Glad you joined me today. We're going to talk about Clark Howard. There was an article written by a person that went through all of what Clark Howard thought about annuities. First of all, let's talk about Clark Howard, a really big fan of his. He's a syndicated radio guy, he has a podcast, and he has a great website, clark.com, that you need to go to. Do all of you out there, remember Ralph Nader? Ralph Nader was a consumer advocate for a long time. Clark Howard has taken that role over.
This dude, he knows so much about so much. If you listen to his show, he helps people with homes, and credit cards and cars and all this stuff. But we're going to take a deeper dive into what he has talked about when it comes to annuities.
The article I’m referencing was written by a guy named Christopher Smith. I don't know Christopher. He seems like a nice guy, but he had Clark's caricature on there and had specific quotes that Clark was talking about when it comes to annuities. I put some notes down on some things that Clark says about annuities that I 100 percent agree with. First thing, he has disdain for bank and insurance salespeople only pushing high commission annuity types. Hello. Absolutely, Clark. I don't like that either.
Annuities are not one-size-fits-all. This can be easily solved by the Annuity industry if all product types, and by the way, there's not just one annuity. There are many different types. If they all had the same commission levels, hopefully low, that's never going to happen. But if it did, then this problem would be wiped away. There are good people in the business. There are bad people in the business. It's like any business. But in the annuity business, there is a propensity for agents and advisors to reflex and sell the high commissioner products.
The second thing is, and this is a good one. Christopher Smith wrote that a lot of people that are pre-59-and-a-half. If you're less than 59-and-a-half years old, you have to be very careful and understand the rules like a deferred annuity. Let's just say there’s a fixed rate annuity. If you buy that, if you take money out before you're 59-and-a-half, the IRS are going to penalize you 10 percent for taking that money out.
Clark said, "That should be told; people should understand that." Absolutely. I had a call the other day. A gentleman was 43 years old. Very smart, and he's being pitched, in this case, Index Annuities. He was being pitched an Index Annuity at 43 years old, and I said, "Hey, you do understand if you take money out, you're going to have to pay a 10 percent penalty." He did not know that. I have a ton of general rules. Ninety-nine percent of the time, this applies.
If you're less than 50 years old, please consider not buying an annuity. Annuities are transfer risk products. When you're in this, especially in your 40s, don't buy one, 30s don't buy one, but that's me. But I think I'm right in his primarily because of what Clark says about the 59-and-a-half. You can be really careful.
Are there ways around that with some getting into the winds 72 t-rules and the annuitization? Yes, but if you have to do those types of things, you need to think first, like, am I too young for an annuity? I'll tell you if you're too young. Another thing. He's not a fan of index annuities sales, and indeed, I'm not either the way they're sold. Clark hates the bad chicken dinner sales seminars that attract senior citizens, and then they try to sell them an index annuity.
Most senior citizens have all the money. That's where a lot of the annuity people, and the bank people, and the broker's people are hammering them for annuities. He is right. The article says that fixed annuities, which are multi-year guarantee annuities, are similar to CDs that you can borrow from the bank. He's right about that. They aren't FDIC insured like a CD at a bank. But if you're looking for a fixed rate for a short term, say, two or three or four or five years, multi-year guarantee annuities are a very good choice for you.
You should make a decision on annuities regardless of the type, on the contractual guarantees of the policy. Totally agree with Clark on that. He also likes the lower commission products. I and him are on and we're right together on that. The lower the commission, the more pro-consumer it is in my opinion that it means the high commission products are horrifically bad all the time, but they are not one size fits, or a square peg into a round hole. I totally agree with him on that. He also doesn't like the incentive trips that some annuity agents, they suddenly sell one product get to go on a totally agree with him on that. But this is the one I really liked.
Not everyone needs an annuity spoiler alert, but a lot of people do if they want principal protection or lifetime income, or solve for legacy or maybe long-term care, but not everybody needs one. If someone's trying to sell out there, and never mentioned the word annuity, they're afraid to say the word annuity, why are they afraid to say the word annuity? It's a contract. Clark is absolutely correct about that.
One of the things Christopher Smith wrote in the article is a Clark quote where he says when people sign annuity contracts, he considers them prisoners. I know what Clark is saying. He's saying if you buy an immediate annuity, or deferred income annuity or qualified longevity annuity contract, or lifetime income product. You're ripping the knob off the faucet, and that income stream is flowing.
But that's not being a prisoner in my opinion. That's getting a lifetime income stream that you can never outlive similar to Social Security. When you turn on Social Security, you're not being a prisoner of Social Security. You have agreed to receive that lifetime income as long as you're breathing. Listen. I understand. An example is a guy that was 77 years old, and someone's was trying to sell him a tenure index annuity with a 10-year surrender charge. If that 77year-old person signs that contract, Clark is probably right. He's a prisoner. That shouldn't happen. But changing the terms doesn't really apply to the majority of annuities, the majority of annuity types. Once you have the contract in place. The terms, keyword contract, the terms of the contract are locked in, period.
Now what he's specifically referring to, I think are indexed annuities with that index option strategy. I've done videos on this you know that. If you've seen my YouTube channel before, and if you haven't go to the playlist and pull up index annuities, I've covered this. The index annuity can be can change the way the index annuity option is calculated at their discretion, typically on an annual basis, or bi-annual basis. I think that's what Clark's referring to and by the way, Clark totally agree with you. I think that needs to be explained.
People need to understand that if they buy a 10-year indexed annuity with a one-year call option. They're really buying a 10-year surrender charge with a one-year guarantee. People need to understand that doesn't make index annuities a bad product. They're CD products. But a lot of people are signing the paperwork without knowing that.
Another thing he said was most types of annuities are filled with expensive fees. Now, most annuities don't even have annual fees, multi-year guarantee annuities, deferred income annuities, single premium, and immediate annuities, qualified longevity annuity contracts don't have any annual fees. By the way, if you don't attach an income writer to an indexed annuity, it didn't have any annual fees either. I think what Clark is talking about in this article is more about variable annuities. Disclaimer, I don't sell variable annuities because I'm not selling anything that has potential to go down. But I think that's what Clark is talking about because most variable annuities have an average annual fee of anywhere from 2-3 percent for the life of the policy.
I think that's the one that makes Clark's head pop off when he's like looking at fees because that's a lot of fees. I believe that's what he's talking about with variable annuities. Another thing he's talking about is tax. He said tax-deferred growth is sometimes a misleading benefit. I know where he's going there. Let's just take the CD versus the multi-year guarantee annuity. CDs and a non-IRA account you have to pay taxes on the interest every year with a multi-year guarantee annuity. It does go gross tax-deferred.
However, when you take the money out, you're going to have to pay taxes on that interest at that time. I know what he's trying to say is tax deferral is good, but it's not great. I can't agree with that. You do have to understand that you had to pay taxes on it eventually if it's a non-IRA account. But a lot of people liked that tax-deferred growth, especially in the high-tech world that we're in at the time of this taping. Last thing that he talked about, he considers the word annuity to be a curse word.
Now, I've said that before where people who have annuities and I'll agree annuity is the financial services curse word. It really is. But you can't say annuity. It's like saying restaurants or trucks or shoes. There're different types. Some are good, some are bad. But the bad really comes down to when the annuity is not properly explained.
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