That's really hard. Now, if you
13:01
Speaker 2: have enough margin, if there's enough room for error at
13:04
Speaker 2: the end of your life, it doesn't matter. You get
13:06
Speaker 2: the idea. But if you're running a tight retirement where, hey,
13:10
Speaker 2: the model says we have a high probability of success
13:13
Speaker 2: if we live to age 90, the question is, what
13:16
Speaker 2: if I live longer? And this is where annuities can
13:22
Speaker 2: be a solution because annuities allow a group of people
13:25
Speaker 2: to pool that risk through an insurance company. And as
13:29
Speaker 2: a result, certain annuity products can provide lifetime income that
13:33
Speaker 2: continues even if you live to 95, 100 or beyond.
13:39
Speaker 2: Think annuity. If you want to think annuity, think, you know,
13:42
Speaker 2: what's the closest thing in our lives that is similar
13:45
Speaker 2: to an annuity? Think annuity. pension or think social security? Now,
13:50
Speaker 2: these are not perfect comparisons, but just, you know, for
13:52
Speaker 2: the simplicity of our brains, think that, right? So like,
13:55
Speaker 2: what happens with a pension? I retire from a company
13:58
Speaker 2: or the federal government, I get an income stream. It's
14:01
Speaker 2: known as a defined benefit product. And I get this,
14:05
Speaker 2: I get this income stream, this defined benefit for the
14:08
Speaker 2: remainder of my life. What's the downside of it? The
14:10
Speaker 2: downside is that I can't call up the company and say,
14:14
Speaker 2: I need $ 10, 000, give me extra, right? You can't call
14:16
Speaker 2: up Social Security and say, I need more this month,
14:18
Speaker 2: give me extra. But what's the upside of Social Security
14:21
Speaker 2: or a pension? If I live to 150, it keeps paying.
14:25
Speaker 2: That's the upside. So insurance products or these pensions use
14:30
Speaker 2: rules of large numbers. This is actually the base of
14:32
Speaker 2: insurance is using rules of large numbers to to pool
14:36
Speaker 2: risk together. Some people are going to live really long
14:38
Speaker 2: and really, really, really benefit from these products. Other people
14:42
Speaker 2: are going to live really, really short and don't benefit
14:44
Speaker 2: at all. As a matter of fact, they're probably hurt
14:46
Speaker 2: by the product, but you're pooling risk with other investors.
14:49
Speaker 2: So this is probably the primary reason why people consider annuities.
14:54
Speaker 2: And we would say should consider annuities if it fits
14:59
Speaker 2: within their broader financial plan.
15:00
Speaker 1: Really important discussions to be had. And, of course, we
15:03
Speaker 1: talk about having those conversations and really breaking this stuff down.
15:06
Speaker 1: It's a great day to set up that appointment at
15:07
Speaker 1: Klaus Financial with our retirement planning professionals. All you got
15:10
Speaker 1: to do is pick up the phone, give them a call, 608-442-5637. Again,
15:14
Speaker 1: no charge for that initial get-to-know-you appointment at Klaus Financial.
15:16
Speaker 1: It will be complimentary to you. Again, their number is 608-442-5637.
15:22
Speaker 1: You can also schedule that complimentary conversation right from the website, KlausFinancial.com.
15:27
Speaker 1: That's Klaus, K-L-A-A-S, Financial.com. Again, just head on over there
15:31
Speaker 1: to schedule that complimentary chat. You can also listen back
15:34
Speaker 1: to this and previous shows, podcasts. right from the website.
15:37
Speaker 1: We'll talk about some of the benefits. We will also
15:39
Speaker 1: talk about some of the downsides and trade-offs. We will
15:41
Speaker 1: do that next as we continue our conversation about annuities
15:44
Speaker 1: with our retirement planning professionals from Kloss Financial as Money
15:47
Speaker 1: in Motion continues here on 1310 WIBA. Talking this morning
16:00
Speaker 1: with our retirement planning professionals from Kloss Financial, C.J. Kloss
16:03
Speaker 1: and Eric Schwartz, talking about annuities, solutions, or a sales pitch.
16:07
Speaker 1: We're getting the details from Eric and C.J. Don't forget,
16:09
Speaker 1: if you missed any part of today's program or you
16:11
Speaker 1: want to get caught up on some of the previous shows,
16:13
Speaker 1: just head on over to klossfinancial.com. That's Kloss, K-L-A-S, financial.com.
16:18
Speaker 1: You can also schedule a complimentary chat right from the website,
16:21
Speaker 1: or you can call the office right here in Madison
16:23
Speaker 1: at 608-442-5637. No charge for that initial. Get to know
16:27
Speaker 1: your appointment tech, Kloss Financial. Again, their number, 608-442-5637. So Eric,
16:33
Speaker 1: let's talk about the benefits and where can annuities actually
16:37
Speaker 1: add value inside of a financial plan?
16:41
Speaker 3: Yeah, I think there are several areas where annuities can
16:45
Speaker 3: provide value. I mean, they'd have to, right? That's why
16:47
Speaker 3: they're so common. And the first one's pretty simple. It's
16:51
Speaker 3: what CJ was spending most of the last section talking
16:53
Speaker 3: about here. It's guaranteed income. For retirees who are giving
16:58
Speaker 3: up their paycheck and moving into retirement, they're often worried
17:01
Speaker 3: about running out of money. And if they know that
17:03
Speaker 3: a portion of their income is guaranteed, that can provide
17:07
Speaker 3: significant peace of mind, right? Even if it isn't the most,
17:12
Speaker 3: maybe like it's not going to maximize their retirement assets,
17:16
Speaker 3: they have that peace of mind to say, well, it's
17:19
Speaker 3: worth it to me not to worry about that. The
17:22
Speaker 3: second one would be longevity protection. So similar to the
17:26
Speaker 3: guaranteed income part of that, unlike most investments, annuities can
17:31
Speaker 3: continue paying income regardless of how long someone lives, right?
17:36
Speaker 3: When we think of insurance, we think of passing off
17:38
Speaker 3: risk to an insurance company, right? So when someone purchases
17:42
Speaker 3: an annuity, they are passing off the risk of them
17:44
Speaker 3: living too long and running out of money to an
17:47
Speaker 3: insurance company. So longevity protection is a big, big benefit
17:51
Speaker 3: of annuities. The third here I would say is principal protection.
17:56
Speaker 3: So many fixed annuities and indexed annuities as well are
18:00
Speaker 3: gonna offer some degree of protection from market losses, right?
18:04
Speaker 3: Now you're gonna limit your upside as we talked about,
18:07
Speaker 3: but you are gonna have that certainty that you don't
18:13
Speaker 3: lose the principal. The fourth one here is actually what
18:17
Speaker 3: we would call like behavioral benefits. So many investors, they'll
18:22
Speaker 3: panic during market downturns and, and no matter what, you
18:25
Speaker 3: can't talk them out of it. Um, and annuities can
18:28
Speaker 3: help certain individuals stay invested and, and kind of avoid
18:31
Speaker 3: those really emotional decisions because they know they have that
18:34
Speaker 3: additional level of, um, of protection. Now it, it comes
18:38
Speaker 3: at a cost, right? But they do have that additional
18:41
Speaker 3: level of protection, right?
18:43
Speaker 1: And finally, some.
18:44
Speaker 3: Annuities will provide unique planning options for spouses or beneficiaries
18:49
Speaker 3: that can help support the broader retirement and estate planning
18:53
Speaker 3: goals someone might have. So they've been, in some cases,
18:57
Speaker 3: built to fit perfectly into a more complex estate plan, potentially.
19:05
Speaker 1: It sounds really compelling, and I could say, let's end
19:08
Speaker 1: the show here, but I've got to guess there's, for
19:11
Speaker 1: every give, there's a take. And CJ, let's talk about
19:14
Speaker 1: the other side of that, the downsides as well, things
19:17
Speaker 1: that folks should probably be cautious of.
19:20
Speaker 2: Yeah, good question. There are downsides and there are trade-offs,
19:24
Speaker 2: as we've been talking about. So first, Liquidity concerns would
19:30
Speaker 2: be one of the trade-offs. Many annuities impose surrender charges
19:34
Speaker 2: if money is withdrawn beyond certain limits during the early
19:37
Speaker 2: years of the contract, and that can reduce the flexibility.
19:40
Speaker 2: A second would be complexity. This is another tradeoff or
19:43
Speaker 2: downside of an annuity is some annuity contracts exceed 100
19:46
Speaker 2: pages and contain like tons of writers and guaranteed guarantees
19:51
Speaker 2: and exclusions and formulas. And consumers should not purchase something
19:56
Speaker 2: they don't understand fully. Third, there's a cost. Certain annuities
20:00
Speaker 2: have very little direct cost and others can contain insurance expenses,
20:05
Speaker 2: investment management fees, rider costs, mortality expenses, and administrative charges.
20:10
Speaker 2: So this is why earlier I said when somebody comes
20:13
Speaker 2: to us and says I own an annuity, our very
20:15
Speaker 2: next immediate question is what type? Because Take a fixed
20:20
Speaker 2: annuity that Eric talked about previously. Often they're sold on
20:23
Speaker 2: a commission. There's a holding period like there would be
20:26
Speaker 2: with a CD. If you surrender it during that holding period,
20:28
Speaker 2: there's a penalty. But in terms of like explicit cost,
20:33
Speaker 2: like I put in $ 100, 000 and I'm charged $ 5, 000, there's
20:36
Speaker 2: nothing there. There's no direct cost besides the inflexibility and
20:41
Speaker 2: the lower expected rate of return. Conversely, you take a
20:44
Speaker 2: variable annuity with an income rider. Listen, everybody, we've seen
20:48
Speaker 2: variable annuities with income riders be upwards of 3%, 4%,
20:51
Speaker 2: 5% per year in overall fees between the subaccount fees,
20:55
Speaker 2: the M & E fees, the rider costs, so on
20:57
Speaker 2: and so forth. So you get the idea. Not only
21:00
Speaker 2: do the products function very differently in terms of what
21:03
Speaker 2: they provide, but also the costs associated with them or
21:05
Speaker 2: the complexity can be very different depending upon the type.
21:09
Speaker 2: And then fourth, there's inflation risk. A fixed income payment
21:12
Speaker 2: that looks attractive today could be far less 20 years
21:15
Speaker 2: from now in terms of what it purchases for you,
21:18
Speaker 2: which is one reason why inflation should always be part
21:21
Speaker 2: of the conversation whenever you're evaluating a retirement income strategy.
21:26
Speaker 2: And then finally, another thing to be cautious of with
21:28
Speaker 2: annuities is opportunity costs. So in exchange for guarantees and protection,
21:32
Speaker 2: which I like that. I'm a consumer as well. I
21:36
Speaker 2: like the idea of guarantees. Uh-oh.
21:42
Speaker 1: Did we lose CJ's connection? We may have lost CJ's connection. Eric,
21:48
Speaker 1: are you still there? I got you, Sean. I'm still here. Yeah,
21:52
Speaker 1: let's kind of pick up with CJ, of course, talking
21:54
Speaker 1: about opportunity costs. Let's talk about guarantees and protections and
21:58
Speaker 1: kind of the other side of that as well. Yeah.
22:03
Speaker 3: So as we look at opportunity costs, as CJ was saying,
22:07
Speaker 3: in exchange for those guarantees and protections, investors are giving
22:11
Speaker 3: up a degree of growth potential, right? And that sounds
22:14
Speaker 3: like a small thing, but remember, we're talking about investing
22:17
Speaker 3: for many years. So those small opportunity costs, they really
22:22
Speaker 3: add up over time and they can create a situation
22:25
Speaker 3: where you look back and you say, wow, paying those
22:29
Speaker 3: extra fees over all those years really ate into my retirement.
22:33
Speaker 3: So it's just something you want to be aware of
22:35
Speaker 3: up front.
22:36
Speaker 1: And speaking of costs, let's kind of get into that
22:38
Speaker 1: a little bit as well as we talk about that.
22:41
Speaker 1: It does seem to be an area where folks can
22:43
Speaker 1: get confused, isn't it?
22:45
Speaker 2: Oh, absolutely.
22:46
Speaker 3: Like CJ said, these are really complicated products. And I
22:50
Speaker 3: think one mistake, though, is to be fair, is assuming
22:53
Speaker 3: that all annuities are expensive. There are a lot of
22:55
Speaker 3: expensive annuities out there, but it's not necessarily true that
22:58
Speaker 3: they all are. So, for example, traditional fixed annuities, they
23:01
Speaker 3: don't have an explicit annual fee. They act more like
23:04
Speaker 3: a CD with a penalty if you surrender the policy early.
23:08
Speaker 3: But they don't have like a separate, oh, you know,
23:10
Speaker 3: you're going to pay us X percent per year just
23:14
Speaker 3: to have this insurance fee. Now, on the other hand,
23:17
Speaker 3: certain variable annuities, they can include multiple layers of expenses
23:20
Speaker 3: that can really add up. These are the ones that
23:22
Speaker 3: really get people to think that all annuities are really
23:27
Speaker 3: expensive because the variable annuities have a lot of features
23:30
Speaker 3: and things you can add to them that really, really
23:34
Speaker 3: up the price. The key question really here, though, is
23:38
Speaker 3: not what is the fee? The better question is, like,
23:41
Speaker 3: what am I receiving in exchange for that cost, right? Because...
23:44
Speaker 3: Like I said, this is similar to buying insurance, and
23:47
Speaker 3: people buy insurance all the time. There's a reason, right?
23:50
Speaker 3: We want to transfer some of the risk to another
23:54
Speaker 3: entity like an insurance company. So if someone's paying for
23:58
Speaker 3: a guaranteed lifetime income benefit, there may be a legitimate
24:02
Speaker 3: value there being provided. So in financial planning, the cheapest
24:06
Speaker 3: solution isn't always the best solution, okay? So investors should
24:10
Speaker 3: understand exactly what they're paying for.
24:13
Speaker 1: As we talked this morning with Eric Schwartz and CJ Kloss.
24:15
Speaker 1: We'll get back to CJ in just a moment. But Eric,
24:17
Speaker 1: I did want to talk about something that comes up
24:20
Speaker 1: in this conversation when we talk about annuity, and that's
24:23
Speaker 1: sales practices. Talk about a product. We're bringing that in,
24:26
Speaker 1: aren't we?
24:28
Speaker 3: Definitely. And this, I think, is where the bad reputation
24:31
Speaker 3: of annuities comes in. The product itself isn't necessarily the issue.
24:35
Speaker 3: It's often how it's sold. Some annuities, a fair amount
24:40
Speaker 3: of annuities actually will pay substantial commissions to the person
24:44
Speaker 3: selling them, which creates huge conflicts of interest. Now, to
24:48
Speaker 3: be clear, many insurance professionals do excellent work and provide
24:52
Speaker 3: great value. And we have some great partners in that
24:56
Speaker 3: space that we trust and we believe work very well
24:59
Speaker 3: with clients. But consumers should understand that compensation structures can
25:05
Speaker 3: influence recommendations, right? We did a show on this, actually.
25:10
Speaker 3: It was titled Follow the Incentives. This was back in October.
25:13
Speaker 3: I believe it was the 15th show. For those who
25:17
Speaker 3: didn't hear it, go back and find a recording on
25:19
Speaker 3: our websites. But conflicts of interest and compensation structures are
25:23
Speaker 3: why we encourage people to ask questions. So if you're
25:28
Speaker 3: considering an annuity purchase, think of asking questions like, how
25:34
Speaker 3: are you compensated? What commissions are actually being paid? What
25:38
Speaker 3: sort of ongoing services are included? Once I pay that
25:42
Speaker 3: initial commission to the agent, are they just going to
25:45
Speaker 3: disappear or are they actually going to be here to
25:47
Speaker 3: provide support and help explain this really complicated product over time?
25:53
Speaker 3: Are there other alternatives available, right?
25:56
Speaker 1: So there are a lot of.
25:57
Speaker 3: Different financial solutions out there, and an annuity is not
26:00
Speaker 3: the only one, even if it is the one that pays,
26:03
Speaker 3: in that case, maybe the highest commission. And the last
26:07
Speaker 3: one is, why is the product appropriate for my particular situation?
26:12
Speaker 3: Annuities are complicated and they're unique, which means they are
26:15
Speaker 3: not right for everyone. So you want to make sure
26:18
Speaker 3: that you are asking the professional, why is this right
26:22
Speaker 3: for me? And good advisors are going to be happy
26:24
Speaker 3: to answer each and every one of those questions.
26:27
Speaker 1: Great advice this morning from Eric Schwartz and CJ Kloss,
26:29
Speaker 1: our retirement plan professionals from Kloss Financial. And CJ, before
26:33
Speaker 1: we wrap up this week, what's the biggest mistake you
26:35
Speaker 1: see folks making when evaluating annuities?
26:39
Speaker 2: Yeah, good question. The biggest mistake is viewing annuities as
26:42
Speaker 2: either completely good or completely bad. We've been talking about
26:46
Speaker 2: that this morning, and neither is true. Annuities are simply
26:49
Speaker 2: a tool. Some people genuinely benefit from them, and others
26:53
Speaker 2: may be far better off by using other alternatives that
26:57
Speaker 2: don't include annuities. The right answer depends on a person's goals,
27:01
Speaker 2: their income needs, their assets that are available to them,
27:05
Speaker 2: their risk tolerance. maybe their tax situation and their desire
27:09
Speaker 2: for flexibility. So we would say don't make the mistake
27:13
Speaker 2: of just either writing off the annuity landscape because you
27:16
Speaker 2: don't understand it or it's too complicated or one of
27:19
Speaker 2: your friends said they got burned by it. But we
27:21
Speaker 2: would also say, and we've talked about this today, Eric
27:24
Speaker 2: will reference it as well, is be cautious of incentives
27:28
Speaker 2: because annuities often, not always, but often do come with
27:32
Speaker 2: a large commission tied to them, which just increases the
27:35
Speaker 2: potential for conflicts of interest between you and the person
27:39
Speaker 2: who's representing that product.
27:41
Speaker 1: And Eric, along those lines, let's talk about, obviously we
27:43
Speaker 1: talked about commissions and sales incentives. Should the takeaway then be,
27:49
Speaker 1: we should automatically avoid annuities or avoid advice from certain advisors?
27:53
Speaker 1: What's kind of the big takeaway there? Not at all.
27:57
Speaker 3: I think CJ said it really well. The goal here
27:59
Speaker 3: is not to be pro-annuity or to be anti-annuity. The
28:03
Speaker 3: goal here is we want to be pro-planning, right? We
28:06
Speaker 3: want to be approaching this from a standpoint of not
28:11
Speaker 3: how do we sell an annuity, but how do we
28:13
Speaker 3: solve a problem that an annuity may come in and work.
28:17
Speaker 1: Really well for.
28:18
Speaker 3: So at Kloss, as CJ said earlier, we don't sell
28:21
Speaker 3: commission-based annuities and we don't receive commissions for recommending them.
28:25
Speaker 3: Our comp is not tied to whether a client purchases
28:28
Speaker 3: an annuity or And that really allows us to focus
28:31
Speaker 3: on helping clients determine whether an annuity actually improves their
28:35
Speaker 3: overall financial plan. And in some cases, we may conclude
28:38
Speaker 3: that an annuity could be beneficial, and we may actually
28:41
Speaker 3: refer a client to one of those trusted professionals I
28:44
Speaker 3: mentioned earlier. And in other cases, we may say, no,
28:48
Speaker 3: we don't really think it fits here, and we'll actually
28:51
Speaker 3: advise against it. Either way, our compensation is not changed
28:56
Speaker 3: in that situation. And we also help clients evaluate annuities
28:59
Speaker 3: that they.
28:59
Speaker 1: Already own, okay?
29:01
Speaker 3: So people over the years may have purchased annuities and
29:04
Speaker 3: then come to us later. And in certain specialized situations,
29:10
Speaker 3: annuities can sometimes, or we can actually sometimes provide ongoing
29:14
Speaker 3: investment management inside a certain type of annuity structure. And these, again,
29:21
Speaker 3: don't involve any sort of commission. And they also allow
29:25
Speaker 3: our clients to.
29:28
Speaker 3: To not face the tax impact of potentially surrendering an annuity.
29:32
Speaker 3: The important point here is that consumers shouldn't focus solely
29:35
Speaker 3: on whether a product is being recommended. They should focus
29:38
Speaker 3: on understanding why it is being recommended. how the advisor
29:43
Speaker 3: is compensated, and whether the recommendation truly serves their long-term goals.
29:48
Speaker 3: So the big message of our show today, ask questions
29:52
Speaker 3: and don't be afraid to do that because the right
29:54
Speaker 3: advisor is going to be happy to answer those questions.
29:57
Speaker 1: Really important information this week. Don't forget, you can listen
29:59
Speaker 1: back to this and previous shows podcast right online, KlausFinancial.com.
30:03
Speaker 1: That's Klaus, K-L-A-A-S.com. Financial.com, while you're there, you can schedule
30:07
Speaker 1: a complimentary conversation right from the website or you can
30:11
Speaker 1: give them a call, 608-442-5637. No charge for that initial
30:14
Speaker 1: get-to-know-you appointment at Kloss Financial. It will be complimentary to you. Again,
30:18
Speaker 1: their number, 608-442-5637. You're going to want to hold on
30:22
Speaker 1: to that telephone number now because it's time for the
30:24
Speaker 1: Kloss Quiz Question of the Week. It works like this.
30:26
Speaker 1: In just a moment, I'll ask you the Kloss Quiz
30:28
Speaker 1: Question of the Week. You will then have 30 minutes
30:29
Speaker 1: from the end of today's program to call the Kloss
30:31
Speaker 1: Financial office right here in Madison at 608-442-5637. 4, 4, 2, 5, 6, 3, 7.
30:36
Speaker 1: If you are the first caller to correct answer, you
30:37
Speaker 1: win this week's prize, which is a $ 25 gift card
30:40
Speaker 1: to Amazon. This week's Kloss Quiz question of the week
30:43
Speaker 1: is this, true or false? The term annuity describes one
30:47
Speaker 1: single product that works the same way for everyone. Is
30:51
Speaker 1: that true or is that false? Telephone number 608- 442-5637.
30:54
Speaker 1: First caller, win that $ 25 gift card to Amazon if
30:58
Speaker 1: you got the correct answer. And again, that's Kloss Financial's
31:00
Speaker 1: office right here in Madison. Eric, CJ, it's always great
31:04
Speaker 1: chatting with both of you. You guys enjoy this great day,
31:06
Speaker 1: and we'll do it all again real soon.
31:08
Speaker 2: Thanks, Sean.
31:08
Speaker 1: Thanks, Sean. Take care, guys. News comes your way next
31:10
Speaker 1: right here at 1310 WIBA. This is Money in Motion
31:14
Speaker 1: with Kloss Financial Asset Advisors LLC, a registered investment advisor
31:19
Speaker 1: registered with the SEC. The contents of this show are
31:23
Speaker 1: for informational purposes only and should not be considered individual
31:26
Speaker 1: investment advice. Kloss Financial does not offer tax or legal advice.
31:30
Speaker 1: Any opinion offered during the course of this show is
31:33
Speaker 1: the opinion of that particular investment advisor representative and not
31:38
Speaker 1: necessarily the opinion of Kloss Financial.