Retire Smart Austin | Episode 173

Cynthia de Fazio  00:20

Phil, welcome to Retire Smart Austin. My name is Cynthia De Fazio, joined today by Phil Capriotti, senior of Empower Wealth and tax. And to our viewers at home, we’re talking all about the A-word today, annuities. We have to talk about it. We know there’s a lot of questions about annuities. There’s questions about is that product right for me with my retirement today? Stay with us. We are doing a deep dive into the world of annuities. Phil, how are you today?

Philip Capriotti  00:56

Good morning. Cynthia. Doing wonderful about yourself.

Cynthia de Fazio  00:59

I am doing wonderful as well. I’m so happy to be in the studio with you this morning, and I’m so glad that we’re tackling a show about annuities, because people have so many questions about them, they do.

Philip Capriotti  01:09

And folks, before we get started, don’t turn the TV off or change the channel. And the reason I say that this is not a sales pitch on buying annuities. This is actually more of the warning, the pros and cons, advantages and disadvantages. We’re going to dig specifically into variable annuities. Now, the reason I chose this topic this morning was because we’re finding that when we’re running many of our clients, Morningstar reports. Inside of those Morningstar reports are variable annuities, and we, and I’ve known this for years, but we’re seeing more and more people getting ready to retire that own these financial products. And the unfortunate thing about them is, I would say nine out of 10 clients that I’m interviewing, and I talk about clients as prospects, folks that come in and want to get a second opinion and want us to, you know, structure that retirement plan for them as tax efficient. They have no idea of the disadvantages. As a matter of fact, the financial advisors that are selling these products are not even doing annual reviews with clients. So, if you’re out there and you own a, specifically a variable annuity, we’re going to focus on that today. I want you to call, pick up the phone right now, because we have five spots. Dial, 888-818-6557, tell them that you have a variable annuity. You want to have a Morningstar report run on it, because you need to understand the advantages and disadvantages, specifically internal and external fees. So, let’s start by saying, What the heck is a variable?

Cynthia de Fazio  02:50

That was my first question, like, where does that word come from? Variable? What does that mean?

Philip Capriotti  02:54

Yeah, so variable means it fluctuates up and down with the market. But specifically, you know, the definition is, it’s an insurance product that offers investments inside of it. These investments are known as sub accounts. These sub accounts are like little mini mutual funds. They’re built the same way, so like any mutual fund, they have high internal fees. Now we’re going to start with that most of these sub accounts are market volatile, meaning when the market is going up, the variable annuity is our friend. When the market is going down, the variable annuity is not we can actually lose income, we can lose benefits. We can actually lose we can lose value. So, let’s start with the fees. Really want to talk about this. So well, maybe we should talk about the advantages first.

Cynthia de Fazio  03:45

Let’s do that. Let’s start with sunshine and happiness.

Philip Capriotti  03:48

Let’s do it then. We’re going to go with the unicorns and yeah, we’re going to go with that. So, the first thing about annuities, variable annuity specifically, and any annuity, pardon me, as they offer tax deferred growth. We may be using many products, similar products, not variable annuities, the fixed index variety for folks that have significant wealth, pardon me, and are not spending the money and they don’t want to pay taxes on it at the end of the year. So, with these new tax changes, making eliminating long term capital gains, making them ordinary income, annuities may be a good option, pardon me, yeah. So, tax deferred growth, which means your investment gets to grow inside of the insurance product, and no matter what value it earns, unless you take a distribution, it’s nontaxable. Okay, so that’s number one. That’s the first thing. The other thing with variable annuity specifically, is you have multiple investment choices, and this is why I say advisors really need to review this yearly. I don’t know why they don’t review them yearly, but that’s what we’re finding. Part. Me a second. Folks, absolutely so again, the range of investments, typically, they’re like mutual funds called sub accounts, and you can get your large cap growth, large cap dividend, you know, a major, a huge variety of different funds. The fact is that these funds are loaded with fees. Each sub account has a fee that ranges between one half a percent or 50 basis points and 2% per year per year. So that’s number one fee. What we’re seeing is an average fee of about 1.65 1.75 in most of the annuity variable annuities that we’re seeing. Not a big fan of that huge fee, because the advisor is allowed to charge a management fee on top of that. And the problem that I have with it, folks is that these products are not specifically being explained properly all of the minute details the one of the other benefits. So that’s an advantage and a disadvantage, as they have death benefits. So regardless of if you’ve turned on income from these annuities, they have what’s called a guaranteed value or a death benefit. If the owner or the annuitant passes away, okay, it will go to the spouse, or any of the value left in the account will go to the spouse or go to the beneficiaries. Okay, one of the primary reasons why folks buy these products is for guaranteed lifetime income. Okay, all right, and I’m good with that. I like the guaranteed lifetime income. However, if you have a variable annuity that is funded by an IRA qualified money that you’re forced to take RMDs from once you reach of age. Many of these things allow you to start up income, but the problem with it is you’re starting up taxable income. So variable annuities per se do not allow us to do a Roth conversion inside of the variable product so that we can turn on tax free income. What do we talk about every single week? Tax efficient, tax-free income. Absolutely. So many of these are a couple of companies that say, Oh no, we’ll allow to do the Roth conversion, but you have to convert the entire annuity at one time to a Roth. They don’t allow for segmented Roth conversions- is a big no, no. Many of it. Many of these annuities also have another thing called living benefits, or long-term care benefit riders, another rider, another charge on top of the sub account, normally ranging from half a percent to up to 1.25% for each one of the riders. Okay? In addition to that, folks, they also have what’s called administrative fees. Administrative fees are onetime fee that normally range between 30 and $50 a year. I’m not really concerned with that. I am concerned with the mortality charges. Okay, so that’s yet a third fee. Wow, fourth fee, right? Because if the advisor is charging a fee, so the mortality charges normally run about another 85 basis points, anywhere from point five or half a percent to up to a full percent. We see it range about point eight 5% so if you add point- 1.85 another point out for sub account fees, if you add another mortality fee of point eight five, you add another rider fee of an average of 1% you add your M and A charges, What we’re seeing is we’re seeing fees in excess of 3.2 to 3.8% each year, whether you make money or lose money or not, every year, including the years that you turn this income on. So, I’m not an annuity hater, but to be honest with you, you there are over 2000 different annuities, not that many variable annuities. I can count on two hands what types of products I would actually own and what types of products I would actually recommend to a client. As a licensed fiduciary, if you have a variable annuity, pick up the phone right now. 888-818-6557, we want to, we want to run a morning star report, not just on your investment portfolio, but if that investment portfolio has an insurance product in it, like a variable annuity. You need to know these internal fees. And when you come into the office and I ask you, how much are you paying for the annuity, do you know what your internal fees are? And you tell me, No, I know your advisor has not been reviewing this with you yearly. Absolutely makes me very, I want to say angry, but we’ll say passionate, disappointed. It’s not right. It’s just simply not right.

Cynthia de Fazio  09:53

It’s not right. Phil, to our viewers at home, there’s a number to call on your screen, 888-818-6557, And if you’re in the viewing audience today and you’re asking yourself, How do I even know? Do I have a variable annuity? What type of annuity do I have? Am I aware of the fees that I am currently paying? If the answer is no or you’re unsure, this is the perfect time to call in. Number is 888-818-6557, and grab that complimentary consultation, that portfolio review. If you are unsure, this is the perfect time to take advantage of this. Usually, we have five spots available at the beginning of the hour, so please don’t miss your chance. If you don’t have a pen, that’s okay. You can grab your smartphone, click on that QR code at the bottom corner of your screen that will take you right to the landing page for Empower Wealth and tax and you can claim your spot accordingly. Remember, especially when you’re entering the retirement years. You don’t want to be surprised when the covers are pulled back, and you realize that you’re paying an astronomical amount of fees. We have to take a very short commercial break here on Retire Smart Austin. Don’t go anywhere. We’re going to do another deep dive into variable annuities when we return.

Philip Capriotti  11:09

I first got in the financial world in college, the first year, summer, I got a position as a laborer underground, and about 110-degree heat after that first year, I realized there’s no way on God’s good green earth that I’m going to be a laborer for the rest of my life. So, it made me really buckle down to my studying. Second year, a friend of mine got his insurance license and worked with a company called the palm Ross agency. So, my very first week, I’m broke. I go in. They give me 50 leads that been worked by about seven different agents, so I’m thinking, I think they don’t want to give me the new lease because I’m green. But okay, I’ll go on it. I had made more in that first week than I made in an entire month as a laborer. I did that my sophomore year, my junior year, in my senior year, I got ready to graduate Well, I’m graduating top of my class my senior year, so I’m getting offers now, and I have another offer from banker’s life and casualty to go into their entry level management program. I was the very first branch manager, the youngest branch manager with banker’s life and casualty. I was running the Philadelphia office by the time I was 25 I was running the Toms River New Jersey office, and I was running the reading office. So, my wife was none too happy with me at that point. So about three years later, I started my own company, and that’s when I actually decided to become independent, and then the rest is history. I’ve been in this industry for quite some time.

Cynthia de Fazio  12:43

Welcome back to Retire Smart Austin. My name is Cynthia De Fazio, joined today by Phil Capriotti, senior of Empower Wealth and tax and to our viewers at home, we’re talking about a very important subject, the world of variable annuities. Do you know if you have a variable annuity? This is the perfect time to find out what the answer to that question would be, Phil, we talk about doing a deep dive. We talk about doing a morning star report. Let me ask you a question. Have you had clients come in recently that have been completely surprised to learn that they had a variable annuity and what the fees were?

Philip Capriotti  13:13

Yeah, shocked. As a matter of fact, I have a story with one specific client, although I literally have dozens of clients. They are unaware of these fees. So, this one specific client that I that I actually prospect soon to be a client, had come in, and the gentleman has a CPA. As a matter of fact, this gentleman is a CPA. It’s amazing how many CPAs I get to work with. Yeah, it’s really and, and it’s funny too, because he said, all of my neighbors, okay, out in Spicewood, they all come in. They all ask me for advice, of like, why I talked to Phil. Okay, it’s amazing. CPAs, they’re good at doing very good at doing taxes, Comptrollers and stuff, at any rate, owned a variable annuity. So, the story is he has about 11.8 about $12 million in retirement accounts, various different retirement accounts, zero in a Roth zero. We’re going to fix that. Well, at any rate, we he had one annuity. We had about 2 million in it, and that was designed for income for him and his wife, and it was non-qualified money. So not all of that income is considered taxable, maybe about half of it, okay. His advisor this income level, when the market was sky high, was going to provide them for $140,000 a year in income. Okay, okay, and that was and then it was freeze at that level, the advisor said, no, no, no, don’t collect the income yet. There was a downturn in the market, and when he by the time he needed to turn on that income, the income reduced to $110,000 a year. Wow. Okay, so again, variable goes up and it goes down. So, we really there’s a lot of moving parts in them. It’s no wonder. So, it’s a shame they generalize all annuities as bad. I mean, a lot of these financial advisors, but at any rate, let me get to the story about the internal fees. So, he’s interested in tax deferred growth. He’s a CPA. He doesn’t want to pay taxes on any of the earnings because he’s that. He’s not spending. I understand that. So he has another annuity with $4.2 million in what variable annuity, I won’t mention a company, okay, his administrative fees were point eight 5% his investment management fees were 1.85% now do the math his rider fees because he had a guaranteed minimum death benefit rider on it for another point 45 a little less than half a percent, and another rider on it for increasing income for another point six, 5% Okay, mortality charges for another point seven 5% this client’s internal fees were running 3.65% now you don’t have to be a math wizard to figure out that 3.65% times $4.2 million the annual management fees were running 137,000 plus dollars per year per year. And he’s owned this product for 15 years. And when I talk with him, and I said, Does your advisor? Does he at least rotate these sub accounts? In other words, change the investments each year, not to my knowledge. As a matter of fact, this is the first I’m understanding how much it’s costing me to own the product. Again, you know a buyer beware and a word to the wise. This is why we do the heavy lifting. This is why we do as far as I’m concerned, I want to say spiritual work. Okay, we need to be able to reach out to the millions and the 1000s, hundreds of 1000s of clients here in our area, because literally 10s of 1000s of people own these variable annuity products. And I would say the large majority, 95% have no idea of the internal fees or why they even purchase the annuity, why these annuities are not reviewed every single year on the anniversary date to remind the client why they have it. What’s the product designed to do and what are the costs that is not the yeoman’s work of a licensed fiduciary, not at all. So, with that being said, needless to say, one of the nice things when you have these products, folks, number one, get a second opinion from a licensed fiduciary. You want to make sure you’re talking to someone who is legally obligated to act in your best interest. The second thing, we want to run that Morningstar report on it. And the third thing you’re eligible for, many cases, to do what’s called a 1035 exchange. Just like you, if you own a piece of real estate, you can do a 1031 exchange. Kind of talked about some tax changes last week, but that’s okay. A 1035 exchange allows you to move from a high-cost product that you may not need or want into a different product if you’re going to and we’ll talk about the types of products we normally recommend you should only own an annuity, any type of annuity, especially variable annuity, for two reasons, okay, far as I’m concerned, tax deferral. Okay, defer the taxes on the earnings until you need them and or income. I do not own a pension. Philip, my friend down the street, has a federal government pension. In fact, he has two of them. Okay? His wife worked with the government too. She may have one or two that is a pension. So, we like to use annuities, fixed indexed annuities, to provide pension benefits. And we’ll talk about that more when we come back. The fact of the matter is, if you have these products, pick up the phone. Dial 888-818-6557, let’s run a morning star report on any insurance product you have, variable or not and your portfolio as well. You need to understand these products and how do they fit into your overall tax efficient retirement income plan.

Cynthia de Fazio  19:33

Well, you’re going to need more than five spots this week. I mean to our viewers at home, we understand that you have a lot of questions about your retirement, and especially if you have a variable annuity, and are you paying too much fees? As you can see from today’s client story that Phil shared with us, realizing that you’ve been paying 132,000 a year in fees is just, it’s life changing. This could be the difference between a happy retirement and one that’s filled with stress. Yes, you deserve to have a stress-free retirement. That number to call is 888-818-6557, 57 if you don’t have a pen handy, we’ve made it even easier. You can grab your smartphone, click on that QR code please at the bottom corner of your screen that will take you right to the landing page for Empower Wealth and tax and you can schedule your time accordingly. You deserve to have a retirement of your dreams, and you also deserve to have the portfolio X ray, have the Morning Star report done so you realize exactly where you stand. We’re going to take a very short commercial break here on Retire Smart Austin, but we’re talking all about variable annuities. We have so much more when we return.

Philip Capriotti  20:37

Hello. My name is Philip Capriotti, if you’ve already filed for Social Security and would like us to fast track you straight to a licensed fiduciary to create your tax efficient retirement income plan, we’ll be happy to accommodate you. You know, one of the most important priorities to ensure that you do not become tax poor in retirement is to, number one, structure, a tax efficient retirement income plan as well as a comprehensive Morningstar report. This will ensure that you understand three major variables. Number one, how much risk are you taking? Number two, how much return Are you receiving? And number three, how much are your internal and external fees? To fast track your meeting with one of our licensed and experienced team members, just click on the link below complete the form attached so we can provide you with an accurate and detailed plan. Let’s start empowering your retirement right now.

Cynthia de Fazio  21:43

Welcome back to Retire Smart Austin. My name is Cynthia De Fazio, joined today by Phil Capriotti Senior of Empower Wealth and tax, and we’re pulling back the covers, and we’re talking about variable annuities and the fact that you could be paying an astronomical amount in hidden fees that you’re not even aware of. So again, this call today could be life changing. 888-818-6557, Phil, I’m so glad that we did the show today, because obviously people have questions about variable annuities. They may not even be aware that they have a variable annuity, or the fact that they’re being charged so many fees on a yearly basis.

Philip Capriotti  22:18

I can see why annuity is some financial advisors that say annuities, oh, no, no, we don’t know. Well, you can’t. You know all, let’s put it this way. You know all products are not created equal. You can’t lump them all together. But as far as I’m concerned, I’m not trying to demonize variable annuities. I guess what I am doing is demonizing the advisor that sells them without being totally transparent about all of the fees. That’s just it. That’s the bottom line. There’s a time and a place for that type of thing. One of the things that I’d like to dig into with respect to do you remember not Don Henley Glen fry, he came out with a song, no more cloudy days. Okay, okay. So, if you have a variable annuity, we want the sunshine to people, okay, right? We want to, we want to take a deep dive. We want to look inside of them. If you have an annuity, one of the other disadvantages with these variable annuities, and what I like to do whenever you need an annuity. First of all, don’t talk to a just a strictly only insurance agent. Okay, always talk with a licensed fiduciary who is series 65 and insurance licensed. Make sure you buy these products for from companies that, for the most part, only allow fiduciaries to work with their- with their products. We have one specific company won’t mention on air, they have five proprietary products which are really rated the best annuities in the industry. Well, Phil, why are they rated the best annuity in the industry? Well, the first thing that they allow us to do is the 1035 exchange, exchanging a variable annuity, especially for someone who doesn’t have a pension, and they may even have IRA money in this variable annuity, do the conversion to a fixed index annuity. So here are some of the common threads that should be in any annuity product, in my professional opinion, number one, if it’s qualified money, the annuity has to have the ability to do internal Roth conversions. We have to be able to take that let’s say I have 500,000 inside of that annuity. I need to be able to do your mock tax return each year and say, Okay, Mr. And Mrs. Jones, we can convert 100,000 at the lowest tax break it in bracket, in your in your range, inside that annuity. So, if, let’s say we want to turn on tax free income in five years, I want to put together a structured plan to do a conversion each. Here, 100 100 100 100 so when I turn on the annuity, it’s tax-free income. That’s number one. If your annuity company doesn’t allow for internal, partial, internal Roth conversions, I check it right out of my box. That’s my box. No more. Second thing with annuities, zero or very low internal fees. There are no reason, none at all, to have a product where the insurance company pays your advisory commission and now you’re stuck paying two, two and a half, three, three and a half percentage in fees for the rest of your life. By the way, even when you turn that annuity on, the fees will continue when you turn the income on. All right, so we want to have zero fee, or very, very low fee. I like to use the zero fee. Second thing, if you use in a fixed index annuity, you have to be able to have indexes that allow for no spread, nothing to be taken off the top, no cap. You want to unlimited cap. If the S&P grows, I want to get if this, if the percentage is 90, I want to get 90% of that growth. And you have to be able to lock your interest in at any time during the year. Many of these insurance products, you have to wait until the anniversary date of the contract, which is normally annually, to lock in the interest. So let me give you a quick example. We’ve had clients that are up maybe 1213, 17% in their annuity after six or seven months, but they can’t lock in that six to 16 or 17% until the rest of the six months goes by. So, what can happen in that next six months? It goes from 17% down to two or three, and I’ve seen that happen. So, you have to be able to lock in high water marks. So, you have to be able to do internal conversions. It has to provide you with increasing income. You have to have indexes that have no cap and continue to grow. Also, you have to have reset each year most of all your insurance or your licensed professional must have an annual review every single year with each individual client and each individual product. Makes me sad to see that there are advisors out there not doing it. However, that’s why you dial 888-818-6557, click the QR code. Thanks for letting me talk about the topic.

Cynthia de Fazio  27:37

Thank you, Phil, thank you for bringing it to our attention, to the viewers at home. This could be the most important call that you make for your retirement. Years, 888-818-6557 thank you for spending time with us today. On Retire Smart Austin, with Phil Capriotti, be safe, be happy and be blessed. We’ll see you back next week.