Annuity Lies And How They May Impact Your Future
My head is healing up nicely now. It gets better when I stop beating it against the wall in my office. My business partners have grown to recognize the thumping, pounding sound. It’s just an occupational hazard that comes with being in the retirement income planning business. I sell annuities.
“Did you know that running out of money in retirement is the biggest fear for those over 50?”
“Did you know that a Fixed Annuity is the ONE financial tool that GUARANTEES that you will have an income that you can NEVER outlive?”
If you ask someone if they’d be interested in a retirement plan that produces a reasonable rate of return, allows them to participate in market gains without any exposure to market losses, guarantees they will never lose a penny if one sticks to the plan, has a better than average chance of making a better than average return with no risk of loss, has little or no fees at all, allows some limited access to funds, and will pay them a lifetime income when they decide to begin taking it, and if they die all the money goes to their designated beneficiary—and people say, “of course!”
Then, ask someone if they’re interested in an annuity—and the response is, “not interested.”
If this sounds familiar, if this is YOU, then you too have likely been subject to the systematic disinforming and “misinforming” of the general public regarding Fixed Annuities. The media is careless and sloppy with the facts of Fixed Annuities. Investment Advisers have done a masterful job of spreading the negative noise about Fixed Annuities, largely since they have a strong vested interest in keeping your retirement funds “under management.” When you transfer your funds to an annuity—that’s “bottom line” walking out the door of that fancy office! (more on this later). Well-meaning friends, in an effort to be helpful, regurgitate the same lies that they have been told about annuities from the media and “financial planners.”
To be certain, a Fixed Annuity is not always good for all people, all the time, in all cases. Only after careful consideration with an experienced agent, and a comprehensive review of all your retirement assets and goals, should you consider an annuity purchase. But do yourself a favor and allow yourself to be exposed to the truth, not lies, distortion and myths.
Here are a few:
#1.) Commissions to agents. This is a lie promulgated ironically by the securities industry. Agent compensation from the insurance company issuing the annuity can range from 3%-7%. (typically, around 6%). The agent is paid ONCE, and once only and not with your funds. Fully 100% of your money goes into your account (unlike your mutual fund or stock purchase where 5%-6% comes off the top and into your broker’s pocket). Often a bonus is added to your account when you make your initial transfer. If you think 3%-7% is too high, consider what the financial adviser gets every year off your account. (see #2)
#2.) High Annuity Fees. This is another lie! There are no “high fees” with a Fixed Annuity. The only fees associated with Fixed Annuities are optional, are fully disclosed and are typically less than 1% per year. This is very different from Variable Annuities which definitely have high fees, are sold by securities dealers like brokers, investment advisers and many financial planners who make a ton of money off you every year whether your account has gone up or down. But in the interest of full disclosure (which is more than you’ll get from your licensed securities dealer), you can make a lot of money in Variable Annuities—you can also lose a lot of money in Variable Annuities. Anybody seeing a pattern here? Buy securities—pay high fees each year, “enjoy” stock market volatility, lose money, no full disclosure!!! You can’t lose money in a Fixed, as long as you stick to the agreement with the insurance company. Most Fixed Annuities have NO FEES. NONE. EVER. Are we clear on this?
#3.) “If I die, the insurance company keeps my money”. This is another lie spread by the securities industry. Any cash in your account upon your death goes to your designated beneficiary. Period.
#4.) “Annuities don’t keep pace with inflation”. If you have an annuity with a Fixed Rate, you will get that rate of return for that crediting period. If you have an old-style fixed rate annuity, such a fixed rate might not keep pace with inflation (historically about 3% average over the last 100 years). These days, most Fixed Annuities offer a fixed rate option but only as part of many different crediting options available. Typical returns are in the 5%-9% range with an average of about 7% in a reasonably-good market. An Income Rider account can easily produce 12%-13% or more. In recent years, new plans have rolled out with inflation protection riders.
#5.) “You’ll never get 100% of the market gain with a Fixed Annuity”. This is a half-lie only because it is only partially explained. True, you don’t get 100% of the market gain, but you get ZERO PERCENT OF THE MARKET LOSSES when the market goes down. Is that a good trade? Most people like safety and 7% for their retirement funds vs. the Wall Street Casino.
#6.) “There are high surrender charges with Fixed Annuities”. My security dealer friends like to refer to annuity surrender charges as “fees”. If anybody should know about fees, it’s the securities industry. The various fees applied to mutual funds and variable annuities are staggering and can kill your retirement dreams. A Fixed Annuity is a long term retirement income planning tool. If you are not planning on using the benefits of an annuity for a long period of time (like for life), then you should not buy one. An insurance company incurs certain costs to issue an annuity—commissions, bond fees, etc. None of these costs are passed along to the customer at issue. These charges are recouped on a declining scale over the years of the contract. At the end of the original term of the contract, there are no surrender charges. Most Fixed Annuities allow a 10% free withdrawal each year in addition to any Lifetime Income Rider payments you are receiving. If you withdraw more than 10% of your account value, you are assessed a penalty for the amount beyond the “free” 10%. Here’s an example: if John has $100,000 in his account, and in year five he needs $15,000—he gets a penalty-free $10,000, and will pay a 5% charge on the additional $5,000, or $250.00. The subject of surrender charges is very real and should not be overlooked, or understated…or lied about by anyone!
#7.) “Fixed Annuities are complicated”. Unlike a mutual fund’s prospectus or stock offering, everything in a Fixed Annuity is disclosed. It is important to meet with an experienced agent who can explain annuities to your satisfaction. It’s true that there are a number of “moving parts” in a Fixed Annuity, but a good agent should be able to explain these parts. After all, annuities have been around for over 2000 years…they can’t be THAT hard to understand!
If you have a negative opinion about Fixed Annuities, ask yourself where and how was such an opinion formed? From whom did you hear the negative noise? How did they hear it? Did they have a vested interest in your money? Were they merely a misguided good friend—trying to help, but unconsciously furthering lies and half-truths?
Here are some facts:
1.) People buy annuities for their inherent safety, security and stability.
2.) No one has ever lost a penny in a Fixed Annuity if they follow their agreement.
3.) If chosen, one can receive a guaranteed lifetime income.
4.) Your annuity growth is tax-deferred. Over the years, this becomes a huge factor.
5.) You participate in market growth in good year, without losing anything in a bad year.
6.) You have access to your funds in a variety of ways. Your money is not “locked up”.
7.) Fees are low and optional.
If you are considering retirement income decisions, wouldn’t it be better to get the facts and truth about all your options? Understand all these choices. And make reasonable decisions based on objective facts rather than hearsay and half-truths? It’s so much easier on my head!