The topic is squeezing annuity yield. I want you to close your eyes and envision that you were in an orange grove in the state of Florida, and you pick the orange of the tree, you cut into it, and you hold it over your head, a foot away from your mouth, and you squeeze, squeeze that wonderful orange juice into your mouth. It's so refreshing. It's so wonderful.
What does that have to do with annuities? When we're talking about buying contractual guarantee annuities, we're in an environment where whether the Fed's moving or not moving or raising interest, it doesn't matter. Annuities are contractual guarantees. You're buying it for what it will do, not what it might do. Will do are the contractual guarantees might do is the hypothetical, theoretical, back tested, hopeful agent return nonsense, unicorns chasing the butterflies. It's just all sales pitch. When you're buying annuities, you're buying contractual guarantees.
Let's talk about how you squeeze yield with annuities. The two primary functions that people use annuities for are either principal protection or income for life. I have an acronym called PILL, Principle Protection, Income for life, Legacy, and Long-Term Care. Those are the four items you need to look at annuities to solve for solve for contractually. If you don't need it to contractually solve for one or more of those items in the PILL, you do not need an annuity. Never buy an annuity for market growth.
Let's talk about squeezing yield out of, say, Multi-Year Guaranteed Annuities, which are the annuity industry's version of a CD. Now, can you time it? No. Should you try to time it? No. Do people try to time it? Yes. I don't know why everyone thinks they're market mavens or masters of the universe or Gordon Gekko of MYGAs. But MYGAs are the industry's version of a CD; you get a guaranteed interest rate annually for a specific period of time that you choose, whether it's a one-year, a two-year, a three-year, a four-year, a five-year. You can go past the five-year. You can go as far out as 10+. My question is, why? I would keep the maturity short, five years or less.
So how do you squeeze yourself? How do you make sure that you're not locking in and miss out? You can't, but there's one strategy that helps, which is laddering the purchase. Give you an example. Someone says they have $300,000. They don't want to lose a penny. They don't want to pay any fees. They just want an interest rate. They don't need income. They just need a guaranteed interest rate. Then what I was saying is take $100,000 buy a three-year, take $100,000, buy a four-year, take $100,000, buy a five-year, or you could do 2, 3, 4, or 1, 2, 3, whatever the laddering you want to do from the duration standpoint that feels good and comfortable for your situation, you ladder it.
You have money coming due at different intervals to attach to rising interest rates hopefully. Now, at the end of a duration of a Multi-Year Guaranteed Annuity, you can get all the money back. You can send it back to where it came from. You can roll it to another Multi-Year Guaranteed Annuity or roll it to a Lifetime Income Stream Annuity. The bottom line is you control the asset. It's your call, period. But squeezing yield out of MYGAs comes down to not trying to time it, not picking a specific duration, and laddering those maturities. But let's just say you said, 'Hey, Stan The Annuity Man, I don't want a ladder. I don't want to do that. I want to squeeze the yield out of one maturity. I'm thinking about a five-year or a three-year. Which one would you recommend?' Three. 'Hey, Stan, I'm thinking about a four-year or a three-year. Which one would you recommend? Three. 'Hey, Stan, I'm thinking about two-year or three-year. Which one would you recommend?' Two. See a trend there? The trend is that I'm always going to go toward the shorter duration.
Now, the annuity sales guys are looking down upon me, going, 'Stan, that's not the way to make the most money. The longer the duration, the higher the commission.' But with Multi-Year Guaranteed Annuities, the built-in commissions are anywhere from a 1/2 of one percent to two percent. On a five-year MYGA, some are one percent, and some are two percent. But it's in that range; it's all built-in. In other words, you put $100,000, and you're going to see $100,000 in your account, even though we get paid a one-time fee from the administrative cost. As my CEO, who's the smartest person in the room, she says, 'Hey, it's like light bill, water bill, the commission's as part of the overall administrative costs of issuing an annuity for annuity company.' So when people say, 'All annuities were expensive, and commissions are high,' they have no clue what they're talking about. That's MYGAs. That's how to do MYGAs.
Let's talk about income. You are squeezing yield out of income. How do you do that, Stan, The Annuity Man? Let me tell you. Lifetime income is primarily based on your life expectancy, or life expectancies if joint with your loved one; at the time you take the payment, interest rates to play a secondary role. Interest rates play a secondary role because peoples are like, 'I'm going to wait until another year to buy the Immediate Annuity lifetime income stream because of the interest rates.' Well, that's dumb. If you do that, you have to factor into 12 payments that you missed while trying to be the master of the universe. There is no such person in the annuity company, and they have the big buildings for a reason. 'Wait a minute, Stan, you just threw that down. You threw that gauntlet down, and I heard it hit the floor. We are still talking about squeezing annuity yield?' Yes, we are, and I'm glad you stopped me right there.
The way to do it with lifetime income is to ladder the purchase. That makes sense because the older you are, the higher the payment, and if interest rates do happen to go up, even though they're a secondary pricing mechanism to the lifetime income stream, you're going to benefit from that. That's squeezing annuity yield with lifetime income. Remember, as my buddy Tom Hegna says, it's all about mortality credits, and mortality credit is the pooling of risk. You're pooling the risk with people of your age group to get a higher payment share in that risk. That's the annuity business. At the end of the day, it's all about life expectancy. The annuity industry says, 'Hey, we think you're going to live to this age and you're saying, 'You know what? I'm going to take that bet because I might live longer, and if I do, you're on the hook to pay Mr. Annuity company, and if I don't, I'm structuring my annuity that 100% of the unused money goes to the list of beneficiaries of the policy and you Mr. Annuity company don’t keep a penny regardless of the circumstance.'
One of the biggest misconceptions about lifetime income is, well, if you buy a Lifetime Income Stream Annuity and you die, money goes poof. Well, that's life-only, and that's one of 40 ways to structure it. Most people structure it, so 100% of any unused money goes to the beneficiaries, even though the annuity company's on the hook to pay. If there's a medical miracle and Dr. Fauci comes up with a pill to make you live to a 150, the annuity company is on the hook to pay. I have thousands and thousands of clients with Lifetime Income Stream Annuities that are at zero on the account value, but the annuity company keeps paying. That's the reason I always offer this.
People say, 'What is the return on investment?' I don't know that until you die. But squeezing annuity yield at Multi-Year Guaranteed Annuities, Fixed Annuities, it’s very, very simple. You just ladder it. You don't try to time it, and you keep the maturity short, and at this time, where interest rates are rising, and we'd been told by the Fed that they're going to continue to raise rates, you can wait and time it, but you can't time it perfectly. You also have to look at this. It's like lifetime income when you’re looking at MYGAs and squeezing yields. When looking at Fixed Rate Annuities and squeezing yield, you have to factor in the months you're waiting and the interests you're losing while you're waiting to hit the zenith point of yield. Like markets, with interest rates and Multi-Year Guaranteed Annuities; the bell doesn’t ring at the top or the bottom, ever. Pull the trigger, and keep the maturity short.
That's not some sales pitch. That's just me doing it for three decades and knowing how to do this. Still, with lifetime income, it's not about interest rates, it is about life expectancy and when you're squeezing annuity yield with lifetime income type products. Also, remember this because life expectancy drives the pricing train. What's the risk? Let me tell you. It's the life expectancy tables changing against you, meaning that the annuity companies say, 'Well, you know what? We've looked at the studies and the CDC and the previous COVID stuff, and we determine that you will live longer.' What does that mean to you? That means there will be more payments, which means the payments are going to be lower. Don't focus on interest rates right now; focus on the possibility that life expectancy tables will change against you. If you buy lifetime income, now what are you doing? You're locking the life expectancy tables permanently now, which might be a better play than trying to time the interest rates that play a secondary role in the pricing.
The bottom line is this. You can not time it whether you're doing principal protection MYGAs or Lifetime Income Stream. I know you're smart. I know you have advanced degrees. I know you're a master of the universe. I know you made all this money in the stock market, and now you're going from accumulation to decumulation and trying to figure out how to do transfer-of-risk annuities. You're still smart, and you still want us to find the arbitrage and sweet spot, and you want to time it perfectly. You can not.
Squeezing yield comes down to laddering when it comes to lifetime income. Squeezing yield comes down to laddering or choosing the shortest or shorter maturity you're looking at on my live MYGA feed at theannuityman.com. You can also run lifetime income quotes at theannuityman.com with the best calculators on the planet.
I want you to go back to the first part of the podcast where I painted this beautiful picture of you walking through this orange group, picking an orange, holding it a foot above you, and then you're squeezing the orange juice into your mouth that's going all over your face. It's very angelic music, somewhat classical, and a jazz combo is playing in the background and squeezing annuity yield. Yes, we do that. Yes, we will give you those strategies that make the most sense for you.
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.