Make It Last – Ep 5 – All About Annuities

Annuities are one of the most oversold and misunderstood financial products in the marketplace.

This week, on Make It Last with Victor Medina, we discuss how to tell if an annuity is right for you, including three kinds of people who should never buy an annuity.

Want to learn more? Be sure to tune to Make It Last on Saturday mornings at 7:30am on WCTC 1450AM or subscribe to the show on iTunes here.

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. For more information, visit Medina Law Group or Private Client Capital Group.

Here is the link for the show:

Make It Last – Ep 5 – All About Annuities

For more information, read the transcript below:

Announcer:  Welcome to “Make it Last ‑‑ Helping You Keep Your Legal Ducks in a Row and Your Nest Egg Secure” with your host, Victor Medina, an Estate Planning and Elder Law Attorney, and Certified Financial Planner.

Victor J. Medina:  Everybody, welcome back to Make it Last with Victor Medina. It’s the show that helps you keep your legal ducks in a row and your financial nest egg secure. If you’re listening to us live, it’s Saturday morning, 7:30 AM. I hope you have your cup of coffee because I have my cup of coffee.

Maybe you’re listening to us on iTunes. We do have every one of these episodes available for download if you just go to iTunes and click the subscribe button. All you have to do is search for Make it Last with Victor Medina, and you’ll get this, and every other episode downloaded to your device, and you can listen whenever you want.

We wanted to say thank you to all of the great feedback that you’ve been giving us because we’ve really been enjoying doing the show. I’m glad that you’re enjoying listening to it. If you have comments for us, including any show topics, you can go ahead and send it to We’ll get that into the hopper and try to get you a show that you want to listen to.

Otherwise, listen up for today’s show because it is going to be a great one. We are going to talk about annuities. Now, annuities are one of the most oversold, over‑hyped, and misunderstood financial products for people in retirement. I can’t tell you how many times somebody comes in and has questions about annuities.

It doesn’t matter who you are. You either have a view that you think that annuities are great, or you think that they’re terrible, or you have no idea but you’ve got some feeling about annuities, including if you’re not sure about them, then you don’t want to consider them at all.

We’re going to go pretty deep on that in segments two and three here today, and we’re going to talk about annuities. If you are listening in for the first time, you’ve caught a good episode.

If you are interested in this topic, I’m going to urge you in the course of this show to go grab a pen and paper and get ready to take some notes because we are going to give you some great advice, including I’m going to share with you the two situations where you should never buy an annuity and three situations where it might be right. You want to stay tuned for that.

Today’s show, we’re going to have three segments. Segment number in today’s topics, I’m going to talk to you about the real reason why everyone offered you some free tax prep this year.

Segment number two, we’re going to talk about in today’s straight talk, the annuities, just basically what they are.

In segment number three, we’re going to talk about today’s top tips. We’re going to share with you the top tips about annuities. This is the show for today.

Now, I’m going to start off with talking a little bit about the real reason why everyone offered you free tax prep. I don’t know if you were catching the advertisements set around there or looking online, but it seemed like this was the year that everyone was offering to help you file your taxes 100 percent for free.

These ads came out from H&R Block. It came out from TurboTax, from the company, Intuit. It even came out through Credit Karma. Everyone was giving you the opportunity to file taxes for free.

Now, TurboTax, as everyone knows, is basically the do‑it‑yourself verse tax prep software. They launched a while ago. When they first launched, you had to pay in order to file your income taxes.

You probably paid somewhere between 40 and 50 bucks in order to get to the software. There was usually a small charge based on the number of states that you were filing in addition to the federal return.

Well, if you fast forward, they are doing about 40 million individual tax returns. What this means is unlike a service, like H&R Block or someone where you go meet with somebody as a tax preparer, you’re the tax preparer.

People will download the software and follow the prompts, get all of that information inputted and then they’re going to go ahead and file the return for you. Now, when we fast forward, they’re doing this service essentially now for free. You can file a free return.

Following on the heels of that, you’ve got H&R Block and Credit Karma also doing these free returns. The real question is how are they keeping the doors open? I’m famous amongst my friends for saying that if you’re not paying for their product or the service, you are the product or the service.

Let’s fast forward to something like Google. If you go onto Google and you do a search, that search is coming back to you for free. Why is that? Is it because Google loves providing a free service in the form of a search engine?

No, of course not. They’re tracking your information and then providing advertisements to you based on the searches that you’re making and then tracking that, and then refining their algorithms, and so on so forth.

In the case of H&R Block, and places like TurboTax, and Credit Karma, they’re using your information to sell to you more services. With the case of Credit Karma ‑‑ if you’re not familiar with this company, this is a company where you can put in your information and for free, check your credit score.

I can go into all kinds of details about the credit score that they’re giving to you. It’s a Vantage 3.0 versus a FICO score, but the idea is that you’re getting some idea what your credit looks like.

Now, in addition to that, if you’ve logged on, you’re going to see that they’re giving you offers. They’re going to give you offers for credit cards, because based on your credit score, they’re going to look and see who might actually give you a credit card, whether it’s high and then there’s an attractive card offer, or whether or not your credit is low and there’s a lower card offer. They’re going to give you that card offer based on your credit score.

Here’s the thing. They get a cut of that from the credit card company for getting you to enroll. The service is free but when you select something in there, they get paid. If you don’t select anything, they don’t get paid anything, but there are enough people that are taking advantage of this offer that they can go ahead and make money, run the site and do everything else they need to do.

In addition to that, they are offering free tax prep. When you complete the tax prep through them, they’re going to give you other credit card and loans or financial strategies based on what they’re seeing in your tax returns. If you filed your taxes with Credit Karma, you authorize them to use your information through the year 2025.

Imagine that. You’ve given them nine years’ worth of rights to use the information that you have filed to continue to market to you, to sell your information to other people. This is how they’re making their money.

It’s the same thing with H&R Block. H&R Block has a different problem they have to solve because unlike TurboTax, which is an online software service, or Credit Karma which is a web browser‑based service, you don’t buy the Credit Karma software, you just sign up on the site, H&R Block has physical buildings. They get to pay their rent on that.

What they really need is people coming into their offices in order to help pay for those services. As you might imagine that, that’s been going down because they saw about a six percent drop in tax returns which prompted them to lay off about 13 percent of their workers.

H&R Block, this year teamed up with IBM’s Watson computers. Now, they’re going to offer some tax‑wise financial strategies at no extra charge to them. That will give them the opportunity to go ahead and give them other services, including a fee‑free, interest‑free loan of about $1,250 against the tax returns, the tax refunds that are coming.

These are not bad in the sense that it might help somebody along the way. The idea here is that you’re being sold additional services in exchange for the opportunity to file taxes for free. I’m here to warn you about that so that you understand what the tradeoff is. There is no such thing as a free lunch.

If you are electing to go through this for free, realize that you’re giving up some privacy, you’re giving up the rights to actually have everything given to you as your free advice, the advice that you’re paying for, you’re getting that in exchange for this commons to buy something else, and is important to know about that going forward.

Victor:  As you might imagine, we really encourage the use of a professional in these situations as opposed to giving up this privacy for these companies.

When we come back, I’m going to give you the straight dope on annuities. We’re going to do annuities, the good, the bad, and the super ugly. I’m going to share two situations where you should absolutely never buy an annuity and three situations where one might be right for you.

Stay tuned when we come back on Make It Last with Victor Medina.


Victor:  Welcome back to Make It Last with Victor Medina. We are on the topic of annuities today. I’ve got to start this segment off with a story.

I do estate planning as well as the financial planning for people. They’re two different companies. I’m an Estate Planning Attorney, and I’m a Certified Financial Planner. I had somebody come in and wanted me to help them get their affairs in order, get the legal plan done, as well as look at the financial plan and make sure that it fits.

When I was looking at it, there’re some particular goals that they had in mind. I said, “Let me ask you something. What do you think about annuities?” His response was classic. He says, “I hate them. I don’t like when you use the word. I think it makes you seem less credible when you use the word, and I don’t want to talk about them at all.”

I said, “OK, but you have to understand that I’m kind of like a cardiologist. If I’m telling you that what you need is a heart transplant, you might not like the heart transplant. You might not want to hear the word, heart transplant, but it’s the thing that’s right for you. It will help you get better.”

We kept going on, and at the end of the day, he ended up purchasing an annuity. He thanked me because [laughs] he’d come 180 degrees, but it illustrates that everyone has got a firm opinion on annuities.

I have another client family that we just finished up doing planning, and they love them. Couldn’t get through them fast enough in order to put one in place. Of course, we helped put a great one in place, one that was appropriate for them.

For them, it was really a no‑brainer that they wanted an annuity. I had to talk them into one that was better for them, as opposed to one that they wanted because they loved them so much. I said, “It’s not really where the promises are going to be.”

There’s a wide spectrum of opinions on annuities. My personal belief is that annuities are neither good nor bad. They’re OK in the right situation. They’re the right solution in the right situation. There are times in which they are absolutely the wrong solution.

Now, in addition to the book that’s often offered here on the radio show about the legal book, I’ve actually written a second book. That book is in the financial planning world. If you go to Amazon or if you go to the iBook Store or something like that, you can find “Make It Last ‑‑ Ensuring Your Nest Egg is Around as Long as You Are.”

That book is really for people that are in retirement, nearing retirement. In that book, there’s a chapter, and that chapter is called, “Variable Annuities ‑‑ The scourge of the Earth.” You might imagine that I’ve got some firm opinions about variable annuities, but annuities have all different flavors.

There’s no one single type of annuity. I think that there are good ones and bad ones. I think that variable annuities are bad ones for reasons that I’m going to talk about here today, but there are good ones. The situations really depend on someone’s financial circumstances, and what their goals are. You have to keep an open mind to how we accomplish the goals that we want.

Now, let’s set the stage for annuities. Annuities are nothing more than a contract for the regular payment of income, or regular payments over a period of time. That’s essentially the definition of an annuity. You’re going to get periodic payments.

Annuities have been around for a long time. If you think about it a pension, a pension is nothing more than an annuity. It is a guaranteed income stream for the balance of your life, and it’s there to pay out that income.

Something happened along the way, which is that insurance companies found an opportunity to new vehicles and then began to offer them to consumers.

There are really three different kinds of annuities. There are a fixed rate annuity, which you might think of as a long‑term CD where the rates are better than you can get for a CD, but there’s some period of time in which it’s guaranteed. That’s called a fixed or fixed rate annuity.

There are indexed annuities, and indexed annuities are a hybrid of a fixed rate annuity, plus the opportunity for some growth. I’m going to talk to you a little bit about the way those work. There are variable annuities.

All investments have two out of three benefits for their investing, but never all three. You can have safety, you can have growth, or you can have liquidity, but you can’t have all three at once. Let’s think about that.

If you have your money in a CD, or in a savings account, a money market account. You have safety and liquidity, but you don’t have great growth. There’s not a great interest rate to that.

If you have your money in stocks or mutual funds, you have growth. You have liquidity. You can get out of that and turn it into cash, but you don’t have a lot of safety. If you have it in stocks, those stocks could go right through the basement. You can lose all of your money.

Annuity contracts are somewhere in safety and growth, but the trade‑off is often liquidity because in exchange for these promises that the insurance company is going to be making for you, they’re going to have some contract terms which limit the availability of that as a principal.

We call those surrender charges, and they are a part of the deal that you make with the insurance company because you agree to hold your money there for a certain period of time.

The reason why insurance sales people love selling annuities is because they come with high commissions. Commissions are neither a good thing nor a bad things, as long as you know what’s going into there.

Understand that the reason they’re being offered and sold so often is because they pay the agents a pretty hefty commission. It can range anywhere between 7 percent to 11 percent, or higher, in exchange for the really terrible annuity contracts that are being pushed out there because it pays the agents more.

This is one of the reasons why you want a fiduciary as your investment adviser and your financial planner because they are going to put your best interest ahead of making money off that.

I’ve said before I don’t like variable annuities because variable annuities are essentially insurance contracts wrapping investments. With variable annuities, you will buy the insurance contract, and it will invest your money essentially in the stock market.

There are all kinds of rules about how it has to be invested in order to get to the other guarantees. You have to have a certain amount in equities, which is to say there’s really not a lot of principal protection on them. You could lose the value of your investment.

If anyone is guaranteeing you that your principal’s protected inside of a variable annuity, they’re really doing you a disservice or lying to you. The other reason why I don’t like the variable annuities is because they often come with high fees that are associated with the contract.

There are the fees that are associated with the investment themselves, so the mutual funds or other investments that are inside that, they have operating expenses. The contract itself has an operating expense that’s associated with it, called a mortality and expense charge. There are rider fees that sometimes are charged against that.

When we’ve calculated, we’ve seen that the variable contract could be anywhere between two and four percent of annual charges against the money that’s in that account. That means that your investments have to outperform that or else, your principle is invaded. You will lose money. You can see that they’re terrible contracts.

I have a tool that I’m going to put in the show note. This is actually encouragement for you to go ahead and subscribe in iTunes. You will get a link on there for how to evaluate your variable annuity to make sure that it is good, at least so that you understand it.

We have not yet talked about indexing. I’m going to talk a little bit in the next segment about how that works.

Victor:  When it comes to variable annuity, we’ve often seen that all of the benefits that someone wants to get out of a variable annuity. They can get from inside of an index annuity. We’re going to talk a little bit about that.

That’s the lined up to annuity. When we come back on the next segment, I’m going to share with you two situations that you should absolutely never buy an annuity and three situations where one might be right for you. I just need you to stay tuned when we come back on Make it Last with Victor Medina.


Victor:  Everybody, welcome back to Make It Last with Victor Medina. We’re talking about annuities today. I have just spent about eight‑and‑a‑half minutes telling you all about them, and why I dislike variable annuity.

Right now, I’m going to talk to you about two situations where you should absolutely never buy an annuity. The first situation is one in which you might need that money back in a short amount of time.

Annuities are long‑term contracts. Used correctly, they are fine financial products based as part of an overall plan. They are not short‑term amount of money. If you are putting aside a lump sum that you were going to need in the next zero to five years, an annuity is not a right product for you.

In exchange for all of the great promises that the insurance company is making about principle protection, or an income right, or indexing options, you are agreeing to give them that money for a certain amount of time. If you need it back, they are going to charge a fee to get that money back. Those are called surrender charges.

There are some contracts in which you can get a return of premium. Return of premium is essentially the ability to get your money back, but those are specialized contracts. For the most part, the annuities that are being offered or sold to you are ones in which there are surrender charge that will be, I don’t know, anywhere between 7 to 10 years.

If you have a product that seems like it’s too good to be true, that is promising you the world, often it comes with a much longer surrender period, like 15 to 20 years. Those are just absolutely unconscionable, they’re terrible. There’s no reason to have a 20‑year surrender period on any contract.

First situation is one where you’re not going to need that money back. If you’re going to need the money back, annuity is not right.

The second situation which you should never buy annuities, when you don’t fully understand the contract, the fees that are involved, and what it’s doing for your portfolio. When we meet with client, in fact, I had a meeting yesterday with a client in which there was a $130,000 worth of annuities, inside of $1.2 million investment portfolio.

I asked the client, “Why do you have this annuity?” The answer was, “I don’t know. It’s what the adviser told me that I needed.” It turns out that the “adviser” was an insurance sales person, who basically sold them this annuity and made, let’s say, seven percent on $100,000 worth of an investment, made $7,000 for selling it. It didn’t have any place in the portfolio.

I’d ask, “Is this serving some need?” “No, no, no, they just told that we need, but I don’t know what it actually is doing in our portfolio.” That’s not good. You don’t want to ever buy an investment where you don’t understand what its purpose is in your portfolio.

The other thing that we’ll often do is tear apart a contract to help explain it to a client so that they understand what they’re actually in. Maybe they have an annuity already. You want to fully understand the contract. For instance, you want to know what the period of the surrender charge is. You want to know what annual fees are being charged against your account.

With the variable annuities I mentioned, you might have, I don’t know, as much as four percent of annual fees in there. You really have to dig in to figure all of them out. They’re not going to be on that front page showing how much is being charged as though it was something that they want to disclose.

You want to understand those annual fees, and there might be called writer charges. They may be called mortality and expense charges. If you have a variable annuity, they might have to investigate what the underlying fees are on the investments. Another reason why I absolutely hate variable annuities is that you’re often limited in the number of investments that you have to choose from.

Often, the investments that you have to choose from any variable annuities are ones that are proprietary to the insurance company. Which is just a long way of saying they’re making more money on your money. You are forced to take these more expensive investments because, in fact, they are the only ones that are available in the contract.

These are all elements of the deal or the contract that you are making with the insurance company. It’s important to understand those because this is your money. If you don’t start asking these questions, the insurance agent that is selling you this policy is not going to offer this up. Their job is to get you to buy the policy so that they can make a commission.

Another situation is you need to understand what your fees and contracts, and what it’s doing in your portfolio. If you have either one of those situations, you shouldn’t have an annuity.

Here are three situations, practical situations, where an annuity might be right. The first one is that you’re solving for a guaranteed income stream. Do you remember in the first part of the annuity discussion? I said that the whole definition of an annuity is a fixed period of payments. That’s the pure definition of an annuity.

I said that it’s what a pension was, way back when that you’re going to get guaranteed income for a period of time. If you need to solve for a guaranteed income stream, an annuity might be correct. These are not one size, fit‑all solutions. There’s a story that I like to tell about. A bum knee that I had where I bought the wrong knee brace because I just thought that any knee brace would do.

There are knee braces that they make you look like the terminator. There are knee braces that are just little straps that go around. Each one is a good knee brace, but there’s only one that’s right to help you solve your problem.

For a guaranteed income stream, there are better products than others. You have to make sure that you get the right one. If you’re looking to solve for a guaranteed income stream, which is annuity might be the right solution.

The other one is that you need an absolute principle protection where you need these amount of funds to be earmarked as 100 percent guaranteed to be there. You wouldn’t do this with all of your portfolio. That wouldn’t be correct, but you might carve out a percentage of that that you say, “I want this. I want to know that this will always be here.”

Either because you’re going to leave it behind as an inheritance or it becomes your hedge against the future to know that you have some spending money because you have enough income. You want to make sure that these principles are there. If you want absolute principle protection, an annuity might be correct.

The last one is that you want to reduce the amount of risk that you need to take in your portfolio for longevity purposes. You see, when you retire, if you just take a fixed income stream for the rest of your life, it’s not going to keep pace with inflation. In fact, inflation will erode your purchasing power.

What you want to be able to do is hedge against that by investing in a way that helps your money grow. You might have to take a certain amount of risk that put your portfolio into a lot of volatility in order to meet what that longevity is going to be 30 years from now.

If you carve out a percentage in a fixed income situation or guaranteed income stream, then you might be able to lessen the risk that you need to take on that portfolio in order to meet your goals.

Those are three situations where annuities might be correct. Here’s what I’m going to do. If you’re interested in learning more, what I want you to do is follow the free book offer that we give during this show.

When you get all of the emails that are associated with that, go ahead and send us an email that says you want a free annuity review. What we will do is we’ll set up an appointment for help. We review your current annuities and maybe give you some answers about better solutions that are in there.

This is a service we’re going to offer just the listeners of this show, so absolutely free for you. We need you to go ahead and reserve the book so that we know that we’ve got your contact information. It cost no more than five bucks to get you a copy of that book.

In fact, if you put it in the email, maybe what we’ll do is we’ll send you the other financial book, so that you have that instead of a legal book. We’ll figure out how to get that done.

In any event, I hope this has been educational for you. We want you to really understand what’s going on.

Victor:  Annuities are a big part of what are being sold to people in retirement. Could be good, could be bad, not sure. For your situation, it really is helpful if you work with a fiduciary level adviser, like what we are at Private Client Capital Group. Examine how it’s going to fit in your portfolio and make sure that you’re getting a recommendation for the absolute best solution for your situation.

This has been Make It Last with Victor Medina. We’re going to help you keep your legal ducks in a row and your financial nest egg secure. Thank you so much for listening. We will catch you next week on Make It Last.

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Content provided here in is for informational purposes only, and should not be used or construe as investment, or legal advice, or a recommendation regarding the purchase or sale of any security, or to follow any legal strategy.

There is no guarantee that the strategies, statements, opinions, or forecast provided here in will prove to be correct, as performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.

All investing involves risk, including the potential for loss of principle. There is no guarantee that any investment plan or strategy will be successful. We recommend that you consult with a professional dedicated to your needs.