In this episode I talk about fixed index annuities and how I use them in my practice. Hopefully it gives you a little insight about them and maybe they are right for you?

If you're looking for a trusted source to help you stay on top of the ever-changing financial world of investing, retirement and estate planning, and asset protection, whether it's for you and your family or your small business, you're in the right place. This is the 1715 Treasure Coast Financial Wellness Podcast, where we'll keep you up to speed with the latest market news and conditions every week. Now here's your host, Thomas Davies. Hello and welcome to another edition of the 1715 Treasure Coast Financial Wellness Podcast.

My name is Thomas Davies. I'm a wealth advisor here in Stewart, Florida, and welcome. It's still hot. Man, that seems to be the topic right now.

Although here in Stewart, we had some rain today, so a high of only about 83 to 85. But man, it's been hot and it's interesting. Heart attacks rise significantly in this extreme heat. So if you're out there mowing the lawn or just out there playing golf, whatever it is you're doing, just hydrate, hydrate, man.

Be careful out there because it is more a significant risk. As it gets hotter, the heart attacks are on the rise. Some more news out here, Yosemite might bring back reservations at the park for those of you that are trying to jam in those last-minute vacations. Kind of interesting that I personally have never been out there, but now they're going to be relying on reservations.

So that's not the top news of the week. Let's talk about that big elephant in the room, Jerome Powell. Not that he's an elephant, but let's just talk about the interest rate raise. It's the highest rate raise in making it a 22-year high.

Central bankers will decide whether to keep raising rates based on how the economy fares in the months ahead and in quotes, with a particular focus on making progress on inflation, he said. So oops, he did it again, raised another 25 basis points. What does that mean to you? Well, it means credit cards are going up.

If you're going to go out and try to buy a car, it's going up. Mortgage rates will probably go up, and credit is starting to tighten in some sectors, although inflation is coming down. They may raise another quarter point. Some people will say that this is it and they're done, but certainly it's something to watch as credit starts to tighten and spending starts coming down.

Chipotle came out. Their stock's been falling about 8.2% after hours in trading this morning, and their rate causes inflation and labor. It's hard to find people out there to work, and things cost more, along with yellow trucking, who looks like they're going into bankruptcy as customers abandon the freight carrier amid a cash crunch and labor negotiations. For those of you that have watched some of the nightly news, everybody, not everybody, but a lot of corporations, not corporations, a lot of unions, excuse me, are going out there and striking.

We all heard about the Actors and Writers Guild out there striking. Now there's threat of the airlines, the stewardess, the pilots, and some of the unions across the country as things get more expensive and interest rates go up. These are some things that are going on right now. Facebook, aka Metta, came out with their earnings with a nice pop this morning, but they also warned about higher spending in the Mettaverse.

How many of you out there in the Mettaverse? I can tell you that my son, who plays a game called Rec Room, he'd be on it all day out there playing the game in the Mettaverse, in that virtual reality world. Kind of interesting and something to watch. So this week we are going to talk about annuities, specifically fixed indexed annuities, how they pay out, and what are the options that you have under them.

When you hear that word annuity, I want you to think of the word insurance, because these are insurance companies that are taking your money and either investing it or paying you out over a lifetime, and that's going to be the focus of this week, annuities. They can be really confusing. Once again, I'm going to focus this week on fixed indexed annuities. We're not going to talk about variable annuities, because in my practice here, I only use fixed indexed annuities.

That is what I prefer. This is just my opinion, but I feel that most insurance companies out there, guess what? They don't want to pay out. They want to take as much money in and pay out the least.

It's kind of what insurance companies do, right? Well, there are places for annuities in your asset allocation and inside your portfolio. So I'm going to talk about that and how I use them inside my portfolios that I manage and how we use them for the income portion of a portfolio. So annuities.

I can help you understand the different payout choices inside that fixed indexed annuity. You know, it can be an attractive retirement savings vehicle that you can use to get payments for life. It's something that you can use, that you're going to give an insurance company your money, and then they're going to pay you out over a lifetime. That is one of the payouts that's available, is getting income for life.

The ones that I like to use, generally there is no risk to principle. You do have to understand that the risk is inside the insurance company, meaning that your money is at risk and it's only as good as the insurance company. So if you're looking at buying an annuity, you want to make sure that the insurance company is solid and rated, and that your money is only as good as the insurance company, because they're the ones who are going to be paying you out. So one of the options is to receive lifetime income.

In particular, I had a recent case where this person had a million dollars and they wanted to receive income for life. Well, that income for life for this particular person was $88,000 a year, actually it was per year for the rest of their life. And you say, well, how does that work? Well, the money gets invested in the S&P, just like the S&P, it can go up and go down.

But your principle is never at risk, meaning you can never lose principle if the market goes down. Now the bad side to that is you don't make any money that year, because the market went down. But you're still receiving that income, and that income is coming out of your principle. And once that principle runs out, usually after about 10 to 15 years, depending on your age, depending on the rate, depending on how much income you're withdrawing from that annuity, it's going to run out at some point.

And then the insurance company continues paying you that income for life. That is how I use the fixed index annuity. There is another way that I like to use it, and those are for people who are risk averse. They say, you know what, I don't want to go into the markets, I don't want to do anything with the stock market, but I know I need to get my money to grow.

So another way we utilize it is we do what's called a cap rate. And they're able to invest, and most recently, I'll give you a real world example, had someone come in, very risk averse, very conservative, but they know they can't put their money under the mattress. You know, you'll get eaten up by inflation. So this particular person, we put them in a fixed indexed annuity, they were conservative, and the way that this works is, once again, your principal is guaranteed, it can only go up, principal's guaranteed by the insurance company, remember that, it's only as good as the insurance company, and they're at a cap, and the cap rate was 7%.

So the most that they can make is 7% a year on their money. So if the market goes up even a fraction of a percent, they're going to make 7%. It's called a performance trigger. This is one of the options that's inside the annuity.

And if the market goes down, they don't lose a dime. It's that simple. It goes up, you make money, it goes down, you don't lose any money. And they like that.

The conservative person likes that. Now, this is an alternative to a CD, where a CD is going to play you a flat rate over a course of a year, let's say a one-year CD or a six-month CD, generally to get the best terms and annuities, it's the long-term contracts. Contracts can be 5, 7, and 10 years. The 10-year contract is going to get you generally the most favorable types of returns and triggers and things that are inside that annuity.

So this particular person did a 10-year contract, and they're going to be happy. If you look at the course over the last 10 years in the market, the S&P 500, you're going to get maybe 2, 3, maybe 4 down years, but generally you're not going to get 10 down years in a row. So you're going to make some money over the course of 10 years. One of the things that is always brought to my attention is that those fixed rates, those cap rates, can go down.

Generally they don't go down on enforced contracts, but it is a possibility that they can reduce those cap rates. If you have several years of down markets, I would have to understand that they would make adjustments. But my understanding is that even in the down markets, that most of these insurance companies have never reduced their rates on enforced contracts. So that's important to remember, and that's important to ask too.

So why do you want to buy annuity? Is it something that you put all of your money in? No, absolutely not. You can do a portion of it.

You can actually ladder an annuity. You could buy a couple different annuities with different settlements. You could do a 5-year, you could do a 10-year. Let's say 6 months from now you do one in 6 months, you do another one 6 months from now using a portion of your money, maybe with different carriers, different insurance carriers.

There's that word insurance again, because that's what it is. So if you hear that word annuity, you have to understand it's insurance, and you're insuring your money. It is not a growth story. It is an income story.

I like to use annuities for income, not for growth. I think there's better ways to grow your money in the market, whether that's investing in ETFs or stocks, inside those areas of investment, other than investing in an annuity or an insurance contract. Now, I know there's a lot of insurance guys and gals out there that will argue that the best way to invest your money is in life insurance, or some type of insurance, or all of an annuity. The old saying is, you don't put all your eggs in one basket, and you want to diversify your portfolio, and diversification is the most important thing that you can do in your portfolio is to be diversified, and that includes with your income.

So once again, I like to use the fixed index annuities for income for life. It's a payout for the rest of your life. A lot of people my age and younger, they have no such thing as pensions. Pensions have gone away.

They're gone. So you have to try to make some type of income for yourself, and the annuity will replace that income portion of your portfolio, and it's a way to do it, so you can check the box. You can check that income box. You don't have to worry about it.

Hopefully you'll be able to put enough money in there to check the box in income and make it so that your needs are covered first. Then you can worry about growth. Then you can worry about estate planning. Then you can worry about being philanthropic and giving your money away at the end, but let's make sure that the income portion of your portfolio is enough to cover everything that you're going to need.

This is one of the ways that I like to do it in my practice, is using that fixed index annuity and utilizing the income for life. Now, there's a lot of strategies to getting income. Another real-world client I had today, we basically got income through ETFs, and we averaged about 10.3% on that portfolio. It does put the principal at risk, unlike an annuity, but this particular person is okay with that.

Their portfolio right now is full of risk, and we're actually de-risking it by getting a better asset allocation inside the portfolio, but through high yield, through corporate bonds, all ETFs, and this fixed income, this person was getting about 3.5%, averaged a couple other things in the portfolio, about 4%, and we're going to crank that up to about 10.3%, and that income won't change, and they actually will be able to make some money on the growth side, and they're not capped. There's another way to make income in your portfolio. There's a lot of ways to do it. It's really finding the right way for you, and once again, this is really about annuities, and I hear it all the time, people putting all their money inside annuities, and it's just not the right thing to do.

You don't want to give all your money to one insurance carrier. There is too much risk in that. If you just want annuities, that's fine. That's great.

My recommendation is to do it with multiple carriers. Buy different annuities from different companies. So if you've got a million dollars, maybe you want to break that up into five annuity companies or three or two, not to get too complicated, but you definitely want to break that up. So hopefully that helps a little bit.

This was about fixed indexed annuities. Once again, that's how I like to use them in my practice. If you have questions about it, give me a call or drop me an email. I'll be glad to answer your emails or phone calls.

They can be very complex. I don't like variable annuities. I think there's too much sizzle in there rather than the stake, so to speak, and there's just too much devil in the details. A lot of times they end up charging you 3%, 4%, and they promise you 6%, 7%, 8%, 11%, whatever it is.

You got to look and see how much they're charging you to make money, and a lot of times it comes down to like you're only making 4% or 5% after all the charges inside the portfolio. So that's why I like fixed index annuities. It's very simple. You can never lose.

You can only go up. You're capped at a certain rate, whatever that rate is. The other side of it is income for life. You're going to draw money.

There's going to be a particular interest rate for the rest of your life, and that's it. It's that simple. You just collect a check for the rest of your life, and that's going to be it for today. Thanks for listening.

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