Busting the Annuity Myths: My Interview with Tom Hegna (Part 1)

the power of zero

Popular speakers in the financial and retirement space like Ken Fisher and Suzy Orman have made annuities rather unattractive. The major objection has to do with the supposed fees of the product, even though many of the annuity options are not actually fee-based products.

Ken Fisher has high fees, just like other investment options like commodities, hedge funds, and real estate. Variable annuities have higher fees than mutual funds but they also come with guarantees, and he’s essentially convincing people to move from those guaranteed products to another high fee fund.

People often say they want no fees, but if that was the case they would just put their money into a savings account. It’s not about the cost of the fees. Its about the value you’re getting in return for the cost.

Life insurance and annuities are not a religion and don’t require your beliefs. They are both basically risk transfer vehicles. An annuity is essentially a guarantee that you will never run out of money as long as you live.

With all the medical breakthroughs that have happened recently, people are living longer lives, which is only increasing the odds of falling prey to the number one risk in retirement.

Tom believes that you should spend all your money and leave life insurance to your kids. Leaving your IRA to your kids is not a great vehicle to transfer your wealth.

People have been programmed to spend their paychecks while they are working while not touching their 401(k)s and IRAs while they are working, but once they retire they have to switch their mindset. You should use your money to actually enjoy your retirement.

Any money that you want for retirement is appropriate for an annuity, especially after the age of 59 and a half. Annuities are not meant for a down payment on a house or your children’s college education, but depending on your goals, annuities can be one of the best places to put your retirement money.

If you’re young and want to save as much as possible without losing what you have, an annuity is a great option. It would be possible to purchase a significant stream of money by the time you’re retired and it wouldn’t be that painful if you spread it out over your working years.

People need to start thinking about income, rather than accumulating a big pile of money by the time they retire.

Tom owns eleven annuities but he has even more in cash-value life insurance. Tax-free income in retirement is going to be vital, and people are not prepared for how much taxes are going to go up in the near future.

If taxes go up and the market crashes, there are going to be a lot of people who are going to suffer.

Liquidity is not a one time event, it’s a lifetime event. When you buy additional lifetime income you are increasing your lifetime liquidity.

Annuities are a long-term plan. That money is not for emergency expenses. The overall strategy is not all or nothing. You can’t put all your money into an annuity or life insurance, they are all part of a balanced portfolio.

If you guarantee a portion of your income in retirement by way of an annuity, it will free up the money in your stock market portfolio to continue to perform for you.

Life insurance and annuities are permission slips. They give you the ability to spend all of your money and invest more aggressively elsewhere. Tom has been a proponent of investing 1% of your portfolio in Bitcoin which fits right into his overall strategy. Having guarantees in your portfolio gives you that kind of option.

In this low interest rate environment annuities are more efficient than normal because the interest rate matters less and less as you get older. You also have to compare the other options.

Why be in the market when you can guarantee a 12% payout rate for the rest of your life?

Mortality credits are extra money from the risk pool that you get paid the older you are and the longer you live. Because the insurance companies can predict mortality in a large group pretty accurately, they can price the plan differently and afford these kinds of payouts.


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