Understanding Annuities - Part 2: How Annuities Actually Work

Bobby Bonilla Day is funny until you realize it’s also a masterclass in cash flow. Decades after he stopped playing, he still gets a check because the deal was built around deferred payments and a guaranteed income stream. We use that story to strip away the noise and explain what an annuity really is, how annuitization works, and why predictable paychecks can be more valuable than a big account balance you’re scared to spend. 

We also dig into why annuity sales keep climbing even while many “talking heads” call annuities a dirty word. With pensions disappearing and Social Security designed to cover only part of retirement, more families are looking for tools that reduce sequence of returns risk and longevity risk. We talk through the big categories people hear about, including fixed index annuities and single premium immediate annuities, and we explain the key idea we care about most: using the right tool for the right job inside a holistic financial plan. 

Then we bring it down to street level with a real retirement income planning case. A couple wants about $120,000 after tax per year. After pensions and Social Security, they still face a roughly $78,000 annual gap. Instead of betting their entire portfolio on a 3% to 4% withdrawal rule, we show how carving out a portion of assets to create guaranteed lifetime income can lock in the paycheck and leave the rest of the money available for liquidity, growth, and inflation hedging. 

If you want clearer thinking about retirement paychecks, guaranteed income, and where annuities can fit without taking unnecessary risk, hit play. Subscribe, share this with a friend who’s nearing retirement, and leave us a review with your biggest question about annuities and income planning.

Sources:

https://www.espn.com/mlb/story/_/id/40430232/bobby-bonilla-day-2024-new-york-mets-pay-119-million-every-july-1-ohtani-contract-deferred-money
https://www.insurancebusinessmag.com/reinsurance/news/breaking-news/record-annuity-sales-mask-growing-capital-concerns-for-us-life-insurers-567317.aspx
https://rethinking65.com/retail-annuity-sales-top-460b-in-2025-limra-estimates/

---------------------------------------------------------------------- 

Disclosure: Information contained in this podcast is for entertainment and informational purposes only, and should not be considered as financial advice. Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“PCA”), an SEC registered investment adviser.  Registration as an investment adviser does not imply a certain level of skill or training. Keystone Financial Group and PCA are separate, non- affiliated entities. PCA does not provide tax or legal advice. 

Transcript

Disclaimer And Quick Kickoff

Announcer 0:00

The financial huddle does not provide tax, legal, financial, or other professional advice. Listeners are encouraged to consult their own advisors in these areas. All right, everybody, huddle up. Play balls in. This is the Financial Huddle. Ready?

Ed Beemiller 0:14

Welcome back, Huddlers. It is time for our next episode of the Financial Huddle Podcast.

Brian Minier 0:21

Get it done. Yes, sir.

Ed Beemiller 0:23

As is customary, I am joined by my partners in crime, Mr. Ryan Fleming.

Ryan Fleming 0:27

Well, hello, Eddie. Hello, Huddlers. Hello, hello. And Mr. Brian Manier. Hello, hello. Hello.

Ed Beemiller 0:34

All right. Well, if you remember from our last episode, that was the first part of our annuities discussion.

Ryan Fleming 0:44

The dirty little word.

Ed Beemiller 0:46

The dirty little word. And then this podcast is part due. Oh. Or two. For you non-French uh speaking folks in our parlors in our audience.

Ryan Fleming 0:59

Including myself. Bilingual here. Yeah.

Why Annuities Deserve A Part Two

Ed Beemiller 1:03

But today we are talking about how annuities actually work. So we're kind of get going to get more into the into the concept, how we utilize these within when we're custom building financial plans, we're going through financial analysis and other things with our clients. And you know, last week was you know, last podcast, I should say, was a lot more about, you know, what is an annuity? When did it when did it come about? You know, what you know, what what's the history of it? And and now we're gonna get into more kind of application uh in and use of this.

Brian Minier 1:38

And were they good or bad? Yes.

Ed Beemiller 1:40

Good or bad. So from from the first time, yeah, a lot of times, oh, I've never really heard of an annuity or anything else. We're we're gonna go back to our roots a little bit today because you know the the financial huddle was you know, we're we're trying to throw a little bit of a little bit of sports into our bring the sports back in the midst. Financial repertoire. Yes. So, you know, you a lot of people say, I've

Bobby Bonilla Day And Deferred Money

Ed Beemiller 2:03

never heard of annuities or anything else. Well, has everyone heard about baseball in our audience? Oh baseball? Do you know anything about it? A little bit about it. I figure I figure you might. It's that time of year. Yep. It's you know, the the the bats are cracking and the and the balls are flying.

Ryan Fleming 2:19

Oh, best sound ever.

Ed Beemiller 2:20

Yes.

Ryan Fleming 2:21

Best sound ever. Ball cracking off that bat, man.

Ed Beemiller 2:23

Now, we're and we're gonna get a little historical sports perspective because this would be a major league baseball player or a I should say retired major league baseball player for many years. Uh and for you Mets fans out there, although I'm I'm not sure how many of them that we actually have, uh, Mr. Bobby Bonia.

Brian Minier 2:43

Bonilla. He's got a he's got a day named after him.

Ed Beemiller 2:46

Yes. And that day takes place on July 1st.

Ryan Fleming 2:52

Every year.

Ed Beemiller 2:53

Mets have have actually have embraced it. It's Bobby Bonilla Day. Well, when you say every year, I'm I'm I'm gonna basically say for since 2011, and it's gonna run through, we're gonna have Bobby Bonilla Day through 2035.

Ryan Fleming 3:09

Most amazing heist ever.

Brian Minier 3:11

So we we we talk about by the way, that lasts longer than our Social Security Trust Fund. There you go. There you go.

Ed Beemiller 3:18

So people say, I've never heard of annuity. What are annuities? What are I mean, who uses annuities? Why why would you do that? Well, professional sports uses annuities, and more and more common, especially in today's day and age, as part of contract negotiations, where with salary caps and everything else, Mr. Bobby Bonia actually is a two-timer in doing this within his contracts. But the what the one that is most known uh in The Gotham is day. Yeah, they got him as a earned day. Basically involved he had played for the Mets, and he had about 5.9 million left on his contract, and this is back in 2000. So rather than paying him out that lump sum, the Mets basically said is listen, we're gonna give you a check for $1,193,248 to be exact, but we're gonna defer that to 2011. Oh, and we're gonna pay you that $1,193,248 from 2011 to 2035. Not bad. So what year are we in, fellas? 2026, right? Okay. Bobby Bunia last played professional baseball in any guess?

Ryan Fleming 4:45

2002. I'm gonna say yeah.

Ed Beemiller 4:48

2001.

Ryan Fleming 4:49

Yeah. I was gonna say early 2000s.

Ed Beemiller 4:51

After he is receiving payments for 34 years after he retired in almost dollar amount of two million dollars.

Ryan Fleming 5:01

That's crazy, man. That's insane.

Ed Beemiller 5:03

Has a separate contract through a previous organization that he's receiving a half a million dollars. Add those two together. Bobby's receiving a cool two and a half mil per year.

Ryan Fleming 5:14

Since 2001?

Ed Beemiller 5:16

Yep. Wow. Now, and when you talk about, well, what did we talk about annuities are? Well, well, annuities can create a guaranteed lifetime income stream. Well, who knows? 2035, maybe Bobby Benia, you know, is still alive or he's not. So, but that contract is guaranteed through that period of time. So that really talks about how anew annuities or those income stream payments, how valuable they are, and they're utilized throughout everyday life in in many different instances. And this is a case, especially when we're talking about professional sports with deferment of payments.

Ryan Fleming 5:57

It helps the it helps the the clubs mitigate the risk of the city.

Guaranteed Income Outside A Pension

Ed Beemiller 6:01

Otani too much kind of similar. We're we're his where they basically have backloaded things, and that's kind of annuitization. You know, so when we talk about that, you know, here's real-world life. Now, most of us don't earn two and a half million dollars often in annuity each year, or maybe are not in the same situation, but you know, it's it's a viable option for for many people to consider as part of a holistic retirement income and distribution plan.

Ryan Fleming 6:27

For sure.

Ed Beemiller 6:28

So, Bri, why don't you know what time it is? I'm afraid it's that time. It's that time, ladies and gentlemen.

Record Annuity Sales And The Why

Brian Minier 6:37

Let it fly. Let it fly, baby. Yeah, huddlers. Uh, you probably recall if you listen to our last podcast, we talked about that dirty word, and people would say, I don't like annuities. Right. Yet, if nobody likes annuities, there's a lot of annuities that are on the marketplace right now. In fact, looking at this article from Rethinking65, it said US life insurance is sitting on record capital and the strongest annuity sales in history as it talks about 2025 data. It also says Limer data showed US annuity sales reached a record, get this, 461.3 billion dollars in 2025.

Ed Beemiller 7:25

In just one year.

Brian Minier 7:27

Nearly doubling. Oh, that was last year. Okay, nearly doubling over five years. Okay. It also said in the article sales of fixed index annuities. So we talked about the different kind of annuities. So FIAs improved 8% year over year in the fourth quarter to $34.4 billion. And then it said total sales for the year for fixed index annuities totaled a record $128.2 billion in 2025, up front one percent from 2024. And that's just within the fixed index. That's fixed index annuities. And then we also talked about some other types of annuities last time. SPIA specifically single premium immediate annuity sales were $3.5 billion in the fourth quarter, up 12% year over year. So we talked about different tools for different jobs. Right. To me, I just find this fascinating that so many people and there's so much noise from different talking heads about annuities are bad, don't ever use them. Yet we see from from this data right here that there's a lot of them out there. And so there's a reason, there's a place, right, and people are using them.

Ed Beemiller 8:34

Yep. Yeah, and and and we feel very strongly that just like many other financial strategies, there's there's a purpose and a place to consider them.

Retirement Paychecks And Lifestyle Targets

Ryan Fleming 8:46

Yeah. You know, especially with in light of just in our culture, like there's not a lot of pensions that have been around like for many, many, many decades, you know, prior to that, where a lot of the onus of these young people's future are going to be based on their savings habits. And Social Security is not gonna cover it. You know, social security is not gonna cover it. Um Social Security. Well, it's never meant to. Yeah, it's never meant to, right? Right. And so today's show it it covers 40% of the year. Forty, forty percent of what you need in retirement. Right. So, you know, what I thought would be maybe a little helpful is to share a little a case um that I have recently been working on with a client where we uh implemented some of the benefits of an annuity, and maybe this might help the huddlers bring this to life a little bit more. So um I have a lovely couple. Um, the husband uh has been the breadwinner for the majority of their uh lives together, but he was a he's a doctor, uh family practice doctor for I might think I think like 38 years. And you know, they came to me, they came to one of the classes I put on, and really their goals and objectives were he he wanted to get out and retire. He's 67 years old, and uh he's tired. And so, you know, like what we do is we gather, we fact-find, and obviously as fiduciaries, we gotta we gotta see the whole picture. Um, but it really just boiled down to um income and and and huddlers out there, you know, that's really what retirement is. If you put it into a nutshell, it's about what's your paychecks every single month? Yeah, you could have three million dollars saved up, and that's amazing, don't get me wrong, but that doesn't solve your retirement. Retirement is all about paychecks, and so they were very adamant about uh having some uh confidence in what those paychecks were.

Ed Beemiller 10:30

So to give you guys a little bit of so like like a pension, you know, that our grandparents receive, where you work for this company for X number of years, you're gonna get X amount.

Ryan Fleming 10:40

Yeah, yeah, pretty much guaranteed. So, you know, obviously the first question is uh that we say, well, then what is your desired lifestyle? You know, what is it that you would want on a monthly or annual basis? And we everything starts there, right? It's just what is your desired lifestyle? And we talked about this last time. What's the solve? We had to we really had to hone in on that. Well, they kind of came up with the idea that they wanted about $120,000 after tax every single year the rest of their life. Was it $10,000 a month after tax? So when I met them, they had roughly around $2.2, $2.1 million of total assets with their estate. And we had a pretty good idea that within the next year they were gonna be able to turn on uh Social Security of about $48,000, give or take. Um, and then the wife of this couple, she uh has gonna have a pension, teacher. So you're gonna have like state teachers' pension. Um, and so she's gonna have um $32,000 some dollars a year that's gonna be coming in. Oh, excuse me, it wasn't a teacher's pension, it was more of like a state type of a pension. So it's $32,000 a year, then Social Security, and then a very, very small pension of about $1,500 a year. They paid into it enough to get a very tiny amount. So we added that all up, and there was about a uh a roughly about a $78,000 a year gap. Now, what they could have done is they could have done the Bill Bingham rule and you know, taken 4% or Susie Orman 3%, and and maybe it worked out in their favor, right? But that was all relative to what the sequence of return was going to be on the market. We talked about that extensively. They could have done that and it could have actually worked out very well for them to be to be fair. But these are the type of people that are more conservative in nature. You went through and explained the different ways that you could draw that income, and they definitely were leaning towards an annuity type of a solution because they wanted absolute certainty. So, you know.

Ed Beemiller 12:39

Yeah, so what we talk about, and we mention it all the time, solving for their income objectives or other financial objectives without taking unnecessary risks.

Ryan Fleming 12:49

So they fell in that category of, hey, yeah, and and like we learned in past episodes, this was actually going to be the cheapest way for them to solve that big gap that they needed and give them the confidence that they needed. So what we did is we looked at a fixed index annuity. Brian

Solving A 78k Income Gap

Ryan Fleming 13:06

mentioned these. We we actually really like the fixed index annuities for what they are, um, but this had a guaranteed pension attached to it, a guaranteed lifetime paycheck, and they chose a joint paycheck. And so what we did is we said, okay, out of your $2.1, $2.2 million, how much would be needed to create $78,000 of guaranteed joint income? And they wanted to turn it on within the next 12 months because he's 67. I mean, he he really wants to retire and get out. It's not like he's gonna work another five years or something. Okay, so they needed this income quickly, and so again, right tool for the right job. You have to find the best product that's gonna provide that solution that Brian was talking about. And in this particular case, we were able to work the numbers backwards. We we took the portion, we reached into their portfolio, we took out the portion that was needed to create the 78,000 with absolute certainty. They couldn't believe it, they felt amazing, and they still had hundreds of thousands of dollars left on the sideline that could be invested in their later bucket. And you could make the argument that because their income is set, so the rest of their lives before they're before their feet hit the floor, they're gonna have this $120,000 of income, and some of it might be a little bit adjusted for inflation, but they could try to quell inflation with putting the money in that later bucket and investing that, and maybe even being a little bit more aggressive than what they otherwise thought because everything is set and safe moving forward. And we felt that that is just a fantastically balanced, comprehensive income and distribution plan for them that allows them to hedge inflation, purge longevity risk, eliminate sequence of return risk, and have guaranteed paychecks for the rest of their life. And you know what? They deserve that. I mean, this gentleman served thousands and thousands of people for 38 years or so. And in return, he needs to have that confidence that he he doesn't have to worry about money the rest of his life. Now, that is just a quick case study. Recently, within the past month or so that we've been working on, and we've been able to work with hundreds of cases like this over our careers together. And but it just goes to show that this is real life application. This is somebody that lives in our community here, that's been a professional, and many people that are listening. Uh, this is what ultimately you need to be considering and thinking about. That there's a real place for it. Again, it maybe it's not for you, but for many, many people relative to the stats that Brian talked about, this is a very, very, very viable solution. And for the Huddlers out there, if you ever want to read a little bit more about this kind of stuff, I just wanted to say um in the in the notes uh of of this podcast, you can check out a couple articles recently put out by Ernst and Young that talks about the usage of life insurance annuities. And if you ever want to read uh an expert, a foremost expert on annuity and income planning, look up Dr. Wade Fowl. Um, he is one of the leading retirement income and distribution planners in the world. Dr. Wade Fowl, P F A U is how you spell his last name. So I don't know.

Brian Minier 16:12

Hopefully that was helpful. Yeah, what I like about how you solved that particular objective for that couple is you took a portion of what they had, you solved the income, and then the rest of it, we can now be more aggressive or more growth oriented with that. Versus taking that three or four or whatever percent rule where you have to do that on the entire

Segmenting Money For Safety And Growth

Brian Minier 16:34

balance. That's right. And that means you have to have one risk assessment or one risk tolerance for the entire amount of someone's uh retirement portfolio, versus here you can segment those, you can solve the income, and now we can do some other growth-oriented strategies with the rest.

Ed Beemiller 16:52

And it really provides a versus let's say you just had it all in a managed account, 100%, and you were once again the objective of solving for income. You you can speak to a more traditional, like say a broker who says, Oh, well, everything should be in the market. And and everyone's gonna have different opinions on that, but that broker is gonna say, well, this should work, right? Whereas it's a probability. Yeah, it's a probability analysis. When we basically introduce an annuity with that guaranteed type income stream as part of a holistic plan, we can we can say with a great deal of certainty, this will work. Yeah, this will work in creating the the in that income amount.

Brian Minier 17:35

Well, that income is guaranteed in that particular scenario. So unless their spending or their lifestyle changes based on what they told us, we solved it with that particular problem.

Ryan Fleming 17:45

And again, it's we're not against market-based stuff. That's not what we're saying. I mean, we manage a lot of money in the market.

Ed Beemiller 17:51

Yeah, we do it. We feel like that's that's a that's a viable.

Ryan Fleming 17:55

It's an important part of Australia. And they could have kept it all in the market, right? It could have. But we want the certainty. Right. We want the certainty, and most people that we find they lean more towards that way.

Brian Minier 18:08

Yeah, and here's the reality in that case, because of how much they have saved over their life, they're more than likely not going to run out of money. Exactly. So it's an issue of not running out of money where it is for some people. In this particular case, how do you optimize? Yeah. And we believe the way that you solve that, you optimized for legacy, for survivor, for peace of mind, and as we talked about before, mitigating that sequence of returns.

Ryan Fleming 18:33

Yeah, and it's and it's it's cheaper to do it that way. It takes less money to provide that income than the whole amount, like Brian talked about. And that's a big deal. And again, go back and watch that episode where we did the math on that.

Ed Beemiller 18:45

Well, another thing, if if we go back to the last part one of this and we talked about the the risk or the negatives of an annuity, once again, you can't look at it in a in a tunnel. You got to look at it as a piece of everything. So if someone says lack of liquidity, well, guess what? We only did a portion into this. Now we have this market base account over here that can provide us that additional liquidity. For sure. So every every I I believe that every con that was mentioned in our episode one is addressed through holistic planning. Don't just look at the one product. That product is creating and meeting the objective that they have of a guaranteed level of income. You know, with without market risk, it's pro it's basically the guarantee of that financial institution providing the guarantee.

Ryan Fleming 19:37

And left them multiple hundreds of thousands of still that they have access to to invest to uh hedge inflation.

Ed Beemiller 19:42

Right, right.

Ryan Fleming 19:43

So, yeah, very good.

Good Or Bad Depends On The Plan

Ed Beemiller 19:45

Yep. So I I really think, you know, as part of this two-part series here, what we really tried to tackle, you know, going back to the roots of what we're doing is financial literacy. And and this is a topic, the word annuity can mean so many different things to different people, and it's all based upon their preconceived notions and beliefs that have been built over their lifetime, where some people listen to the Ken Fishers, the Susie Ormans, or these different folks that are completely against annuities. You'll have other people that love annuities. Once again, take the time, educate yourself.

Ryan Fleming 20:20

Bobby Bomnia loves annuities. He's loving two million dollars of annuities.

Ed Beemiller 20:26

Um, you know, for through 2000, what? 2035. I'll I'll take that. I'll take it. You know, so it's this is something just like anything else. Any other topics that we bring up, you know, what we're trying to do is to kind of pull the covers off this topic and just provide some some real you know, real truth. Are annuities good or bad? We feel they can be very good. Are there bad annuities out there? We talked about this before.

Brian Minier 20:54

Yes, there are or they're just implemented improperly.

Ed Beemiller 20:58

Right, right. So we hope you've learned a little bit more about annuities, how they can be utilized. We do think they're a viable alternative to consider. You know, Hudlers, thank you again for for taking the time reaching out. Whether whether you're you're listening to our pod tax or podcasts, or whether you're watching us over over the screen and seeing our mugs on there, we we just appreciate you taking the time and being involved. Please pass the word out, and uh we'll be tackling another uh topic.

Ryan Fleming 21:29

Yeah, really soon.

Ed Beemiller 21:30

Real soon. And you know, it it it could be you know something very provocative or or or or maybe maybe not.

Brian Minier 21:38

Maybe another dirty hanger. Maybe another dirty word.

Ed Beemiller 21:40

Maybe another dirty word, but you know, we'll we'll we'll you'll have to stay tuned. It's like this, you know, it's it's like the TV show.

Ryan Fleming 21:48

Good tease, Ed Part 2 to be coming. That's right.

Ed Beemiller 21:50

Hey, thanks everyone.

Ryan Fleming 21:51

Thanks everybody, have a great day, and we'll be back soon. See ya.