Selling Fear

SPEAKER_00 0:08

Your guns to a really great financial future. Tom and Don are talking real money.

SPEAKER_05 0:14

It's a fact. We hate the way annuities are sold to you. We we may hate most annuities, but what we really despise is the way they're sold, the way they're pitched, the things that you think annuities can magically do for you that they really can't do, but they help facilitate the sale, which gets a commission into the hands of the people who sell them. And so today we want to go back to the land of annuities because they are being sold in such mammoth numbers now that the baby boomers are old. We're buying tons of these things because they appear to give us things that you really can't have, but you want so badly. I mean, there are others that are good, but we're the we're the most important of all of them, because the others tell you like buy real estate or stuff. We don't. We don't do that. We tell you how it's supposed to work, how it works based on science and how the folks who sell you things will mislead you. I'm Don McDonald. Tom Cock is over there. And Tom, how are annuities being both missled and misperceived?

SPEAKER_03 1:34

Yeah, this is a fascinating topic uh that comes up almost every day here. And uh and by the way, you brought up the number.$460 billion worth of annuities sold last year because we're at the peak 65. In other words, more people are putting$65 million. Half a trillion bucks? Half a trillion dollars.

SPEAKER_05 1:54

That's like almost as much money as Elon Musk has. Yeah. So times eight million dollars. Which is a weight. Okay, I can't let that go. That's a sad thing to say. I know. Yeah. The annuity industry is smaller than Elon Musk's wallet.

unknown 2:11

Yeah.

SPEAKER_03 2:11

That's quite a wallet, though. So um But okay. This the reason I love this topic is that most of the time annuities are sold. In other words, people generally don't go out and hunt for an annuity to buy. They go to a class, they go to something else, and the people say, Hey, are you worried about the stock market? Are you concerned that you won't have enough money for retirement? Ah, we've got something figured out for you that's going to make you 7% a year, 8%. That's what people hear. That's what they hear. You mean they don't drive to the annuity store at the mall? Generally not. They get pitched these things. Um, and that's the pitch, that's what they buy. That's why$464 billion worth of annuities are sold last year. And yes, there are a lot of old boomers that want a secure income. We'll talk about the reasons people buy these in just a moment. But um that's uh that's all well and good. I want secure income in retirement too, right? You want you want the same thing.

SPEAKER_05 3:13

If you ask any investor to be totally honest with you, be totally honest, what do you want from your investments? And they will tell you two things. I want to make as much money as I possibly can, but I really don't want any risk doing it.

SPEAKER_03 3:33

And that you just said the most important word of the program today, investments.

SPEAKER_05 3:38

Yeah.

SPEAKER_03 3:39

And annuities should not be viewed as investments and they're sold as investments. I know they are. So because an annuity is an income stream.

SPEAKER_05 3:49

You're giving a lot of Okay, that's an immediate annuity. See, the problem is the problem is so many products fall under that annuity definition, that broad definition. What most the only annuity that has any decent function is a an immediate income annuity. Trevor Burrus, Jr.

SPEAKER_03 4:14

What about a deferred income annuity?

unknown 4:17

No.

SPEAKER_05 4:19

Similar deal, but you know, you're giving up your money to get the you know, okay. I guess it comes in second, but you should still be investing. And then when you're done investing and you're saying, I've got to have an income, then the immediate, really to me, the immediate you're only gonna get me to go with immediates. I'm not gonna go deferred, I'm not gonna go variable, and I'm sure as heck not gonna go equity-indexed annuities. Those are the those are the those are the devil of the insurance industry. Those are Satan of insurance.

SPEAKER_03 4:51

And last year there were sixty-three billion dollars worth of variable annuities sold. Hard to believe. Because you equate that with something out of the 1980s.

SPEAKER_05 4:59

But right, and the high fees associated with it. But but but I I would be willing to bet a huge chunk of that is coming out of 403B plans that still default to variable annuities in most school districts. Trevor Burrus, Jr.

SPEAKER_03 5:10

Absolutely.$128 billion last year into your favorite indexed annuities. The liar annuities. Yeah.

SPEAKER_05 5:18

Yeah, those are the liar annuities. Those are the ones where they lie. They literally in these sales pitches. They I've been to their stupid lying sales pitches. They tell you with their evil little mouths that you will have no risk and you'll get the returns of the stock market.

SPEAKER_03 5:36

But the thing that you should consider around all of this is why you're buying an annuity, which should be about income. It should not be about return. It should not be that I'm gonna make the market with no risk. That's not why you should be getting an annuity. Annuity should be replacing your income. That's the that's what I loved about this piece, is this is the message we need to be giving people. Don't, even if you're inclined to get one, you shouldn't be looking at the return at all. You should be looking at how much income I'm going to get and what I have to give up to get that, right? I mean, that's at the end of the day what matters. You're giving up liquidity, you're paying somebody something for all that, but you shouldn't be doing it with anything, Don, that combines stocks, investments, and some sort of guaranteed payout. That's the struggle, right? These products are confusing, they're conflating, and they're really making somebody else a lot of money.

SPEAKER_05 6:29

And let's go, let's just go back to the only decent one, which is the income annuities, the single premium income annuities or the immediate income annuities. Let's go back to that product that is the only decent product out there. They're still missold by insurance agents. Because what they're doing, what they're saying, give us$100,000 and we'll give you 7%. Now, the first thing most people think is that, oh, I'm making 7% on my money. No, no, no, no, no, no, no, no, no. They're going to give you an income on the money that derived from their investment portfolio and a piece of your principal back every month. It is your money coming back to you in large part. As a matter of fact, I've run the numbers a variety of different ways. And if you retire and hand a million dollars over to and put it into an SPIA or a single premium in income annuity, you're gonna, you're going you're you're gonna need to live past eighty. Past eighty to make to get back any more than your principal.

SPEAKER_03 7:34

Yeah, it's just your money coming back to us until eighty, the way I look at it. Right. It does. Yeah. Yeah. And so again, but the reason when you read the studies, when you read what people are saying, the reason people buy an UDIS are number one, lifetime income. And that makes sense. What you just said there, right? This is just a fixed amount I'm getting, and it's starting tomorrow. They like tax-deferred growth, and that's another reason never to use an IRA for one of these because you're already getting tax-deferred growth. Risk mitigation.

SPEAKER_05 8:03

That's what they that's the thing. That's the big thing.

SPEAKER_03 8:06

It is. Um, and a streamlined retirement income, right? You know you're getting a certain amount every month. So again, it's okay in my book and Don's, which is rare that we're gonna agree on something to get to to pay out to get a guaranteed income. That's okay. It's right. It's kind of okay. It's kind of okay. But you shouldn't be doing it where you're trying to make something on it. You shouldn't be doing it to get market-like returns.

SPEAKER_05 8:33

Trevor Burrus, Jr. And and you need to remember a couple of things. One, most of these uh single premium income annuities don't index for inflation, so your spending power is going to go down, uh, unless you add a writer, an index, an inflation writer, and that's gonna lower your payout. They also don't go to your surviving spouse or significant other unless you add another writer, which again, particularly if you're a man, reduces your payout because women tend to live longer. Uh and here's the other thing about these. We all we're we're all like, oh, but what if I live until 99? I don't want to run out of money. You're giving yourself way too much credit. You're not living until 99. Not many of us. Yeah, not many of us do. And uh if we do and you're you're that healthy, go go get a job.

SPEAKER_03 9:25

Do something.

SPEAKER_05 9:26

Do something. Make a couple extra bucks if you're running out of money.

SPEAKER_03 9:29

Makes a very good point. Um, that many people forget. You if you've worked or you've been married to somebody who worked, there's this other annuity you get. It's called Social Security. Uh and yet most people make big mistakes around that filing too early, not paying attention to their filing status when it comes to their spouse, making sure that uh the household gets the most. And it's still less than 10% of us who wait until age 70 to get it or even close. It's still more than a third who wake up and take it at 62. So that's very constantly.

SPEAKER_05 10:01

So if you're really concerned about outliving your money, well, then wait until 70 to take Social Security. Bingo. You'll have more of it. And and it indexes for inflation. Well, here's uh an important part of our little program. We find both we and you love the QA. The QA episodes, the Friday QA's are our number one episode almost every week. They they get the most downloads. Uh and we love answering your questions, so that's why we make it so easy to ask them. You just go to talkingrealmoney.com, click on the ask a question button, and type them in or speak them in. If you speak them into the microphone button, you get on the Friday podcast. If you type them, we answer them on our regular podcasts. And sometimes Tom even picks up the phone and calls you.

SPEAKER_03 10:55

We go to the Colony, Texas, where Jay is standing by and joins us on Talking Real Money. Hi, Jay. Hello, Tom and Dunn.

SPEAKER_04 11:04

Nice to talk to you.

SPEAKER_03 11:04

My pleasure.

SPEAKER_04 11:06

Last week you talked about the YRA, also known as the Trump accounts. Yes. And how it would be seated with$1,000. You also indicated that uh family members or what have you could have an additional$5,000 a year, but you indicated this was pre-tax. The only pre-tax money I have is in my traditional IRA. Is this the money that would move over?

SPEAKER_03 11:28

Yeah, it's a great question. So that's that's a not a very good statement by me. So when I say pre-tax, I I try to label these things in a qualified uh Roth or sort of brokerage. Um, so when I said pre-tax, I meant money that uh was going to eventually, when it came out, was going to be taxed. So for like a traditional IRA, right? The money, the growth, that when you start taking that out, you're gonna pay regular income tax on it. Sadly, you cannot roll money from your IRA into a uh grand, a child or grandchild's uh youth, what'd you call it? Uh I like your youth retirement account.

SPEAKER_04 12:09

Youth retirement account. Yes, a YRA.

SPEAKER_03 12:11

Uh YRA. Um, you cannot do that. And you're right. So it's it's not a great tax uh situation because this is money you've already paid tax on. It's gonna go in, and then when it comes out, uh it will be taxed like a regular um uh uh IRA. So it's not ideal in that regard. The idea here, you know, and I think we've discussed this on the program, uh Jay. I'm I was not a huge fan of these when they came out because it feels like we have all these things already available. In fact, I like the 529 better because that goes in, uh, yes, you've already paid tax on that money, but that's going to grow tax-free and cannot come out either into um secondary school or higher education funding or Roth IRA for that young person, which is an astounding advantage. But I guess the idea here was kind of well, let's get uh let's let's set something aside for very young people. Let's raise kind of the uh the the awareness of the fact that we should be saving for people, young people when they get started. So you're right. Uh and and and this is not very tax advantageous for the person making the gift. You're correct to say that.

SPEAKER_04 13:23

All right. I do appreciate that clarification. Um I'm uh contributing in other manners whether other than the 529 uh or a YRA, but I do have a grandson that qualifies for that.

SPEAKER_03 13:33

Yeah, so yeah, uh it you're right. And it's there are other ways, right? You can do a Uniform Gift of Minors Act. I favor, as I said, the 529 just because I favor sort of financing education. If my grandkids need a car at some point, that's gonna be between them and their parents. Probably not me, uh, but uh but I but I but I'm happy to finance education. My father did this for my children as well, and I just happen to feel that's a good way. So there's but there's all kinds of other avenues, and I do apologize to you and to others if I made that sort of unclear in terms of the taxation. This is not a very tax-advantageous situation for the person who wants to make the donation. You're absolutely correct.

SPEAKER_04 14:16

All right, do appreciate that clarification.

SPEAKER_03 14:19

Thank you. And we get the written ones too. So go to talkingrealmoney.com, click on ask a question. We're happy to do it. So this one comes in from Columbus, Ohio. Joe writes, Hi, Don and Tom, I'm 42 years old and on track for a government pension at age 57 that will cover 100% of my living expenses. Dang. Wow, Joe, that's really good.

SPEAKER_05 14:39

Yeah. I should have gone to work for the government. What was I?

SPEAKER_03 14:42

Yeah. You would have lasted about 10 minutes. They got a lot of rules and stuff. Uh, because my floor, he says in quotes, is secured. I'm assuming that means his his basics are covered. Yeah. I've opted for an aggressive global equity strategy. Good for you. Portfolio is structured for simplicity. My 457 uses broad index funds to mimic Vanguard's total world stock ETF, VT, and my Roth IRA is a 100% VT. However, I've run into a dilemma with my taxable brokerage account to capture the foreign tax credit, which VT does not qualify for. I'm currently using DFAW. I hope this isn't confusing. You're not going too fast here, the dimensional world equity ETF. I value the all-in-one nature of DFAW and its tax-free internal rebalancing, but I recognize its mild factor tilts mean it won't perfectly trap track rather the market cap-weighted performance of VT. Am I overthinking the tax drag of VT in a taxable account?

SPEAKER_05 15:44

Yes. Woe are you. So are you.

SPEAKER_03 15:49

You might want to explain first what he's talking about in terms of.

SPEAKER_05 15:52

Yeah, because you you you don't pay foreign taxes on VT. Which is why VT doesn't pass the foreign tax credit through, doesn't qualify for it, because you don't pay them. So why I don't understand what you're missing. You never pay because Vanguard pays foreign taxes in the fund and they don't pass them through to you. I I I I think, yes, you're overthinking this. This is so, so small.

SPEAKER_03 16:21

I think you could stick with all that that same fund in all the portfolio. But I mean in all those accounts, that's fine.

SPEAKER_05 16:27

However, that being said, we actually prefer not exactly tracking the market. We like tracking the market, it's fine. But we have read and studied oh man for decades, Tom, we've studied the research generated by the folks at Dimensional, the folks at um at Avantis, the folks at academic institutions all over the country, over and over and over again, that show there are factors of return that if you overweight to those factors, have over the long haul provided a slightly higher return. So we like seeing you in those. But yes, we think you're overthinking the tax thing.

SPEAKER_03 17:18

And by the way, you can go, you could do that work yourself. You could go look at uh, for example, VBR, the Vanguard Small U.S. Small Value.

SPEAKER_05 17:26

Now you're making life harder.

SPEAKER_03 17:28

And you could compare that to AVUV, which is Avantis's non-traditional active management of small cap value. How's that? Is that good? No, rules-based? Uh anyway, you take a look at that yourself. So, okay, let's go to another question from beautiful Cedro Woolley, Washington, where I was recently invited to write a sort of thing. Wait a minute, what was that name again? Cedro Wooly. Cedro Wooly? It's a long way away. Wait, how do you spell that? W-O-O-L-E-Y. C Dr. No, no. Cedro S E D R O Cedro Woolly? It's north of here.

SPEAKER_05 18:03

S E D R O W O L L E Y. No. W O O L E O O L E Y?

SPEAKER_03 18:09

Yes, correct.

SPEAKER_05 18:10

Yeah.

SPEAKER_03 18:10

Cedro Wooly.

SPEAKER_05 18:12

Where did somebody come up with that name?

SPEAKER_03 18:13

I I'm guessing, correct me if you think I'm I'm thinking it's a Native American thing, but I could be wrong. So I'm sure you're gonna look it up and tell me. Anyway, Scott from there writes How safe do you think bonds are with the national debt over$39 trillion?

SPEAKER_05 18:31

Safe. Why? U.S. government has the ability to tax. Unlimited, basically. Uh so they're they're very safe. Very safe, and the rest of the world considers them very safe because our because of it's really the strength of our economy. It's not just the ability. They're safe inherently because of the tax ability. Um but they are um they are safe there because they're really backed by the potential output gross domestic product of the of the U.S. Yes, I hate the fact that we're in debt that high. I don't like it. It doesn't make them inherently high risk, though, particularly not for American bondholders who will own them in uh American dollars.

unknown 19:19

Trevor Burrus, Jr.

SPEAKER_03 19:20

Yeah. And back to that for a moment. There used to be the argument, well, now that the Chinese own most of our bonds, that is not the case anymore. Americans own most of the U.S. government bonds. So we are all owners of most of our own debt. I think number two now is the U.K., by the way, moving ahead of China. Yeah, but we own a lot of our while again, I'm with Don. I hate the amount of debt. Um we've managed, by the way, to get through other periods where the debt, the deficit, and the debt were higher on a per capita basis through economic growth. Will that happen soon? I don't know. But will those bonds still get continue to get paid? Yeah, I think that's pretty likely. Trevor Burrus, Jr.

SPEAKER_05 20:03

No, I think it's absolutely totally going to happen. Unless the U.S. economy collapses entirely. And it won't be because of the debt, it'll be because of lots of other horrible things that haven't happened but could.

SPEAKER_03 20:15

And then are you moving in with us or are we moving in with you? Which one were you?

SPEAKER_05 20:20

Trust me, uh when it comes to growing stuff and living off your backyard. Yeah, we can grow like twelve months of the year.

SPEAKER_03 20:30

Yeah. I can only grow maybe three and a half months.

SPEAKER_05 20:33

Maybe, yeah. Okay, I have the answer. Um there were two towns right next to each other.

SPEAKER_03 20:39

Ah, there you go. Cedro.

SPEAKER_05 20:40

There's little there's Little Woolly, which was named after Samuel Woolley, one of the early settlers.

SPEAKER_03 20:45

Okay, so I was wrong again. Yeah.

SPEAKER_05 20:47

Well, you were half right. Because Cedro is misspelling S-E-D-R-O is of course white settlers, misspelling C-E-D-R-O, which is the Native American word for cedar tree.

SPEAKER_03 21:03

So big trees that have a lot of hair on them, apparently.

SPEAKER_05 21:05

Right. Cedar woolly. Woolly cedars.

SPEAKER_03 21:09

It's a lovely place.

SPEAKER_05 21:10

It's actually two towns that combined into one in Skaggot County.

SPEAKER_03 21:14

Skagget County. But I don't know.

SPEAKER_05 21:16

I sp it says Skaggot.

SPEAKER_03 21:18

That's how it's written, but not how it's pronounced.

SPEAKER_05 21:20

That one's mispronouncing it. Just like they mispronounced des moines out there, another white settler pronunciation. Trevor Burrus, Jr.

SPEAKER_03 21:27

We just had somebody on a call yesterday who lives in the correct one in Iowa.

SPEAKER_05 21:32

Uh-huh. You didn't say it des moines, did you?

SPEAKER_03 21:34

I didn't, because I wanted you know me. I wanted to, but I just can't do that.

SPEAKER_05 21:39

You people in Washington mispronounce so many things, you know?

SPEAKER_03 21:42

I know. It's horrible.

SPEAKER_05 21:43

It's like we went we went west so we could say anything we damn well please.

SPEAKER_03 21:48

And so uh since we're on the railroad.

SPEAKER_05 21:53

Then I built a railroad.

SPEAKER_03 21:54

The uh the part of the series I'm watching on American Frontiersman about Lewis and Clark. Do you pronounce it Sacagawea or Chicagaweega?

SPEAKER_05 22:03

I pronounce it Sacagawea, but that's probably wrong.

SPEAKER_03 22:06

They pronounced it Sacagawea. I've heard it both ways, so.

SPEAKER_05 22:09

Oh, probably in the Pacific Northwest, you've heard it the wrong way. Because they mispronounced it. All the white settlers there mispronounced Sacagawea.

SPEAKER_03 22:18

All right, I'm going with Cedro, so I'll see ya.

SPEAKER_05 22:21

C-E-D-R-O or S-E-D-R-O? Leave it alone, man. I can't. You know me. I just can't leave this stuff alone. Uh Wow. Okay. Tom? Yes. I just want to let you know. We can add another question because we're I don't have any more questions. No, but I'm just saying for the future. Oh, yeah. Because we're at 19 minutes. And we have a Oh no, no, not with the collar. I forgot the collar. Take that part out, Don. All right, we're doing great.

SPEAKER_03 22:57

Time's up as they say. Time's up. We're out of here.

SPEAKER_05 22:59

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SPEAKER_02 23:46

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