If Only They’d Tell You
I think all advisors have a list of things that we wish that product salespeople would tell their clients. When they come to us, we get to tell them the “bad news”. And then they feel bad because they did something wrong (I’ve learned I never score bonus points with prospective clients by telling them they messed up). Here are some of our most recent experiences:
Payouts are the same as earnings. Much of the material that clients get on annuities stress the payout they’ll receive. And, unfortunately, many clients (especially when the salesperson compares the payout rate to current interest rates) assume that that wonderful high rate is what the annuity is earning. Unfortunately, that 6% distribution promised includes a healthy distribution to the investor of what they’ve paid in. For one annuity for a 65 year old male I recently found on the internet (which is fairly representative, I think), the first 15 years of payments are just paying back the principle. (Given that the remaining life expectancy of a 65 year old male is about 17 years, which is significant.) In other words, a buyer doesn’t start receiving earnings until after 15 years, if the investor lives that long! While it is not exactly the same, just think of many annuities as a big Ponzi scheme; insurance companies take your money to pay you back what you gave them and tell you you’ve come out ahead. Whoopee!
I get my money back if I die within X number of years. This can be true on many contracts, but like any other “guarantee”, it comes with a steep price. The returns of the contract (the actual earnings the annuity investments make) may be reduced up to 2% for that benefit—which means two things: 1. Even with several years of payments followed by a lump sum, you’re still getting mostly just principle back and (2) if you live beyond the 20 year target, your actual returns will still be pretty paltry.
Rate guarantees are guaranteed. Well, sometimes that can happen, but usually only by jumping through a lot of hoops, which your limit your flexibility and return. Remember, every “guarantee” comes with a steep price. For example, in some cases, the “guaranteed rate” only applies during the “accumulation stage”, that is, when you’re putting money into the annuity. Once the “withdrawal stage” begins, typically a much, much lower rate applies. And get this, in most cases, you don’t even get the “guaranteed rate” unless you convert your balance to a lifetime-annuity, paying out the balance over your expected life. Or if you die. (As a policy, I try to avoid solutions that require someone to die.) As Yoda would say, “A bummer it is.”
This doesn’t mean that all annuities or annuity salesmen are bad, just that an investor has to be extremely careful to make sure what they’re getting (or not getting).