By Bill Broich
Recently, a well-known financial columnist suggested that annuities were a “foolish” choice. He went on to make several points to build support for his position and to gain attention for himself. This person makes his living by being contrary, by suggesting the normal way of business is not accurate. He does it so he can gather leads to sell his own books and seminars, products he charges for and subscriptions for which he collects annual royalties. His approach is the “negative” approach and a closer examination will reveal exactly what it is: “A poorly informed, poorly educated self-indulgent person who only wants your attention so he can sell you something”
The underlying marketing approach of his is simple, be contrary. Millions of people love and use annuities as a foundation for their guaranteed retirement accounts. Once the foundation is built, then other investments can be added for growth and inflation protection. His “story” is simple, annuities suck and if you would only do it his way, you would be better off. In actuality, if you do it his way, HE will be better off.
First of all I know he is not a stupid person, but he is grossly misinformed about annuities and the benefits they provide. Let’s examine his points.
Annuities have significant fees and expenses. By not paying the fees and expenses, you will have more money left over. The fees are subtracted annually from your account and if you did not pay the fees, your account would grow more.
Annuities come in two flavors, securities (variable annuities) and insurance (fixed interest annuities). If you buy the security version, he is right, there will be fees and we agree with him, variable annuities can be a poor decision. The other type of annuity is sold by the insurance industry; it contains no fees and has no expenses. It is not an investment at all, it is a deposit. Deposits have no risk and you cannot lose your money. Make sure you know which type of annuity you are considering; if it is sold with a “prospectus” it is a security.
Guaranteed returns are after expenses: here is where he crosses the line and compares apples with hand grenades. Annuity companies get the benefit of the use of your money, simple. This is nothing different than any bank deposit, the bank loans out your deposit, and pays you interest. Insurance companies do the same thing. His remark that if the annuity pays the annuitant 4% in interest, the insurance company is probably making 2% on top of that and that is actually a fee, a hidden fee. Sooooo how is that any different than banks? The interest offered by the insurance company is guaranteed and has no fees, what you are offered is what you receive. Guaranteed returns and a completely outsourced management of your money.
Annuities are tax time bombs. Our expert suggests that paying taxes on returns annually is a far better way to accumulate money tax efficiently. Annuities are allowed to tax defer accumulated and earned interest until any date in the future when the funds are then accessed. Think for a moment about returns on bank deposits, you are forced to pay taxes on all interest paid whether you use the funds or keep them on deposit.
Common sense will tell you that anytime you can control the future tax liability, you have control over your own financial destiny.
Ever hear about Albert Einstein and his famous theory? What did Einstein believe was the most powerful force in the universe? His Theory of Relativity? No! Einstein believed the Theory of Compound Interest was the most powerful force in the universe. If you deposited $1 and it magically doubled each year for 20 years, and as one example you paid taxes on the returns annually and the other was allowed to defer until the 20th year, how much would you have in each funds? Tax deferred for the 20 years would have accumulated to $1,048,000. Taxes would be due when the funds were removed. The other account paying income taxes annually at 30% would contain $524,000. That is the power of tax deferral.
Annuities are not guaranteed. Our expert also advised a recent group than annuities are subject to financial failure and if the economy turns down, annuities would also fail. Statements like this are silly, stupid and not appropriate. Would you lose your funds if they are on deposit and insured by the FDIC? Absolutely not, your funds are guaranteed. That same guarantee (under a different system) fully guarantees your funds on deposit to the legal state limit. Anyone can check with their state department of insurance and find their state limits. In fact, many states have higher than FDIC guarantees. Here is a link to check out your states guarantee limit: https://www.nolhga.com/policyholderinfo/main.cfm
Our expert offers advice about products he knows absolutely nothing about, but like many “soothsayers” his followers follow blindly and without question. It is sad that so many people have heard his side of annuities, a side that is hedged with half-truths and misleading statements. It is also sad for those who would benefit greatly from the use of an annuity, benefits that include among other things such as income, income that cannot ever be outlived.
Maybe he will come around some day, my guess is it will be the day he looks at the huge bank account he has accumulated giving financial advice and need someone to provide him income, income he and his wife can never out live and guess what? He will discover the miracle of annuities, Of course by then he would have fleeced millions out of their money for dues and subscriptions, all for the betterment of himself.