Well, hello there, and thank you for tuning in to another episode of the Providence Financial Retirement Show. I’m your host, Anthony Saccaro. We are your retirement income source, and this is the place where retirees come for income. And we’ve got a fantastic show for you because we’re gonna answer some questions, as we always do, and we’ve got a pretty wide variety today.

We’ve got a question about Roth conversions, question about Social Security, and whether or not Social Security’s going broke. That’s a hot topic. We’ve got a question about taxes and a question about annuities. There is certainly no shortage of things to talk about when it comes to retirement planning.

And if you’re retired or close to it, I’m sure that these questions and our conversation about them are gonna be really interesting to you. And if you have a question for the show, all you need to do is ask it by going to providencefinancialradio.com, and maybe we’ll get a chance to discuss your question in a future episode.

Our first question today comes from Ravi in Westlake Village, and he has a question about Roth conversions. And let me read it to you as he wrote it in. “I retired last year at 64, and I’ve got most of my savings in a traditional IRA. With the market bouncing all over the place lately, my balance dropped pretty hard last spring, and my buddy says that a down market is actually the perfect time to do a Roth conversion.

But that sounds backwards to me. Why would I wanna do anything while I’m losing money?” Can you explain whether this makes sense, and if it does, how I’d even go about it? Well, Ravi, thank you for taking the time to write in your question, and I’m gonna say right out of the gate that, yeah, your buddy is right, actually.

So let’s talk through that. If you’re not familiar with what a Roth conversion is, let me just give you a brief overview. A Roth conversion is when you transfer money from a traditional IRA account into a Roth IRA account. When you make this transfer, you’re going to pay tax on any amount that you convert to the Roth IRA, but whatever is in your Roth IRA is gonna grow tax-free forever.

That’s the exact reason why we have a lot of our clients at Providence Financial doing Roth conversions. Pay the tax now while taxes are lower, put those dollars into a Roth IRA so that it’s now gonna be tax-free, and our client never has to pay taxes on that money ever again. That’s the benefit. Ravi, though, brings up a very interesting point that a lot of you might not be aware of, even if you’ve thought about doing Roth IRA conversions before.

Most people think that if you do a Roth conversion, it’s gotta be done cash to cash, meaning that you have to convert cash in an IRA to cash in a Roth IRA,

and that’s actually not true. The IRS rules allow you to do what’s called an in-kind conversion, and that simply means that if you have stock or mutual funds or other investments inside your IRA, you can simply transfer those investments to the Roth IRA and then pay tax on whatever the current market value was at the time of transfer.

That’s called an in-kind conversion. Ravi’s question has to do with the timing. When does it make sense to do an in-kind conversion? The answer, as Ravi’s buddy suggested and told him, is when the market is down. I know it’s a little counterintuitive, Ravi, but the fact is that when the market is down, it’s actually better for you to do a conversion at that point than when the market is up.

And you’re not really making any big changes when your portfolio is down. All you’re doing is taking the same shares that you have in the IRA and transferring to the Roth IRA. Why is it better? Because when the value of your investments is down and you do a transfer, it’s that lower value that gets reported as the taxable amount.

And then when those stocks do recover, all that recovery happens tax-free. That’s exactly why it makes sense to do a Roth conversion when your investments are down. Think about it this way. Let’s say that you have a stock that is worth $100,000 and it drops by 30% to $70,000, and now you do a $70,000 conversion.

That $70,000 is what’s going to be taxable, and when that stock rebounds, all of that rebound will occur inside the Roth IRA, and you won’t have to pay any tax on it at all. It’ll be tax-free. And you’re not the only one, Ravi, who didn’t think that this makes sense, but hopefully now it does. And I thank you for taking the time to write in that question.

There’s more to think about, though, when it comes to Roth IRAs besides just whether we convert cash or whether we convert in kind. But before we go there, it’s important to understand that when it comes to your retirement, there are many risks, and not knowing the conversion rules is just one of the risks.

Because I’ve been a retirement advisor for well over a quarter of a century, we’ve put together an animated video that I want to offer you that talks about the seven most common risks that we’ve identified that affect most of you and what you need to do to know them and how to avoid them. If you want to get this video absolutely free of charge, we’ll email it to you.

You just have to go to our website to let us know that you want it, and that’s easy. Our website is providencefinancialradio.com/video. Again, it’s providencefinancialradio.com/video. Leave us your information, and in a short time, you’ll get an email with that video, and all you gotta do is press play, and you’ll be able to watch it.

And it’s fun to watch ’cause it’s animated, so we put a lot of thought into it. And it’s also short, but it’s very power-packed. To claim your free video, go to providencefinancialradio.com/video and we’ll get it right out. I’m Anthony Saccaro. Thank you for spending some of your day with us You’re listening to the Providence Financial Retirement Show, where it truly is all about the income.

Our goal here on the show is to help you as a retiree or someone about to retire have the information you need so that you can enjoy retirement, and that’s why we’ve been doing this show for well over a dozen years. We’re talking about Roth conversions at the moment, and we just answered a question from Ravi, who initially thought that maybe doing a Roth conversion in a down market when his portfolio’s down doesn’t make sense.

But if you heard that segment, then you know that it actually does make sense to do Roth conversions when the market is down. Actually, it’s more beneficial for you than doing conversions when the market is not down And hopefully you now have a better understanding of that. When I’m having a Roth conversion conversation with someone, though, oftentimes a question comes up, something like, “Why bother?

Why even do it at all, because I’m gonna have to pay the tax now? Isn’t it better just to wait and kind of pay the tax when I have to than to pay the tax now?” And quite frankly, that’s the number one reason why many of you have never considered doing a Roth conversion. You’ve gotta pay the tax, and who wants to pay the tax?

There’s a couple of problems with that question, though. It’s important to understand that at some point in time, you’re going to have to pay the tax on that IRA money, so it’s not optional. It’s not as if you do a conversion, you have to pay the tax, but if you don’t do a conversion that you never have to pay the tax.

That’s not the case. If you have pre-tax retirement accounts, the government’s gonna force you to start making withdrawals at some point in the future through required minimum distributions. You’re going to have to pay the tax at some point, and the question then becomes, do you wanna pay the tax on the government’s timetable, or do you wanna be more proactive and pay the tax on your own timetable?

I can tell you from experience that doing it on your timeframe and being proactive usually gets you a much better result than just kind of following the river downstream and doing what the government tells you you have to do. The second problem with wondering, why should I even bother, is that this is short-term thinking.

In our culture, we tend to want instant gratification, and when it comes to taxes, instant gratification means, how much can I save in taxes this year? If you do a Roth conversion, you’re not saving in taxes this year. You’re gonna pay more tax this year, and that’s counterintuitive to how most of you are thinking.

Why would I wanna do that? The end result of not doing Roth conversions this year and not paying the tax this year usually means that over your lifetime, your taxes are gonna be a lot more expensive. I wanna challenge you to consider that if you save tax this year, you’re probably gonna pay a lot more tax over your lifetime, whereas if you pay the tax this year, you’re probably gonna wind up saving a whole lot of tax dollars over your lifetime.

So what would you rather do? Save a little bit of tax this year and pay a whole lot more over your lifetime, or pay some tax this year knowing that you have a lifetime of tax-free benefits ahead? And I’m pretty sure that once you reframe it this way, you’ll start to understand very clearly why it makes sense to do Roth conversions this year.

I should also point out something that I know a lot of you may not know, and that is that Roth conversions don’t have to be done all at one time. If you have a million-dollar IRA, you don’t have to convert the entire million dollars at one shot and get hit with a boatload of taxes. Most of the times, it doesn’t even make sense to do that.

Oftentimes, the best way is to set up a five or ten-year conversion strategy So that you’re really minimizing the taxes each year, but still ultimately accomplishing your goal of converting from taxable into tax-free over an extended period of time. It’s a great way to have your cake and eat it too.

Minimize taxes each year, but know that you’re saving taxes over your lifetime as well. If this is different than kind of how you’ve thought about conversions and you wanna learn more, well, I wrote about Roth conversions in my book, More Life Than Money, and I wanna send it to you absolutely complimentary.

If you wanna get a copy of More Life Than Money, just go to providencefinancialradio.com/book. Again, it’s providencefinancialradio.com/book, and you’ll have it show up on your doorstep in just a few days. To get your free copy of More Life Than Money, go to providencefinancialradio.com/book and you’ll have it shortly

Thank you for spending part of your day with us. I’m Anthony Saccaro. You’re listening to the Providence Financial Retirement Show. We’re in the middle of a great show because we’ve got four really good questions from our listeners. We’ve already answered a question about Roth conversions and whether it makes sense to do those in a down market.

We have a question about Social Security and whether it’s going bankrupt. We’re gonna tackle that next. And later, we’re gonna answer a question about taxes and also another question about annuities. Our next question, though, comes from Carol in Moorpark, and she wrote in this, having to do with Social Security.

“I’m fifty-eight years old, and I’m trying to plan, but every other headline I read said that Social Security is gonna go broke in two thousand thirty-three, and my benefits are gonna get slashed. My daughter actually told me I’d be a fool to count on it at all. Honestly, it’s got me scared and even a little angry.

I’ve paid into Social Security my whole working life. Can you tell me straight, is Social Security really about to collapse, and should I even be factoring it at all into my retirement plan?” Carol, thank you for taking time to write in the question, and I can certainly feel your pain. I can feel your anxiety, and you’re definitely not alone.

Many retirees or pre-retirees are wondering the same thing. Fortunately, I’m pretty sure I have good news for you, though. Social Security has been a hot topic, and for some reason, I’ve seen it all over the media recently, so it’s fresh in a lot of your minds. The question you’re asking, though, is, “Can I even count on it at all, or should I just plan on it collapsing?”

Social Security and the way that it’s currently set up now is not going to collapse. That’s a very strong word. It almost makes it sound like there’s no benefits gonna be paid to anyone, and everyone’s gonna lose their Social Security benefits. And depending on which reports you watch or read or listen to, you definitely might get that impression, but that’s not the case.

According to the Social Security Administration, and according to what you see on your Social Security statement when you get it, is that the worst-case scenario is that benefits would need to be cut by twenty-three percent. That’s it. It’s not a total collapse. Now, don’t mistake me, a twenty-three percent cut’s not gonna be good.

I read that the average cut would be five hundred dollars a month across the board, but it’s not complete devastation. It’s not a total collapse, and that’s the first thing worth noting. The second consideration is that the Social Security deficit problem is really quite fixable. But it is gonna require some changes, and politicians don’t wanna make those changes because it’s gonna involve some negatives through either tax increases or benefit cuts.

That’s the only way you can fix a deficit, whether it comes to the government or whether it comes to your own household. You’ve gotta find a way to make more income, and the government does that through taxes, or you have to find a way to cut expenses, and the government does that by cutting benefits.

And no politician wants to have the increase of taxes or benefit cuts on their resume, because that’s not how you get reelected. You also don’t get reelected as a politician if you let everybody’s Social Security benefit across the board get cut by 23%. And that’s a scenario, Carol, that I don’t think you have to worry about.

If I were to put my money on it, I don’t think that there will ever be a cut in Social Security to individuals that are currently getting Social Security. You mentioned that you’re 58 years old, so could there be some changes before you get to Social Security age? There could be, but I’m gonna say that it’s probably not likely.

A lot of the changes that they have to make are gonna be changes that could be implemented over the next few decades to solve the Social Security deficit. And if you’re already collecting Social Security, they probably won’t affect you. And if you’re within five to maybe even seven years or so of collecting Social Security, if they do affect you at all, it’s probably gonna be very minor.

I really don’t believe, though, that any retiree is going to see their Social Security benefit cut at all. And quite frankly, I would hate to see you make your Social Security decisions based on the fact that you’re gonna lose some benefits. Because in the long run, that could cost you one or $200,000 of income lost over your lifetime by deciding to file early just because you think that benefits are gonna be cut.

I wanna take a minute and talk about what are some of the changes that the politicians could make to solve the Social Security issue. Before I do that, though, it’s important to remind you that when you decide to take Social Security is a really big decision. It’s much bigger than I find that a lot of people take it.

And as I mentioned a minute ago, if you take it the wrong way, you may cost yourself one or $200,000 of lost income over your lifetime just by filing at the wrong time. If you’re approaching Social Security age and you have questions about when should you file, well, I’ve got something for you. It’s an animated video that we put together that talks about Social Security and all the benefits that are involved: the spousal benefit, the survivor’s benefit, divorce benefits, lot of benefits that many of you are unaware of And this video will also share with you some of the things you need to think about as far as when should you file.

If you’d like to receive this video, we’ll send it to you absolutely free of charge, and you can get it by going to our website and asking for it. That website is providencefinancialradio.com/video, providencefinancialradio.com/video. If you leave us your information, we’ll email it to you, and you’ll be able to watch it right on your computer.

To get your free video about Social Security, just go to providencefinancialradio.com/video and you’ll get it shortly. If you just joined us, you’re listening to the Providence Financial Retirement Show. I’m Anthony Saccaro, and we’re answering several of your questions. We already answered a question about Roth conversions and does it make sense to do a Roth conversion when the market is up or when the market is down.

And now we’re in the middle of answering a question from Carol about Social Security and whether or not it’s gonna go broke. We’ve already discussed why the word broke is really the wrong word to discuss the state of Social Security. The real point is that there is a solvable funding gap, and here are some of the things that Washington has in its toolbox to be able to close that gap I want to acknowledge that there is a real gap.

That’s not the question, but the gap is fixable. There are several considerations that are being discussed as how to fix Social Security. The first thought is to raise or even eliminate the payroll tax cap. Right now, today, wages are only taxed up to a cap, and that cap is about $184,000 if I’m remembering correctly.

Which means that if you make more than $184,000, you’re only paying Social Security tax on the $184,000. If you make a million dollars, there’s $850,000 that you’re not paying tax on for the purpose of Social Security. And if you raise that cap, of course, that’s gonna bring in a lot more revenue. It does mean higher taxes, though.

And as I pointed out earlier, politicians don’t wanna be on the hook for raising your taxes, but it is a potential way to solve the problem. A second thing that they’re considering is to raise the payroll tax slightly. Not the cap, but the actual tax. Right now, the combined rate is 12.4%, and that’s split between the worker and the employer.

If you were to raise that just by 1% to 13.4%, it would close about 26% of the shortfall, and ultimately, that would mean a half a percent more of tax for the worker and also half a percent more of tax for the employer. So it’s a tax increase, but it’s not devastating. A third way to potentially fix the problem is to raise the full retirement age, and Social Security has already done this.

It used to be that everyone at the age of 65 would start collecting Social Security, and now the full retirement age is 67 years old. And they could raise that age to 68, 69 or 70, and they can do it over time, not just necessarily all at once. And I agree with this, and the reason is because in 1935, when Social Security started, people were not living nearly as long as they are today.

It might have only been four or five years that you were collecting Social Security, but today, you might be collecting Social Security for 20 or maybe even 30 years, and the system was never really designed to cover you for that long of a period of time. You’ve probably heard someone say that 70 is the new 60 and 60 is the new 50, and it really is true.

With advances in medical technology and people taking care of themselves, people are living longer, healthier lives than they had been in the years past. And raising the full retirement age really just makes sense. In conclusion then, Carol, I don’t think you have to worry about Social Security going broke.

It’s just a matter of when the government’s gonna start making some of these changes, and they don’t usually do it ahead of time. They usually wait until the last minute. So I wouldn’t expect to see any of these changes until probably 2032 when they’re backed into a corner because they no longer have any time to wait, otherwise the benefits are gonna be cut.

Hopefully, that answers your question. I don’t think you have anything to be worried about, but thank you, Carol, for taking the time to write it in. If you’re of Social Security age or you’re rapidly approaching that time and you wanna learn more about when is the best time to file and some of the other benefits that Social Security offers, in my book, More Life Than Money, I designate an entire chapter to just Social Security.

You’ll learn a lot by reading it, and I wanna send it to you free of charge just because you’re a loyal listener. You can get it by going to providencefinancialradio.com/book. Again, it’s providencefinancialradio.com/book. Leave us your information, and you’ll have it in just a few days. It’ll show right up on your doorstep.

To claim your free copy of More Life Than Money, just go to providencefinancialradio.com/book and we’ll get it right out

Thank you for joining us today for the Providence Financial Retirement show. We are your retirement income source, and this is the place where retirees come for income. As usual, we’re answering your questions. We’ve already answered a question about Roth conversions and discussed why it oftentimes makes sense to do a conversion when your portfolio is underwater, and we just answered a question from Carol and explained why Social Security is not going broke.

There are two more questions, though, that we’re gonna cover through the remainder of our time. We’re gonna answer a question now about tax torpedo, and what does that mean, and then in a little bit we’re gonna answer a question about annuities. Regarding the tax torpedo concept, though, Gerald from Simi Valley wrote this in: “I’m 71, retired, and I just started taking Social Security a couple years back.

My accountant mentioned something he called a tax torpedo and said I might be getting hit by it, but he kind of rushed past the explanation. From what I gathered, it has to do with my Social Security getting taxed because of my IRA withdrawals. I always thought Social Security was tax-free. Can you break down what this torpedo actually is, and more importantly, is there anything I can do about it?”

Gerald, thank you for taking time to write in the question, and you and I are neighbors because I live in Simi Valley, so we’re probably not more than five miles apart because Simi Valley is a close, tight-knit community. First off, you mentioned that you always thought Social Security was tax-free, and you’re not alone.

There are still many of you who believe that you don’t pay tax on Social Security, and if you’re under a certain income threshold, then that’s true, but most of you aren’t. We’re gonna talk about those thresholds in just a minute, but suffice it to say that most of you are actually gonna pay tax on your Social Security income.

So it’s not tax-free, as a lot of you might think. The tax torpedo concept that your accountant is talking about actually comes from this idea that if you make interest the wrong way or you take too much money out of your IRAs, whether it’s because you wanna live life or because the government forces you to through required minimum distributions All of that interest and all of those withdrawals add to your income, and there could be a torpedo effect that not only affects your Social Security, but could affect other things as well.

What determines then how much tax you’re going to pay on Social Security? Let’s start with that. There’s this term in the tax code that is called provisional income, and that is all of your income from all sources, and it adds half of your Social Security back in as well too. So it’s not an advantageous formula for you.

But if your provisional income is under thirty-two thousand dollars, if you’re married filing jointly, then you’re not gonna pay any tax on Social Security at all. If it’s somewhere between thirty-two and forty-four thousand dollars, you’ll pay tax on up to half of your Social Security. And if it’s over forty-four thousand dollars, then you’ll pay tax on up to eighty-five percent of your Social Security.

There is one thing though that’s gonna catch a lot of you by surprise, and that is your provisional income might not necessarily have anything to do with your cash flow. If you have your investments set up properly and you’re taking cash in the right order, you might be able to withdraw $100,000 a year of cash flow and not pay any tax on Social Security at all.

It depends very much on how your investments and your cash flow is structured. The tax torpedo can be framed in a couple of different ways, but the most obvious way that the tax torpedo occurs is when someone starts taking too much money out of their IRAs. When you do that, it may push you into a higher tax bracket, and that means you have to pay more tax, so that’s a torpedo.

It may also cause your Medicare Part B premiums to rise. That’s a torpedo. And this also may cause your Social Security to be taxed or may be taxed more heavily than it was before, and that’s also a part of the tax torpedo. Gerald, the tax torpedo that your accountant is talking about is this domino effect that could happen to your income or to your taxes just by starting to make withdrawals from the wrong account or in the wrong amount.

When you make a withdrawal from your IRA, it doesn’t just affect your taxes because of the withdrawal, but that domino effect comes into play, and that’s that tax torpedo that he’s talking about. In just a moment, I’m gonna give you some ways that you can minimize that tax torpedo, so you don’t have that torpedo come right at your checkbook and affect your cash flow every day.

Before I do that, though, I wanna offer you a complimentary video that is called Proactive Tax Savings Strategies. If you’ve listened to the Providence Financial Retirement Show for any length of time at all, you know that I’m a big believer of being proactive instead of being reactive. And we put together a video that talks about some of the ways that you can be proactive when it comes to taxes so that you can save taxes over the long run.

If you want this video, we’ll email it to you free of charge. You just have to ask for it, and you can do that very simply by going to providencefinancialradio.com/video. Again, it’s providencefinancialradio.com/video, and we’ll email it to you in just a short time. To claim your free video about how to be proactive with your taxes and not reactive I’d suggest that you get this video.

Just go to providencefinancialradio.com/video. No cost, no obligation, just information. I’m Anthony Saccaro. Thank you for spending your time with us today. You’re listening to the Providence Financial Retirement Show. Our goal here at Providence Financial is to help you have the education and information you need so that you can enjoy your retirement.

And part of the way to do that is to make sure that you minimize your taxes, and that’s what we’re talking about right now. We’re talking about this tax torpedo concept that Gerald CPA told him about. Is there a way to make sure that you don’t get hit by this tax torpedo? For some of you, absolutely.

Others, not so much. It depends on your income. It depends on a lot of factors. And some of you just can’t do anything at all. You’re gonna get hit by the tax torpedo, and the best thing you can do is just prepare for it and make sure that you’ve planned properly. Because if it hits you and you didn’t know it was coming Then it can dramatically affect your lifestyle.

For others of you though, there is a way to minimize the tax torpedo or maybe wipe it out completely so you never get hit by it. There are two immediate ways that come to top of mind that could help you minimize or eliminate the tax torpedo. One of the ways has to do with Roth conversions, and the second way has to do with where you have your money invested.

Let’s talk about Roth conversions first. If you’re like most people, you haven’t done any conversions or you haven’t done a lot of conversions. This means that when you get to required minimum distribution age or at some point whenever you wanna start taking money out of your IRA account, this torpedo concept could be coming full force.

Let’s say that you have a million dollars in your IRA and you wanna withdraw 4%. That’s $40,000 a year. For most of you, that’s gonna cause you to have, be in a higher tax bracket, pay more tax. It may cause you to pay more in Medicare Part B premiums, and it may also increase the amount of tax that you’re gonna pay on Social Security.

That’s the torpedo effect. If you were to be smart though and do some strategic planning and start to convert some of that million dollars or maybe most of that million dollars into a Roth IRA, that torpedo effect over the long run is gonna go away. If you happen to have one million dollars in a Roth IRA and you were withdrawing $40,000 from the Roth, there is no torpedo effect at all because all of those withdrawals are tax-free.

They don’t count for your Medicare Part B premiums, and they don’t count towards Social Security taxation. And if it doesn’t completely eliminate the tax torpedo, it’s certainly gonna help you reduce the taxes and soften the blow of the tax torpedo. A second consideration is for those of you that have money in taxable accounts that are earning interest and dividends.

Those interests and dividends are gonna show up on your tax return as income, and that additional income could also trigger the tax torpedo effect. Once again, let’s use a million-dollar example, but this time it’s not in an IRA. It’s invested in something that’s giving you 4 or 5% of interest or dividends, which would be forty or fifty thousand dollars a year.

Regardless of whether or not you spend that income, you’re gonna get a 1099 for that income, which means you have to claim it every year, and that also could put the tax torpedo in effect. And the simple solution would be to take that money and put it in something that is tax advantage. There are investments out there where you could still earn forty or fifty thousand dollars a year of interest, but unless you actually withdraw the money, it’s not gonna show up anywhere on your tax return, and it dampens the effect that that tax torpedo might have.

Gerald, I wanna thank you for taking time to write in the question, and I certainly hope my answer has helped you along with the rest of you listening to the Providence Financial Retirement Show as well.

Thank you for being with us today, spending some time. I’m really glad that you’re here, wherever life may have you. My name is Anthony Saccaro, and you’re listening to the Providence Financial Retirement Show. We’re answering several important listener questions that have come in over time, and we’ve already answered a question about Roth conversions.

We discussed whether or not Social Security is gonna go broke. We just talked about the tax torpedo and what you can do to really dissolve that torpedo effect. Now, though, we’re gonna switch gears, and we’re gonna talk about annuities, and that’s because Diane from Camarillo wrote in a question about them that I know you probably have as well.

Here’s her question: “I’m sixty-six and just retired. With interest rates having moved around so much the last couple of years, my brother-in-law keeps telling me that I should lock in an annuity now while rates are favorable. But honestly, every time someone mentions annuities, I hear mixed things. Some people swear by them, and others say run the other way.

I don’t even really understand how rates affect them. Can you explain what’s going on with annuities right now and how I’d know if one is even right for me?” Sure, Diane, thank you so much for writing in the question, and I’m more than happy to try to un-confuse annuities for you. They are very confusing, and depending on which books or articles you read and who you talk to, you’re definitely gonna get mixed opinions.

And maybe it makes sense to talk about why that is. Annuities are a source of conflict between insurance agents and financial advisors, and more specifically, stockbrokers. You almost have this dividing wall between the two. Insurance agents think that all your money should be in annuities because they’re safe, and they’re gonna give you a decent rate of return, and brokers who sell mutual funds think that you shouldn’t have any annuities at all.

So who’s right? Well, neither of them, quite frankly. It just depends on your situation as to whether an annuity makes sense or not. Because we don’t have a lot of time left, I certainly cannot get into all the weeds when it comes to annuities. I have a resource that I’m gonna offer you in just a minute that if you wanna learn more about annuities and you wanna get into the weeds, you’re gonna wanna get this.

I’ll share that with you in just a minute. But Diane, your question had to do with interest rates and how do they affect annuities now. So let’s talk about two kinds of annuities that interest rates affect. There’s something called a fixed annuity, and then there’s something called an indexed annuity. A fixed annuity is gonna give you a percentage every year guaranteed for a certain number of years.

And right now, you can get something like five percent a year guaranteed for maybe the next decade. There’s also another type of annuity, though, that’s called an indexed annuity, and it doesn’t pay you a fixed rate of return like the fixed annuity does. What it does, though, is it ties your interest rate that you earn every year to the stock market.

So in good years with the stock market, you’re gonna make some interest. In bad years, you’re not gonna make any interest at all, but you’re not gonna lose any principal, so they’re really safe. And because of how they work, my best guess is that you’ll probably make a lot more than the five percent that you could get guaranteed with a fixed annuity.

You might be able to make six or seven or even eight percent a year. It’s also important to understand that if you put money into an annuity that’s not IRA money, that the interest is always tax-deferred. You don’t pay any tax on the interest as you earn it. You’re only gonna pay tax on the interest when you make a withdrawal.

If you have money that’s just set aside for your retirement and you’re not withdrawing anything from it, you won’t pay taxes on any of the interest that you earn. And by the way, that could actually help you with the tax torpedo question that we answered earlier because none of this interest shows up on your tax return, and that can certainly soften the tax torpedo blow.

In short then, they’re very conservative investments- And you can earn more than in the bank. You can participate in the stock market with an index annuity, and you can also soften that tax torpedo blow. And that’s one of the reasons that both fixed and index annuities are attractive to a lot of retirees.

Your question, Diane, though, had more specifically to do with how do interest rates affect the amount that annuities can pay you? And without getting into the weeds and all the mechanics of it, suffice it to say that the higher the interest rates are in general, the more interest that annuities are gonna pay you.

And that’s true whether we’re talking about a fixed annuity that gives you some type of guaranteed interest or whether we’re talking about an index annuity that allows you to participate in market performance but without the risk. And I think your brother-in-law is onto something. And the reason is right now rates are really high compared to where they were just three or four years ago.

To you, this means that you can lock in a higher interest rate for a longer period of time than you’ll be able to if rates go down, which is what’s projected. Even if you go back a few years to where interest rates were really low, the annuities then were not paying nearly as much interest as they are paying today.

So if you have some money set aside and you’d like to keep it conservative and you’d like to earn somewhere between a 5% and maybe even an 8% rate of return per year tax-deferred, I think your brother-in-law might be right. It may be a very good time to start thinking about annuities, at least for that portion of your portfolio.

Annuities are not right for everybody, though. And in just a minute, we’re gonna talk about who they might be right for and who might wanna stay away from them. But there is one particular type of annuity, the variable annuity, that I don’t know is right for anybody. And if your ears just perked up because you have a variable annuity, you’re gonna wanna get this complimentary video that I’m gonna offer you about variable annuities.

There’s no cost and no obligation, but you’ll learn the ins and outs of variable annuities, and you’ll probably pick up some things that you didn’t even know that exist in your own variable annuity. If you want this video because you have a variable annuity or you’re thinking about getting one, all you need to do is go to providencefinancialradio.com/video.

Again, it’s providencefinancialradio.com/video.

Leave us your email address and your information, and we’ll email it to you shortly. All you gotta do is press play, and you’ll be able to watch it right on your computer. It’s fun, too, because it’s animated, so we try to make it interesting. And it’s really short, but it’s very powerful as well. To get your free video about variable annuities, just go to providencefinancialradio.com/video and you’ll have it in your inbox shortly.

I’m Anthony Saccaro. Thank you so much for staying with us, and I certainly hope you’re enjoying the Providence Financial Retirement Show. We’re in the middle of answering Diane’s question about annuities. And as I mentioned, they’re certainly not right for everybody. What’s important to understand, though, is that annuities are not good or bad.

You can’t look at an annuity in a vacuum and decide whether it’s good or bad, just like you can’t look at any other type of investment in a vacuum and decide whether it’s good or bad. Investments of themselves are generally not good or bad, they’re just good or bad for you. Let’s take a few minutes then and have some conversation about who an annuity might be right for and who an annuity might be wrong for.

The first person that it might be right for is the person with an income gap. If your bills are exceeding your Social Security and your pension and whatever other income you have, an annuity can help you fill that gap with some type of guaranteed income, and that way, you make sure that all your expenses are covered.

Another person who they might be right for is those of you who might be panic sellers. If you’re always worrying about the market and you tend to panic sell when the market goes down, or even if you just lose sleep by watching your portfolio fluctuate every day, well, an annuity might be right for you as well, too, because you can eliminate those market swings Another category of individual that they might be right for is someone who’s in a high tax bracket.

If you’re in a high tax bracket and you have a lot of interest and dividend income that’s being taxed, well, putting your money into an annuity will allow the taxation to be deferred, and as long as you leave it in the annuity, you’re not gonna pay tax on any of that interest at all. So there’s a big tax benefit that a lot of people miss when it comes to annuities.

And finally, someone who an annuity might be right for is just someone who might want simplicity. You dump your money into the annuity. You never have to look at it. It’s safe. You know you’re not gonna lose money. No matter what the market does, you know you’re gonna get some type of fixed rate of return or some type of rate of return depending on the stock market, but you don’t have any risk to your principal.

We have a lot of people that tell us that they worry about their portfolio when they’re on vacation, and it keeps them from really enjoying retirement, and an annuity will help you sleep better at night as well. And if that sounds like you, then maybe an annuity might be right for some part of your money.

On the other hand, there are several categories of people that an annuity might be wrong for. If you already have plenty of guaranteed lifetime income, then you might not need an annuity for that at all. If you’re not worried about market volatility and you can stomach watching your portfolio go up and down because you don’t need the money, then keeping that portion of your money safe probably is not gonna help.

If you’re focused on leaving your money to heirs, that’s also a situation where an annuity might not make sense either, but really only if you don’t need the money. There are some tax drawbacks for annuity for your heirs, and if you had all your money in stocks or mutual funds, it’s gonna be more tax efficient for them than an annuity.

If your primary goal then is to leave money to your heirs, an annuity might not serve the best purpose for that. And finally, if you’re younger, maybe you’re 30 or 40 years old, you’re probably better off in mutual funds or index funds or even just stocks as opposed to annuities. So although annuities can be right for many of you, they’re certainly not right for all of you.

And Diane, I really wanna take the time and thank you for writing in that question If you’re still wondering, though, whether an annuity is right for you, maybe you’re confused like Diane was, well, in my book, More Life Than Money, I wrote an entire chapter all about annuities, and I get into a lot more detail than we just covered here in a few minutes, and you’re gonna wanna read it.

We’ll send it to you free of charge. You just have to request it. You can do that by going to providencefinancialradio.com/book. Again, it’s providencefinancialradio.com/book. Leave us your information, and we’ll get it right out. You’ll have it in just a few days. But you’ll learn what you need to know to decide whether an annuity is right for you or whether it’s something you should stay away from.

Just go to providencefinancialradio.com/book and request your free copy. You’ll have it shortly, I promise. I’m Anthony Saccaro. You’ve been listening to the Providence Financial Retirement Show. We answered a question about Roth conversions. We answered a question about Social Security going broke. We also tackled the tax torpedo concept, and now we just talked about annuities.

Thank you for joining us today. Really glad that you’re here. You’ve been listening to the Providence Financial Retirement Show. Have a great week, everyone. God bless.

Disclaimer: This transcript is provided for educational and informational purposes only and reflects a general discussion from a live radio broadcast. It is not intended as personalized financial, tax, or legal advice. Individual circumstances vary, and listeners should consult a qualified professional before making decisions.