As my primary business is offering Fixed and Fixed Indexed Annuities I am constantly amazed at how many people have an immediate negative reaction to the word “annuity”. So many people who call in from my radio show will ask “Are these annuities?” and from that point on it is a challenge to understand what is implied in that question.
For some callers, it is a straight-forward question because they may not be sure what products we are talking about that offer the benefits and guarantees that we are referring to. These types of callers are open to hearing more and finding out how annuities work, and how they can offer what seem to them to be “too good to be true” benefits.
They may be invested in Stocks, Bonds, Mutual Funds, Real Estate, CDs and they are very comfortable with these, as they have been invested in them for years. They are curious how these annuities can offer guarantees of growth and lifetime income that these other financial instruments that they are used to cannot provide, and that is why they have called in. With these types of callers education on how annuities work and the role, they play in financial planning to guarantee lifetime income can be advantageous.
On the other hand, there are those callers that instantly turn negative when they hear the word “annuity.” I will ask why they seem to dislike them and usually, all I get are canned responses like: “oh I don’t like annuities”- sometimes that is all they can answer. When I ask why they will say “oh I just don’t like them.” Now granted, no one is obliged to like what I have to offer, and annuities are not for everyone for every situation, but there is more going on here I think. Some other Cliché lines are “They have high fees” or “They only give me back my own money” or “They are not liquid” or “They have surrender fees.”
Now all of these objections have an element of truth in them, but they are not the whole story. So many people who have never owned an annuity and do not know how they work to have these immediate come-back lines when I ask why they don’t like annuities.
Where do these opinions originate?
I can tell them that there are different kinds of annuities, just like there are different kinds of stocks, or bonds or mutual funds for example, and some are better than others. Some stocks, bonds, and mutual funds have high fees, and some are very risky, but that does not mean all stocks, bonds, or mutual funds should be avoided at all cost.
Similarly, with annuities, we stay away from the high fee, risky annuities called variable annuities. When I state the annuities, we deal with have either no fees or optional fees for extra benefits (usually 1% or less) it just does not seem to register. They are still convinced they are correct, and I am mistaken. I could go through the other standard objections as well, and I do- but that is not the purpose of this article.
The purpose of this article is to go into the psychology behind these answers. Now I am not a psychologist, although I have a Masters Degree in Philosophy and have taken many psychology classes in the past, I believe many “salespeople” come to have a certain level of psychological understanding of people after many years of interaction. It is a commonly accepted belief that people buy by emotion and justify with facts, and I believe that is what is behind all of this. It is what people have been taught all their lives from the earliest days of their investment experience that has them emotionally tied to what they have always done. There is a comfort zone in doing what they have still been doing- whether it is the best thing for them now or not.
Most people have the bulk of their retirement money in 401K plans or IRAs, and these have been tied to the market for the entire time. If you ask people what kind of fees are in these plans most would not have the slightest clue, yet they are incredibly concerned about the fees in an annuity. They will freely admit that they can, and in most cases, have lost much money in corrections such as we had in 2000 and 2008.
They will also acknowledge that they do not want to go through another downturn that could take years to recover from and could dramatically alter their retirement plans. However, for the most part, this type of person is willing to take that risk because they are not willing to change. In Physics they say “an object in motion stays in motion, and an object at rest, stays at rest.” Getting this type of person to make a change that will give them the peace of mind they want- to know that their retirement income is guaranteed and will not be affected by any adverse market downturns, economic disaster, world events, interest rate risk, or anything else- is incredibly frustrating at times.
Logically it does not make sense when you ask people if they like getting Social Security and they say “yes”; and then you ask them if they like “pensions” and they say “yes” again (and usually add that they wish they had one!), for them to then say they do not like annuities. So it must be something else, and I believe that something else is conditioning and marketing. When you have been doing something for 20, 30, or 40 years (the accumulation period), and now someone says there may be a better way to handle that money during your retirement years (the distribution phase) it is emotionally and psychologically hard to make the transition for many people.
In addition to that, you have all the Financial Advisors who have YOU as their income stream through “money under management” fees telling you that these annuities are terrible, and they would never place a client’s money in one of them. Now they are collecting fees of 1-2% a month from all of their accounts, and that is a nice income stream that they do not want to go away. In a way, they see it as their lifetime income stream! So they have all sorts of charts and graphs and illustrations that are meant to convince you that they can protect your retirement. However, deep down everyone knows that when the market takes another downturn of 30%, 40%, 50% or more, they will probably be taking a severe loss as well.
One of the most significant problems retirees have, as many authors have stated that they see their money as an asset to be protected, rather than an asset to be used for income. To quote the renowned retirement planning researcher Dr. Michael Finke CFP, Chief Academic Officer at the American College of Financial Services “When retirees spend their assets and see their retirement savings decrease, they become negatively affected. Alternatively, spending income, not assets, has no negative effect on the mental or emotional state of retirees”.
The problem is making the transition to seeing your retirement account as a lifetime income stream- like a pension- rather than a lump sum (a nest egg) that you are afraid to touch. If you like Social Security and wish you had a pension, logically you should love annuities, as they are the only other financial instruments that can guarantee lifetime income. Besides, for married couples, unlike Social Security and Pensions, the income stream does not stop when one of the spouses dies. The surviving spouse can maintain the same level of income, and any funds remaining will pass to their beneficiaries. I if you’d like to have a Pension, and you like getting your Social Security check every month, what’s not to like about annuities?
An annuity is like a personal pension that you own and control that will give you, and your spouse guaranteed lifetime income. However, there are additional features as well. You can take lump sum withdrawals out of it; you can stop the income and take all the money out. The account value can grow for your benefit or the benefit of your beneficiaries, even after starting to receive income; you can get enhanced payments if you need home health care or institutional care with some annuities, and you can leave any funds still in the account at your passing to your beneficiaries. These are all extra features not available with your Social Security or Pension payments.