Annuity Income Essentials: Focus on the Payout Rate

Hi there. Stan The Annuity Man, America's annuity agent licensed in all 50 states. Today's topic is annuity income essentials, and one of those essentials is focusing solely on the payout rate. Now, let me explain: There are a lot of shenanigans going out there in the sales pitch world of annuities. You'll hear stuff like, "Sir, this annuity has an upfront bonus." Who cares? The upfront bonus is candy for the stupid. There are a hundred pennies in the dollar. If a company's giving an upfront bonus, they're taking something away within the policy. There is nothing wrong with them, but if you're going to quote, like we quote, contractual guarantees only, we're going to quote lifetime income with and without products that have bonuses. It doesn't matter. Or you'll hear at the expensive steak dinner seminar, "Well, your income account increases by 8% or 9% or 10% or 7%." You're like, "That's incredible. That's fantastic." Stan The Annuity Man is saying, "That's crap." If it sounds too good to be true, it is every single time. So yes, it is growing by that percentage; it's monopoly money.

What I mean by that is that a lot of people call us, if you go to The Annuity Man and set a time to speak with one of my team members, they'll say, "I just bought an 8% annuity." No, you didn't because there is no such thing. And then they'll argue and then we'll say, "Oh, you bought what's called an Income Rider that grows by 8% until you turn on the lifetime income stream." But you can't access that money. You can't peel off that interest. You can't cash out that part of the account and get your 8%. It's a shiny thing for you to think you're getting something that you're not.

The Payout Rate

But what agents never talk about is what's called the payout rate. And the payout rate is really where you need to focus all of your attention when it comes to quoting lifetime income. Now, to go back for a second, remember, annuity solve for four things. The acronym is PILL. P stands for principal protection. I stands for income for life. L stands for legacy. Other L stands for long-term care. We ask two questions to every single person on the planet who sets an appointment with us. What do you want the money to contractually do? When do you want those contractual guarantees to start?

If you say I need income now, or I need income later, whatever that is, year from now, two years from now, nine years from now, seven years, whatever, it doesn't matter. The payout rate is really the only thing that matters because annuity companies can play games with the bonus. They can play games with what's called the roll-up rate. That high percentage of people think they're getting an 8% or 10% annuity. They're not.

The payout rate is really what matters. And the payout rate is, in essence, a numerical reflection of your life expectancy. Remember, lifetime income annuities, SPIAs, DIAs, QLACs, and Income Riders are primarily based on your life expectancy or life expectancies of joint at the time the income starts. It's nothing more than that. The annuity company knows when you're going to die, when we're all going to die. That's the reason they have the big buildings for a reason. That's the reason they have the logos on the plane. That's the reason they're sponsoring sports stadiums. They know when we're going to die, and they price things accordingly. But the payout rate is what you need to look at.

You might say, "Well, my buddy quoted me this Indexed Annuity and Income Rider that has an upfront bonus, and it grows by 8%, and it's less payout than what you showed us at The Annuity Man that didn't have a bonus and didn't have this high roll-up rate."

Why? Because the payout rate was higher. If someone has a high bonus and roll-up rate, the payout rate won't be as high. They've got to take it away from somewhere. Now, the payout rate applies to all of these products: SPIAs, DIAs, QLACs, and Income Riders. What really frosts my cookies, that's Southern for being mad, is when you'll see Immediate Annuity quotes from some of my so-called competitors, bless their hearts, and they'll show the payout rate as yield. Let me give you an example.

Example

Let's say a 70-year-old runs an Immediate Annuity quote and the payout rate; I'm bringing this out of midair, so don't attach it. This is an example. Let's say the payout rate is 7%, which means if he puts in a hundred thousand dollars, the payout rate is 7; he will get $7,000 a year for as long as he's breathing. And you can structure Immediate Annuities, cash refund, installment refund period certain all kinds of ways.

The Yield

But what some sites do is they'll put that up there as yield. So, some will say, "I just bought an Immediate Annuity with a 7% yield." The yield is when you buy a bond with a coupon that pays you 5%. Yield is when you buy a CD that's paying you x percent for a specific period of time. Yield is MYGAs, the annuity industry version of a CD that pays a specific percentage for a specific period of time and protects your principal. Yield is not a payout rate. Shame on all these other sites that are doing that. We have to correct them all the time. I should send them a bill. That's not yield.

Yield is not touching the principal and peeling off the interest. That's yield. That's a bond, that's a CD, that's a MYGA, that's a treasury. With stocks, you'd look at the dividend. If it's other than stock, you're just peeling off the dividend, but that payout rate is not yield.

Annuity agents should not be allowed to mislead the public thinking they're getting yield because we always get those calls. "Well, I'm getting a 7.2% yield on that Immediate Annuity, on that Deferred Income Annuity." No, you're not. That's your payout rate. That's your life expectancy period. That's it. End of story.

Capacity

The reason that I'm pounding the table figuratively and literally is because a lot of the things you hear, a lot of the sales pitches, try to distract you with what I call shiny things. A shiny thing is an upfront bonus. A shiny thing is a roll-up rate on an Income Rider. Payout rates aren't shiny things, but payout rates create the payment. That's what it is. Also, remember that when quoting for lifetime income, you have to quote all carriers regardless of the product you're looking at because these are commodity products, and there's a capacity issue. If carriers have enough of your age range, they're going to lower the guarantee in order to not attract you. If they don't have enough, they're going to raise the guarantee to attract you. It's very simple, but you can't just get one quote, et cetera. So, the payout rate is the game.

Pitch Example

But let me give you an example of a bad chicken dinner seminar, an expensive steak dinner seminar example. "Sir, we have this Indexed Annuity with an Income Rider that has a 25% bonus. So, you get the 25% bonus, the Income Rider, which is attached to the Indexed Annuity; draw a line down a blank sheet of paper, Indexed Annuity accumulation value, Income Rider over here, monopoly money." But this is where the rubber meets the road. This is where your income base is going to be. It's always going to be higher than this side. Remember that. Always. So, you're drawing the line down a blank sheet of paper. The Income Rider might have what's called a roll-up rate, which grows to 7, 8, and 10 percent. But then what they never tell you is that payout rate. If these two are high, the payout rate will be low. If these two aren't that high, the payout rate will probably be higher. There are a hundred pennies in the dollar.

One last thing, and this one is disturbing. If someone tells you that the annuity income is going to increase with the index and it's going to beat inflation, at the end of the day, you're going to have all your money, take out income, and you'll have more money than you started with. That's just not true. Annuity companies are for profit, and when you get income from an annuity, it's a combination of return of principal plus interest, meaning you're drawing down on it. Drawing down in the South means subtraction. You're subtracting that lifetime income amount from the total. Also, if there's a promise of an increase in income, remember the Madonna thing, Madonna, Vogue. Remember that? Without an increase, with an increase. Suppose someone's saying that the annuity is going to increase your income. In that case, all the annuity company does is simply lower the initial payment to make up for that potential increase, and sometimes it can be as much as lowering it by 30 and 40 percent.

When it comes to annuity income, the essential thing to remember is to focus on the payout rate. Don't focus on the shiny stuff. Focus on the contractual guarantees, and the contractual guarantee revolves around that payout rate. It is not yield, but it is a numerical reflection of your life expectancy or life expectancies at the time you take the payment. Hope that helped.

My name is Stan The Annuity Man. Schedule a call, run quotes, read the books, look at the videos, and everything else. Take your time and make your decision on your terms and on your timeframe. See you next time.

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.