Is Now the Time for Fixed Index Annuities?

Summary

Episode Summary: "Is Now the Time for Fixed Index Annuities?"

Podcast: Jill on Money with Jill Schlesinger
Host/Author: Audacy
Episode Title: Is Now the Time for Fixed Index Annuities?
Release Date: February 19, 2025

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Introduction

In this episode of Jill on Money with Jill Schlesinger, host Jill Schlesinger, accompanied by co-host Mark, delves into the topic of fixed index annuities—a financial product often marketed as a safe investment option for retirees. The episode features a real-life listener call from Derek, a Maryland resident approaching retirement, who seeks advice on whether fixed index annuities are a suitable choice for his retirement planning.

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Listener Call-In: Derek’s Retirement Planning Dilemma

Timestamp: [03:01]

Derek initiates the conversation by sharing his current financial situation and impending retirement plans:

• Age: Derek is 60, and his wife will turn 56 in May.
• Retirement Timeline: Derek plans to retire in two years, while his wife intends to stop working this year.
• Income: Together, they earn approximately $225,000 annually ($185,000 for Derek and $24,000 for his wife), plus $15,000 in inherited Required Minimum Distributions (RMDs).

Derek explains that they have been proactive in saving and investing, accumulating nearly $4 million in retirement accounts, including IRAs, Thrift Savings Plans (TSP), and individual stock holdings. They also own a home valued at $640,000, which will be paid off shortly.

Quote:
Derek [05:07]: "Everything for both of us is almost 4 million. 3.96 million as of last weekend."

He expresses his intention to engage in Roth conversions and seeks a second opinion after finding that his current financial advisor is recommending strategies he’s uncomfortable with, particularly the suggestion to allocate 30% of his portfolio into fixed index annuities.

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Analyzing Derek’s Financial Position

Timestamp: [04:37] - [06:37]

Mark meticulously reviews Derek’s financials:

• Retirement Accounts: Nearly $4 million, split between traditional and Roth accounts (10% Roth, 90% traditional).
• Investment Approach: Derek has individual stocks valued at $150,000 and maintains $70,000 in savings and another $70,000 in Certificates of Deposit (CDs).
• Pension: Derek will receive a $45,000 annual pension starting at age 62.
• Assets: Fully paid-off home, no rental properties, and financially independent children.

Mark acknowledges Derek's impressive financial standing, highlighting that with a diversified portfolio and substantial savings, Derek and his wife are well-prepared for retirement.

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Evaluating the Advisor’s Recommendation: Fixed Index Annuities

Timestamp: [07:50] - [15:20]

Derek recounts his advisor’s recommendation to allocate 30% of his portfolio into fixed index annuities, which are marketed as low-risk income-generating investments tied to the S&P 500 with a potential 4% return.

Derek:
[08:09]: "He is suggesting for the safe, protected guaranteed income side that I look into some fixed income annuities which I’d always heard weren’t a good idea. But I was open-minded so I figured I would listen to him."

Mark responds by expressing skepticism about the suitability of annuities for Derek's situation. He argues that Derek’s substantial savings and diversified investments already provide sufficient security and that fixed index annuities may be unnecessary.

Mark’s Key Points:

1. Financial Robustness: Derek's $4 million portfolio, combined with a substantial pension and Social Security benefits, negates the need for additional safety nets like annuities.

2. Flexibility and Control: Mark emphasizes the advantage of managing investments independently, suggesting that Derek could optimize his portfolio without the constraints of annuity products.

3. Tax Efficiency: He advises on strategic Roth conversions and efficient withdrawal strategies to minimize tax liabilities, leveraging Derek’s ability to convert funds without the immediate need for guaranteed income.

4. Alternative Strategies: Instead of fixed index annuities, Mark recommends:

   • Utilizing the G Fund within the TSP for safer investments.
   • Maintaining a balanced allocation with a majority in index funds tailored to Derek’s risk tolerance.
   • Considering intermediate-term bond funds or creating a bond ladder for the conservative portion of the portfolio.

Notable Quote:
Mark [10:50]: "I don't think that an annuity is solving a problem that I do not think presents for you and your family, Derek."

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Conclusion and Final Recommendations

Timestamp: [15:20] - [17:15]

Mark concludes the discussion by reinforcing his stance that fixed index annuities are unnecessary for Derek’s financial situation. He highlights Derek's strong investment portfolio, pension, and future Social Security benefits as ample resources to cover retirement needs without locking funds into annuities.

Key Takeaways:

• Avoiding Unnecessary Products: Given Derek's substantial savings and investment acumen, additional products like fixed index annuities may not provide meaningful benefits and could limit investment flexibility.

• Customized Financial Planning: Mark underscores the importance of personalized financial strategies that align with individual goals and risk tolerance, rather than relying on generalized financial products.

• Empowerment Through Knowledge: By questioning his advisor’s recommendations and seeking a second opinion, Derek exemplifies proactive financial management, ensuring his retirement plan remains aligned with his personal financial landscape.

Final Advice by Mark:

• Maximize Existing Resources: Leverage the existing diversified portfolio and pension to generate the necessary retirement income.
• Strategic Withdrawals and Conversions: Implement efficient withdrawal strategies and Roth conversions to optimize tax outcomes.
• Future-Proofing: Remain adaptable to future financial needs and market conditions without being constrained by fixed income products like annuities.

Quote:
Mark [16:11]: "I think that annuities are solving a problem that I do not think presents for you and your family, Derek."

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Episode Insights

This episode underscores the importance of personalized financial planning and the critical evaluation of financial products. It serves as a reminder that investment decisions should be tailored to individual circumstances, and that high-net-worth individuals like Derek may not benefit from standardized financial products such as fixed index annuities. Instead, strategic management of existing diversified investment portfolios can provide sufficient security and income in retirement.

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Related Resources

For more tailored financial advice and insights, listeners are encouraged to visit jillonmoney.com, subscribe to the free weekly newsletter, and explore additional resources such as the Fundrise Flagship Real Estate Fund for diversified real estate investments.

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This summary aims to provide a comprehensive overview of the episode’s key discussions, offering actionable insights for individuals considering similar financial decisions.

Transcript

[Jill Schlesinger]

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[Mark]

Welcome to the Jill on Money Show. It's Wednesday, February 19th and we are here trying to help you make better financial decisions. Maybe just kind of bring down the pressure a little bit. So many of you, you put so much pressure on yourselves. Come on, we can get through this together. So anything that's going on for you, whether it's just another set of ears and eyes on a situation or maybe a big decision that is con you're confronting right now, give us a holler. Go to jill on money.com click the contact Us button, write us a note and if you want to join us live on the Air.

[Jill Schlesinger]

Check the box.

[Mark]

We'll do everything else. When I say we. Mark. Mark will do everything else. I don't do much here except talk while you're on the website, don't forget there's so much stuff there. We have another show. We've got a radio show. We've got videos, we've got resources. And we of course have the free weekly newsletter comes out every single Friday. So check it out. Today we are joined by listener Derek. He is on the line from Maryland. Hello, Derek. What can we do for you?

[Derek]

Well, I had a few questions. I just recently turned 60 and my wife will turn 56 in May. And we're getting close to retirement. I plan on retiring in two years. She's going to stop working this year. She works at a school and she's ready to take a break, maybe do some other things. So we. I started thinking I probably want to start doing Roth conversions and want to kind of figure out to plan ahead for when I do retire in two years. So we've been looking for some financial advisors. I found a fee only advisor who says he's a fiduciary. Met with him a few times and he's suggesting some things that I didn't think I'd want to do. So I'm seeking some other advice.

[Mark]

Okay, that sounds good. So, Derek, how much do you earn right now?

[Derek]

Right now combined with everything, about 225,000 a year.

[Mark]

That means both of you together or.

[Derek]

Yeah, that's both of us. It's 185 about for me, she's about 24 and then I have 15,000 a year in inherited RMDs.

[Mark]

Okay, great. When she's going to retire? At the end of the academic year.

[Derek]

Correct.

[Mark]

Okay. So will she be entitled to a pension?

[Derek]

She will. She won't be eligible for it until she's 65 and it's very small. It's going to be like $200 a month.

[Mark]

But yeah, so that's like a coffee budget, right? Okay, maybe not even. Perhaps. Okay. And so let's talk a little bit about the money you guys have salted away in your career. So what's in. Let's talk retirement first. So she'll have a pension. Does she also have a 403B or. Or some other vehicle?

[Derek]

We. We both have IRAs. And I have TSP and IRAs.

[Mark]

Are you a federal worker?

[Derek]

I have been for the last 20 years. Prior to that I was other places, but yes. So I have a pension and I have TSP and then we both have IRAs.

[Mark]

Okay. What's your pension amount?

[Derek]

In two years, when I'm 62, it'll be 45,000 a year.

[Mark]

That's more like it. Okay, how much money do you have in the retirement accounts in the TSP right now?

[Derek]

TSP or everything.

[Mark]

You could give me everything. Whatever you want.

[Derek]

Everything for both of. This is almost 4 million. 3, 3.96 million as of last weekend.

[Mark]

I'm gonna call it 4 million because I can. That's awesome. Congratulations.

[Derek]

Thanks.

[Mark]

Well done. How'd you get all that money? What'd you do? What's the key? What's the secret to your success?

[Derek]

We just started saving and doing the matches right when we both started, and it just built up over time.

[Mark]

Amazing. Is that 4 million all pre tax, meaning traditional retirement?

[Derek]

It's about 10% Roth and 90% traditional.

[Mark]

Okay.

[Derek]

I've been doing some. I've been adding to Roth the past few years and I've been doing some conversions the past few years.

[Mark]

Do you have a brokerage account as well?

[Derek]

I have some individual stocks, yes. About 150,000 of individual stocks in Schwab.

[Mark]

Okay, and what about money in the bank? Like, just boring. Cash savings.

[Derek]

We've got about $70,000 in savings and about $70,000 in CDs.

[Mark]

Okay, that's great. You guys own your home?

[Derek]

Yes, it's valued about 640,000 and it will be paid off next month in March.

[Mark]

Are you gonna have some sort of party?

[Derek]

I don't know. We haven't thought about that.

[Mark]

I mean, when you pay off a house, it must be like great relief. It's fabulous. Grown kids?

[Derek]

Yes, both are grown, finished college, no debt, and have full time jobs.

[Mark]

So you don't support them at all right now?

[Derek]

No.

[Mark]

Great. Any other assets like a rental home or anything like that?

[Derek]

No, that's. That's everything.

[Mark]

You ready for the magic question? Prepare. Prepare yourself. My friend Derek in Maryland, how much money do we need to generate for you to be able to live your lives when you retire?

[Derek]

In two years, I'm shooting for say 8,000amonth.

[Mark]

Okay. When you look ahead, what was your game plan around Social Security?

[Derek]

Probably 70, but you know, I'll. I'll see what whoever I'm working with at the time said. Definitely not 62. So either 67 or 70.

[Mark]

Do you know what the benefit is at 70?

[Derek]

I do. Want mine or mine or my wife's? Or both?

[Mark]

I'll take both.

[Derek]

Okay, 70. I am $5,004 and she is 24. 54 okay.

[Mark]

So I mean do you think that after you're done in two years, do you think there's any part time income that you're going to think about or not?

[Derek]

I don't think so.

[Mark]

Okay.

[Derek]

Unless I need to. But my preference would be not.

[Mark]

Okay. I'm with you, man. You worked hard, you've earned it. So you meet with an advisor. What are they telling you to do?

[Derek]

We talked about it and he's. He focused on protect a risky area which. And the other thing I want to mention is I didn't, I wanted to still manage my own funds. So they're all in Fidelity and T row Price and I kind of like doing that and I want to still do that. So we're going to keep 70% in funds, probably index funds.

[Mark]

Right.

[Derek]

And. But he wants to have a protected area that he is suggesting 30%. And I did say I'm kind of on the aggressive side. Plus with the pension, I'm more having a little more in stocks as long as no one balks too much at it. So he is suggesting for the safe, protected guaranteed income side that I look into some fixed income annuities which I'd always heard weren't a good idea. But I was open minded so I figured I would listen to him.

[Mark]

Okay. Is he saying okay? I thought he was going to say something different, which is funny. So in the thrift savings plan, he's not saying that you should use for the fixed account that you should use like the G fund, or is he?

[Derek]

We haven't gotten that far. I asked that. I said, you know, wouldn't. Why wouldn't I just. You have the G fund with this 30% and withdrawal from that and supplement that as the stock market's doing well. And he said you could, but he seemed to think I would do better and it would potentially grow more in these equities.

[Mark]

Uh, interesting.

[Derek]

And be safer.

[Mark]

Yeah, I mean I, I understand wanting to sort of lock it down, but it sounds like you feel very comfortable with risk. I'm not saying you're willing to like roll the dice on 4 million bucks, but it does sound like comfortable with risk.

[Derek]

I'm comfortable with risk, but I like knowing I have safe income. I don't want to risk the end part.

[Mark]

Yeah, yeah, yeah. And is he suggesting that you buy one of these low cost annuities, like income annuities, like through. I don't know what he pro. He probably wouldn't sell it to you or is he suggesting he would sell it to you?

[Derek]

He's not tied to any of these insurance companies. He just looks into it and finds what he thinks the best options are. He looks at the ones that are a plus and been around for a while. So he's actually suggested three different ones for me and two of them for my wife. Kind of broken up. No.

[Mark]

I don't know. I'm not into this.

No way.

No way. So here's what I think. I don't think that this is like some sort of malpractice, but I think he's not reading who you are and that's just me. First of all, you're young to start tying up money and annuities. It would be one thing if you were like, oh, like I have one part of my fund that I really want to keep. Pretty boring. That's fine. But it seems to me you've got 4 million bucks. Right. I think that you'll have this unique opportunity which is from 62 to 70. Right. We will need to take money out of your pre tax accounts. You don't even have to convert so much, but you are going to have to. You know, we got to get the eight grand a month. Right?

[Derek]

Right.

[Mark]

So it's not eight grand then because it's eight grand less your 45 grand a year. Right. Because you get, you are going to, you're going to pull the trigger on the pension and so you're going to take out. I don't know, let's see. I'm just going to look here, I want to look at my brackets for a second. So you've pretty much been in the 22% ish bracket.

[Derek]

Yeah.

[Mark]

Okay. You start taking money out of your pre tax plan. Okay. Between the two of you figure out which account to take it out and just take up to the 200,000 or so. That's at the top of that 22% bracket. Just take it out and live on that. That's fine. It'll probably be more than you need to live on because you know you will have the 45 grand a year. But, but it's one, it's sort of a, a different way to get money out without necessarily converting it. I, I, you know, like, and build ups a little bit more. You know that brokerage account, that Schwab account, which, with individual stocks, that should be more of like a way for you to access funds that you need and like start building that up a little bit with not just individual stocks. Right. You can add some ETFs. You're comfortable investing. So I don't think this is a big problem. Now, let's say, you know, you're 60, 63, 64, 65 years old. We got to see where tax rates are, right? And then maybe you see, like, hey, you know what? Maybe I'll convert more aggressively from age 65 to 75. Maybe I'll just start taking money on. Maybe instead. Maybe I don't need all this money. Maybe I'll. Wait a sec. But up until that 70, you know, you'll have a little flexibility just to see how you're doing. I want to just make sure it is eight grand a month that you need. It's not ten grand a month. But you have plenty of money. You're not going to run out of money. Okay? So that's number one. So the most important thing is, bully for you. You've saved a ton of money. You're not going to run out of money. You can do some combination of converting a little bit, using the money to live on. Then at age 70, you've got your Social Security. You're going to barely need to do much more. You know, you'll have your Social Security, you'll have your pension. You'll have money. You'll have money. And then the question really becomes, you know, if the money in the brokerage account has built up and you. You're willing to sell some of the individual stocks. Maybe, maybe not. We'll see. And then you will try to really start to attack the traditional part of your portfolio and convert it before you have to start taking it out at age 75. But you're in such good shape, I don't think you need an annuity. You see, the thing is annuity, okay? If you are, like, freaking out and you're like, I need consistent income and I must have, like, something that spits the money out, that's one thing. I don't think that's what you're saying. I do think you have to be more careful about how you invest and the thrift savings plan. The G Fund is a very good fund.

[Derek]

Okay, so you would suggest maybe putting more in the G Fund. And how much is it?

[Mark]

What's. What's the breakdown of your TSP right now?

[Jill Schlesinger]

What.

[Mark]

How much is in, like, the C fund versus the G Fund?

[Derek]

It's a. I have it set up at the target, so I don't recall what the 2040 target date is. I. I don't have.

[Mark]

Okay, it's probably fine. But you can roll. You can sort of keep more in that G Fund. And when you retire, you don't have to take. You don't have to roll this over. You can keep it there. I think you can achieve your objective with an allocation that will generate a little more safety for you. Not every single year, but you have more than enough money. You can ride anything else out that you. That a terrible year. You. Let's say you're 64 years old and the market is collapsing. Collapsing. It doesn't matter. You can ride anything out.

[Derek]

Okay.

[Mark]

I don't think that there's anything that could happen to you guys that would, like, derail you. Sometimes I think people want to solve a problem, but there, but there's not a problem. Like, I don't think there's a problem here. I really don't. And I think that if you were, if you were really skittish and you came in presenting as a skittish person who really wanted to have something to be safe. Yeah, sure. But I don't think that's how you're presenting. And so I don't.

[Derek]

For the 30. For the 30%. If I, you know, if I wanted to put that in a protected area, would that, Would that be the G fund or other.

[Mark]

Probably better.

[Derek]

Okay.

[Mark]

I mean, like, you, like you could go to a T row price. You could have an intermediate term bond fund, you know, you could make. You could build your own bond ladder if you wanted to. But like, I don't think it's that complicated. Mark, I'm just going to bring you back in here. Do you think that there's any complicating issue here that would suggest annuities?

Not one annuity, let alone five annuities.

[Derek]

No.

[Mark]

I mean, they've got $4 million. Ignoring all the other stuff, their investments alone. It's going to cover their monthly need come retirement. Then you add on a nice pension, Social Security. No, no, no, no, no.

I don't think so.

And I think Derek knew the answer to this because, you know, he was like, what's up with this? And he called.

[Derek]

Yeah, I questioned a lot and I've been reading about it and I'm kind of hearing the same thing. You are sense. But, you know, they're not always bad, but it's not always the answer.

[Jill Schlesinger]

Yeah.

[Mark]

And I especially think because he's saying he wants like an index annuity, Right. Or does he want an income annuity? He has one that's tied to the s and P500.

[Derek]

Tied to the S and P. Worst case is it doesn't lose anything. But it's more like it's most Likely to make. He said 4%.

[Mark]

I'll tell you what, I'm putting a thumbs down on this.

[Derek]

Okay.

[Mark]

I don't like it.

[Derek]

That's what I thought. I just wanted to confirm.

[Mark]

I'm glad you called. I'm glad you called. I am, because I. Yeah. And I think you guys are in great shape. I think the most important thing for you in terms of, like, if you want to manage the money yourself, the real question to solve is, do I have enough money to get where I want to go with a reasonable amount of risk? Right. And the answer is yes. And I'm sure he gave you that answer. Right.

[Derek]

Right.

[Mark]

So that's the most important thing. Okay, great. From there, it's like, okay, how can I be a little bit more efficient? How do I get some of this money out of my traditional account so that I don't get slammed with required minimum distributions? Okay. So we can do that. You'll be able to do that. And look, you said you have two kids. I don't know if they're married, if they have kids. There's a lot of things that you'll be able to do down the road. Even if you had required minimum distributions, you perhaps could potentially send those over to a qualified charitable distribution or you could give some stocks away. There's a lot of things you can do, but I think that annuity is solving a problem that I do not think presents for you and your family, Derek.

[Derek]

Okay. Thank you.

[Jill Schlesinger]

Good.

[Mark]

Okay.

[Derek]

This was very helpful.

[Mark]

Oh, so good. Do you. Do you have your estate docs done? Everything good?

[Derek]

Yeah.

[Mark]

All right. All right. Excellent. All right. If you have a question, have you talked to an advisor, somebody who is a fiduciary? I didn't say all fiduciaries are great advisors. I just said that's the, like, the minimum that I want to give. Get. Give us a holler. Go to Jill Money dot com, click the contact us button, and let us know if we can help you out. Write us a note, check the box, all that right there. You can subscribe to us on the Odyssey app or wherever you find your favorite podcast. Please put your hands, metaphorically, on someone's back. Change your work, Change your wealth. Change your life. Thanks for listening, gang. We'll talk to you tomorrow.

[Jill Schlesinger]

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