You hear a lot of horror stories about fixed and index-linked annuities — mostly coming from sources that are biased, have a vested interest in trashing annuities or are just plain uninformed. Ironically, most of the stories (sometimes referred to as case studies) feature payout two-tier annuities and discuss these dogs as if all fixed annuities are two-tier.
A two-tier annuity is one that requires you to take your money out in installment payments over a period of time in order to get the full account value. Unfortunately, you are not guaranteed by the insurance company (very few insurance companies even offer payout two-tier annuities) a market rate of return during the installment payout period; therefore, you’re trusting the insurance company to pay you a market rate and you can bet your next Social Security check that an insurance company that would issue a payout two-tier annuity can’t be trusted to pay you a fair interest rate during the installment payout phase. On the other hand, if you withdraw your money lump sum you’re in for a shocker because you’ll lose any previous bonus paid and get only the minimum guaranteed earnings rather than the more attractive returns shown on your last annual statement. In other words, lump sum withdrawal means the rate you’ll earn will never keep you even with inflation — you’ll lose purchasing power with every passing day.
The sad truth is that most of the horror stories involved elderly people that should never have owned an annuity — any annuity — in the first place. Unfortunately, they were sold a two-tier annuity which is, in my opinion, the worst of the worst and then found out they were locked into a long-term contract with no escape clause. Their complaints fell on deaf ears at the two-tier insurance company and the financial advisor who sold them the two-tier. Their complaints were picked up by the press, regulators and brokerage community which then painted all fixed annuities with the two-tier paint brush. The facts are: annuities, like all saving and investment vehicles, are not good for everyone nor are they universally bad for everyone. So, before you nix all annuities, take the time to learn the real truth about annuities in general and two-tiers in particular. I think you’ll be surprised to learn that the “no loss” provision of most fixed annuities along with avoiding income taxes on earnings until you actually withdraw them, are two major pluses that you can’t find in other safe places where you keep your retirement money.
The first link below is to a recent article I wrote which appeared in a trade journal for financial advisers. Read it critically and with an open mind. I think you’ll see that fixed annuities, with the exception of the payout two-tier outcast, have merit for many retirement-minded folks that are interested in low risk, good returns and paying fewer taxes.
http://www.agentssalesjournal.com/index.php?option=com_content&task=view&id=797
If you’d like to read more about the lawsuits filed against two-tier annuity issuers and see what other say about tw0-tier annuities, go to any of the following links:
http://www.anapolschwartz.com/practices/NASD/allianz-annuity.asp
http://www.nctimes.com/articles/2005/07/10/business/news/20_58_387_8_05.txt
http://www.ag.state.mn.us/Consumer/PressRelease/AllianzSnnuities.asp
http://mcppremium.blogspot.com/2006/04/who-owns-your-insurance-marketing.html
Hi there,
I was referred to your blog via another blogger and her site is now escaping me..But, she had you as one of her faves.
I am working with a CPA (my client) who has helps his clients create solo 401k plans to invest in alternative investments like real estate, franchises, startups. I’m sure you are familiar with this, more than me.
Have you written about this topic at all? I’m not trying to pitch you, but to see if you could point me to the articles/posts. If someone could contact me via email, i would like to learn more about your work and plans for your site.
Thanks,
TJ McCue
So much retirement blog can be found on boomermingle c o m, many seniors there are discussing it. Are you intersted in?
I get a kick out of a lot of debates over which equity indexed annuity should you or should you not own. I think a lot of these debates miss a far larger point. What are the alternatives? Who has a better alternative?
I have a client with an educational trust set up through someone else. They can’t change the trustee. The trust has lost far more money to market instability and market down turns than they have distributed to the beneficiaries in education funding. This is a shame.
If these same funds were put into almost any Fixed Indexed Annuity in 1997 when the trust was initially funded the assets today after 11 years of growth would have doubled the asset base in the trust. This situation even includes two significant down cycles in the market indexes.
Then if we consider the college funding withdrawals taken out the net asset base today we would still be at least 150% or so of the initial funding contribution. I would take this performance in a heartbeat when considering the actual performance of the assets under broker management. The assets today are about 50% of the initial funding contribution.
Brokerage accounts are for risk money not for safe money. Almost any broker who is honest will admit to having lost some clients money. In all honesty I have never lost a clients money with Fixed Indexed Annuity products. I will admit that some brokerage clients will make more money with equity products but the average clients don’t exceed the performance of the Fixed Indexed Annuity products.
What about Bank CD performance. Often the rate of return on CD’s does not keep up with the rate of inflation.
What about Real Estate
Think housing slump, Think lack of liquidity, think potential drop of home prices.
What about Corporate Bonds
Bond prices fluctuate. When current interest rates rise exising bond prices drop. This even happens with good bonds. Never mind the Bank Bonds or Mortgage Lender bonds which looked good a year or two ago. Where are most of them now?
The best Solution is of course diversification into multiple asset classes. However I believe that an intelligent client of almost any age from 20-80 plus should have a singificant portion of their assets committed to the safe money category of Fixed Indexed Annuity products!!!
Lets not forget the tax advantaged growth of annuities, the guarantee of principal found with Fixed Indexed Annuity products and the ability to create a lifetime income stream just like a pension!
Tom