What is an Indexed Annuity?

[@craigbutcher8079]

Everything presented here took about 20 minutes and I didn't learn anything really new -- but it has taken me the last three years to learn what you presented in less than half an hour. Even so your presentation was still the best 20 minutes of those three or more years spent on this subject because it confirmed that what I thought I knew (from talking to our financial advisors who sold us some annuities as part of our bucket strategy, reading about them online and in books, and above all reading the contracts themselves and modeling the expected payouts in our 30 year retirement plan). It turns out our advisors did with annuities what I would have wanted them to do if at the outset I had known enough to ask for it. And our advisors do spend a lot of time explaining to their clients what the products are and how they fit in the plan -- but again, your explanations are the best.

[@timlambert2548]

You’re awesome man. You are so helpful to this old carpenter.

[@RetirementPlanningEducation]

Thank you! I'm glad you found it helpful. I'm a fellow carpenter as well: www.pankowoodworks.com

[@Palmafricana]

Very clear and informative! Thank you Andy👍🏻👍🏻

[@amardeepchawla4052]

A great explanation. Thanks for doing this. People are so easily fooled by the agents selling them. 👍

[@annjean8709]

Great tutorial video! Thank you for sharing.

[@RetirementPlanningEducation]

I'm glad you liked it, thanks! I'll be doing a much deeper dive into indexed annuities later this month in one of my Facebook live videos. I'll save up the replay here.

[@R.and.R.]

This is extremely helpful. Thanks Andy!

[@RetirementPlanningEducation]

Thank you!

[@R.and.R.]

@@RetirementPlanningEducation Andy, have you ever done a video about the fixed annuities that are kind of like a CD but issued by an insurance company?

[@RetirementPlanningEducation]

@@R.and.R. No, I haven't, but I can give you the rundown now. They're called Multi-Year Guaranteed Annuities, or MYGAs. It's functionally like a CD in that you give money to an insurance company for a pre-agreed amount of time (like 3 years, 5 years, etc.) and they agree to pay you a guaranteed rate of interest over that time. At the end of the contract, you get your principal back plus the guaranteed interest. That's it in a nutshell. However, there are a few big caveats with these that make them noticeably more restrictive than CDs: they will have formal surrender penalties such that if you close out your contract or remove more than 10% of it per year prematurely, they will charge you a surrender penalty. And that penalty will eat into your principals (whereas with CDs, even if you terminate them early, you will never get back less than your principal; the penalty for CDs is only to take away some of the interest you otherwise would have received). The other big caveat is if you'll be under 59 1/2 when the MYGA contract matures. If you'll be under 59 1/2 when you cash it out, you'll have to pay a 10% penalty on the interest (in addition to paying tax on the interest). If you're under 59 1/2 and want to avoid the penalty, you'll have to roll your MYGA into another annuity. As such, MYGAs aren't really replacements for CDs if you're under 59 1/2 and plan on needing the money at the end of the contract term. The big upside of MYGAs is the interest they pay is noticeably higher than interest rates on CDs. But the interest still likely won't keep up with inflation. For example, interest on a 3 year MYGA now is probably under 2% per year. Maybe upwards of 3% on a 5 year MYGA. It all depends on the particular insurer and what their credit ratings are. The lower rated insurers (which you should probably avoid) typically pay higher interest to entice people to overlook their weaker credit ratings.

[@R.and.R.]

@@RetirementPlanningEducation Very helpful information. Thanks! Is there any way to annuitize those or would the yearly withdrawal feature serve that purpose?

[@RetirementPlanningEducation]

@@R.and.R. I don't know this for certain, but I believe most (all?) MYGAs simply wrap up and they're over; I don't think they have any built-in annuitization feature. Or at least, I don't think they allow you to annuitize while you're still in the middle of the contract. However, once the contract matures, you're free to do whatever you want with the proceeds. And that includes buying a traditional immediate annuity. As such, you can choose to annuitize your money AFTER the MYGAs matures. But I don't think you can typically do it while the MYGA is still in force.

[@viviangary6317]

This video was so helpful thank you. I learned so much!

[@R.and.R.]

Excellent presentation. Can I assume that a fee-only CFP who pushes a product like this is getting paid a commission by the insurance company?Would that be a conflict of interest? Thanks!

[@RetirementPlanningEducation]

Anyone who calls himself or herself "fee-only" is not able to earn any sort of commissions...period. If they're truly fee-only, there will be no sort of compensation or kickback or commission for having you buy an annuity they recommend. Or, maybe they're saying they're fee-only and aren't. It's definitely worth asking them very bluntly if they will receive any sort of compensation or commission related to you buying the product. Separately, there are an increasing number of "fee-only" annuities where the advisor who recommends them doesn't get any commission. However, that advisor is often able to deduct an ongoing fee from the value of the annuity. Similar to how most advisors' fee is a percentage of your investable assets they manage. They can also take that percentage out of the annuity contract value each year. That's another question to ask; will they be deducting any fees from the annuity after its purchase.

[@R.and.R.]

@@RetirementPlanningEducation Thanks Andy!

[@jonasbayaniesteves7516]

Thank you. Great Explanation

[@RetirementPlanningEducation]

thank you!

[@jessefletcher9116]

very helpful, do you have a video that explains structured notes? They sound very similar to annuities in that they can limit both the upside and the downside risk (for a price).

[@enriquegil1413]

Excellentl information, thank you

[@quitefrankly6815]

Thank you very much! Excellent!

[@ucduong8703]

Thank you for clear explanation

[@yoginderchugh9150]

Exceptional information. keep up the good work! I do have a question though. How would you compare Indexed Universal Life with Indexed Annuity? Will appreciate a response.

[@RetirementPlanningEducation]

I'm glad you like it, thanks! IULs and indexed annuities are very different products. The common denominator is with regards to how they earn interest; in both cases, the interest is "indexed" such that it can't be less than zero and is indexed off of the returns of some financial index. But otherwise, they're quite different. IUL is first and foremost life insurance; not a traditional investment. It rightly has costs and fees associated with the life insurance aspect. Therefore, some of each of your payments goes to pay for those things. Only the remainder of your premium payment goes into the "cash value" feature of the policy. And it's that cash value feature that earns the interest from indexing. Whereas with an annuity, it's more closer to a traditional investment in that all of the money you put it actually gets interest since there isn't also the life insurance component to have to pay for. But there could potentially be fees for riders, and those will get deducted from the contract's value. Not a clean answer, I know. But IUL and indexed annuities are functionally very different overall and serve different purposes.

[@franciscagonzalez6105]

Well explained. Thanks

[@scottprice4813]

Correct me if I’m wrong but all insurance products are reverse engineered with the actuaries basically telling the marketing guys how it is . There is no miracle return from any annuity product because the insurance company has already baked in their return requirements ahead of the policy holder . So all the brochures and benefit bases simply harken back to the mortality tables and the fact you are getting your money back first before you see a penny of the insurance company’s money. Then you look at the fees for the income rider and a pay table that is probably worse than a plain vanilla income annuity and you really have to give these insurance companies a hand!

[@RetirementPlanningEducation]

Yes, regarding the annuity payouts and different ways in which the contract holder can choose to receive payments, they’re all actuarially equivalent, and there is no free lunch for the contract holder. So then only real way (other than when someone dies) in which the results may substantially vary is in the way in which deferred annuities receive interest, and how much investment risk the contract holder is responsible for. Such as in the case of a variable annuity, where the contract holder is responsible for shouldering basically all of the risk. If those investments happen to do really well, the contract holder will have better than expected payment results. And vice versa.

[@Dajen_Tk]

Great video!

[@RetirementPlanningEducation]

thank you!

[@stevesolbakken6365]

If I put $100K in an income annuity is the annual interest computed on the $100 K every year or is it computed on the balance after withdrawals? For example, if I withdraw $2k/month is the interest computed on $100K or $76K?

[@MOBU76]

Which annuity would you recommend for lottery winners with no beneficiaries ( children). Lets say i won $7 mil and i want to invest $5 mil into annuity to collect income for the rest of my life

[@RetirementPlanningEducation]

Sorry, but I can't give any specific product recommendations. But, if you win a large lottery, check to see if you can get payments via an annual payment option instead of lump sum. And then compare that annual payout rate vs what it would be if you instead took the lump sum and bought a private annuity through an insurance company. Maybe you ultimately could get a better annual payout by taking the lottery winnings as a annual payments instead of a lump sum???

[@brocklanders6969]

Deferred Income or Immediate Annuity from an A++ rated insurer like NY Life, MassMutual or The Guardian.

[@JoeC5050]

for non qualified index annuity, can we just pay surrender charges and close out (before 59 1/2 age) without IRS penalty , if no growth happened? Means 100K remained at 100K in 3 years.

[@RetirementPlanningEducation]

If the surrender value is not more than what you paid into it, I don't believe there would be any 10% early withdrawal penalty. But confirm that with the insurance company.

[@JoeC5050]

@@RetirementPlanningEducation thanks..logically makes sense since there is no growth.. Surrender value is less than what I paid because of charges. But insurance company wont give info as they say contact your CPA. 2.5yrs over, no growth in my annuity. Horrible product (atleast in my case).

[@frankkeel8410]

What is taxed the interest only or the whole RMD

[@RetirementPlanningEducation]

If it's a "qualified" annuity (that was purchased with pre-tax IRA money), all amounts eventually received from the annuity are fully taxable as ordinary income. If it's a "non-qualified" annuity (meaning it was bought with normal non-IRA money), it gets trickier. Generally speaking, a portion of each amount taken out is a tax-free return of your original principal, and a portion is taxable is treated as interest and taxed as ordinary income.

[@Beadgcfb]

What happens at death of the owner?

[@RetirementPlanningEducation]

Depends on the annuity and what kind, if any, of death guarantees they purchased. In the absence of any added on "rider" to ensure a certain amount of death value, the person's beneficiaries will get whatever contract value there is, if any, when the person dies. The longer the person lives, the less contract value there will be. And if they live beyond roughly average life expectancy, assume their contract value will have been depleted by then (if they purchased the guaranteed withdrawal rider, they'll get the lifetime payments as long as they life, even if the contract value depletes. But once they die, those payments stop)

[@thewolfhunter]

I'm 55 and If I put $750K from a lottery win in a index annuity Can I 1- Start receiving monthly payments now? 2-Will it last me the rest of my life? 3- What rate would I get? 4- How much would I get a month? 5-What do I have to pay taxes on? Thanks

[@RetirementPlanningEducation]

The answer to all of those questions is, "it depends." There are infinite combinations of bells and whistles across different insurers' various indexed annuity offerings. It's impossible to answer any of those questions without getting a quote or illustration/projection from a specific product.

[@JOTAERRE1MILLION]

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