I often wonder to myself, “why more people are not securing their retirement with a guaranteed income?” All of the aspects for a happy retirement are there – guaranteed income, safety, security, no market risk, possible LTC benefits, and peace of mind.
Take a look at this quote from the Financial Research Corporation: “Our analysis shows that no other investment vehicle can rival the income annuity for retirement security. There is no other vehicle in the marketplace that can convert assets into income as efficiently as the income annuity. The simplicity of the product – combined with the high payout rates, liquidity features, and optional inflation rider – make the income annuity a product that will certainly gain popularity in the near future.”
So, why do some clients pass on the opportunity to put the worry of market volatility and running out of money behind them?
Sometimes, an advisor who does not understand annuities talked them out of it. Or, an advisor knew they would take a pay cut from not being able to charge fees on managing that client’s money anymore. Other times, it could be a friend who had a horror story about an annuity they owned at one time. Normally in this scenario, their friend was put into the wrong annuity by someone who did not know what they were doing.
But what if I told you research has shown that most people do not transfer money to annuities because of the perception? Not the annuities themselves, but the perception.
Regardless of the reason, it puts you at a disadvantage when you choose not to implement an annuity into a portion of your portfolio. The video link below details how portfolios with annuities outperform those that do not have annuities. You can watch that video here: Annuities Improve Portfolio Outcomes
Believe it or not, this is a well-researched topic. But what do the experts have to say about this topic? In no particular order, let’s look at some of the top reasons people do not implement annuities into their retirement. I will also address how Atlas can help you overcome those barriers.
Purchase vs. Transfer:
The point of an annuity, when it comes to income, is to do just that – give you an income. However, when people think of the annuity in a ‘purchase’ framing, they are less likely to accept the purpose of the annuity.
I’ll give you an example:
What sounds better to you? Beef advertised as “75% Lean”, or beef advertised as “25% Fat”? See what I’m getting at? It’s all about how you frame it in your mind, even though it’s saying the exact same thing. The hardest thing I must do is shift the mindset of my clients from an ‘Investment’ mindset to a ‘Consumption’ mindset. Meaning it’s no longer about chasing interest rates, ROR’s, deltas, IRR’s, or whatever other measurement was used in the accumulation phase of their retirement. Once you walk away from the steady paycheck of a job or business, it’s a whole new world. You need income. You need cash flow. And you need it to be guaranteed no matter what happens in the economy.
Now let’s look at the beef analogy using annuities:
“You should buy this annuity, and it will give you a monthly income of $1,000 per month.” What does that make you think when you hear that? You are possibly making a giant purchase from which you may or may not reap the benefits. That picture in your mind of handing over one giant check for a series of smaller checks is too big of a hurdle. That’s how I hear most anti-annuity advisors frame annuities for their clients. I believe that is a great disservice to the client.
Now, what do you think when you hear it this way?
“You can transfer a portion of your portfolio to an annuity, and it will guarantee you and your spouse $1,000 per month in spendable income that will never run out, no matter how long you live. It will continue to participate in market gains in the good years and be completely protected in the bad years. If you both pass away early, the remainder of your money will be passed on to your beneficiaries.” What does that description make you think? Possibly that you’re allocating a portion of your money into an asset that will provide a lot of value to your life in retirement. But depending on who you talk to, it depends on how it is framed. The first guy says, “25% Fat”, while the second guy says, “75% Lean”.
“Purchase” vs. “Transfer .” It’s the same thing, only framed in a different light. Keep in mind that you are not “buying” an annuity. You are allocating, or repositioning, a portion of your investments to give you guaranteed spendable income for the rest of your life. And that’s IF you want to keep it the rest of your life. Just because you transfer money to an annuity does not mean you have to keep it forever. However, I’ve never had a client surrender an annuity that is designed for the purpose of income.
How do I help clients overcome this?
An advisor can guide the amount to allocate to an annuity based on your needs. Whether income, growth, LTC, or legacy, remember this is not a life-long commitment. If, for some reason, circumstances change, then you can reposition at the end of the term.
Overwhelmed by Annuity Options:
There are approximately 200 annuity companies. Each company offers anywhere from 5 to 20 different annuities. So, on the low end, that is one thousand different choices for annuities. Every advisor or annuity producer you speak with seems to offer you a separate company and claims, “this is the best!” How do you know you are making the right choice?
That can be extremely frustrating. So frustrating, in fact, that most people just give up on the idea of protecting their money and guaranteeing their income for life. A fascinating book called “Thinking Fast & Slow” basically explains that you have two systems in your brain. One that uses your “gut feelings” to make a decision, which is usually correct. The other system uses complex functions to analyze more details. The more the second system becomes engaged, the more exhausted you become.
This is a huge disservice to your future. Most people know that having a guaranteed income for life is the right decision, and System 1 tells them, “Yes, do this.” But then System 2 becomes engaged when they start getting bombarded by desperate salespeople trying to sell them on a particular product or strategy. And the result ends up being that they give up entirely and stick with what they’ve always known. Which is most likely a diversified portfolio or just sticking with the advisor they’ve been with for years, even though it is the subpar plan.
How do I help clients overcome this?
First, with the help of an advisor to determine the purpose of the money (i.e., income, growth, LTC, legacy, etc.) They should present options for the best companies next to each other, providing a printout of what you can expect. No guessing. No speculation. No sales hype. Just verifiable truth. Then you make the decision. That’s it.
Multiple Steps to Funding the Annuity:
Studies have shown that when participants in a pension plan are given a choice between a lump sum or guaranteed payments if the plan sponsor offers the guaranteed payments (i.e., the annuity) themselves, most participants take the guaranteed payments. When the plan participant must move the money to someone else to provide the guaranteed payments, they take the lump sum. Most people, however, do not have the option to take guaranteed payments from plan sponsors because they do not exist. So, it is 100% on the back of the client to move the money and figure out where to take it. At this point, you have every advisor and their grandmother trying to get you to jump on board with their plan, which can be very stressful (System 2 is kicking in).
To fund an annuity yourself, you must first decide which annuity is the right fit for you. In the above example, we saw that it stops for many people due to the overwhelming number of choices and misinformation.
Second, you must initiate the transfer. That entails getting on the phone with your current advisor or parent company and informing them that you intend to move a portion of your money. Basically, you are choosing to no longer do business with them. At least with that chunk of money. That phone call alone is enough to stop some people from securing their future, as sad as that is to say.
Some companies make it easy to transfer money. Others make it seem like it is their money, and you’re asking permission to have some of it. You could be forced to speak to the person “in charge” of your portfolio, or you may be sent to what is known as “retention.” I’ve heard so many blatant lies, runarounds, and mischaracterizations to convince people NOT to move THEIR money that it makes me sick.
Why would these “retainers” make it so difficult for you to move YOUR money??? Because they are going to take a pay cut when you do. Someone in this scenario is getting a guaranteed income. It’s either when you get the annuity. Or it’s the advisor with YOU acting as THEIR annuity. If they convince you not to move your money, you’re ensuring them a guaranteed income by paying their fees. You become their annuity.
How do I help clients overcome this?
Your advisor should walk you through this process step-by-step. No one should stop you from securing your financial future.
“That’s not fair.” Remember hearing that from your kids? Remember saying that as a kid? Metaphorically, I hear clients say this all the time. Typically concerning crediting methods, such as caps, spreads, and participation rates. When you have a Fixed Indexed Annuity, you will have a selection of indexes to track. When the index does well, you will receive growth in your annuity. When the index does poorly, all of your gains are locked in, and you will not lose a single penny (minus any withdrawals or expenses that you may have chosen as a rider – such as an income rider).
So, that sounds fair, right?
Investors start to feel a sense of unfairness in annuities regarding the crediting methods. For instance, the index you have chosen to track is up 10%, and you have a 50% participation rate; you will be credited with 5% interest. The misconception of unfairness is when the investor believes that the annuity company is keeping the other 5% for themselves, the annuity company does not keep the other 5%. Again, with your advisor, you should understand all the financial workings of an annuity company’s profit margins in the near future. But let’s say they kept the other 5%, and we put this exact scenario based on gambling at a Blackjack table in Vegas. If the casino manager told you that you would keep half of the pot every time you won a hand, and the casino would keep the other half, you would think that is a raw deal? Probably, until he tells you the next part – every time you lose a hand, the casino will pretend like it never happened, and you can take your bet off the table! Honestly, how many people wouldn’t take that deal??? And how much would you bet on each hand if you knew you couldn’t lose your money? I would venture to guess as much as possible! As mentioned above, this is not how it works. But even it was, can you honestly tell yourself that you wouldn’t take that deal at least with a portion of your retirement money?
“I don’t want to tie up all my money.” This is another fear heard frequently. Let us address the “all of my money” part of this concern. You cannot put all of your money into an annuity. The annuity company will not allow it. In fact, you have to have a certain amount of assets before they even consider issuing the annuity. One massive misconception with annuities is that this is an “all or nothing” deal. The only amount that should be allocated to an annuity is the amount that will serve the purpose of that particular sum of money.
How about the “tying up the money” part? This misconception is based on old-school Single Premium Income Annuities, or SPIA’s. This is the type of annuity that you send a lump sum to the annuity company, and they send you a guaranteed monthly income. They used to be illiquid, but just like your car has improved drastically from the one you drove as a teenager, so have the options with annuities. SPIA’s are still very useful in certain circumstances, keeping this fear of liquidity alive. In today’s annuities, you will still have 10% liquidity every year for the length of the agreement.
How do clients overcome this?
When you work with me, you will have an exact plan on how to use the annuity appropriately. If we can only withdraw 10% per year, that means we have purposely put a precise amount of money into that annuity because we plan on only using 10% of that money per year.
Also known as the “Fear Of Missing Out.” This is an interesting fear studied. It comes down to ‘loss aversion’ vs. ‘risk aversion.’ Long story short, some people would rather keep their money at risk for the hope of a bigger gain, even if it means a more significant loss, rather than protect their money from any loss if it means taking a smaller gain.
How clients overcome this:
When you protect a portion of your money, the portion that will ensure your survival in retirement, then you can use the remaining amount to go after the more significant gains with no consequences! You will have the best of both worlds. However, when you do not have your living expenses secured, you will always be at risk of running out of money. Or, you will always get subpar returns because your portfolio will be so diversified it will water down any opportunity for significant growth.
If you are one of the fortunate who has a pension and all of your living expenses are covered, there are still annuities designed just for growth and have no fees associated with them. They can still give you phenomenal returns!
Hopefully, this article gives you insight into 6 of the biggest reasons people are not securing their retirements with annuities. If any of these struck you personally, reach out to an advisor. It’s a straightforward process to get these concerns cleared up once and for all.