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Annuity Scams – Fear Factor or Reality?

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The Internet is full of warnings and alerts about annuity scams that create the appearance of  industry run amok with fraud. Should you be fearful of annuities and the people who sell them?

Dick and Eric delve into annuity scams and alerts in this weeks blog entry.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

For more information on Avoiding scams we have provided and excerpt from Dick’s book – The New Retirement.

Avoiding Scams

The SEC also offers advice on how to avoid scams. In the financial services industry, there are many scams. And unfortunately, every year a great many individuals fall victim to these frauds and lose some – or even all – of their savings. So, here are some of the things that investors can do that may help in preventing them from falling victim to a scam.

Ask questions and then verify the answers to those questions. Many scam artists will rely on the fact that a great many people simply do not follow up or investigate important information prior to placing their money in an annuity, investment, or other financial opportunity. It is simply not enough to ask the advisor for more information, as it would only be more of the same fraudulent “facts.” Instead, check out the information from other sources, verify then trust. Take some time to really research the investments and other products that are being offered in order to make sure they are what the advisor has said they are.

Research all companies before investing in them. Prior to investing in a company’s stock or other opportunity, one should fully understand that company’s business and its products or services. Before purchasing any shares of stock in particular, be sure to read over the company’s financial statements on the SEC’s website. It is possible to also contact each states securities regulator. Most companies are required to file financial statements with the SEC and states they are doing business in.

Know the advisor. As mentioned, spend some time doing research on any financial services representative before doing any investment of any money at all. This includes finding out if the advisor is correctly licensed and if he or she or the firm has had any disciplinary issues with regulators or clients.

Be skeptical about unsolicited offers. Should one receive a call or an email from an advisor out of the blue regarding any type of investment, be sure to research both the advisor and the investment opportunity offered.

Remember, if it sounds too good to be true, it probably is. Compare any promised returns with actual current returns on well-known stock indexes.

There is no such thing as **guaranteed returns in securities, so be careful. Even the safest of investments or financial opportunities carries with it some degree of risk. Typically, this will correlate with the return that can be expected on the investment. In other words, if money truly is perfectly safe, then it is likely headed for a lower return. Likewise, just the opposite is true as well; if high returns are promised, there is probably going to be a great deal of risk involved, too.

Pretty marketing materials do not mean that a firm or advisor is legitimate. Pretty websites and brochures are fairly easy to make in this day and age. In fact, a nice looking simple website can be created in just a few hours. Therefore, just because a company or advisor has nice-looking marketing materials, it does not mean that they are offering legitimate financial opportunities.

Do not cave in to pressure to invest immediately in a “great opportunity.” Scam artists will often tell their victims that they are offering a one-time-only opportunity and that if an investment isn’t made immediately, the client will lose out forever. Here again, research the “opportunity” prior to investing any money.

In any case, being an educated investor or consumer will be the best defense against scams. So take the time to do homework before putting money anywhere. It will be more than worth the effort to do so.

Annuity Guys® Video Transcript:

Dick: Eric, our topic today is one that I’ve been thinking about for a long time.

Eric: You trying to figure out the best scam you could run on somebody?

Dick: Well, when we start talking about annuities and folks, a lot of you found us by going on the internet, and you did a google search and you searched some term, and you brought up our website. So when you did that you probably, since you’ve been out there looking into annuities and things about annuities, you probably experienced a lot of material that, I would say an inordinate amount of material that warn can you about scams. Scams on annuities and this type of thing, and we’d just like to talk about that.

Eric: Yeah, if you’ll look at the sidebar, up and the ads around the thing when you search for the term annuity. They’re like, “Alert! Scam! Beware!”

Dick: Senior alerts, retirement scam alerts.

Eric: Everybody wants to pile on the negative, and you know why, because you click.

Dick: Right, it gets your interest.

Eric: It’s like everybody who wants to watch the car accident as you drive by. For some reason, negative sale sells and in this case scams; alerts are what draws people in so it’s a marketing term.

Dick: It is true that there really are scams, so it’s not as if we want it say, that you don’t ever have anything to be concerned about, but on the other hand you kind of want to understand, what’s really the driving forces, behind the information that you see on the internet.

Eric: Right, and financial services have gotten a black eye a lot lately, because you’ve got Madoff, you’ve got these big name accounting, not accounting firms but…

Dick: Investment firms and the like.

Eric: That people have run off with the money, millions of dollars.

Dick: Right and let’s be really frank. These large schemes that people put over on unsuspecting victims literally, they’re not that easy to discern. They’re not that easy to know, what’s really going down, underneath. I mean if you were to look up Madoff’s character at the time when he was flying high you probably wouldn’t find any fault with him.

Eric: One of the most respected guys in the investment world at the time. Unfortunately, they have all studied Ponzi schemes and that’s basically what they’re doing, they’re taking one person’s money and passing it off up the chain.

Dick: One thing Eric, that you and I have frequently told our clients, it’s just a standard theme. Always beware if an adviser asks you to make a check out with their name on it, so Madoff, a lot of people were making out checks to Bernard Madoff and his investment company directly to him. He had more or less full custody, full control over their money, and so at least there should be some red flags going up.

Eric: In fact one of the things when we’re doing paperwork here in the office, I’ll tell the person, “If anybody ever tells you to make a check payable to them, you run as fast as you can.” Here, you’re working with a company. And I don’t want to throw company names out there necessarily, but you’re making the check typically payable, to the insurance company or the investment company. Those are where those checks should be going not to the individual, even though that person is your adviser and you have complete trust in them, you still don’t make the check payable to them.

Dick: It’s a safeguard. Its checks and balances, and so now, if we switch gears from a lot of the big Ponzi type schemes, and the investment company scams that take place, and we switch over to annuities. Annuities are highly regulated by state insurance departments. These are companies that are perhaps 50 to 100 years old.

Eric: Most of them are…

Dick: Older.

Eric: Have significant time spans that they’ve been in existence for.

Dick: There are third party ratings that you can look at, folks that will tell you following them over a long period of years, how they have fared, how well they have done. It’s really a different realm when you get into annuities with the protections and the regulation that’s involved, and yet there have been some accusations of scams with annuities.

Eric: By whom?

Dick: Well, primarily what we run into and what we read in the news are those that go after the older people, the senior citizens.

Eric: The unsuspecting person that should never have bought an annuity.

Dick: In the first place.

Eric: The scam there is basically, it’s the suitability of the product for the individuals. It’s somebody taking advantage of somebody’s, I don’t want to say diminished mental capacity perhaps or just not understanding the product and how it works. That’s one of the things we stress a lot. You buy what you know and what you understand. There is nothing wrong with needing to understand how a product works before you purchase it.

Dick: Right, equip yourself. Do your research. Understand how third party rating agencies work. Look at the background of the annuity company and then you have to have a certain mind about your own finances, in the sense of how much do you put into an annuity.

We often say if an adviser tells you, you need everything in annuities you should run the other way. So there’s this balance of allocating the proper amount. In fact, you want the least amount in annuities as a rule that will produce the maximum amount of income that you need.

Eric: We talked about the foundational aspect. You know having a secure foundation. That’s what we utilize. We don’t want to put more in than you have to, but we want to protect a certain amount.

Dick: And on the other hand, there are reasons why folks use annuities. It could be for avoiding probate or just safety of the money and a reasonable growth on that money to get it over to heirs. You just have to weigh over what your purpose for that money truly is, and not let somebody talk you into something that is not going to be good.

Eric: Right and in the scam aspect with annuities, oftentimes we hear the things that really if you hear them on their face, they’re too good to be true; you know **guarantees of unlimited potential.

Dick: And no downside risk. I mean we do agree there is no downside risk, but when you couple that with unlimited upside potential, it’s not true.

Eric: Right. When you hear something that sounds too good to be true, it often is, is the rule of thumb. Somebody that doesn’t play out for your, layout rather, both the positives and the negatives of a product, really isn’t giving you the full picture. We all like to paint a rosy picture of what you can do on this side, but there is a reality of what actually will happen, and you need to understand all those, when you’re working with an annuity and any financial property.

Dick: Right and you know something that probably many different ones that have experienced or been invited to these free lunch and free dinner seminars…

Eric: Oh, those scams? Free food scams?

Dick: Are those scams?

Eric: Of course, they are.

Dick: What if it’s good food?

Eric: Well, then it’s good food, but still, nobody buys an annuity over dinner.

Dick: I would think it might be a scam, if I was really going to buy an annuity over dinner.

Eric: Never sign the check if it’s if the know that it’s free. No, when you hear about the free food and the free dinner aspects we always laugh, because from an advisory standpoint it’s a way of getting people and talking to a room of people, and that’s why you see them out there. It should be really thought of as an educational seminar, but it’s just like when you get that call to go see a time share. “Oh, we give you a free weekend in this great sunny…” The expectation is you’re going to sit through the sales presentation.

Dick: Right and that’s what you’re getting with the free dinner or free lunch. You may get some valuable knowledge about something, you may have a nice meal, but you are going to be asked to set an appointment.

Eric: Right, it’s the expectation. When you get something you’re expected that law of reciprocity, that see people want something back from you, and so don’t be surprised when you’re asked.

Dick: Yeah, and I think, folks that there’s really nothing wrong with that, when it’s done correctly without that scam aspect to it, where someone is trying to do something that is not legitimate, sell something that is not legitimate or talk you into something that is not suitable or just target people over 70, or something of that nature, because they’re easier to sell an annuity to. So I think that as long as you’re aware, that you look at both sides of the equation. You do a little research then your potential for being scammed in these situations is greatly minimized.

Eric: That’s right. It’s all about educating yourself, being realistic in what you’re getting. Going back to what we said, “If it’s too good to be true, it probably is.” The same goes for somebody sitting through any presentation, whether it be annuities, investments, whatever. We’ve all been sold that bridge that goes to nowhere, right?

Dick: Folks, never tie up more money than you can afford to tie up in annuity. Make sure you have liquidity. If somebody comes along and starts talking to you about the mortgage on your home to buy an annuity, reverse mortgage, this type of thing, it would be the rarest of occasions that that would have any validity. So you want some red flags to go up and think about it. That would go for any investment you know, “Hey, mortgage your home and here’s an investment.” I mean there may be certain situations where that would be warranted, but it would be very rare.

Eric: And let us tell you there are places that you can go online and the internet is a great tool to investigate if you think something is a scam or you’re concerned about the broker, the company, there’s ways of researching all of those pieces.

Dick: Let’s just reiterate just a little bit about what we started out talking about, and that is that many times on the internet, you’re going to see a lot of stuff that talks about scams and the real intent is just to sell you an annuity. So you have to see that thinly-veiled marketing aspect and it’s everywhere. It’s very pervasive.

Eric: People are just trying to get in front of you is really what they’re trying to do. Take your time, educate yourself. One of my favorite sayings is, “You only get to do retirement once, so make sure you do it right.”

Dick: No do-overs. You know I just might mention that, for any of you that would like, you can go on, you may have already had access to it, but you can get my book, which does have some interesting chapters in it that talk about annuity scams and talk about [unintelligible 00:12:04] and the SEC and how they can help you, also about advisers, the different types of advisers.

Eric: The broker-check pieces, and how you can investigate an adviser, excellent.

Dick: So, use that.

Eric: Thank you for visiting today. Have a good day.

Dick: Thank you. ‘Bye, now.

Annuities – The Best Financial Product No One Wants!

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Why would an insurance actuary call annuities the best financial product no one really wants? And why would he go on to say that in retirement he might not even purchase an annuity himself even when he knows they make good sense?

Dick and Eric discuss why individuals purchase annuities – even though they don’t want to…

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Annuities: The best financial product no one really wants

“Annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life”

People who save through RRSPs have a choice to make when they retire. They can transfer their RRSP balance to an RRIF and draw it down at their own pace (subject to a minimum) or they can buy an annuity.

The simple fact is, an annuity may be a great idea, but hardly anyone buys one.

It is easy to blame low interest rates, which depress the amount of annuity income one can buy these days. But annuities were not in vogue even when interest rates were much higher a dozen years ago.
‘Let me be honest. When I retire, I am unlikely to buy an annuity myself, even though I’m an actuary and know all the advantages’

Economists have come to refer to this phenomenon as the “under-annuitization puzzle.”

Buying an annuity seems like an elegant solution since it removes the risk of outliving one’s assets (what actuaries like to call “longevity risk”), it eliminates the hassle of making investing decisions after retiring and the income stream it provides is super safe (it really is, at least in Canada). So why are they so unpopular?

In recent years, however, the economics of annuities have improved greatly. Annuities in Canada now generally return 95% to 100% of premiums paid. In fact, with the recent fall in long-term government bond yields, annuities now return more than 100% return of premiums paid in many cases. The economics, then, can no longer be blamed.

Another often-cited reason for not annuitizing is that the retiree wants to leave a large lump sum to a survivor in the case of early death. This argument, however, does not hold up on closer examination.
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Even when people have little or no interest in leaving assets behind for their heirs, they tend not buy annuities. Moreover, annuities can come with generous survivor income options, if one is prepared to pay for them. Another excuse shot down.

There are other explanations for this puzzle, including: The desire to have money on hand in retirement for a rainy day; the recognition that income needs might vary and the fixed income from an annuity might not match up well; and a reluctance to give up the chance to do better by investing in equities within a RRIF if stock markets do well.

Let me be honest. When I retire, I am unlikely to buy an annuity myself, even though I’m an actuary and know all the advantages.

I would be the first to admit this reaction is not entirely rational. The reason, plain and simple, is that annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life. [Read the Full Article from Fred Vettese at the Financial Post]

Annuity Guys® Video Transcript:

Eric: The topic is annuities. The best financial product no one really wants.

Dick: Can you imagine that no one would want an annuity, Eric? Is that a true statement?

Eric: No, the people I talk to every day, everybody wants an annuity.

Dick: But that’s different. Folks, the people that we talk to may be someone like yourself that’s actually went to our national website, as Eric likes to remind me, international website.

Eric: International website.

Dick: But goes to our website and they’re already in the mindset of annuities.

Eric: Right, they’re doing their research. They’re doing the background on why this might work for them.

Dick: So we might be just a little bit skewed, do you think?

Eric: We’re taking it based off an article, and interestingly enough, it was written by an actuary who works for an insurance company. His comment and I love this, “Annuities are not sexy. You hand over your money to an insurance company who then puts you on a seemingly stingy allowance for the rest of your life.” Well, that sounds pretty pathetic, if you ask me.

Dick: I do have to say that, before I knew much about annuities, many years ago that never entered my mind, never crossed my train of thought. Would I rather have a new car, a new house, or an annuity?

Eric: Rather than an annuity. That’s not fair. Everybody would rather have a new car or a new house.

Dick: That’s right, and really when you think about it, and that’s a lot what this article gets into is we built this money up. We accumulate this money and we like the idea of hanging onto it, controlling it, investing it, whatever we choose to do with our money, but to hand it over to an insurance company and let them give us money back, it’s kind of a transitional state that we go through to make these types of decisions, and there has to be a pretty good reason behind it.

Eric: I come from a family of educators. I’ve talked about that before.

Eric: You know right now in Illinois, we’re fighting. They’re fighting to maintain their pension. Well, what’s an annuity really?

Dick: It’s a pension-style income.

Eric: I mean for today’s 401k investors they’re basically, when you get your retirement you’ve got this lump sum. Do you want to keep the lump sum or would you rather have a pension?

Dick: The vast majority of retirees before they retire and they have this choice, not all companies give this choice; but there are a lot of corporations that will give the employee the choice of a lump sum or a pension. Now the vast majority choose the pension. They’ve worked their entire life.

Eric: For the seemingly stingy income for life?

Dick: Yeah, and yet, even those that would take the lump sum, in many cases will turn right around with that lump sum, and buy a commercial annuity that they feel is a better option, than maybe the pension the company was going to offer. So we tend to get it when it comes to that lump sum that comes from the employer, but yet many times we’ve worked all of our lives, built up all of this money and what’s the purpose of it?

Eric: It’s mine. I want to keep it.

Dick: What’s it supposed to accomplish?

Eric: That’s exactly it. It’s just future spending. It’s not savings. Its future spending is what we’ve save for, but we don’t think of it in those terms. We think of it as “This is money I saved. I don’t want to give it to somebody and then have them, give me a seemingly small allowance.”

Dick: Right, and that’s where the insurance company’s job, their job is to look at risk, to manage risk, to know what’s realistic. You’ll have to read this report, folks and kind of get the gist of what this person’s saying, because he actually is an actuary and he’s really laying out that these insurance companies don’t always win on this stuff.

Eric: And he talked about annuities are much better—the design and what they payout in today’s era, is much better than they were 10-20-30-years ago.

Dick: Right, a lot’s changed.

Eric: You really do have an actuarial advantage to buying an annuity and he admits that, even though I know this advantage exists, I’m not so sure.

Dick: I might be standoffish when I first retire, but maybe as my age advances I’m going to be more apt to do this. This kind of brings me back to a lot of the buzz that is out there and things we talk about with the hybrid annuity but one of the things that appeals so much to folks, on a hybrid-style annuity is that they are able to control that lump sum. What we call majority control the first 10-years or so of an annuity. You have some surrender charges, so you control about 90% of it during that first 10 years, and those surrender charges decline, so after 10 years, you control 100% of it and you still have a lifetime income. And yet, if you haven’t used that money in your account, it can all go on to your heirs, your spouse, whatever is important to you.

Eric: Exactly. In his life point, I guess in summation here he talks about you know what? Everybody has, even if you have that lump sum investment you have, usually a portion that’s in equities and you have a portion as you get closer to retirement that we should all be moving into those fixed payments, bonds, CD-style. What would be wrong with taking those more conservative assets, turning that into an annuity and then just truly letting your equities run, and knowing you have that **guarantee that income coming on?

Dick: Well, Eric obviously this is what we talk to our clients about. We talk to them about balanced allocation. Not putting everything into annuities, not necessarily having everything in the market. Finding that balance that works for each individual, and so to me, he’s right along the lines of what we continue to explain to people.

Eric: Exactly, yes. He takes care of the foundation very well.

Dick: So Eric, would you say that an annuity is something that no one wants?

Eric: All right, there are a few people that want annuities.

Dick: Well, folks we’re not saying that an annuity is going to be the end-all and the be-all or exactly what you need, but you do want to look at it closely and determine where it might fit into your overall financial picture. We really appreciate you spending the time with us, today.

Eric: You have a great afternoon.

 

 

 

Study Finds Near Retirees Get Crushed! Can Annuities Help?

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A recent headline from the Yahoo Daily Ticker caught our attention – American Incomes Are Falling And Near-Retirees Are Getting Crushed: Study.

The report was based upon findings from Sentier Research, a data analysis company, and (to the surprise of no one who works with individuals in or nearing retirement) they found that the inflation adjusted incomes of those age 55-64 were down nearly 10 percent from December of 2007.

Dick and Eric examine how interest rates hovering near zero have impacted savers and near retirees, in addition to discussing how annuities can be utilized in these situations.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

An excerpt of the Yahoo report.

Annual incomes in the United States have dropped sharply in recent years, and near-retirees are getting hit the worst.

That’s the conclusion of a new study by Sentier Research, which looked at the trend in median U.S. household incomes since 2000.

Twelve years ago, after adjusting for inflation, the median household in the United States earned about $55,000 per year, reports Catherine Rampell of the New York Times, citing Sentier’s data.

Now, the median income has fallen to about $51,000.

The two age-groups that have been hit the worst in this period are households led by those in the 55-64 age group and those in the 25-34 age group. The incomes of the near-retirees have fallen by nearly 10% in the past three years.

This data explains why our economic recovery is so sluggish. [Read the Full Article]

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Annuity Guys® Video Transcript:

Dick: Today Eric, we’re going to talk about a subject that . . . we’ve just looked at a study, and this study basically talks about those folks that are near retirement just being crushed by all of the negative economic factors that have happened; their income, their assets, and different things. I guess this is something that you and I have experienced our own practice with this age group.

Eric: In fact I just talked to a gentleman earlier today who talked about, the last 12 years in his 401K, it’s just now back to where it was 12 years ago. Here’s a generation, he’s in his mid 50’s preparing for retirement, what’s he going to do? He is literally grasping, because what he anticipated having and what’s reality right now just aren’t happening.

Dick: When you look at the way 401Ks have been affected; IRA’s, 401K’s, all of this qualified money, you look at the property values, retirees, or those near retirement in that age group, and this age group we’re talking about is about 55 years old to 64. They don’t have that equity in their home anymore.

Eric: We all approached homeownership. For a lot of us, it’s our biggest investment. We put dollar after dollar into our houses anticipating when we get to retirement the equity is there. With the depression in the housing market, boom, that option for a lot of us has gone away. Not only do we not have the amount of equity, in some cases, we don’t have any equity.

Dick: It can be negative equity.

Eric: It’s been just devastating. The study talks about, the [inaudible: 01:51] Research Study, they’re talking about declines for this 55 to 64-year-old households are age range, the average income. When you factor the median adjusted income, so you’re looking at it at inflation-adjusted number, incomes dropping since December 2007 to now; almost 10%.

Dick: Pushing 9.7%, I believe it was.

Eric: If you think about the cost of gasoline, the cost of food, the things that impact our lives, I see it, I feel it, so you know as you get closer to a fixed income . . .

Dick: You start to sense the old idea of stagflation: Inflation is increasing, and yet, the incomes are decreasing. We find ourselves in a position of saying, “Where do we turn?”

Eric: You’re traditional, ‘I am going to put it in my [inaudible: 02:40].’ As you’re getting closer to retirement, you’re supposed to become more conservative, you don’t want to lose money; you don’t want to go backwards.

Dick: Based on our fed direction right now.

Eric: We’re all going to be saying, ‘We were Bernake’d.”

Dick: We’re being penalized if we’re in this age group, because the savings rates are so poor.

Eric: We keep on saying we’re trying to boost the economy; we’re trying to get the engines fired.

Dick: At the expense of what? Our retirees

Eric: We’re killing our retirees. The headline was ‘Crushing the Retirees’. They are literally getting crushed by 0-returns in their options.

Dick: When we turn even to annuities, and that’s our headline up here, ‘Can annuities help?’ Annuities are affected by these low interest rates.

Eric: Yeah. Let’s be honest, these insurance companies utilize investment vehicles as they hedge.

Dick: Bonds, treasuries, and the like to . . .

Eric: To take those dollars, they grow them, and that’s how they return those dollars back to those retirees. They’re getting the same level of constraints placed on them as many of these individual retirees.

Dick: Eric, one thing that I’ve seen and I think it’s unfortunate; I’ve seen some retirees, or those that are near retirement, they panic a little bit. I can understand why they panic. They want to make up, maybe for lost time or they want to make up for market losses. Whatever has caused this, sometimes they’ll tend to take more risk on than what maybe they should.

Eric: That’s the black/red syndrome. If you keep betting red, it’ll hit red sooner or later, won’t it? If you’ve given away all your chips, you can only spin the wheel so many times before you’re done. It’s the gamblers mentality. Like the guy I talked to, 12 years to get back to where we were 12 years ago. He’s not where he thought he’d be.

Dick: You really have to start where you’re at. We have seen those folks that were fairly-well positioned, that came through the financial crisis very well, but those are few and far between as compared to those that were following some of the traditional methods of investment and found themselves not doing so well.

Eric: They always say, ‘There’s something that makes money in every economy, for somebody.”

Dick: Timing.

Eric: The hard thing is, as we’ve got people in this age range, what’s been my . . . if we look at an annuity that’s going to be a potential for some of these folks, I like for someone who still has over 5 years of, basically, working years left.

Dick: Before you’re going to need to turn on that income stream.

Eric: Let’s look at hybrid annuities, because they have those **guarantees that it will roll up and defer.

Dick: They increase your income dramatically if you can leave them alone.

Eric: Right, and that’s the key. You have to be able to leave it alone. Let it set in deferral. For people that are panicking because they’re getting close and they don’t want to sit in the market and have another 12 years of 0 gain . . .

Dick: Or go backwards.

Eric: . . . it’s an option. It’s an option for a portion of those dollars. As I say, we talk about the foundational aspect of income. You’ve got Social Security in a pension, and then if you can stack a . . .

Dick: That’s going to get you to that number that you need.

Eric: Your basement, cover the foundation.

Dick: It’s going to cover the basic needs of life.

Eric: That hybrid is one of those options; it works well in that situation. If you’re a little bit closer to retirement, there’s other options in the annuity world. It’s the immediate annuity; it’s your self-directed pension plan. You can turn it on, you can set them up so that you get little bumps in your income, or you can set up so that you just turn it on, you can set and forget it. It’s there as long as you are. Then there’s, of course, the pre-issued side if you’re looking for . . .

Dick: With the pre-issued I think that a person would look at maybe just taking the yield off of the interest that’s coming in off of it and preserve that principle to reinvest into another pre-issued annuity or some other financial vehicle that’s available at the time, that’s a better choice.

Eric: It’s the old CD mentality, when you’re going to take your interest earned and use that as your income stream.

Dick: The big difference right now between the pre-issued and the CD is about 5% or 6%. It just depends on the situation.

Eric: Those are annuity options, and obviously, there are other investment options out there, as well. You have to balance: Guarantees, its risk/reward. That’s why we like annuities for that foundational aspect; it takes a little bit of the risk out.

Dick: Exactly. Eric, when we start to think in terms of retirees getting crushed, and what is the answer, I think we, folks, we want to state pretty clearly that there really are no silver bullets; there’s no perfect answers. There’s different financial vehicles such as annuities or could be bonds.

Eric: Paying stocks.

Dick: That are going to be the best in your situation. That’s where it really takes a good advisor to help determine what is going to best in your situation.

Eric: It’s weighing your options. We’re not a big proponent of putting all your eggs in one basket. We like asset allocation, diversification of assets, and asset classes. Look at what’s available to, and then make that decision based off those factors.

Thanks for tuning in today.

Dick: Thank you.

The Love Hate Annuity Relationship

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Every financial product has negatives and positives, how these products are presented or utilized by companies and advisors can lead to a vast array of emotions and opinions…. Hence, annuities are no stranger to this love/hate relationship.

Dick and Eric discuss some of the rumors that annuities face that often lead to the conflicting opinions among individuals considering an annuity in retirement.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Below are some excepts of an article by “Coach Pete” D’Arruda president of Capital Financial Planning and host of Financial Safari Radio broadcast the stimulated the idea foe this weeks commentary. [Full Article]

Annuities Have a Negative Perception

Despite their benefits, annuities have received negative attention over the years for a number of reasons, including rival products seeking to discredit them, poorly constructed products in the space and inappropriate sales of the products. It is imperative potential annuity investors have all the right information on hand to make an informed decision.

While annuities are not for everyone, those who can benefit from them should not let common misconceptions dissuade them from using an annuity as part of a comprehensive financial plan.

The Top 5 Rumors About Annuities

  1. Every issued annuity is a variable annuity#.
  2. The impact of inflation is too great for fixed annuities.
  3. With penalties and surrender charges, annuities are just too expensive.
  4. Never use your IRA money to invest in an annuity.
  5. With a big name comes a better return.

Remember that securing **guaranteed retirement income in this volatile, low-rate environment is difficult – but not impossible. Do your research, tune out the conflicting opinions and don’t be afraid to ask the tough questions of your financial planner. It’s absolutely possible an annuity should be part of your financial plan.  Get your hands on an Annuity Owner’s Manual before purchasing an annuity and learn the good, the bad, and the fine print before you ever invest your money. [Read the Full Article]

Annuity Guys® Video Transcript:

Eric: Today we’re going to talk about the love/hate relationship that people have with annuities.

Dick: Why does that happen? I mean what is this love/hate relationship? But it really is there.

Eric: It is. We were reflecting on an article by Coach Pete, who’s on radio in the financial safari down there in North Carolina.

Dick: His radio station is really picked up all across the nation too, so a lot of people hear him.

Eric: He gets questions occasionally. One of the questions was, “What’s the true story?” Talking about the negativity of some of the annuities. Really, it’s looking at why annuities are so negatively portrayed in the media and these attempts to discredit annuities sometimes by their rival products.

Dick: I think it’s also important to recognize that there are these positive articles about annuities. There’s a lot of emphasis, even from the federal government, now that annuities could make a big difference. But yet we get a lot of negative press.

Eric: Sure. If you think about it, annuities compete for the same slice of the pie as mutual fund^s, stocks, bonds, and CDs. I mean all those pieces are options for people when they’re trying to determine where to put their retirement dollars.

Dick: Do you think that some people just might try to color it, I mean the wrong way, for personal gain?

Eric: I have never seen a mutual fund^ company advertise ever. Well, maybe . . .  You have to realize there are competing opinions, and everybody wants to think that theirs is the best. Yes, insurance companies compete against investment companies and the such. So there are conflicting opinions and approaches. You see sometimes people tend to go negative. We’re in the political campaign era. We don’t see any negative campaigning going on. I think that’s part of or one of the reasons that some people have such a negative opinion about annuities. That creates that hate relationship.

Dick: From our own perspective, when we’re working with folks that are just kind of entering that realm of understanding annuities, many of their questions center around variable annuities# because that’s all they’ve read about in the press. They don’t know the difference between the variable and the fixed and the immediate. They pick up this negative connotation that’s continually put out there by the press.

Eric: His first point was, yeah, every annuity is a variable annuity#. Well, that’s not true, but a lot of people confuse especially the variable annuity# and the fixed indexed annuity.

Dick: Correct. They have some similarities.

Eric: Exactly. If you use the S&P as a benchmark, well the S&P is an investment product, right? So they think that it’s invested in the S&P.

Dick: Yet a fixed annuity is just what it says. It’s fixed. It’s safe. Your principal is **guaranteed, which is the opposite of the VA.

Eric: Exactly. In a variable annuity#, your principal can go up and down with the performance of the underlying sub-accounts or the investment accounts.

Dick: Where with a fixed indexed, you’re not really invested into that index. You’re just using it as a gauge of rising and falling.

Eric: Exactly. That’s where the confusion comes in. It’s not necessarily a fixed return that you’re going to get with an indexed annuity. But the safety aspect of every fixed annuity out there, the worst you’ll do is a zero on the return.

Dick: Your principal is always protected.

Eric: It’s protected.

Dick: The other thing, Eric, that we run into a lot with the VAs is the idea that, “Hey, aren’t these annuities all high fees?”

Eric: Right. With a fixed annuity, everything’s built in. It’s what you put in is what goes in. There’s no load fee. That confuses the mutual fund^ aspect. “Well, what’s the load I have to pay? What’s the upfront cost?”

Dick: Sure. Right.

Eric: With fixed annuities, it’s all factored into the performance of the product. What you put in actually goes into your annuity.

Dick: I do find that from folks that are just setting up an annuity that they are kind of amazed. “Okay, so I give you $100,000 or I give this company $100,000 and then they give me a bonus. I start off with $105,000 or $110,000 in this annuity. And I don’t owe you anything?”

Eric: Yeah. “How much do I have to pay for that?” The insurance company has already factored that into the program.

Dick: Right. Yet, it is a little different with the variable annuity#, or a lot different, we should say. I’m just saying in the sense of the fee structure. With the variable annuity#, the fees are going to be right there on your statement. For the most part, you’re going to somewhere from 3% to 5% maybe, depending on the riders.

Eric: Depending on the riders. I mean you could get one of the barebones ones that have very low fees. But most of them, if you’re really looking at the income **guarantees or the death benefit **guarantees, you’re going to have significantly higher fees.

Dick: Yes.

Eric: All right. Rather than just focusing on the variables, we can talk about some of the other misconceptions. What about inflation? Can a fixed annuity combat inflation?

Dick: I think the answer to that is obviously yes.

Eric: Why is that obviously yes?

Dick: Well, there are different ways that you can either defer a fixed annuity with a very high rollup rate, high growth rate for future income. You know that when you turn that income on, that’s going to be an offset against inflation. Yet, there are also ways to actually have cost-of-living adjustments.

Eric: The other aspect that combats inflation is if you’re looking at something that’s going to be in the equities market, you have risk involved with the volatility of the market. That’s one of the things. You don’t have to worry about inflation on the side of you haven’t worried about taking a loss.

Dick: Yes. A lot of times there’s just this automatic assumption that if your money is in the stock market, it’s going up 8% a year. If we look at the last 10 or 12 years, you’ve made virtually nothing. There’s also the possibility that your money goes negative. Now how well does that keep up with inflation?

Eric: Oops.

Dick: Not good.

Eric: No, not good at all.

Dick: It’s not good for sleeping at night.

Eric: We’ve talked about, in previous videos, strategies for addressing inflation with annuities, whether it be through laddering. There are tools out there that can help you combat inflation with annuities.

Dick: Right, and I would, folks, recommend that you go back and look at some of the other videos that we’ve done on laddering annuities and various aspects of inflation.

Eric: Sure. All right. The third point he makes is with penalties and surrender charges, annuities are just too expensive. He points out that this is partially true. There are surrenders. There are penalties. Depending on the annuity you select, I mean it can have surrenders. I can think of one off the top of my head that has a 16 year surrender. So they are out there. There are surrenders.

We’ve talked about this also in previous interviews. Why are there surrenders built into it? It’s because these are not short-term products. If you’re buying it for the wrong reason . . .

Dick: Well, these companies have to secure the clients’ money. The money goes into long-term bonds, very high-quality investment vehicles, and US Treasuries. The idea is, to protect everyone, these surrender charges have to be there.

The key to setting up an annuity properly is making sure that it does meet the objective, that it meets the long-term objective. Then you’re not going to be in a situation where you’re going to suffer a penalty or a surrender if it’s done properly.

Eric: Exactly. I think that’s the key. If you look at something that has a ten-year surrender, it’s typically a long-term product. It’s been designed. Annuities are designed for lifetime income. They are safe, secure vehicles that have longevity, basically, as part of the quotient of what they’re built on.

Dick: I think the idea of the 10 years or 12 years or 8 years, whatever the surrender aspect of the annuity is, gives the client a sense of, “Well, if things change or I would change my mind, I have this escape.” But most folks that set up an annuity really look at the benefits way beyond 8 years, way beyond 10 years or 12 years. They want this to carry them through their entire retirement. It truly is a long-term solution to a long-term problem.

Eric: Exactly. That is really the solution it should be solving. It’s not a vehicle where you are going to trade in and out of different annuities each and every other year. If that’s your intent, you’re looking in the wrong spot.

Dick: Right. Go ahead. I was going to say let’s talk about what makes people love their annuities.

Eric: Well, they take out volatility of the market performance. If you’re concerned about volatility, people typically do that. The income aspect, you have for life. There’s a novel idea. Those are the two big ones that jump into my mind right off the bat. So **guarantees . . .

Dick: Safety. I can say this, Eric, from experience with clients, many times going into it the thought of, “Should I do an annuity, shouldn’t I do an annuity,” there’s hesitation. There’s this love/hate because of all of the negative press and propaganda from all directions.

Eric: What’s coming in. Yeah.

Dick: Correct. Yet, what I find is that those folks that actually have an annuity, that have had it for several years, especially those that have come through the financial crisis, that they’re very satisfied. There is an appreciation and a love for that decision that they’ve made. Very seldom is anyone not satisfied.

Eric: I would agree. If you buy it for the right purpose, if it fits like a glove because it satisfies what your need was, then you’ll be happy. That truly is where people who have purchased it and got what they wanted and are happy. If they educate themselves going in and understand what it’s going to accomplish for them, then they will be pleased with an annuity. Most often, you’ll love the fact that you’ve made that decision because, in some ways, it’s sleep medicine.

Dick: Yeah, it is. It’s sleep assurance. It’s sleep insurance in many ways. I know that we could end it right here, but let’s hit it on the other side of it. Let’s talk about the hate. Why would you hate an annuity?

Eric: You bought for the wrong reason. You thought you were going to buy it now thinking the rates were awful, and all of a sudden rates go up higher. “Oh, if I would’ve waited, I could’ve gotten a better rate.”

Dick: Or you like maybe living on the edge a little bit, you know?

Eric: You like volatility.

Dick: You like the up and down of the market, taking that calculated risk, hoping for the best.

Or you’ve got this discretionary money that you could put into the market. It wouldn’t hurt anything. You stuck it in an annuity, and now that annuity isn’t performing at the high level of the market.

Eric: Right, you have an annuity. You have the safety **guarantees. You’ve eliminated the risk. All of a sudden, everybody else is talking about how the market is doing . . .

Dick: They’re making all this money.

Eric: Oh, I’m making so much. You missed out. Timing is everything. But, you know what, the timing of an annuity is you’ve taken that **guarantee, and you shouldn’t have to worry about it.

I guess I’m not being negative enough.

Dick: Well, thanks folks for tuning in today. We hope this helps you in your overall decision to kind of balance all of this information out there, both positive and negative.

Eric: Well, we hope you don’t hate us, but I don’t know if you’ll love is either. Thanks for coming in.

Dick: Bye-bye.

Are Annuities Best in a Difficult Economy?

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Dick and Eric reflect on a email they received this week highlighting a Tony Robbins video (see below) on the National Debt and Federal Budget Deficit. What does it mean for the nation when we have over $15 trillion dollars in debt?  and how does that impact retirees and those considering annuities in retirement?

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Tony Robbins Video on The National Debt and Federal Budget Deficit.

 

 

Annuity Guys® Video Transcript:

Dick: Today, we want to talk about a lot of the things, Eric, that we hear from all over the nation; folks are concerned about Social Security. Will Social Security be here? They’re concerned about this economy and what if it continues and isn’t a strong economy? How would an annuity fit into that scenario?

Eric: I guess, let’s start with what led us to this topic.

Dick: Okay.

Eric: We were watching . . . we got an email sent to us, had a Tony Robbins video, the motivational speaker Tony Robins, and he took a little time to reflect on the state of the economy, and really, the state of the national debt.

Dick: He really takes quite a bit of time; almost 20 minutes.

Eric: Long by our video standards even. He did a very interesting analogy of . . . when you think about the national debt, you think in terms of trillions, and really, what really what a trillion is.

Dick: How do we fathom $1 trillion?

Eric: How do you wrap your head around it? He starts out by saying, “If you think about a million seconds . . .” we’ll use time in here. If we were to say, “What happened a million seconds ago?” How long ago was that?

Dick: Since I already know the answer; about 12 days.

Eric: 12 days. All right. Then he takes the next step, 1 billion seconds. If you want to go back 1 billion seconds . . .

Dick: You’d think if it was 12 days for 1 million.

Eric: A couple of days, a couple extra months.

Dick: Maybe extra few years or something?

Eric: 32 years. There’s your . . . all right. 1 billion seconds is 32 years.

Dick: That’s huge.

Eric: Jimmy Carter was the president. We were waiting in line for gas then, too. You have this national debt that’s in the trillions of dollars; now trillions of seconds. This gets . . . 1 trillion seconds. How long ago was a trillion seconds?

Dick: If a billion is 32 years, then we maybe think it would be, maybe if we were stretched out, 320 years?

Eric: Keep going.

Dick: 3,200 years?

Eric: How about almost 32,000 years ago. See, when you start to put that in proportion . . .

Dick: That’s just 1 trillion.

Eric: That’s just 1 trillion. We’re in multiple trillion.

Dick: We’re in debt how much?

Eric: Is it $3 trillion?

Dick: $15 trillion. Our national debt . . .

Eric: As you say, just one year.

Dick: Our budget is, I think, $3.9 or something, and then about $1.2 million of that is borrowed money.

Eric: Right. That kind of put the whole what started this topic for us in perspective. There you have it, 32,000 years of seconds.

Dick: Let me just say, folks, we’ll make the video available. We’ll give you a link out to our website with the video on it, and I do think it’s worth your time to watch this, it really puts things in perspective. We wanted to put some things in . . . I can’t quite say perspective.

Eric: I’ll critique it: The first couple of minutes are very good. After that it kind of gets . . .

Dick: It’s a little long-winded, but it’s a good exercise to understand just what we’re really up against. Then from there, Eric and I want to put a little perspective on annuities and investments that people are considering in this day and age.

Eric: Right. When you take into consideration what’s going on with our economy, what’s going on with the world; how many times have we had to sit here and go, ‘What’s Greece doing today?” Are they going to pay their debts? Are they not going to pay their debts?

Dick: How’s that going to affect our market?

Eric: Then all of a sudden the trickle-down is, how many of our banks own bonds in Greece or in Euros? If the European Union falls apart . . . all these things, all this uncertainty into today’s global economy, because we’re no longer . . .

Dick: We look at Greece, how Greece is affecting all of this, and Greece is one of the smallest economies on the earth. Not the smallest, but it’s a very small economy in relation to industrialized nations.

Eric: I don’t want to say this wrong, but I believe someone once told me that if you took all the cash Apple had on hand, they could actually pay off Greece’s debt.

Dick: There you go.

Eric: It gives you a proportion of what Apple is in relation to Greece. Yet, all this turmoil globally is caused by a nation the size of Greece.

Dick: I think that the big question here is with all of the headwinds that we are going to be facing with our country and its debt . . . because we said $15 trillion of deficit, and the other estimates for the unfunded liability such as Social Security and Medicare go as high as $120 trillion; somewhere between $90 and $120 trillion that we owe. We have to decide carrying this kind of debt forward, not just in the United States, but all of the European nations, a majority of the European nations have similar problems. It takes time to deleverage; it takes a long period of time. It’s a sacrifice, its difficulty. If we look at how this might affect the economy over the next 10 or 20 years, how will an annuity work in a person’s portfolio? How much of their portfolio should be in annuities?

Eric: Obviously, we’d always say you have to divide and conquer here. Nothing should ever be all in one spot.

Dick: Correct.

Eric: You have multiple spots for your allocation.

Dick: A good portfolio is well-balanced.

Eric: That’s exactly right. It’s looking at things that are market related and things that are not market related. If you cannot stomach the ups and downs, find your investments elsewhere; that’s the secret. It doesn’t have to be in annuities necessarily; CD’s, money markets, life settlements, whatever that other bucket may be.

Dick: Something that’s a little less correlated with the markets. I do find that when we’re putting together portfolios and balancing portfolios, that the annuity becomes more of the foundational portion. It’s usually more slanted towards the income, future income need, or the potential income need; sometimes, it’s an immediate income need. That is where the annuity seems to be well-suited. Sometimes safety in growth of assets, but less in that area.

Eric: One of the reasons we particularly like an annuity in this kind of market, we believe we’re going to have a boom and bust.

Dick: A lot of volatility.

Eric: Ups and downs. It’s the stair-step approach. If that annuity locks in your gains . . . and here, we’re talking about fixed indexed annuities, we’re not talking about variables. If you lock in a gain, and then the market goes up, you relock in the game at your anniversary date or whatever that period is.

Dick: Typically annually, sometimes further out.

Eric: Bi-annually. Then all of sudden if the market goes down, you’re still on that step.

Dick: You still held where you were that prior year.

Eric: Right. Then we move straight across on that level step. If the market comes up, even though it’s down here, you’re going to step up with market.

Dick: Correct. It’s possible in a flat market, or even a down market, to have increases in an indexed annuity or what’s called nowadays a lot a hybrid annuity. It is a way to have safety, have some growth, and be able to function in a market that really could take a drastic turn for the worse, unexpectedly. I think I’d like to just say, folks, from Eric and I’s point of view, we’re not doom-and-gloom or pessimistic on the economy that we’re going to go into anarchy or everything’s going to fall apart. We do take the outlook just to make it pretty straightforward that we see things being somewhat flat over the next decade or two, maybe up a little, maybe down a little; but somewhere in that area.

Dick: My personal perspective right now is until the economy recovers, people start getting more jobs; rising tide lifts all the boats. In this case, there’s nothing out there. I see the market gaining without a reason for it to be gaining, and it’s the ‘irrational exuberance’, is what I kind of term it. Everybody wants the market to go up, so we’re all kind of wishing and hoping.

Dick: The emotional tide. It’s time for the recovery. There’s been a lot of money pumped into the economy and into the markets, based on quantitative easing and that type of thing.

Eric: Exactly. We’ve pushed it that way, but I don’t see a reason for it to keep going. Unfortunately, that’s my biggest fear right now. I’ve got a lot of people in the market, and my biggest fear is there’s no hope for where we’re going to go future, in the next couple of months, the next couple of years; I don’t see that continuing. Obviously, the election is going to have some kind of bearing as to which direction we go in the economy, but my biggest fear in the meantime: We’re doomed. We’re set for a fall. I don’t want my retirement people that are very close to retirement to experience that. How do you protect their foundations?

Dick: That’s where we do use annuities in that area. I think what you just described is a very good picture of what we’re going to see over and over again, over the next decade or two. That is we’re going to see the market have a rebound, we’re going to see it up, then we’re going to see it drop. What’s the net effect, maybe over a period of 10 to 20 years? We don’t like to think it’s going to be that 50-year history of the market, or 60-year history of 8% average gains. We’ve seen one decade, from ‘99 to 2009, we call it ‘the lost decade’.

We’re just saying that we feel that if this happens, no one can really predict it, but if this happens that we have a pretty flat market, down market, or slightly up market, that a portion of your portfolio could be well served to be in annuity.

Eric: Secure the foundation. With whatever vehicle you do, make sure you’re protecting your retirement. Put it in some place that’s not subject to market risk. If you can’t afford to lose it, don’t put it someplace where it can be lost, and that’s the simplicity of the planning stage here. We’re not saying the stock markets your only other alternative besides annuities. There are lots of options out there. Do your homework, and make sure you’re picking the pieces that’ll basically serve you best for where you want to go.

Dick: I think an answer to our question that we’ve got up on the monitor today: Are annuities best in a struggling economy? I think for a portion of your portfolio in many situations, not all, but in many situations, a portion of your portfolio, it would be best to have in annuities.

Eric: The strange thing is annuities are going to perform better than typical equity-based options in a struggling economy.

Dick: Correct. We haven’t even talked about the contractual **guarantees of income riders. Maybe we’ll save that for another session.

Eric: There you go; a reason to come back next week.

Dick: Thank you.

Eric: Have a good day.

Is Social Security an Annuity?

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It is important to understand the way that Social Security was designed to function. By commercial standards, this is the ultimate lifetime annuity. The definition of an annuity is basically exchanging one’s money with some entity in return for a reliable income stream over a period of time based on a predetermined agreement. The strength of the annuity in this case is the full backing of the US government which is considered to be the safest financial haven of the entire world. With this, Social Security’s ultimate annuity aspects are:

  • Full Backing of the US Government
  • Tax advantaged – 0 to 85 percent is taxed based on income
  • Inflation Protection – cost of living increases (COLAS)
  • Income for life – eliminating longevity risk
  • Spousal, Family and Survivor benefits
  • Priced less than commercially available annuities

 

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

What did retirees do before 1935 when Social Security was not available? What about those less fortunate who had no supplement for their retirement income to survive? There was more family and church involvement on behalf of the poor and more hardship for certain. Here are some recent statistics from www.SSA.gov that demonstrate why Social Security, like it or not, is likely to be continued to a large degree as part of what it means to be a Social Security entitled US citizen.

  • In 2011, nearly 55 million Americans will receive $727 billion in Social Security benefits.
  • Social Security is the major source of income for most of the elderly.
  • Nine out of ten individuals age 65 and older receive Social Security benefits.
  • Social Security benefits represent about 41% of the income of the elderly.
  • Among elderly Social Security beneficiaries, 54% of married couples and 73% of unmarried persons receive 50% or more of their income from Social Security.
  • Among elderly Social Security beneficiaries, 22% of married couples and about 43% of unmarried persons rely on Social Security for 90% or more of their income.
  • Social Security provides more than just retirement benefits.
  • Retired workers and their dependents account for 69% of total benefits paid.
  • Disabled workers and their dependents account for 19% of total benefits paid.
  • About 91 percent of workers age 21-64 in covered employment in 2010 and their families have protection in the event of a long-term disability.
  • Just over 1 in 4 of today’s 20 year olds will become disabled before reaching age 67.
  • 67% of the private sector workforce has no long-term disability insurance.
  • Survivors of deceased workers account for about 12% of total benefits paid.
  • About one in eight of today’s 20 year olds will die before reaching age 67.
  • About 97% of persons aged 20-49 who worked in covered employment in 2010 have survivors insurance protection for their young children and the surviving spouse caring for the children.
  • An estimated 158 million workers, 94% of all workers, are covered under Social Security.
  • 50% of the workforce has no private pension coverage.
  • 31% of the workforce has no savings set aside specifically for retirement.
  • In 1940, the life expectancy of a 65-year-old was almost 14 years; today it’s almost 20 years.
  • By 2036, there will be almost twice as many older Americans as today — from 41.9 million today to 78.1 million.
  • There are currently 2.9 workers for each Social Security beneficiary. By 2036, there will be 2.1 workers for each beneficiary.

Are You Too Young or Old to Purchase an Annuity?

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What is the best age to purchase an annuity?

There have been a plethora of articles and reports about unscrupulous agents who sell annuities to senior citizens who did not understand what they were buying or the contractual ramifications of their decision. Due to the publicity of many of these unfortunate events there has been a blanket statement made by many that annuities should not be purchased by any over 70….. Hogwash!

In the world of financial planning and investment advising there is a need to have safe money options regardless of age. The key relies on the fact that the financial product should provide a solution to a financial need.

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**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Annuities by their name are designed to be income producing financial instruments. Yet, they can also be used effectively as estate planning tools.  Unfortunately for senior adults insurance companies safeguard themselves from bureaucratic regulators by limiting annuity purchase ages – most companies would rather err on the side of not selling an annuity to someone approaching or exceeding eighty years old than to risk being accused of an unsuitable sale by a regulator even if the annuity would be a great benefit to the purchaser.

Why wouldn’t an eighty two year old on their own or with their families consent buy an annuity when they want safety of principal, a higher growth potential than the local bank, a 5 to 10% bonus and all of the account value to bypass probate and go directly to their heirs with no surrenders or penalties? The main reason is that senior citizens are discriminated against by overzealous regulators that in the name of protection have caused the door to be shut on this legitimate purpose for annuities in estate planning.

It should be noted that the age limiting also applies to younger individuals. We have seen insurance companies pull back on benefit eligibility for younger individuals which seem “to promise to much” based on today’s interest rate environment when these benefits are extrapolated out over a younger person’s lifetime.

So again, what is the best age…

The most common age tends to be between 45 and 65. However, it depends on the type of annuity and your planned retirement age. Our most common experience has been to start utilizing annuities in retirement planning 1-15 years prior to retirement. Annuities excel at keeping retirement dollars safe and secure while providing growth for retirement income. We often discuss with clients that they should consider annuities for their income foundation or “If they cannot afford to lose principal” or if they “do not have the time to recover from losses in riskier financial choices” — then annuities are always prudent alternative for consideration.

It seems that every month or so I see a newspaper and magazine financial writer that writes a column gets asked a question like, “I’m 70 years old and my advisor wants me to by a (fixed, variable, hybrid) annuity, should I do this?” I’m sorry, but no columnist can effectively answer that question in 300 words or less, unless his/her answer is “it depends.” It’s not uncommon for retirees to live into their 90’s – and a 70 year old with a family history of longevity may be a candidate for an annuity if they have a concern about outliving their money. It should be part of the discussion – if it fits the need.

 So if I’m in my 20-40’s then I should not consider an annuity… right?

For younger individuals two key elements need to be part of the consideration when discussing if an annuity is a valid option. First, what are they giving up and at what cost? Younger clients who are disciplined enough to make regular contributions into an investment can benefit from dollar cost averaging. Also, they have the advantage of time — the longer the time before the dollars are needed the more likely they are to benefit from the volatile upside of some of the riskier investments. Second, how do they handle the loss of principal? Can they continue to invest into a financial product that may not always consistently grow? If they cannot stomach a loss then other safe money options like annuities should be part of the discussion.

Get Good Advice

In closing, we encourage you to get good advice. Find a financial professional that will listen to your needs and then work with you to find proper solutions. Ultimately it will be you who makes the decision on what to do with your dollars. Do not make decisions based upon a newspaper article or what your neighbor just did that sounds so great. Work with someone who has your goals in mind and you have a much better chance of meeting your retirement target.

Eric: Today, we’re going to talk about what is the best age to purchase an annuity. Now Dick, I see it in the newspaper all the time, “Dear Abby,” well Dear Abby isn’t quite right, but a financial columnist gets the question, “Dear, Dick; I’m 70-years-old. My financial adviser wants me to buy an annuity. Is this a good recommendation?”

Annuity Guys® Video Transcript:

Dick: Absolutely, if you’re 70-years-old, you should never buy an annuity.

Eric: Now 70 and a day, you’re okay.

Dick: Or what about 69 and a half?

Eric: Okay, that’s fine.

Dick: You know really folks; this is the problem with columnists and 300 word articles or whatever. They don’t really take your individual situation into account and where one 70-year-old buying an annuity could be completely the wrong thing, you know Eric we’ve seen that, on the other hand there are other 70-year-olds that have a unique situation, where an annuity could be the exact perfect answer for them.

Eric: Age; we hate to say age doesn’t matter, because really it comes into play in a certain aspect, but it’s all about longevity, expectations, and partly being part of your financial plan.

Dick: Right. If you want to get money over to heirs, maybe your children, you want that money to be safe. You want it to have better earning potential maybe than what the banks could give you.

Eric: Right now, that doesn’t take a whole lot.

Dick: It doesn’t take much. So there could be many of those factors. You want to avoid probate; that could be a good reason to consider an annuity for that purpose.

Eric: Exactly. So the blanket statement to say, “I’m too old for an annuity,” is not the right way of saying it. Now there are certain considerations. I would say as far as liquidity as far as what’s a sound investment, you have to trust the decisions, and that the people you’re working with are giving you good advice. If you ever don’t feel comfortable with any financial advice, get a second opinion.

Dick: And this is where I’ve had taken issue anyway, with some of the compliance regulations and the regulators, which they try to make it one rule fits all, and they don’t really take the individual into account. And I very frequently find that an older person is truly discriminated against, because they cannot choose what is best for their situation. The insurance companies are afraid to sell them an annuity or to allow them to purchase an annuity, because it could be looked at as something incorrect, even though for that person, it would be the very best thing in their situation.

Eric: Yeah, I think part of what happened; this is the historical perhaps side of it. There was a time when annuities were sold and the reflection was that, basically agents were just selling them because of a higher commission level. They were just going to sell them, no matter if they were the right fit or not.

Dick: Yeah, unscrupulous. Not doing the right thing. Taking advantage of people, and yet in every investment that we’ve known out there in the world of investments, there’s been someone that will take advantage of another person. So we have to be somewhat careful, and we can’t change the way the whole world, the investment world is set up. But because of that, I do feel that the protection rules have come down so strongly that now the insurance companies are afraid to sell or allow an older person to purchase an annuity.

Eric: And we’re not suggesting that if you have dementia that you should purchase an annuity. Basically, what we’re saying is that, if you’re of sound mind, and you’re making sound decisions and you understand how it fits.

Dick: And maybe even bringing the family into the decision. But even in the environment that we have now, if the family wants to come into the decision and help their 80-year-old mother purchase an annuity that would be a great thing for the family and for the goals and objectives of the client, they can’t do it.

Eric: Some insurance companies basically tie agent’s hands, based off of age. It depends on the company and what the age cutoff is.

Dick: Right, it seems like, when we get up around in that area of 78-80, in that neighborhood, it becomes pretty minimal what’s available.

Eric: Then of course there are people, I’m going to say in my age group that…

Dick: The much younger…

Eric: They’re also the discriminated against group that some of the benefits, I call them the richer benefits that are available on some annuities, the income riders. We’re actually too young. The benefits are actually too great.

Dick: The companies feel and I think that this should be a cue to some folks that are maybe a little bit more in that sweet spot, which I’m approaching, somewhere in that 50-year- old up to 65-years-old, that some of the **guarantees and that the companies feel are just a little bit too strong to offer to a younger person that could take advantage of that. So we do find this sweet spot to be somewhere between the ages of near 50, up to maybe a little over 65 or pushing 70, where an annuity can be positioned, either to start income immediately or defer it for up to 10 or 15 years.

Eric: I really like that. For me in my practice, those 10 years before retirement, it should be part of the discussion. Even if the decision is no, it should be part of what’s looked at as part of this.

Dick: I can’t tell you how many times, I know you’ve heard it over and over too. That someone has said, “I wish I would have known this ten years ago, five years ago, because why was I wasting my time?” Their money many times, hasn’t done any of the things that it needed to do, to be ready for where they are today, and they could have positioned it with contractual **guarantees, which is what annuities offer and at least that foundational portion of their income or their assets would have produced the income that they needed by this stage.

Eric: Well, and it takes some of the guess work out. If you take a portion of your retirement savings and you position it in a place where you know that you’re this age, your goal is to retire here, isn’t it nice to have predictability of what that income level is going to be at that point, and that is where it becomes part of the discussion.

Dick: So I think that truthfully, getting back to what we were discussing initially and that was too old or too young? I think that we would have to say that it depends on your unique situation. You’re never too old or too young, if it fits what you need.

Eric: That’s right. It has to be a solution to a financial problem and it’s a piece of the puzzle. If it fits it should be part of the consideration. So talk to your financial adviser. Find somebody that you trust and that you feel comfortable with and have the discussion.

Dick: That’s right. Thank you.