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.
**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
- Every issued annuity is a variable annuity#.
- The impact of inflation is too great for fixed annuities.
- With penalties and surrender charges, annuities are just too expensive.
- Never use your IRA money to invest in an annuity.
- 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.
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?
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.