Selecting the Best Annuity & Retirement Income Advisor

Eric and Dick examine comparing annuities to investments in this weeks video review.

**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.

Three annuity mistakes to avoid

What not to do when evaluating annuities for retirement

By Andrea Coombes

If you’re comparing annuities to other investment products, you’re making a classic mistake—and it’s just one of three major errors that consumers and financial experts make when evaluating annuities, according to a panel of experts at a recent MarketWatch Retirement Adviser event in New York that focused on income strategies.

“Both immediate and deferred annuities have been shown to have a very positive role in an overall retirement-income strategy, but the deployment of these instruments is often hampered by some very fundamental misunderstandings,” said John Olsen, president of Olsen Financial Group, and author of a number of books on annuities, including “Index Annuities: A Suitable Approach.”
The panel, moderated by MarketWatch senior columnist Robert Powell, also featured Farrell Dolan, principal with Farrell Dolan Associates, and David Blanchett, head of retirement research at Morningstar Investment Management.
Mistake No. 1: Unfair comparisons

One such misunderstanding—and it’s often made by financial experts, Olsen said—is to assess the value of a variable deferred annuity as though all of its costs “are nothing but pure overhead.” That can lead consumers to view such annuities as unreasonably expensive. [Read More…]

Annuity Guys® Video Transcript:

Eric: Today we are going to talk about whether it is unfair or fair to compare annuities to investments.

Dick: Eric, I think that it’s the hardest thing in the world for all of us to stay off of comparing annuities to investments, and I think it is unrealistic to think that we would do any comparison; however, I think that’s where we get in trouble.

Eric: It’s the expectations game. So often when people come to us, they’ve been conditioned to talk about return, whether it be from a mutual fund^{^}, savings account, whatever. Everything’s about return. What’s the return?

Dick: They spent their whole life accumulating this money so their focus has always been on that.

Eric: They are trying to figure out how can I get the biggest return rather than mitigating the risk necessarily with an annuity to get the biggest return in dollars, rather than return in rate.

Dick: What inspired us this week, reading this article by Andrea Combs that really gets into some of the things that we talk about on a regular basis; and that is why do we buy? Why do we choose annuities? There’s contractual **guarantees, there is cash flow, and that is what she really gets into, that there’s this transition that we go through that cash flow becomes king. Longevity of knowing that we’ve got money, no matter how long we live, and there is a third aspect which is maybe a little bit more parallel to investment, that is where you require secure level of growth, contractual **guarantees.

Eric: I like the idea of just saying it transfers the risk from me, as the investor or individual, to the insurance company. They are going to take care of doling out my allowance each month, hopefully, and that’s the income stream that I have confidence in. They’re insuring my future income stream, is how I look at it.

Dick: Past wisdom from the investment world has been that if we draw our portfolio down by a certain level, say 4%, 4½, 3½%, everybody’s got their own view of it, that somehow we can continue to do that and be invested. The last decade has shown us that that really can’t be relied upon.

Eric: In an era of 5% CDs, it’s easy to say, “I can pull of my 5% and never touch my principle.” If you looked today, if you can find a 5% CD . . .

Dick: It’s not there.

Eric: I could sell a few of those, if I could find a 5% CD. That world no longer exists, that safety, security aspect of getting those returns, necessarily. This is where if you need those returns that are a larger withdrawal than just pulling out your principle, and a lot of people do today, this is where annuity comes into play.

Dick: I was just going to say, again, talking about not being focused on the return. Unfortunately so many times folks, annuities are sold based on comparing them to investments, and especially the indexed annuity or the hybrid annuity where it’s stated that you’ve got upside potential to a downside risk; there is truth to that. The upside potential is pretty minimal, and the idea that it has outperformed certain investments, certain indexes, S&P 500 over certain time periods in history, it was ever intended to do that.

Eric: It’s not what they’re geared for. We’ve talked about it in the previous videos, in order for you to be happy, you look at the **guarantees. If you can be happy with what the **guarantees are offered through an annuity, then anything that you get above that . . .

Dick: It’s a pleasant surprise. It’s good news. You’ll never be surprised by an annuity by it going the wrong way. I have to qualify that a little bit. We’re talking more about fixed annuities here and not as much about variable annuity^#. Because a variable annuity^# is an investment, and yet, it does have some **guarantees.

Eric: It can have some **guarantees.

Dick: It can have, so there is some aspect about that that you have to say, “Maybe for some people, a variable annuity^# may fit,” but again that’s a whole different discussion.

Eric: Sure. In her last point, she talks about annuitization, which is a really interesting aspect. We’ve talked a lot about hybrid annuities and the fact that you don’t have to annuitize necessarily, to get the same benefit that you would from annuitization. Her focus is on the stream that’s provided from an annuity.

Dick: For all practical purposes, we’ll just assume that her annuitization would also mean turning on income for life; a different terminology. We do find that with clients that . . . what would I call it, Eric? The depression mentality, where we can live off less so we’re going to, and yet, they’ve set this annuity up so that we can turn it on and turn on this income at a certain point of time and relax, enjoy what we have, and know we will never outlive our money. Yet we have these clients who have a tendency to hold back from that.

Eric: I think nobody wants to give up their principle. You worked hard and earned these dollars, nobody likes the idea of just . . .

Dick: Spending it.

Eric: You give it all to the insurance company and you get that allowance. That’s what really annuitization really is; it protects you on the income side. The income rider on these hybrid annuities does something very similar in a sense: Guaranteed income for life, but still allows you to get access. If anything is leftover, that can go on to your heirs. That’s, I think, the aspect about that type of annuity that’s really popular.

Dick: I think it helps people who wouldn’t normally annuitize to go ahead and take their income stream, because they know that they still have some access to the account value.

Eric: I think it’s really one of the things that we are finding really attractive right now because it does allow that flexibility. For people that are used to this return mentality that we’ve talked about, they still have that opportunity to hold on to those dollars a little bit. Not necessarily get the best return, but to get that income stream, have that safety/security.

Dick: Eric, when we talk about comparing annuities to investments, what’s the balance?

Eric: You have to look at the diversification. For me, when you’re looking at those two things, you have to look at protecting the foundation, and that’s where an annuity comes in. After that, hopefully investments can play a part in controlling for inflation and being out there.

Dick: Maybe a healthy way to compare annuities to investments would be in your own portfolio, in terms of what proportion of your portfolio do you want in security and safety for that income foundation or death benefit-type foundation as compared to what portion are you willing to put at risk?

Eric: Exactly. It’s to protect the foundation. How do you want to protect it? Are you comfortable protecting it in the headwinds that we have going on, or would you rather protect it with a rock-solid foundation?

Dick: I agree. Thank you, folks.

Eric: Thanks for tuning in today.

The post Is it Unfair to Compare Annuities to Investments appeared first on Annuity Guys®.

**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.

Read the article that stimulated this weeks topic…

Why Indexed Annuities Keep Charging Ahead

In the first quarter, indexed annuities topped the charts in sales growth among all annuity lines as compared to first quarter 2011.

The sales volume still did not surpass that of more traditional annuity products, such as variable annuities^# and fixed deferred annuities, but in terms of sales growth, the products were definitely the leader of the pack, and by a substantial margin.

What’s behind it? The answer is in the sales results themselves.

The sales results

First quarter indexed annuity sales reached $8.1 billion — up 14 percent compared to first quarter 2011, according to estimates from LIMRA.  AnnuitySpecs.com is reporting similar results — first quarter sales of $8 billion in 2012, up by more than 13 percent from first quarter last year.

The differences in results reported by the two firms are not significant, given that the firms have slightly different lists of participating companies as well as different research parameters and definitions.

But the double-digit growth that both firms identified is significant, especially when viewed against the performance of other annuity product lines. For example, total variable annuity^# sales fell by 7 percent in first quarter 2012 compared to first quarter last year, according to LIMRA. That was on first quarter 2012 sales of $36.8 billion.

In addition, total fixed annuity sales fell by 10 percent on first quarter sales of $18 billion, LIMRA says. That was despite the two-digit jump in sales of indexed annuities, which are included in the fixed total.

The total fixed annuity plunge was a result of sales declines in most fixed annuity categories that LIMRA tracks other than indexed annuities. These other categories include fixed rate deferred annuities (down 28 percent on sales of $7.1 billion compared to first quarter last year), book value annuities (down 32 percent on sales of $5.8 billion), and fixed deferred annuities (down 11 percent on sales of $15.2 billion). Fixed immediate annuities were the only products to flatline, coming in at 0 percent gain on sales of $1.8 billion.

AnnuitySpecs points out that first quarter indexed annuity sales did lag the previous quarter by 3 percent.  But Sheryl J. Moore sees the product’s 13 percent increase over first quarter sales last year as the more compelling figure. Moore is president and CEO of Moore Market Intelligence, which owns AnnuitySpecs.com.

“No other lifetime income product is as strategically positioned to thrive in this low-interest rate environment. In fact, the indexed annuity is well-suited for any market environment,” Moore said in releasing her firm’s first quarter numbers.

LIMRA portrays indexed annuity sales as “the driving force in the fixed market” for the first quarter, and points out that for the third consecutive quarter, the products “outperformed traditional fixed annuities, capturing 45 percent of the fixed annuity market.” [Read More…]

Annuity Guys® Video Transcript:

Eric: We’re going to talk about annuity timing. Should you jump in or wait?

Dick: Well, that’s the big question. Do we jump in or do we wait and that’s a question we hear all the time.

Eric: We’re hearing it a lot.

Dick: Recently.

Eric: Especially even with people we’re working with in the last couple weeks, because things are changing. The market is changing, but why is the market changing?

Dick: Well, I think it has something to do with the government forcing these interest rates down.

Eric: Uncle Ben, are you doing it to us again?

Dick: These treasuries are setting new records on the downside, literally daily. So this is really making a difference and putting a lot of pressure on the annuity companies, and obviously banking instruments too, to lower rates dramatically.

Eric: Right. I mean we look at what has happened and I’m going to blame Europe, because they’re not here in the room with us, but the pressures of what’s happening with Greece and Spain and the euro and the flight to safety has been the flight to the United States. Bring us all your dollars, your euros, your yen. We’ll take them all and it’s pushing down the fed, the 10-year treasury is down 25%, from the beginning, just a couple of months ago.

Dick: So the big question gets down to do we jump in and do an annuity now for timing issues or do we wait for the rates to increase? Just recently, Bernanke has indicated that we’re likely to see this low rate environment, for three to five years. It wasn’t very long ago he was talking about the next year or two.

Eric: Yeah, it started it was going to be—when they started making these announcements telling us, giving us the information on how long they’re going to… it was 2013, then it became 2014, and then his latest statement is 2015. So now we’re in a—I don’t want to say **guaranteed low rate environment.

Dick: Yes, so how long do we wait for retirement? How long do we wait for these rates to change? Retirement isn’t always, say a choice. I mean there are a lot of reasons why we retire, and sometimes we just need to make that decision, because we need the income or we need the safety of the money. There are many reasons that we would move some money into an annuity.

Eric: Right and I think that’s the key. Why are you putting money into the annuity? If you need income and you don’t want to have to have that worry about outliving your money that’s where the strength of the annuity still lies. Now are we starting to see annuity companies start to pull benefits off the table?

Dick: Last week we had what three or four of them? Major companies start to pull back and just yesterday maybe, we were notified again?

Eric: I’ve seen two today of companies that have made announcements that within the next week to two weeks they are reducing their benefits.

Dick: And how many people have we met with over the past year or two that said that they were going to wait for things to go up?

Eric: Yes. I can remember two years ago when, oh my, gosh it was at 4.50% in the caps and they were like, “You know it’s going to go up to 5.0%. I’m going to wait till it’s a 5.0%.” Right now people would kill for 4.50%. So it’s trying to predict the market on that side, you just can’t do it, if you’ve got a crystal ball… What we’ve got though is we’ve got **guarantees of the fed. That’s probably not a **guarantee.

Dick: I was going to roll with you on the **guarantees. I was going a different way.

Eric: Prediction by the fed that basically, “Hey, we’re going to keep rates at a low level.” So timing-wise, do we wait? Well, if it’s income…

Dick: Then we should not wait, because the **guarantees that are offered right now on annuities for this income account, for the rollup to create a larger income in deferral is still excellent, and it’s about to take another step back.

Eric: It’s still better than what you’ll get in other areas sometimes, but the annuities excel right now with income. Guaranteeing a rollup and deferral, those are the pieces that really are superior. The lifetime income benefits versus some of the other pieces.

Dick: And if you need immediate income there is the possibility of using a hybrid, as some type of an inflation hedge or using an immediate annuity that has a **guaranteed cost of living adjustment. So there’s no reason not to consider going forward, if it’s that time to retire with immediate income or putting money aside for deferred income, because this is where the annuities really do shine.

Eric: Exactly. All right now so if I wanted to buy an annuity for growth, I’m trying to get the most bang for my buck in the sense of return, should I still buy an annuity now or should I consider other alternatives?

Dick: Yeah, we have a bridge to nowhere and we have an annuity in a package deal, right now. No, Eric. I say if you want growth we really have to think outside of the box. I think that we can still utilize safe money vehicles and use insurance companies for this, but I think that we need to be looking at more the secondary annuities, these would be like, pre-owned or pre-issued annuities, and you can find yields all over the internet.

Eric: Pre-owned, is that like buying a pre-owned car, a pre-owned annuity?

Dick: It’s certified. Actually, it is certified by the court. They’re court ordered. So they’re very, very safe. It’s backed by the insurance company, or the annuity company, the same as a standard annuity. Someone actually bought an annuity. Decided for whatever reason they did not need this annuity and they sold it on the secondary market.

And so by doing that, it can create a much higher yield. So we’ve been able to help different ones with yields in the neighborhood of between 5.0-6.0%. However right now, you see on the internet, you see advertised a lot, if you know where to look, somewhere in that 4.0-5.0% range. It just depends on the source that you have for these annuities. Another one would be that you could get growth. What would be another area?

Eric: Well, as you say, sticking with similar life insurance, in the sense of you’ve got life settlements, now. Life settlements are a little bit more unique in the sense of you’re buying life insurance that somebody decided that they didn’t need. Usually, it’s that someone purchased it and it was for a spouse and the spouse predeceased them. So they have a life policy they no longer need, so there’s more benefit to them by actually selling it on the secondary market, than cashing it out sometimes.

Dick: Right. So you know you’re going to get paid out on that and you know it’s **guaranteed by the insurance company that’s behind it, so it’s relatively safe, very safe actually.

Eric: You’re basically buying—you and usually a group of people are buying the premium. You’re paying the premium, in exchange for the death benefit, so you don’t necessarily always know when…

Dick: You never know when somebody is going to pass.

Eric: The people that underwrite these basically go in and they calculate, look at the life expectancy.

Dick: Of their life expectancy.

Eric: Usually they try to time it to 3-4-5 years, so you could expect it to happen, but you can’t **guarantee it. You’re putting this down, knowing you’re going to get this. You just don’t know how long it’s going to take.

Dick: So you always know that you’re going to have an increase in the money. You just don’t know what the percentage of the yield will be, based on the timing.

Eric: Right. You know you’re going to get the death benefit. You just don’t know when it is coming. You’ve also gotten another life insurance product. You’ve got your indexed life insurance. Now your caps there have not been impacted nearly to the extent that the annuities have. You’re still looking at caps that 12-14%.

Dick: Yes, and they’ve held up all through the whole financial crisis, so that’s again not for everyone, but it is an area where if you’ve got the right scenario, the right situation you get a pretty darn good growth on that. You do have to pass a medical audit.

Eric: Yeah, you have to be insurable or know somebody that’s insurable.

Dick: Know somebody who is insurable, right. So that’s thinking outside of the box.

Eric: There are alternatives out there, safe money alternatives.

Dick: If you want to earn somewhere in that 5.0% to maybe 7.0% range, and even in some cases it can go into the double digits, but we’re trying to be a little bit more conservative.

Eric: We’re by nature conservative.

Dick: Under, what do we call that, under promise?

Eric: Understate.

Dick: Over deliver.

Eric: That’s right.

Dick: Back to, did you have a point that you wanted to hit there, on something?

Eric: No. I was looking at the article that kind of stimulated the topic for today and talking about the changes, and what’s going on in the annuity market.

Dick: The annuity world out there.

Eric: You’re seeing a lot more of the purchases on the indexed annuity side, and I didn’t know if we were ready for the summary statement in this sense, but it’s basically looking at the changes and there are a lot more people purchasing indexed annuities.

Dick: Right, which are considered the hybrid annuity, so the fixed index annuity.

Eric: We like to personally think we’re responsible for the increases in the annuity market, but in all likelihood, probably not.

Dick: We’re rising a tide, across the nation with them.

Eric: And it’s because of one, the income riders. The ability for in retirement, and then you also have a safety of principal and a hope for gain.

Dick: Right. So you put all those factors together and compare the hybrid annuity or the indexed annuity to just a standard fixed annuity or the variable annuity^#. What we’ve seen is a great increase in the overall rate of sale, of the indexed annuity and the hybrid annuity and a decrease in the fixed annuity, which is paying very low rates right now, and also in the variable annuity^# which introduces the market risk factor.

Eric: People are agreeing with us more and more that they see the benefits of safety of principal and **guarantees, either whether it be, through just the **guarantee of not losing principal or increases in income.

Dick: Right. Well, I think we need to sum it up with—is this a good time to jump in?

Eric: Yes, and no.

Dick: He sounds like me, now.

Eric: If your timing is that you need income, if you want growth, there are vehicles out there that we would encourage you to look at.

Dick: If you want income it’s a definite, that a portion of your portfolio can go towards an annuity and the timing is probably better to move than to wait.

Eric: If you’re retiring now?

Dick: Or in the near future.

Eric: Yeah, as you say, you probably don’t have time to wait.

Dick: So that’s it for today, folks. Thank you for spending time with us.

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