Today's topic is unique, and when I told my CEO, She was like, "I don't know about that one." The topic is having annuity companies buy bonds for you. Now for the people that are listening to me on the podcast platforms, thank you so much, and I guess you could look at me on my Fun With Annuities YouTube channel to see my scruffy face. For whatever reason, I'm going through this mid-life crisis, and I've got this really weak beard goatee thing going. I'm getting ready to turn 58, which is one of those things. I want to be young, I want to be hip, I want to be with it. I'm a boomer. I still got to be young, but let's talk about annuity companies buying bonds. This isn't like opening a Schwab account, Vanguard account, or Fidelity account. All fine firms, may I add and say, "I need you to buy bonds for me." You can't open an account with an annuity company and have them buy bonds for you. The world that we're living in, and by the way, disclaimer, I don't sell bonds. I don't advise on bonds. I did back in the day when I worked with Paine Webber, Dean Witter, or Morgan Stanley, UBS. I was the master of the universe of the bond world, worked in the World Trade II Center for a moment in time, a cup of coffee. God bless all those people. But I wanted to talk to you about buying bonds and how the annuity companies buy bonds for you.
Now, the greatest ideas that I have come up with are a hybrid. Hybrid’s a plant, hybrid’s car, the hybrid’s a mattress, the hybrid’s not an annuity. So if an annuity agent says, "I've got a hybrid annuity." They're full of crapola. But I talked to a very smart person; his name is Michael Finke. He was on a podcast with me recently, and he said something that was an epiphany head slapper to me: you need to have the same epiphany hip slap moment. He said this, "When you buy lifetime income guarantees with annuities," and by the way, the annuity category’s the only category that can provide a lifetime income stream. There’s no ROI until you die in it as long as you’re breathing. When you die, I can fly to your funeral and then give the ROI in a song format at the funeral. No one's ever taken me up on that. But what Michael Finke said was, "You’re an Immediate Annuity or buying a Deferred Income Annuity, buying a Qualified Longevity Annuity Contract, or buying an Income Rider attached. To a Deferred Annuity for lifetime income guarantees." Those are the product types that do that in the annuity industry.
That annuity company, they're backing up those contractual guarantees by buying bonds. Yes, your life expectancy and mortality credits play into that lifetime income stream, pooling risk, and transferring risk. But the money you're handing to the annuity company is backed up by investment-grade bonds.
He said that the follow-up is a "By the way, Stan, The Annuity Man, American's Annuity Agent," yes, that's how we address it as me. He said, "Annuity companies can buy the bonds better than the people can buy the bonds because they're buying them at institutional levels, and they have access to bonds that me and you, the peons of the world, can't do." Now, that rung true with me because when I was at Morgan Stanley and UBS, and in the municipal bond world, the public had access to really good municipal bonds, bonds, etc. What's happened in the current environment and my two partners that I was with at Morgan Stanley, UBS, are still on that side of the business; they tell me right now that the hedge funds and private equity groups and the family offices they buy up most of the good offerings. So, all of that good investment-grade bond paper is not trickling down to the public.
I get questions about bonds and interest rates and all that stuff. Remember the bond thing, interest rates, when interest rates go up, bond pricing, that valuation of the bond goes down and vice versa. There are no good answers to what to do right here and at the time of this taping and the interest rate environment that we have. God bless the Fed. Man, I would not want to be those guys. You talk about not getting sleep and needing some coffee. But Michael Finke was right. When you're buying lifetime income, you're saying to the annuity company, "I'm going to piggyback on your institutional access to bonds, and you're going to buy the bonds for me, and you're going to do a better job buying the bonds than I could as an individual. Because of that, I will get preferential pricing because you're buying them, and the lifetime income stream will be better."
Now, this isn’t some pound of table sappy nonsense, crapola. Let's buy an annuity. But what I'm telling you is, when you buy an annuity, that annuity company is buying investment-grade bonds on your behalf. Now, don't get caught up on interest rates and things like that when talking about the lifetime income stream. When you're talking about lifetime income stream, the introductory pricing mechanism is your life expectancy, or life expectancies if joint at the time you start the payments, interest rates play a secondary role. Interest rates would have to move, like 200 basis points, for you to see significant movement in the pricing. But that's not your problem. The annuity company's problem is pricing all that in and buying the bonds for you.
Now, I know what you're saying to me. You're saying, “Wait a minute, but what about inflation, and what about blah blah blah” and all that stuff. With annuity companies, when you're buying lifetime income, you can buy what's called a cost of living adjustment increase to address inflation, but the annuity companies don't give that away. You know better than they had the big buildings for a reason; they just lower that initial payment to make up for that potential or contractual increase you build in. The other thing about inflation, I know I'm digressing a little bit, but this is important. The other thing about inflation I want you to be aware of is if you have the Indexed Annuity gunslinger out there that's saying, "Well, my index annuity will increase. The income will increase…every time the index increases," and you go, "Oh my goodness, that sounds great. Let's do that. " And "By the way, Mr. Jones, you get an upfront bonus for doing it." You have to be smarter than that. Don't be the rube at the table. Don't be the sucker at the table. Go to Vegas and play poker if you want to do that, but don't be the rube at the table with your retirement money.
The annuity company is lowering that initial payment, typically 20-40 percent, depending on the carrier and the product type. You can set it up either contractual or potential. I only look at an annuity for what it will do, not what it might do.
Getting back to the topic. Having annuity companies buy the bonds for you is good when you're buying lifetime income, and having them buy the bonds to backup tare lifetime income is good and part of your overall income floor. “What is that, Stan, income floor, never heard of that?” Income flooring is your Social Security, a pension if you're so fortunate, RMDs, which is what I call a forced annuity. All of those are lifetime income payments. "Wait a minute, Stan, RMDs are not an annuity." The IRS forces you to take a lifetime income stream as long as you're breathing from taking the RMDs, whether you want it or not. In my opinion, contractually, semantically, verbally, an annuity.
The income floor is what you're trying to establish to be a better investor, live your life, travel, play guitar, and be the lead singer of a rock band. Yes, that is my dream. Whatever the dream is. But have the annuity companies buy those bonds for you by buying a lifetime income stream, by transferring the risk for that lifetime income stream to be established by the annuity coming in. By the way, just one more thing. Remember this, when you structure a lifetime income stream for either you or you and your spouse, or you and a loved one, it is a customizable structure, meaning that you can tell me exactly how to structure it. We will then shop all carriers for the highest contractual guarantee. Do not believe that when you buy lifetime income, when your Learjet hits the mountain, money goes poof. That's one of 40 ways to structure it. Nod your head. Please tell me you understand that, and you're not listening to some shmuck advisor or reading someone who wrote stupid articles like "Well, never buy an annuity because they're expensive and your money goes poof." That's garbage.
Most annuities have no annual fees. Most annuities are pure transfers of risks that solve four things. The acronym is PILL: Principal Protection, Income for life, Legacy, and Long-term Care. When you're considering a lifetime income guarantee, obviously, you go to theannuityman.com, you go to my calculators, and you can run quotes 24/7 365 to your heart’s content, quoting all carriers. Nobody’s going to call you or show up at your doorstep, hallelujah. But once you do that and run those quotes, put them in the back of your head. "If I do that, then that company, that strong carrier, they're buying bonds on my behalf at an institutional level to backup these guarantees, which should make you feel warm and fuzzy.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.