Scott and Pat help Jim decipher the truth around indexed annuities and when something appears to be too good to be true.
Scott Hanson: Jim, you're with Hanson McClain.
Jim: Hi, thank you. I was listening to your program a few weeks ago and you mentioned indexed annuities, and you said, "Don't walk. Run from those because they're very complicated." But low and behold I went to a seminar, Live Abundant, Doug Andrew, and that's all they do. And they want to sell me indexed annuities. So I'm trying to make a decision on whether I should pull money out of my 401k and invest with them or run as you said.
Pat McClain: And tell me about your 401k now. You're still employed, you're retired?
Jim: I'm retired, 78 years old. We have...well, we used to have a little over $1 million in our 401k. It's gone down with this last downturn a bit but...
Pat McClain: And how's it allocated?
Jim: It's allocated according to Bob Brinker's index. Sort of...
Scott Hanson: Okay.
Pat McClain: Okay.
Jim: You know him.
Pat McClain: So how long...?
Scott Hanson: I haven't followed how his performance has been lately. He did great during a period of time and then missed a couple of financial things.
Jim: Still pretty good. I got seven funds.
Pat McClain: Okay. And it's probably like 50% stock, 50% bonds and cash, and maybe some traded REITs in there, something like that, is that fair?
Jim: Yeah. Yes.
Scott Hanson: You're not doing big sector allocation changes are you with that?
Scott Hanson: Okay, good.
Jim: I don't even know what those are.
Scott Hanson: No, you're not doing wholesale changes to your portfolio, like where you're moving 80% stocks now and 20% stocks down the road?
Jim: No. No, I don't move anything. I'm one of those invest and forget guys.
Pat McClain: So how long have you had this portfolio?
Scott Hanson: So then why...?
Pat McClain: How long have you had this 401k?
Jim: 15 years.
Scott Hanson: Why do you want to buy an annuity all of a sudden? How did this come about?
Pat McClain: Well, he may not want to buy an annuity, that's why he's calling us.
Jim: Yeah, that's why I'm calling you guys.
Scott Hanson: How did this come about?
Jim: They promised 7.5% per year. Good markets, bad markets, on average, forever. And my portfolio's going up and down.
Scott Hanson: And you get your principal back?
Jim: Well, that's what I don't know. I haven't really quizzed them on that yet?
Pat McClain: Is it an indexed annuity? Is that what they're calling it?
Scott Hanson: Or is a guarantee withdrawal benefit for a 78-year-old?
Jim: Yeah. I think they mentioned they have four, five, seven annuities, and they index them, and it's a very, very complicated process that they go through.
Scott Hanson: Sure it is.
Jim: They say that...
Scott Hanson: "Leave this stuff to experts. Don't try this at home. Very complicated process."
Jim: Yeah, that an individual can't do it, that we need their help. I have no...
Scott Hanson: Here's how I always like to approach an investment. The first, smell test. The very first, before you do anything else. I look back and say, "If this is guaranteed, how does this rate compare to other high quality guarantees out there?" Like a one-year treasury or a ten-year treasury. Government, that's the highest. They're the ones who print the dollars, right, so we're pretty confident they'll pay us back. If I loaned money to a large corporation like Apple or Microsoft or General Motors or I don't know, PG&E...I don't care what the company is...what kind of rate would they pay me
Jim: So you're talking about the dividend, right?
Scott Hanson: The interest payment because that's what...
Pat McClain: A bond...
Scott Hanson: So if I bought a ten-year treasury right now, it's around 2%. That would be a ten-year risk-free rate of return, right? Assuming the U.S. government is around in ten years to pay me back. So if someone offers a 7.5%, when I know that guarantees are at 2%, I also know that historically, stocks have averaged about five to six percentage points of return above the rate of inflation, and inflation is so low right now, how could an insurance company guarantee you 7.5%? Furthermore, the building where our offices are housed, the mortgage behind the building is an insurance company, less than 5%. So I know insurance companies are willing to go out and take their portfolio, money they raise from people like Jim, they're willing to go and invest it...
Pat McClain: And lend it to guys like us to buy a commercial building at well, less than 5%.
Scott Hanson: Like 4.25%.
Pat McClain: So the question is what's behind the wrapper? And the answer is…
Scott Hanson: Whatever they're telling you is not true. If they said at 2%...Maybe it's believable. Because you called and you said 7.5%...
Pat McClain: It's just smells.
Scott Hanson: ...they're just not being truthful.
Pat McClain: It just smells.
Scott Hanson: I guarantee you this. You cannot put $1 million in and in ten years from now, guaranteed to have $2 billion. That's 7.5%.
Pat McClain: That's a 7.5%.
Scott Hanson: I will guarantee that. I'll put a $1,000-bet on it right now. It's just not going to happen. What they told is not true. So you're not going to get a 7.5% here.
Pat McClain: So Jim, did they feed you?
Pat McClain: Did they feed you at that workshop?
Scott Hanson: Steak?
Pat McClain: Was it good?
Jim: It was okay.
Pat McClain: Okay, well then you got something out of it. That's all you need.
Scott Hanson: And an education.
Pat McClain: And you got an education. Leave this alone. What you have now is working for you, you seem comfortable. Leave it alone. But appreciate the call.