Are annuities a bad investment? Mark Switaj and Ro Punyani break down how annuities work, why they are often misunderstood, and how they can be used alongside life insurance, equities, and broader retirement planning strategies.

Annuities have a reputation problem. For Mark, that started early when his CPA father drilled two lessons into his head: be prepared and never buy an annuity.

In this episode of The Owner’s Asset, Mark and Ro challenge that conventional thinking. They start with the basics of how annuities work, then explore taxation, purchasing power, Roth IRAs, whole life insurance, joint annuitants, legacy planning, and why Ro believes the real opportunity is not looking at any one financial tool in isolation.

VIDEO TRANSCRIPT

Mark: Hey, everybody. I'm Mark Switaj.

Ro: Hi, I'm Ro Punyani, and this is The Owner's Asset.

Mark: Ro, let's just jump right into it. Annuities seem to be universally hated. Disliked? Maybe hated is a strong word.

I remember that my dad, who was a CPA, drilled two things into my head when I was growing up. The first one was the Boy Scout motto. I'm an Eagle Scout, so I still think I live by this, which is “be prepared.”

And then the second one he drilled into my head was: never buy an annuity.

Why do you think he would say that?

Ro: Because annuities are very obvious in what you give up.

Whenever you talk about a financial strategy, there's always typically some nuance associated with it. If you start talking about the S&P 500, you have to start talking about volatility. Some people think they're comfortable with it.

The trade-offs in annuities are crystal clear. Every dollar you give to the insurance company for an annuity is a dollar you will likely, and I say likely because that's where I hope this episode goes, never see again.

It is counter to the American dream to not seek more tomorrow than you have today. It's this notion that if I work hard and build something, the social contract that binds this country indicates that your tomorrow is better than you are today.

Annuities sort of fly in the face of that, and that's a huge emotional disconnect.

And then the math behind annuities on a standalone basis, I think, is interesting, but it's not as compelling as saying, “I want the S&P, where I get unlimited upside for as long as I own the asset, if not forever.”

Mark: Yeah. It's almost like a trade-off. You can take your money and have the potential, historically proven potential, of upside forever, or you can have the guarantee of a fixed amount until you die.

I think I know what an annuity is. Certainly, as I came into this space with you, you've educated me on things like SPIAs and such.

But for the general listener, real quick, Annuities 101. What is an annuity? And using a simple example of, say, a $1 million annuity, how does it work?

Ro: I'm going to try to do it without any jargon because our whole approach is education first.

An annuity, by definition, is just mailbox money. Money that comes in that you just can't stop. You can't stop it until the day you or the other person on the annuity passes. It's guaranteed income for life.

We use the word “income” on purpose. Mark, remind me when I need to stop using the word income, because the definition of the word income is one of the most grossly misunderstood definitions in finance and personal finance.

An annuity is a contract agreement to get a certain amount of money forever.

Any Sandlot fans out there? Forever.

You get a guaranteed paycheck forever.

Annuities typically come in two flavors, and they're both different shades of vanilla. People like vanilla, but I'm just saying it's vanilla.

The first is accumulation annuities, where you give money to an insurance company and they grow it tax-deferred with no downside. Of course, you give up some upside. It's very different from the S&P from that perspective, so it could be used for safety.

Then the most common way people think about an annuity is mailbox money. You just get checks. That's it.

Mark: Pretty straightforward.

I know each of those has its own specifics, so I think we'll go into that as we talk today. There are all kinds of flavors and toppings you can add to your vanilla accumulation annuity, and there are toppings you can add to your distribution annuity or mailbox-money annuity.

That's where my head went.

If I part with some cash, but I get essentially a system, a structure, that gives it back to me, that doesn't seem so bad.

Maybe I don't have to think about processing my own cash. It takes that burden off me. I don't hate that.

But I heard “tax-deferred income.” I'm seeing taxable moments here. Is that right?

Ro: Yeah. It's taxable, but it can be very efficient relative to other types of taxable income.

If you have a 401(k) and you're in retirement and take that money out, it's taxed as ordinary income, as if you went to work, got in your car, fought rush-hour traffic and did TPS reports and all that funny stuff we see in Hollywood.

If you're listening and you got the TPS report reference, free beer.

Mark: Free beer on us.

Ro: And then there are annuities where, if you buy them with after-tax dollars, you can do a conversion with it. Ed Slott, the famous IRA expert and national thought leader, has annuities in his Roth.

Then the money comes out completely tax-free.

There's also a middle ground where, if you have an annuity with after-tax money, there's something called an exclusion ratio.

That's jargon for saying the insurance company goes, “We know some of the money you gave us you've already paid taxes on, so we're not going to tax you on it when we give it back to you.”

How they calculate it depends on age and other factors, but what you really need to know is that a portion represents money you've already paid taxes on and another portion represents what was earned.

It can be hyper-efficient.

Mark: Okay, so I get that.

The second question that comes to mind is purchasing power.

If I part with $1 million and I'm now going to get a stream of mailbox money coming my way, and let's say I live for 20 years, the value of the $50,000 per year I'm getting in year one isn't going to be as valuable in year 20, right?

Ro: One hundred percent accurate.

The simplest form of an annuity is called a single premium immediate annuity. You hand the insurance company a check and they say, “Cool. We're going to give you 8% a year for as long as you live.”

Wonderful, especially if you're later in life, when your annuity rates are going to be nice and high.

But to your point, Mark, if that 70-year-old lives until 90, which is not unheard of today, the purchasing power of that money will erode.

However, you can add features to an annuity. You can add an inflation rider so that it keeps up with basic reported inflation.

There are ways to combat purchasing-power erosion, but there are trade-offs. The higher your current payout rate, generally the fewer features and benefits you get. You can add inflation-based features, but generally speaking, market-rate annuities can be eroded by purchasing power over time.

Mark: Then I had this next thought on annuities.

I wouldn't mind getting a stream of mailbox money every month. It's almost like forced consumption of my cash.

I'm a big saver and not a great consumer of my money. Truly, as a business owner, frugality is a thing in building the businesses I've built. Spending money is really hard.

So if I'm getting a forced-consumption mechanism, I don't actually hate that.

Ro: I'm sorry, I've got to interrupt because you just stumbled onto my favorite topic on annuities.

You and I were sending articles back and forth recently. The National Bureau of Economic Research says people with annuities have a 2.5% to 3.7% longevity increase.

There's data out there suggesting annuities help you live longer.

Super cool.

Sorry I cut you off. I'm just super passionate about this.

Mark: So if I have an annuity, I might drop my mortality by two and a half or three percent just by having it? I guess you're relieving stress, maybe.

Ro: Arguably you're relieving stress.

Mark: But annuity payments are taxed. If they weren't taxed, maybe I'd live five percent longer.

Ro: All right. Let's do that.

I want to first say that I hope our organization is very good about giving credit to others when it's due. Maybe I got this idea from somebody else because I'm a voracious reader.

But Mark, there are two ways to make your annuity completely and totally tax-free.

Mark: Go on.

Ro: The first is very obvious, and I already said it once, but I'll say it again. You can literally own annuities in a Roth IRA.

There's nothing wrong with that.

Now it's not income. It's cash flow.

Remember I said two of the most misused words in personal finance and retirement planning are words people think are synonyms, but they're not: income and cash flow.

All income is taxable. Not all cash flow is taxable.

You start to live your life with that ethos, with that philosophy, and your world changes. It has done so for me.

So the first way to turn an income annuity into a stream of cash flow is to own it in a Roth.

Mark: Makes sense.

Ro: Simple. Elegant.

The second is more nuanced.

You're still going to pay the taxes on your annuity, but there's a way to recapture that tax, to self-escrow those taxes.

I'm a big believer, and have advised our retiree clients and business-owner clients who are preparing for retirement, to have at least one policy that you pay premium on forever.

Mark: Now you're going for whole life insurance.

We're talking about life insurance where the policy premiums would be paid forever.

That doesn't seem like it makes sense. Why would somebody who's retired or moving into retirement pay premiums in retirement?

Ro: It makes the most sense in the world.

And I love that this is a dialogue we're filming. I want people to watch us have it.

Let's start with a simple, foundational, first-principles question.

Mark, if something is guaranteed to give you more than you put in, is it an expense?

Mark: No.

Ro: That's the first premise.

If you're 75, you're probably not looking at starting a policy. But if you're doing planning, I recommend having a policy that covers at least your RMDs or your Social Security.

Once you've overcome the cost of insurance, if you're guaranteed to get more out than you put in, it's a wonderful asset.

Let's take Social Security. Forget annuities for a second, although Social Security itself is an annuity. It's just done by the government.

If I'm getting, hypothetically, $100,000 a year in Social Security, up to 85% of it may be taxable.

If I took that $100,000 in Social Security and put it into a life insurance policy that's been seasoned for 20 or 25 years, life insurance gets better as it gets older and more seasoned because you never stop compounding the cash value. You borrow in and out of it.

So a policy that's 20 years old, for every dollar you put in, you might have access to $1.50 or $2.

Imagine getting $100,000 from Social Security, putting it into a policy and having access to $200,000 of cash flow.

That's step one.

Step two is that you're still going to owe the taxes. I would rather you take a loan from the policy to pay Uncle Sam, pay your taxes, and keep the capital compounding.

That's the second way you turn your annuity into something much more powerful than just mailbox money.

By running your annuity through life insurance, you self-escrow the taxes. You recapture the taxes.

You're turning income into cash flow.

And finally, you still create that death benefit.

Remember, you said the biggest objection to annuities is that once you hand that check over to the insurance company, it's gone.

Gone?

Not if it's buying a death benefit.

Look at this five-part capital stack we're building.

We're recapturing taxes.

We've built an inflation hedge via the dividend. This only works with dividend-paying mutual life insurance.

Three, you're turning income into cash flow.

Four, you're buying a legacy.

And five, ultimately you're increasing your volatility buffer against the market.

If someone is talking to you about a standalone annuity, listen, because they can be very good.

But if your advisor or your team is talking about integrating an annuity as an adapter or conduit, that's where things get interesting.

Mark: I'm going to Europe next month. I'm taking my mother on a riverboat cruise.

The U.S. is on a different electrical voltage than Europe. We're 110, they're 220. So everybody brings one of those adapters.

What allows me to juice my life in Europe is taking something centered here and making it work over there.

So, probably destroying the analogy here, is life insurance the adapter that takes an annuity and translates it into something usable in a broader way?

Annuities are highly usable, but does it give it that extra voltage?

Ro: I think the cool part about your analogy is that it turns it from 110 to 220.

Annuities are highly usable. I don't want the opposite thinking permeating listeners.

But how do you turn 110 into 220?

Life insurance.

Take an annuity producing ordinary income, less the exclusion ratio, which is critically important, and pair it with an inflation-hedged lockbox that guarantees a death benefit and a legacy.

Annuities are misunderstood.

This is one area where I hope our organization can make an impact on the national dialogue around retirement planning.

Mark: So in this pairing, this coupling of an annuity with whole life, what if the 65-year-old we're talking about is uninsurable?

They can't do the pairing.

Ro: Great. That's a second set of answers to explore.

Let's come back to the original statement. You said, “I don't like annuities because the money is gone forever.”

The whole concept that tomorrow may not be better than today.

False.

We talked about the adapter analogy, but it's also false for a second reason.

A lot of people don't know this, and I've been on other podcasts talking about it. It's a really cool topic that I hope gets more attention in family planning and retirement planning.

You can name a grandchild, nephew or niece as a joint annuitant.

Let's say hypothetically that when my daughter Jasmine turns 18, because she has to be a non-minor, Mark says, “I'm buying an annuity and putting Jasmine as the joint annuitant.”

When Mark passes, Jasmine gets that income stream for the rest of her life.

That's possible.

A lot of people don't know that.

Mark: That makes sense.

If I'm Jasmine in this situation and I'm anxious about Mom parting with $1 million of cash that maybe would have come to me at some point, or I'm the parent and anxious about parting with the cash because Murphy's Law says I could pass much earlier than anyone expected, that structure changes the conversation.

Ro: Right.

And if you are not legacy-inclined and don't necessarily have children, then take the biggest payout you can get. Enjoy that mailbox money and spend it because you've earned it. You've made it to the finish line.

But I think true long-term thinkers, people who are legacy-minded or have kids, realize the finish line is always moving because the kids get older.

How do I help them with their first house?

How do I continue to build wealth and freedom for the next generation?

Level one is the income check. We've done that with the annuity.

We can put a life insurance policy on that next generation. Now we've done what we just talked about, transmuting income into cash flow.

That could be level two.

Level three can then be borrowing from the policy to dollar-cost average into the S&P or borrowing from it for the first payment on a house.

Income makes the wheels go around.

Cash flow speeds them up.

And human creativity and ingenuity is where you go logarithmic.

I know of no business, government, municipality or nonprofit that can exist without income or revenue.

You can solve that with a joint annuity. Then whatever your family decides to do, you can go straight from the joint annuity to dollar-cost averaging into the S&P.

Mark: Let me say this back for understanding.

If I'm 65 years old and thinking about retirement, I'm liking the mailbox-money idea, but I'm anxious about parting with $1 million in cash. My family is anxious too.

I'm also worried I'm going to pass prematurely and then it was a big waste.

What you're saying is that I can sign somebody up as a joint annuitant who, upon my passing, would continue that mailbox money.

And we're saying, in this case, have an eye toward somebody a generation or two down who is over the age of 18.

Have that person, who let's say is healthy, get a whole life insurance policy and fund that mailbox money into that policy.

Now that stream of income is transmuting into cash value in a whole life policy.

And because Jasmine is 18 in this example, Jasmine could take that cash value and turn around and dollar-cost average into the S&P for the next 30 years, 50 years or whatever.

Also, you now have a death benefit.

Also, you have an asset that is growing.

Also, you have an asset that you can leverage and potentially access for tax-free cash flow.

Fascinating.

Ro: It's the move that opens up every other move.

I've been thinking about this concept on my long walks and trying to figure out ways to make it more impactful and real because it's so interesting.

If you offered somebody a guaranteed income for the rest of their life, they wouldn't say no.

By the way, they're called pensions, and it's why people love them.

But the minute you call that same thing an annuity, people react differently.

I think 20 years ago annuities were a bad word. They've changed a lot in the last decades.

You started the dialogue today with your father, the legendary accountant in New Jersey, saying, “Don't ever buy it.”

Well, there used to be two basic types. Now you can have that income stream run through another policy. You can have that income stream run through a trust mandate.

If used properly, you can put a spendthrift provision on that income to make sure somebody doesn't go bonkers with it.

Ultimately, income makes everything go around.

But more importantly, using these structures creatively is how you build culture.

Culture endures.

Mark: Break it down for me one more time.

In the case of Jasmine, let's say she's 18.

You're saying the whole life policy we would build for Jasmine should have a provision where policy premiums could be paid for her lifetime?

Ro: Yes.

Mark: Tell me one more time.

Why would we want Jasmine, who is arguably at the age of 70 on a fixed income, to be turning around and paying a policy?

Wouldn't we want her to be done with this, like being done with your mortgage payment or other bills?

Ro: Because again, something that's guaranteed to go up is not an expense.

Why do I want her putting money somewhere where it always goes up?

I want to shelter her from taxes. I want to shelter her from creditors.

How do I put this?

I've got to get my bouncy ball for this.

I've been dying to say this out loud on a podcast.

I like equities more than life insurance.

I like stocks. I like the S&P and dividend-growth stocks more than I like life insurance.

Mark: Ro, I need to quickly remind you that we sell life insurance.

How can you be saying you like something we don't sell more than something we do?

Ro: Life insurance has two superpowers that the industry isn't talking about properly.

The industry gets an A-plus for talking about its banking properties. Infinite banking is super cool.

The industry gets an A-plus for talking about its estate-planning benefits.

The industry gets an A-plus for talking about the bond-proxy concept.

You know what I think the industry needs to talk about more, and we want to be part of that dialogue?

Dividend-paying whole life has two attributes that I don't think get enough attention.

The first is that it transmutes income into cash flow. We've been beating that one in this episode.

The second is arguably the most important factor.

When you have dividend-paying whole life, you get to stay on the equity curve.

The words “sustainable spend” and “Monte Carlo” make me want to vomit.

Mark, does the S&P 500 have kids?

Mark: No.

Ro: Does the S&P 500 have grandkids?

Mark: No.

Ro: Does it have to send them to college?

Mark: No.

Ro: Does the S&P ever retire?

Mark: No.

Ro: Does the S&P pay taxes?

Mark: Well, no. I pay the taxes.

Ro: So why do people use it as a planning tool?

It's an accumulation tool. It's the best one out there.

Here's where the whole logic breaks down.

The S&P is a phenomenal place to put money. It is an index of human innovation, advanced capitalism, economic activity, profitability, American science and American management science.

But it doesn't have those other obligations.

Do you know how to make money with the S&P?

Never sell it.

Your equity capital is the last sliver between hope and bankruptcy. It's the lowest part of the capital stack. That's why it has unlimited upside.

Everything above it has limited upside.

By definition, the minute an advisor tells you to start selling the thing that has an indefinite call option that never expires and unlimited upside, you've degraded its fundamental value proposition.

Whole life is amazing because it keeps you and your family on the equity curve.

I've been working on this thesis for a year and a half.

Why does Jasmine need life insurance, even if we don't have a taxable estate as a family?

I don't want to ever sell equities.

I don't want to be told I can only spend 4%.

We're trying to make accumulation things do distribution things and distribution things do accumulation things.

Stay in your swim lane and everybody's going to win.

Even if you worship at the altar of IRR, my thesis is: because you worship at the altar of IRR, buy this so you don't have to leave that altar.

Mark: Ro, we have a fictitious knock on the door.

Guess who just showed up?

It's Ken Fisher.

Ken has been telling everybody, including my entire algorithm, that annuities are garbage. Literally everything we've been talking about here, our initial premise, rubbish.

Ro: I actually don't know a lot about him.

Candidly, it's not really relevant.

All I know is an annuity on a standalone basis can help make sure you never run out of money.

Annuities as part of a broader plan?

Look out.

Because if you don't think annuities are a creative asset class, you have the wrong team.

Would you like a second set of eyes on your plan? We'll do that.

What I care about is the creative application of these tools.

Most people think hammer, nail, go.

In modern financial planning, there's too much opportunity for creativity for that.

Mark: So that's the second use of annuities.

The first was tying it to a life insurance policy. The second is considering joint annuities.

And with the dialogue we just had, maybe it's taking both to create this broader system.

Ro: I want to own the S&P for 500 years.

I'm not going to live 500 years, nor would I want to. Life would be bereft of all meaning if I could live forever because I could always do it tomorrow.

But if I want the family to always enjoy freedom, freedom of choice and freedom of time, equities have to be part of that equation.

As such, the only way I can see to keep my family on the equity curve is to have dividend-paying whole life.

I feel 20 pounds lighter, Mark.

I've worked at a mutual fund. I've worked at a hedge fund. I've been a portfolio manager. I've worked in private wealth. I've been a chief investment officer. And now I do advanced pension work with you.

That is its superpower.

Its superpower is to keep you on the equity curve.

I know we sell life insurance. I love equities more than life insurance.

If I have no life insurance or annuities, at some point I will have to sell some of my equities to live.

I never want to sell equities because they have unlimited upside and an unlimited time horizon.

Therefore, what keeps me from doing that?

This thing.

That's all I want.

You don't have to love life insurance like I do. You have to understand it so your clients don't have to sell.

You have advisors who are AUM-only guys who criticize life insurance.

Their practice could grow faster and live longer if they added life insurance.

How could it grow faster?

Because life insurance can serve as a bond proxy. Instead of sitting there doing asset-allocation studies all day, they may be able to hold more equities in their book provided they have life insurance.

And then the practice could live longer because every time there was a death in the family, you wouldn't necessarily have to go fight for Gen Two and Gen Three to become clients. You've put this mechanism called life insurance in place.

We're creating a mechanism for liquidity to come into Gen Two and Gen Three.

Your practice as a financial advisor can grow faster and last longer if you see the point that life insurance's fundamental superpower is keeping you on the equity curve.

And you're doing right by your client.

Let's talk about the argument that it's expensive.

Again, how can something be expensive if you're guaranteed to get more out than you put in?

But more importantly, you're doing right by your client.

What's the one thing that prevents a plan from coming to fruition, Mark?

Mark: Oh boy.

Dying.

Ro: Dying prevents your plan from coming to fruition.

Getting disabled and dying prevent your plan from coming to fruition.

I actually think advisors have a moral obligation to have this dialogue with their clients.

All the work we're doing, asset allocation, planning, structuring, trust work, getting you the cheapest sources of leverage that we can, inclusive of life insurance, none of that stuff can happen if you don't breathe.

So let's make sure the basics aren't skipped in this bizarre ping-ponging between the two industries when it doesn't need to happen.

I'm here selling life insurance and pensions and coaching people toward proper retirement, saying I want more equities and life insurance.

But if I don't have life insurance, I'm going to be a seller of my equities at some point.

So what's the point?

Mark: As I think about us wrapping up and our listeners, I think a lot about how the internet can be a scary place.

Annuities shouldn't be one of those scary alcoves of the internet.

I think we've shown that in isolation, annuities may make more sense in some circumstances. In isolation, life insurance may make more sense in others.

When you start pairing things together, you create a system.

Ro: System is a really good word.

If you're uninsurable or you didn't get access to the whole “superpowers of life insurance” concept until later in life, consider planning for the next generation.

You could use an annuity, a joint-annuity structure or a life insurance policy to help break the cycle of uninsurability and break the cycle of building a massive portfolio only to see it curtailed by estate taxes, a bear market or sustainable-spend rates.

The system that needs to be put in place is designed to make sure the culture of the family is built and that you think about money multidimensionally, not just worshiping at the altar of IRR.

IRR needs time and space to come together.

You cannot rush compounding.

What gives you that staying power?

That's what we do.

And then, back to what we do, my favorite way to buy annuities and life insurance is in a cash balance plan.

If I can get a significant deduction to buy these assets, sign me up.

I know I need some life insurance. I know annuities can be creative. I don't want to shell out after-tax money for it.

You don't necessarily have to.

The premise of what we do is figuring out how to do all of this efficiently.

I'm tired because I've been holding this in for two years, wanting to have this dialogue, and I just never felt ready until I had a deep enough understanding of the mechanics of these things.

Thanks for the questions today.

Mark: This was a lot of fun, Ro. Thank you.

And to our listeners, like, subscribe, and share this with a member of your practice, a business partner you're with, or your CPA who may have been reading off the standard Wall Street script.

Have them chew on our dialogue today.

We welcome any thoughts and feedback as well.

Ro: And the first ten people to come into the comment section and tell us they know where TPS reports are from get a free beer on us.

Mark: Assuming you're 21 or older.

Thank you, everyone.

If this conversation has you thinking differently about how annuities, life insurance, equities, and retirement income can work together, a conversation with Mark and Ro is a good place to start. Book at ownersasset.com/contact.

This content is for educational purposes only and does not constitute tax, legal, or financial advice.