Broker Check

What is an Annuity? Is it Right for me?

May 04, 2022

What is an Annuity? Is it Right for me?


[00:00:00] Jason Fuchs: Unfortunately not all advisors put their clients into annuities for the right. Some do it for the high upfront payouts or some advisors just want to grow their business as big as possible, make it as profitable as possible and do little work. Now at Sage path, we do none of that.

[00:00:17] After today's episode, you will have more clarity on what annuities. And you'll be able to answer that question is an annuity, right? For me,

[00:00:55] Greetings everyone. If you're new here, I'm Jason Fuchs, married to Amber's father to a [00:01:00] three-year-old girl Juul. I also happen to be the managing director of Sage path, financial advisors, ladies and gentlemen. Welcome to the show. Thank you so much for being here. Dad's sense is a show for family, men and women.

[00:01:12] We're all about family, food, fun and finance. Joining me is special guest Amber Fuchs, entrepreneur, mom, wife. Extraordinary. Welcome to the show. Thank you for having me. Thanks for being here as always. Thanks. And that goes for you as well. Ladies and gentlemen, you choose to listen to dad sense every couple of weeks, or maybe you're tuning in for the first time, but regardless we appreciate all of you.

[00:01:39] Thank you so much for being. And ladies and gentlemen, if you have questions, I will answer one during each episode. And Hey, if your question does not get answered during an episode of dads sense. No worries. I will privately personally respond to your question. You're not alone. I'm here to help send those questions to [00:02:00] info at Sage path,

[00:02:02] You can find that in the description of the podcast

[00:02:05] today's question comes from Amanda. Of course, Amber, that's not a real name, but guess whose name it is one of your assistants. Exactly. So Amanda, if you're listening, thank you for all the hard work we do. We appreciate you and welcome to . Our second assistant newest assistant Ben her second week. She's doing amazing.

[00:02:25] That's awesome. So it's great that we have the support of two phenomenal women. Thank you both for the work that you do with. Great question about annuities and ladies and gentlemen, after today's episode, you'll have more clarity on what annuities are and you'll be able to answer the question is an annuity, right?

[00:02:45] For me. Awesome. But before we get into all that, before we talk food, Amber, I always like to know what is going on in your world. Nothing at all, right?

[00:02:56] Amber Fuchs: Yeah. There's a lot going on in my world. a lot [00:03:00] of variables and moving parts, just like with everyone else out there. but what I'm most excited about right now is that.

[00:03:09] We are going to have a little parents get away

[00:03:14] Jason Fuchs: on this weekend. Yeah.

[00:03:17] Amber Fuchs: I'm super excited too. And I think Juul is excited as well. She's going to stay with, her grandparents that live here in Florida and Papa, Nana and Papa. And what's interesting is, recently our daycare had. Weird situation where they had to shut down for a few days.

[00:03:37] Jason Fuchs: I probably shouldn't laugh, but it's

[00:03:38] Amber Fuchs: just so strange. Yeah, it was just so unusual. But fortunately for us having a Nana and Papa close by meant that Juul got to spend a few days with them and everybody had so much fun and Juul. asking a lot about Nana and Papa ever since then.

[00:03:56] Jason Fuchs: She's been

[00:03:58] Amber Fuchs: even more top of mind ever [00:04:00] since then.

[00:04:00] And so I think Juul is going to love having a sleepover with Nana and Papa and you and I will have our own little getaway. So I'm really excited about that. The weather here in Florida is amazing. It looks like we're going to have an amazing weekend. Yeah. we're staying close to home, just a tiny little getaway, so we'll get to continue enjoying this beautiful weather.

[00:04:21] And just have a

[00:04:22] Jason Fuchs: moment. Yeah. The moments in life are pretty slow, but the pendulum of life swings pretty quickly, we've been working hard on a lot of things and I'm tired and I'm looking forward to this getaway. It's something we try to do every two, three months, just the two of us spend a day, a day and a half somewhere close, but away from the house away from all the distractions, the dogs get to hang out with the dog sitter.

[00:04:51] Jessica. She does. She's so good with them. And then of course, Juul typically goes with your parents or Nana and Papa. So in my eyes, it's a win-win [00:05:00] for everybody. And it's a great way for us to spend some time alone and create that space as husband and wife. A lot of times we just don't get, we're both running our businesses.

[00:05:11] We've got a three-year-old and three dogs running around the house. And ladies and gentlemen, as you can imagine, life gets pretty busy. There's always something or someone moving household. We're always chasing something. I feel like

[00:05:26] Amber Fuchs: we do a good job. I think of trying to have little dates and it's often more so for us, at least right now, in this phase, in our.

[00:05:34] We will do lunch dates versus dinner dates.

[00:05:38] and those are tons of fun, but I think you got this idea of us having a little getaway every few months or so from one of your clients, right?

[00:05:47] Jason Fuchs: It was actually from a group. I was affiliated with dads that are entrepreneurs, dads that are business owners.

[00:05:53] I used to meet with them once every couple of weeks, it was all virtual on. And they're all based out of [00:06:00] Orlando. So it was great during COVID because I got the help of some of the other guys, very similar to me, they run a business, they have kids, they're family, men with businesses, not business owners with families.

[00:06:11] It was really neat to connect with people and share our wins. We used to share our struggles, so I got a lot of tips from them. And then as COVID opened up, I realized that. I can get the same thing from some guys at church. So we're back to meeting personally. So although I'm not affiliated with that group anymore, that men's group I told you about.

[00:06:31] I learned a lot from them helped tremendously as a data business owner. And as a husband. Yeah,

[00:06:37] Amber Fuchs: no, I like it. It's been a lot of fun is probably our third or fourth getaway that we've had. so it's still a relatively new concept for us, but I'm really looking

[00:06:47] Jason Fuchs: forward to it. Me too.

[00:06:49] Amber Fuchs: What are you excited about these days?

[00:06:51] Jason Fuchs: Jason, there's a lot to be excited about. Things are going really well in our world. I feel very blessed, very appreciative of everything that's [00:07:00] going on with us. I am super excited about our new employee

[00:07:04] I Shontay Kelly. She is second week on the job to do an amazing straight out of the gate, straight out of the gate. She's a quick learner, so smart, so driven. And from what I can tell, she loves being a part of Sage path. So we're having a ton of fun with that.

[00:07:21] And on Monday, we're recording. We say path is acquiring another financial practice. Alinka is financial they're based out of Washington, DC, where, we recently moved from, so I have family up there, clients up there and we still get up there fairly often. And I'll probably be getting up there more often.

[00:07:42] Right. But it's, it's very exciting. As of Monday, our business will triple in size. Wow. So it was very overwhelming. But these past six months, this past year, We've been laying down the infrastructure at Sage path to prepare for that acquisition because in my eyes, I [00:08:00] don't want to lose that personal touch with my clients.

[00:08:02] I recognize I'm not going over to these people's houses every night for. But I bend the weddings, funerals, baptisms, graduation, parties, retirement parties, all kinds of celebrations, all kinds of, maybe not so much celebrations, but I've had a lot of fun getting to know my clients. And one of the things I love about being the managing director of Sage path is the ability to connect with my clients, not just with the finances, but outside of that world.

[00:08:33] So. A lot of work has gone into this. And I thought about it earlier this week, Monday, super nervous, but Tuesday I realized the work has already been done. We're ready. So I am very excited to be able to connect with some more people, help, some more people. It gives us a great excuse to get back up to the DC Virginia area where we met, we got married and where my family [00:09:00] is.

[00:09:00] So it'll be really, really exciting. Oh,

[00:09:03] Amber Fuchs: that's awesome. Oh, wow. Yeah. That's super exciting. Congratulations. Thank you so much. And I I'm super excited about is Shantay as well. I think she seems like a really good fit with your whole team.

[00:09:15] Jason Fuchs: I agree. Yeah. Yeah. She's incredible. Cool. Well, fantastic. Well, I don't know about you.

[00:09:21] I think we should cover some food. Yeah. All right. Let's get into the food portion of our show. Now,

[00:09:37] Welcome back, ladies and gentlemen, thank you for joining us for the food portion of dad. Sense,

[00:09:42] Say, Amber, I want the listeners out there to know how that easy smoked pork recipe tasted. And I believe we did that in the last episode or right before Easter. I've got a great memory. It's just really short. What do you think? It was good.

[00:09:59] It was really [00:10:00] good. I think it turned out really well. I think I should have put more rebel.

[00:10:04] Amber Fuchs: Yeah. Add

[00:10:05] Jason Fuchs: a little more flavor. Yeah. So ladies and gentlemen, if you're listening, the recipe is on our blog Sage path, for its last blog. Double the amount of rubbish. It was really good. Super tender has wish it had a little bit more seasoning to it.

[00:10:20] Amber Fuchs: Yeah. A lot of the flavor that we got came from the fact that you smoked it. So

[00:10:25] Jason Fuchs: yeah, if somebody doesn't have an hour and 20 minutes to

[00:10:28] Amber Fuchs: yeah. But if somebody doesn't have a smoker, if they're just doing it on the grill or, or in the oven, I guess. They won't have that added element of the flavor. So definitely adding more rub.

[00:10:39] I don't

[00:10:40] Jason Fuchs: know about the grill or excuse me, the oven. I think this recipe is more suitable for a grill. Yeah it was good stuff. I think your parents enjoyed it too. We had a good time.

[00:10:52] Well, a week or two ago, we had the most fantastic lasagna. I guess Juul had the most [00:11:00] fantastic lasagna and was kind enough to let dad share it with her, but it inspired me, Amber. So if you recall, I dug up that lasagna recipe. and I want to know what you think it was

[00:11:14] Amber Fuchs: amazing. And you need to make it again probably

[00:11:17] Jason Fuchs: tonight. Probably tonight. Yeah. The day before we go on. Yeah, exactly. Yeah. Cause we don't have anything else to do, right? Yeah. I don't know if I'll be doing that tonight. I think somebody else might be cooking the Fuchs dinner tonight.

[00:11:31] Ooh. Is up. Oh, my gosh. Wait for that day, it would be amazing.

[00:11:39] Amber Fuchs: The look on your face. I wish

[00:11:42] Jason Fuchs: you still be able to do eventually, that switch just went on in my head. She loves to help you cook. Oh my gosh. What else can she do?

[00:11:51] Amber Fuchs: I mean, we have some, Play-Doh cupcakes

[00:11:53] Jason Fuchs: ready right now. Amazing. Purple green, pink.

[00:11:57] I pulled this lasagna recipe from all [00:12:00] and it cut five out of five star. With almost 19,000 ratings. I don't think we can trust it at all. That's really good. But I guess the ratings are obsolete now that we've tried it. So 19,001 positive ratings, five out of five, and ladies and gentlemen, it takes a little work.

[00:12:18] It takes some time, but it's all worth it. The first step involves simmering some of the most of the ingredients rather for about one and a half, two hours. So ladies and gentlemen, just give yourself some time on this. Trust me, it'll be worth it. You're going to put in a little bit of work. It's not difficult, just a little time consuming.

[00:12:39] And I'm sure that it'll be in the, Fuchs family recipe page. Yeah. Well, fantastic ladies and gentlemen, I will post it in our blog Sage path, forward slash blog. And I'm looking forward to having that again, me too. All right. Well, I would say it's time for some lasagna, but I think we should get in the Q and a, what do you [00:13:00] think the asset sounds good during Q and a tomato sauce on the mix.

[00:13:08] All right, let's get into it now. And we're back ladies and gentlemen. Thank you again for joining us. We are at the Q and a portion of the show and today's question comes from. Now Amanda says, I love listening to your show while my husband and I cooked dinner. Amber is so funny. Ah, thanks, man. Uh, yeah, so nice of you to say, Amanda.

[00:13:37] Thank you. And Amber, it looks like you have a fan. I think I'm funny too. I think so too. Just a little bit, but don't get too big for us, Amber. That's very nice. That sense needs you. I I'm here for you. Sorry, fans. She's not ready to leave yet, but. Amanda continues. My former advisor placed me in [00:14:00] this product.

[00:14:00] It was charging me almost 4% annually. I had a ton of bells and whistles. I couldn't understand it. Jason, thank you so much for walking me through it and getting me out of it. Disclosure, ladies and gentlemen, after answering her question and addressing Amanda's concerns.

[00:14:17] She and her family became a client. And Amanda, I love working with you and your family. Thank you so much. Of course, that isn't your real name. Thank you, compliance. But you know who you are. Ladies and gentlemen, Amanda, Amber annuities can be a great addition to an investment portfolio, but they can be difficult to understand.

[00:14:41] And unfortunately not all advisors put their clients into annuities for the right. Some do it for the high upfront payouts or some advisors just want to grow their business as big as possible, make it as profitable as possible and do little work. Now at Sage path, we do none of that. So [00:15:00] ladies and gentlemen, Amanda, Amber, I am happy to help walk you through this.

[00:15:05] After today's episode, you will have more clarity on what annuities. And you'll be able to answer that question is an annuity, right? For me, ready to get into it, Amber, I am. All right. Before we really get started, though, I want to know how much money in the U S total you think investors hold in annuities.

[00:15:25] And before you answer, I want to put it in perspective. According to investment Institute, 2018 study. There's an estimated $9.2 trillion in IRA accounts, traditional IRAs Roth, IRAs. That 9.2 trillion does not even account for 401ks or employer sponsored retirement plans.

[00:15:50] So that being said, Amber, out of the $9.2 trillion, how much do you think is annuities.

[00:15:59] Amber Fuchs: Well, [00:16:00] I I'm just gonna take a random guests because I don't know much about them at all. And so I'm excited to learn and I'm just going to

[00:16:09] Jason Fuchs: say half, half, . That's a pretty good answer. Half, half that's pretty close. Oh, well, you're halfway close. Put it that way. So out of the $9.2 trillion, $2.2 trillion is held in annuities.

[00:16:25] So about 25%, 24%, 23.9. I think if you really want to, that was not in my head. That was pretty bad. Yeah. It's crazy though. Right?

[00:16:39] Amber Fuchs: I don't know if it's crazy, cause I just don't understand. Understand them. So

[00:16:45] Jason Fuchs: maybe I was shocked by that number as a financial advisor. I think it's a little, and then I,

[00:16:51] Amber Fuchs: yeah,

[00:16:53] Jason Fuchs: that's what I want.

[00:16:56] All right. So what is an annuity and how does it work? [00:17:00] Well, Amber, as always, you asked such great questions. I'm so glad you asked

[00:17:04] annuity contracts they're purchased from an insurance company in exchange. The insurance company makes regular payments to the buyer either immediately or at some date in the future. And these payments, they can be made monthly, quarterly, annually, or as a lump sum.

[00:17:19] Annuity contract holders can opt to receive payments for the rest of their lives or for a set number of years

[00:17:26] if the annuity is not in a retirement account or one K IRA Roth, IRA for three B. I can name all kinds of acronyms when you withdraw that money, the amount contributed to the annuity will not be taxed, but the earnings will be taxed as regular income.

[00:17:46] Okay. So if the annuity is not in a retirement account, the amount contributed to the annuity is not. But earnings are taxed as regular income. It's important. That's why I repeated that if the annuity [00:18:00] is in a retirement account, well, you're taxed on the entire withdrawal at your ordinary income tax rate and the amount you withdraw gets added to your ordinary income for the year.

[00:18:11] That makes sense, Amber.

[00:18:12] Amber Fuchs: Yes. And I assume that there's a penalty. If you withdraw just like a regular retail. Correct before your

[00:18:21] Jason Fuchs: retirement age? Yeah, that w and what's that age? 69

[00:18:25] Amber Fuchs: and a half 64 and a half 67

[00:18:29] Jason Fuchs: and a half 59 and a half. You're so close. 59 and a half. Yeah. So ladies and gentlemen, if you would draw me for 59 and a half your tax at a 10% penalty now regarding contribution.

[00:18:44] So putting money into the. Every product is different. Some annuities they have timelines for when the money can be added. Some allow you to make just one payment. For the most part, though, if the annuity is not held in a retirement account, I'm gonna say that again. It's [00:19:00] important. If the annuity is not held in a retirement account, there is no contribution limit for.

[00:19:07] The annuity. Oh, that's neat. Isn't that neat? Yeah. Yeah. This is a fantastic way to control your taxes in the future. We cannot avoid paying taxes. We have to pay taxes, but it saves path. One of the things we can do when we create an income plan for you, when you reach retirement is make sure it is tax efficient.

[00:19:28] If the annuity is held in a retirement account, okay. Again, if the annuity is held in a retirement account, you're limited to the IRS contribution limits for that particular tax year. In 2022, the limit is $6,000. If you're 50 and older, you can add a thousand dollars to catch up.

[00:19:46] So your total limit would be $7,000. You follow me? Yes. All right.

[00:19:52] What I'd like to do now is I'd like to talk about the types of annuities, Amber, are you okay with that? Yes. All right. Fantastic. There are actually [00:20:00] two types of annuities, two main types of annuities, the first type fixed annuities, and they offer a guaranteed payout, usually a set dollar amount, or a set percentage of the assets in the annuities.

[00:20:13] You got it. All right. Number two, variable annuity. These annuities offer the possibility to allocate your premiums between various sub-accounts. So you're investing the money. This gives annuity owners the ability to participate in the potentially higher returns these sub-accounts offer, but it also means the annuity account may fluctuate in value.

[00:20:40] Indexed annuities are specialized variable annuities. So we can think of index annuities as a sub bullet point under variable annuities,

[00:20:49] indexed annuities. When they go through a period called the accumulation period, the growing period, essentially the rate of return is based on an [00:21:00] index like the S and P index. For example, following. Yes. All right.

[00:21:05] Now annuities, they have contract limitations. They also have fees, charges, including account administrative fees, underlying investment management, fees, mortality and expense fees and charges for optional benefits.

[00:21:17] It is a lot, it sounds expensive and it can get overwhelming. And this is where the cost can get high. Like in Amanda's situation, for example, it doesn't happen all the time, but it happens. And I think the situation is similar to walking onto a car. You intend to purchase that $30,000 car and you're walking out with a $50,000 car, that base model looks great.

[00:21:41] And I'm sure when you, before you got to the lot, you looked at it online, it looked fantastic. Had some great features and it probably does everything you need it to do. But in the end, after heavy persuasion by that wonderful salesperson, all of those features, all of those add on. They can [00:22:00] significantly increase the price.

[00:22:01] And I think it's no different with annuities. Gotcha. Speaking of costs, most annuities, they have surrender fees and they're usually the highest. If you take out the money in the initial years of the contract. So Amber, you brought up a great point. You can't touch the annuity money before 59 and a half, or the IRS will penalize you if it's in a retirement account,

[00:22:21] no. Period. Oh, interesting. So period, you cannot withdraw from an annuity before 59 and a half in an retirement account, outside of a retirement account. Okay. That's good to know. And that's important because remember you have that 10% charge from the IRS, but then if you withdraw too soon, according to the agreement you have with the annuity company, They could charge you two.

[00:22:50] Gotcha. So you have to like years of penalties and remember you're taxed on some of that money to oh, great. Yeah. So it's very, [00:23:00] very, very important ladies and gentlemen that you take the time to understand what you're getting into. Definitely.

[00:23:09] Now, Amber, what I'd like to do is I'd like to look at a case study.

[00:23:11] I think it'll illustrate what I've talked about so far. Just a little better. Sounds good. And ladies and gentlemen, this is a real client.

[00:23:19] His name has been changed and I've changed the amount he invested just to make the numbers a little bit easier to follow this. Robert we're calling him and he has a 52 year old business owner and he uses a hundred thousand dollars to purchase a deferred fixed annuity contract.

[00:23:39] Remember fixed annuities, give you a guaranteed percentage or amount right now Robert's annuity guarantees him a 4% return. Robert is about 12 to 15 years to retirement so over the next 15 years, the contract will accumulate, it'll grow tax [00:24:00] deferred.

[00:24:00] And by the time Robert is ready to retire the contract should be worth just over 180,000. That's pretty good. Yeah, that's awesome. Now at that point, the contract will begin making annual payments of 13,250 bucks. Only 7,358 of each payment will be taxable and the rest is considered a return of principle.

[00:24:23] Right. Cool. Right. Yeah. Yeah. Now these payments here's, what's really cool. These payments will last for the rest of Robert's life. That's awesome. Assuming he lives. So age 85, he'll eventually receive over $265,000 in payments. And remember he ended the accumulation phase with how much Amber's 180,000.

[00:24:46] Yeah, exactly. That's pretty great. That's cool. Yeah. Robert's annuity, ladies and gentlemen. It, may have some contract limitations, et cetera. I'm going to cover all of that at the end of the [00:25:00] podcast. What do you think so far, Amber?

[00:25:03] Amber Fuchs: It sounds interesting. It sounds like annuities are good solutions for

[00:25:07] Jason Fuchs: some people.

[00:25:09] I think so too. Now, remember I used the word deferred, so Robert, he bought a deferred annuity and that just means he's going to collect income somewhere in the future in his case 15 years. So I'd like to talk about a couple of things related to that. What do you think?

[00:25:29] Okay. All right. Deferred annuity contracts. They go through two very distinct phases. The accumulation phase, the payout phase. Now during the accumulation phase, the account, it grows tax deferred. And when it reaches the payout phase, it begins making regular payments to the contractor or owner in this case annually on our website, Sage path,

[00:25:56] Ladies and gentlemen, if you click the resources tab, [00:26:00] there's a really neat tool that allows you to estimate the cost of your annuity. And you can also see the impact of the various benefits you can add to your annuity. So it's almost like test driving a vehicle before you buy it through this resource.

[00:26:14] You can test drive the annuity before you buy it. Cool. Now I, Amber, yes. The fun part is a variable annuity, right? For me. Maybe a question I'm sure many of our listeners out there have for the casual observer it's sometimes seems that variable annuities are either terrible or wonderful. There's not really any middle ground, right?

[00:26:44] Commentators in the financial media, they seem to occupy a polarity of opinions. We might see in politics. For example, what gets lost when these commentators collide is the individual. Now you said that earlier [00:27:00] kind of a case by case basis. Unfortunately, the discussion is rarely centered on whether a variable annuity is relevant and useful to you and your set of needs.

[00:27:11] Now, ladies in general, Before you consider investing in a variable annuity, you might want to make sure you're exhausting, your contribution limits of the 401k IRA or any other qualified retirement plans. You might have variable annuities. They're sold by something called a prospectus, and that contains detailed information about the investment itself, the objectives, the risks.

[00:27:35] It also covers charges and expenses. Ladies and gentlemen, Amanda, Amber. I strongly encourage you to read the prospectus carefully before you invest or send money to buy a variable annuity contract. It is so important to understand what you're getting into and that prospectus is available from the insurance company or from your financial professional ladies and [00:28:00] gentlemen, if you're struggling, if you need help reading the document or finding the document, reach out to me, I'd be happy to help Amanda situation.

[00:28:08] She reached out to me for help, and there was no stipulations. Yep. I reviewed her annuity contract. I made some suggestions. I assumed she would take those back to her advisor and she made a decision to work with us. Fantastic. I feel incredibly blessed and I, and I love working with her and her family.

[00:28:26] That's awesome. But ladies and gentlemen, if you need help, there is no expectation. Work with me. What? I like you to work with me. Sure. I love it. No expectations.

[00:28:37] At the end of the day, variable annuities are really a value judgment. Are the fees charged worth? The price of mitigating risk fluctuating markets can have on your financial security in retirement is tax deferral. Something you need only. You can be the judge of what constitutes value to you.

[00:28:56] Leave the punditry on variable annuities to others and focus on [00:29:00] whether they make sense for you. How you feeling, Amber I'm feeling good. All right, let's go out and get some, a new. Maybe lasagna. I'm sorry. He knew it. He's confused with ozone. You really have

[00:29:13] Amber Fuchs: to assess our situation before

[00:29:15] Jason Fuchs: the situation is like Garfield.

[00:29:17] I want lasagna. All right. Let's wrap this up in conclusion, ladies and gentlemen, Amanda, Amber annuities can be tough to understand if you'd like to know whether or not these things fit into your overall investment. Please reach out to us for help. Head to our website, Sage path,

[00:29:38] There's a cool link at the top of the page. It looks like a calendar and click it. That gives you access directly to my calendar. I'm freely giving them my time. If you don't want to go the calendar out, ladies and gentlemen, call me, email me. All of that information is in the description of the podcast.

[00:29:55] You can find it on our website to anything you want to add in. [00:30:00]

[00:30:00] Amber Fuchs: No, I can't think of anything right now. I'm very excited to have learned more about and understand

[00:30:06] Jason Fuchs: annuities. So the next time Juul was watching Sesame street in the letter of the day is a, what are we going to cover, Amber?

[00:30:18] And on that note, ladies and gentlemen, thank you for sticking around. We recognize you could be doing anything right now, you chose to listen to us and we feel blessed. Thank you. We appreciate all of you. We'll see in another two weeks for a fresh episode of dads sense. Thanks for listening.