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What if I told you there’s an investment out there that promises guaranteed lifetime income but is often called a scam? Join Ralph Estep, Jr. to find the truth about annuities, the pros and cons, and who is the best candidate for these investments.
In this episode of the Ask Ralph Podcast, host Ralph Estep, Jr. dives into the complex world of annuities. He breaks down what annuities are, their types, benefits such as guaranteed lifelong income and tax-deferred growth, and significant downsides including high costs and complexity. Ralph also discusses who can benefit the most from annuities, how to avoid scams, and aligns financial wisdom with a biblical perspective. The episode wraps up with Ralph's honest take on annuities and advice for cautious investing. Subscribing to the podcast and joining their Facebook group for continuous financial discussions is encouraged.
00:00 Introduction to Annuities: Scam or Smart Investment?
00:20 Welcome to the Ask Ralph Podcast
01:20 Understanding Annuities: Types and Basics
04:34 Benefits of Annuities: Guaranteed Income and More
06:13 Drawbacks of Annuities: High Costs and Complexity
07:27 Who Should Consider Annuities?
08:39 Are Annuities Scams? The Real Truth
09:52 Final Thoughts and Recap
10:50 Closing Remarks and Resources
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Ralph:
What if I told you there is an investment out there that promises guaranteed.
Ralph:
Lifetime income.
Ralph:
But it's been called a scam that only benefits the person selling it.
Ralph:
Would you be interested or would you run the other way?
Ralph:
Well today, we're going to break down annuities.
Ralph:
and I'll provide you with the facts so you can make a more informed decision.
Intro:
Welcome to the Ask Ralph Podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines, and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting.
Intro:
Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.
Intro:
Now here's your host, Ralph Estep, Jr.
Ralph:
Welcome to our financial Friday show.
Ralph:
I'm so glad you chose to join us.
Ralph:
I just want to thank you for listening and more importantly, supporting the program.
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It's a beautiful Friday here on the farm.
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And I'm coming to you from the Saggio accounting studio.
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Let me put on my podcaster hat and put down those overalls.
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And yes, I do actually wear overalls when I'm out working on the farm.
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And let's move that adding machine to the side.
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Let's get to some financial wisdom from a Christian perspective.
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Today, we're tackling the complex world of annuities.
Ralph:
Annuities seem to have the bit of a mixed reputation out there.
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Some tout them as an excellent way to receive guaranteed income for life, but all there's called them exorbitant scams that only make them money for the insurance agents who sell them.
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So what's the real truth on annuities.
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Can they have a place in a wise Christian investor's portfolio?
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Or our annuities just trouble.
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That should be avoided.
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By the end of today's episode.
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If I do my job.
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You'll understand exactly what an annuity is, the pros and cons of investing in them.
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Who can benefit the most from them and whether some of the criticisms about annuities are really valid.
Ralph:
Get out your notebooks folks classes in session.
Ralph:
Don't forget to subscribe to the show and join our email list.
Ralph:
You do that at askralphpodcast.com . So you don't miss tomorrow show.
Ralph:
We have the great Dave Jackson hall of fame, podcaster, and Dean of the school podcasting.
Ralph:
And we're going to discuss how you start a podcast for your business.
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Or let's say you're one of those people that has a passion for something.
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He's going to talk about how to create that.
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And make a podcast out of it's a great interview and one you don't want to miss.
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We also just launched an insiders group on Facebook.
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And I encourage each of our listeners to join the group, to continue the conversation from the show.
Ralph:
It's a great place to share your ideas for the show.
Ralph:
We're going to have some.
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Episodes coming up where we got those directly from that group, it's a place to discuss your triumphs and also talk about your challenges.
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I have a link to the Facebook group in the show notes today.
Ralph:
Let's ground ourselves today in the Bible verse, it comes from Proverbs chapter 13, verse 11, and says this dishonest money dwindles away.
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But whoever gathers money, little by little makes it grow.
Ralph:
As we discuss annuities, which can be complex financial products.
Ralph:
These are not simple.
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Folks we'll explore whether they are wise investments to gather money over time or dishonest schemes that dwindle savings away.
Ralph:
Let's start with a simple question, Ralph, what is an annuity?
Ralph:
Well simply put an annuity as an insurance contract that provides guaranteed payouts either immediately or in the future.
Ralph:
There are really two main types of annuities.
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That's an immediate annuity and a deferred annuity.
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Immediate annuity start paying out quickly after you invest your lump sum.
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You give an insurance company say a hundred thousand dollars.
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And every month they send you guaranteed payments based on that amount, your age and other factors.
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These payouts usually lasts for life.
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Deferred annuities.
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On the other hand, lets you invest money for years before the payments start, they operate in an accumulation phase where you contribute funds at grow tax deferred.
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that means, you're not paying tax on those monies as you put them in there.
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Then at some point you switched to a payout phase where you receive routine income.
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Deferred annuities have surrender charges.
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If you try cashing out too soon, this is something you have to understand and watch out for.
Ralph:
We'll talk about that a little later in the show.
Ralph:
Now, within these broad categories of immediate and deferred annuities, there are many other more specific types of, we're not going to go down that rabbit hole today.
Ralph:
Or we'll be here all day and you will definitely zone out.
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Just know the world of annuities is complex with lots of variations out there.
Ralph:
Okay.
Ralph:
So now we've got a general idea of what an annuity is.
Ralph:
Let's dive in this.
Ralph:
Some of the benefits they offer, the number one advertised pro is providing reliable, guaranteed income for as long as you live folks, that's the true selling point of what an annuity may do for you.
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This appeals to our human desire for certainty in an uncertain world.
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And boy, we are in uncertain times.
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You don't have to worry about outliving your money in retirement.
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If you have an immediate annuity sending you checks every month.
Ralph:
Especially if your annuity has cost of living adjustments that increase the payouts to keep pace with inflation.
Ralph:
So, yes, there are annuities that will adjust the amount of payout you receive based on inflation.
Ralph:
Another advantage is that death benefit, many annuities offer, but so you pass away after only receiving annuity payments for five years out of a potential 30 year payout horizon, some annuity contracts will pay your heirs, the remainder of those payments.
Ralph:
You never got to collect.
Ralph:
It's almost like life insurance in reverse.
Ralph:
And if you have health issues already, you can qualify for certain annuities.
Ralph:
Even if your insurance company won't give you traditional life insurance.
Ralph:
So that's something to consider.
Ralph:
For deferred annuities, a benefit.
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Is there tax deferred growth potential while you're in the savings accumulation phase, just like a 401k or IRA, you'll avoid paying annual taxes on any gains.
Ralph:
Your annuity, investment earns.
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They are deferred.
Ralph:
This gives your funds more room and time to potentially go faster to give you larger future payouts.
Ralph:
Now there is a wide range of investment options within deferred annuities as well from conservative bonds to aggressive stocks.
Ralph:
So in theory, they can align them well with most investors, risk tolerances.
Ralph:
However annuities definitely have their downsides.
Ralph:
Number one is they're notoriously high expenses through surrender charges.
Ralph:
mortality fees, expense ratios and their management fees.
Ralph:
Agents selling annuities make big commissions.
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And those costs are passed on directly to the consumer.
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Unfortunately, some annuities come with 10 to 12 year surrender charge periods.
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So if you need your money during that initial decade, you'll face stiff penalties, potentially eating up 10% or more.
Ralph:
Of your original investment.
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Payout rates can also seem very low for what you put in.
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Here's an example, a 200,000 immediate annuity for a 60 year old may only spit out a thousand dollars per month.
Ralph:
And due to low interest rates, the past decade, even rates on fixed annuities, aren't so attractive anymore.
Ralph:
You may lock into just 3% annual returns.
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Another con is complexity.
Ralph:
Annuity contracts come loaded with all sorts of conditions, all sorts of clauses and exceptions and moving parts.
Ralph:
It's easy to get lost in how exactly they work.
Ralph:
And shady agents often exploit that confusion to oversell inappropriate annuity products to buyers, just looking for guaranteed returns.
Ralph:
Okay.
Ralph:
So who can actually benefit from owning an annuity, given these pros and cons?
Ralph:
Well, annuities can serve a role primarily for two groups of people.
Ralph:
Newly retired folks looking for reliable retirement income and investors who desire, downside protection.
Ralph:
If you've recently stopped working and need to map out cashflow streams to replace your employment earnings.
Ralph:
An immediate annuity could make sense.
Ralph:
Just don't put a hundred percent of your nest egg in one, maybe 25 to 50% tops to cover fixed expenses.
Ralph:
And combine it with social security.
Ralph:
With your pensions.
Ralph:
If you have them and withdraw some other investments, you ideally want multiple income sources to give you flexibility.
Ralph:
And that's true, whether this be a discussion of annuities or any other type of investment
Ralph:
for deferred annuities, someone that dislikes wild investments swings also could be a candidate.
Ralph:
If, and this is a big if.
Ralph:
The products benefits outweigh cost Within your timeline.
Ralph:
These products do provide solutions for principal protection, not always available in the stock market, but here's the truth.
Ralph:
Folks.
Ralph:
You may sacrifice some gains for that added security.
Ralph:
So you've got to know exactly what you're getting into and how surrender periods or penalties limit making changes down the road.
Ralph:
Finally let's tackle this question floating around out.
Ralph:
There are all annuities, essentially scams benefiting only the insurance agents.
Ralph:
I hear this.
Ralph:
All the time in my practice.
Ralph:
The short answer is no.
Ralph:
But with some caveats.
Ralph:
Annuities themselves are legitimate products approved in all 50 states that can absolutely help certain buyers achieve financial goals, like low risk retirement income.
Ralph:
But, and this is a big one.
Ralph:
Shady agents absolutely do take advantage of unwitting seniors.
Ralph:
Over promising benefits while hiding costly traps in the fine print.
Ralph:
These people earn sky high commissions and face, little accountability.
Ralph:
When the products fail expectations, years later.
Ralph:
Annuities aren't inherently bad, but complex contracts combined with conflicting agents incentives.
Ralph:
Absolutely lead billions lost by consumers due to inappropriate recommendations.
Ralph:
So wisdom is vital.
Ralph:
When considering these vehicles, you got to know the pros and cons study all the fees charged and how they eat into returns, longterm.
Ralph:
And here's the truth folks vet any agent thoroughly before moving forward, taking time up front could spare you major disappointment later.
Ralph:
All right.
Ralph:
My friends let's do a quick recap today.
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We've covered what an annuity actually is.
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As we said, it's an insurance contract for guaranteed future payments.
Ralph:
We talked about benefits like lifelong income, death benefits and tax deferred growth.
Ralph:
We talked about those downsides, like high costs, low payout rates and confusing complexity.
Ralph:
We also discussed the best target buyers being recent retirees, and those who are conservative for protection of their investments And whether all annuities are scams.
Ralph:
No, but abuses absolutely do happen.
Ralph:
If you're considering an annuity weigh carefully, whether guaranteed income is truly worth reduced investment performance in the long run.
Ralph:
You've got to thoroughly analyze all fine print and fees and talk to an advisor, not being compensated for selling you that product.
Ralph:
annuities can be appropriate tools.
Ralph:
Sometimes I am truly not a big fan of these.
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And I'll tell you that's my bias ahead of time.
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But they require a much diligence given intricate trade-offs
Ralph:
As always, I appreciate you tuning into gain financial wisdom and discernment as faithful stewards, please visit askralphpodcast.com for more back episodes and handy resources.
Ralph:
Also share this show.
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On social media and other areas so that we, as Christians can make wise financial decisions and align money matters with our faith.
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And as I always say, stay savvy out there, my friends and saints.
Ralph:
And God bless you.
Outro:
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Outro:
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Outro:
The information contained in this episode of AskRalph is based on data available as of the date of its release.
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Sagio Accounting Plus and AskRalph Media Inc.
Outro:
is under no obligation to update this content if changes occur.
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Outro:
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