At a glance, waiting to buy an annuity until interest rates climb from their current historic lows might seem like a no-brainer, but that's not necessarily the right approach. In this episode of Money Script Monday, Sal highlights an opportunity to help your clients build a source of guaranteed lifetime income and leave a legacy for their loved ones.
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Hi, my name is Sal Mendoza and welcome back to Money Script Monday.
Today we're going to be talking about if, and whether, you should buy annuities in a low interest rate environment.
$19 Trillion opportunity
Let's get started. There is a $19 trillion opportunity at your doorstep. There's literally $19.4 trillion that's sitting in cash, money markets, banks and it's not really doing much at all?
The reason why is that some people just don't know what to do.
For example, for some clients, they understand that we're at the end of a 10.5 year bull run.
They're scared of losing money. They'd rather get a small paltry something than to lose 25%, 30%. And so, they leave it at the bank.
Two, there are clients who have no idea of the financial products that could help them in retirement, and so it sits in a bank.
Three, there are some people who actually need that money because they're going to, replace a roof or buy a car and so, they have that money so it's nice and liquid and that makes all the sense in the world.
In other words, there's over $19 trillion sitting in banks. Some reasons make a lot of sense and some reasons, well, there's basically some opportunities for you and I to help them.
The impossible becomes a reality
Okay. Let's fast forward to Number two.
In 1968, there was a runner his name was Jim Hines, he shattered the 100-meter dash. He ran that in 9.95 seconds.
At the time, no one ever thought that it would ever be matched or beat ever.
They didn't think it was humanly possible to go any faster, but you fast forward to 1983 and Calvin Smith ran that at 9.93, okay, 9.93.
He only beat that by 0.2, but he still beat it and of course, everyone knows today that the fastest man in the entire world or even galaxy is Usain Bolt at 9.58.
The demonstration, that simple demonstration is sometimes what we think to be true that can never happen sometimes happens.
Global interest rates
Let's move on into global interest rates. A lot of people are not aware that Germany, France, and Japan all have negative interest rates.
This is kind of hard to believe so on the 10-year bond, it's actually negative. When you try to wrap that around your head, like, what does that exactly mean?
Well, that means of the people in that country, that if they want to borrow a loan, if they want to get a loan from a bank, the bank actually pays them to get that loan.
That's what that means. And in order to make that up, the bank, for anyone who wants to deposit money, they actually have to pay the bank in order to deposit money.
It sounds silly and it sounds backwards, but that is the worldwide, that is where we find ourselves today worldwide.
And so, can it ever happen here? I don't know. Is it possible? Potentially.
US 10-year treasury
If you look forward here to 2011, interest rates on a 10-year treasury were 1.98.
In 2016, they went all the way to 1.37. We're probably, one I heard maybe was possible that there was going to be some negative interest rates moving forward.
In 2019, we're, even today, I think I looked earlier today, I think it's like, 1.75, 1.78.
We're in this low interest rate environment and at the end of the day, we don't know if it's going to go up in interest rate.
We don't know if it's just going to stay flat or if it's going to go up a little bit, but what we do know for a fact is that a lot of money is sitting on the sidelines because people don't know what to do, which gives us a wonderful opportunity to help clients out.
When you receive an assessment form, and you see it and you're kind of going through, their age and when they want to retire and how much they need in retirement, and the inflation rate that they think it's going to be.
Some of the money that you'll see in the banks is going to be their savings and checking, and when you see that the checking, is 50,000, the savings, 150,000, it's not a business.
There's probably some really good questions that you can ask to figure out, what exactly is going on and how can you help them.
Potential cost of waiting
One of the ways that you can help them is, one of the reasons that it sits there is we're in a low interest environment that people don't realize that even at a low interest rate, money works.
It's really that simple.
If you had $100,000 and you had that over 10 years at 2%, it'll grow to about $121,900, give or take a few dollars each way.
Some of this money that's parked on the side, they're waiting for that interest rate, to go up to the next level, 3% or to double at 4%.
Let's say that it went up to 4% and let's say that happens 6 years later. You put $100,000 in year six, and then at the end of year four, you'd have $116,000.
But the most important part is that you still have more money because you've started receiving that 2% over a 10-year period.
I think it goes to show you on a small, easy graph that even at 2%, money works for you.
Fixed index annuity
Especially if you have it in a safe environment and what is safe?
Well, a fixed index annuity is safe, and why is it safe? For a lot of the reasons that the money is parked over here.
People are scared that there's going to be a major pull back of, 25%, 35% and we know that fixed index annuities, that the zero is your hero.
Now, the worst-case scenario is going to be a zero.
One of the other reasons is that, in a fixed index annuity that the actual client, money that goes into the product and any interest that they receive, any credits, that's locked and that's protected.
The principal and any interest credits are there. They're not going anywhere.
They're not going down and if you want to, purchase an income writer for a small fee, 95 basis points of 120 basis points, depending on the carrier.
You can eventually turn on that particular annuity to be your pension plan, and that'll give you a lifetime of guaranteed income. And that's the only product that can do that in the entire world.
The other thing that I want to mention is that, the companies that we work with have been around for a long time.
100 years, 125 years, 150 years. Some of these companies manage, $500 million, $1.5 trillion. Some of these companies are very, very massive and they're very, very safe.
One of the things is we want to be able to, explain to all the sideline money the challenges not only that they have, but maybe I can solve that with various different products.
One of those could be an annuity even in a low interest rate environment because we believe a good portion of that is because we're in a low interest rate and people are waiting for rates to go up.
We really don't know if rates are going to stay the same, go up or maybe potentially even go down. But it gives us a great opportunity.
So, my challenge to you is that when you're working with your client, make sure they fill out a complete assessment form so the case designers and the field support reps can actually take a look at those and see if there's some opportunities for us to help them.
And when we help them, we help you. My name's Sal. Thank you for showing up on Money Script Monday.