8% really, can I actually be guaranteed 8%?
I am sure you have seen the ads for these possible rates of returns. In fact, Google to word “Annuity“ and feast your eyes on how much money you can earn by investing in an annuity. Wow, these are very high rates of interest when you consider banks pay 1%, and US Treasuries are nearly that low. What do annuity companies know that the rest of us don’t?
Well, there is a small catch, look at the asterisk next to 8%. It says in small print (when used as income) that is the catch. Yes, the annuity company will credit your account 8% (or whatever the rate happens to be), and your funds will grow year after year at that interest rate. Now, what happens?
Suppose you invested $100,000 in an annuity and the income rider (8%) grew for 10 years. Simple math would be able to tell us that the account value after the 10 years would be $221,964 (compounded). Now you are ready to access your funds and enjoy retirement. Right? Common sense would say that the value in 10 years which had grown to $221,964 at 8% would provide an annual income of ($221,964 times 8%) $17,757.
Here is where to asterisk kicks in, yes you have an account value of $221,964, but the factor determining your income is not 8%, it is based on your age. If you are now 65, that factor for lifetime income is probably closer to 4.5% (varies based on your age) which means a lifetime income from an account value of $221,964 would provide an income of $10,000 a year, payable each year you live.
The insurance company wins because it gets to hold your income for a long time, you as the owner also win because one of two things will happen to you:
1. You will live a long time, and the company will pay you $10,000 a year every year. They will pay even if they have paid you far more than is in your account. The insurance company has assumed longevity risk.
2.You will die prematurely. However much is in the account value of your account will be paid out to your named beneficiary. The insurance company doesn’t get to keep your money.
What benefits the insurance company is one thing and one thing only, they get the use of your money. If they know, you are going to keep the funds in the annuity for the accumulation period, and the payout period, they are more than happy to credit your account with 8%.
So why not be more honest in their advertising? Why not say exactly what it is? The answer is simple; it is not the insurance companies running these ads, it is the middlemen who gather your attention and urge you to check it out. They then take your information and sell it to the sales side of the equation, the insurance agent. I know from experience that insurance salespeople are almost entirely moral and honest. Their chose occupation is to sell insurance and to put in place the benefits that annuities provide.
Every industry has culprits, those who try and use a situation to create interest. The culprit is the internet marketers who buy ads and try and hook you into asking for more information.
Next time you see something that is too good to be true, remember, it almost always is. There is nothing wrong with asking for information and becoming more educated, especially when a decision is as important as retirement planning.
Every day, American consumers receive offers that sound too good to be true. In the past, these offers came through the mail or by telephone. Now the con artists and swindlers have found a new avenue to pitch their frauds, the Internet. It is through the internet that the “teaser” quotes come to us, be careful.
So what do annuities offer? In essence, safety, security, income that pays a lifetime, fear from market risk, probate avoidance and much more. Just make sure the annuity you are considering is the annuity that you think it is.
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