Many articles are sponsored by the insurance industry to try to give an academic veneer to the sale of annuity products. These are less than useless because they mislead.
Scott Stolz has an article for ThinkAdvisor entitled “Why Do People Hate Immediate Annuities?” Stolz serves as a Senior Vice President at Raymond James overseeing their Insurance Group. Stolz’s article fails to discuss the most serious problems with annuities nor does it discuss the superior alternatives to their annuity scenarios.
Unfortunately, this industry’s sponsored content is, at a minimum, effective in keeping annuity salesmen believing that “annuities should be a staple of most client portfolios” and “there is overwhelming academic support for the use of guaranteed income in retirement planning.” At worst, this type of article provides a form of fake-news to increase annuity sales to the public.
Stolz’s article laid out three retirement difficulties: 1. Longevity, 2. Average Portfolio Return and Sequence, and 3. Unexpected Retirement Expenses. Stolz then suggested that an annuity could solve most of the first two unknowns. If annuities are so great, Stolz asks why everyone isn’t using them.
First he blames “very vocal annuity haters” such as me. “For many clients,” he writes, “just the word ‘annuity’ is enough to make them tune out of any presentation.”
After blaming advisors like me, next he blames consumers like you. Here is my summary of his “challenges these products face”.
- You worry that you won’t receive payments at least totaling the amount invested.
- You judge the return of annuities as an investment and find the returns to be poor.
- You aren’t willing to pay what we want to charge.
- You would complain to regulators if we get you to put 50% of your retirement assets in our products.
- You don’t accept our marking that annuities provide guaranteed income for life.
- You want more income for what we are charging.
After blaming the consumer for failing to buy the product, Stolz then suggests that annuity salespeople should stop trying to compete against traditional investments and simply market the guaranteed income for life selling point of annuities.
Guaranteed Income For Life
Yes, annuities provide a guaranteed income for life. That, by itself, is not a selling point. Any pile of money can provide a guaranteed income for life by allowing you to spend some fraction of it each year. But there is no guarantee that that fraction will maintain a fixed lifestyle. Immediate fixed annuities are guaranteed to fail to support a fixed lifestyle. Immediate fixed annuities are “fixed.” They provide a fixed dollar amount, not a fixed lifestyle.
If an annuity pays you $30,000 a year annuity, in 20 years of 5% inflation it will only have the buying power of $11,307. You don’t want a fixed dollar amount of income for life. You want an inflation-adjusted standard of living for life. An immediate fixed annuity can’t solve that problem.
Annuities pay too much in the beginning and then dwindle by inflation for decades leaving those who have purchased them impoverished. Annuity purchasers would do better to save and invest a portion of the early years of an annuity payment in order to supplement later years to keep up with inflation. Of course if they were really savvy, they would not have purchased the annuity in the first place.
Annuities cannot protect against inflation. You can buy annuities that may have some inflation adjustment, but these are tremendously expensive. By all means, though, price an annuity which fully adjusts for inflation as an illustration of just how bad and expensive these products are.
An Immediate Annuity Is Not An Investment.
Stolz is correct when he says that an immediate annuity is not an investment. Any salesman who represents an annuity as an investment or pretends that the payment is a return on your investment is being fraudulent. In order for an annuity payment to be a return on your investment, you would have to still own the money you used to purchase the annuity.
When thinking about annuities, most people fail to take into account the immediate loss of 100% of your principal. Buying an annuity is like purchasing any other insurance policy – there is no new item you own, just a contract. Your payments are no longer yours. The insurance company now owns it.
In our article “What Is The Alternative To An Annuity?” we analyze purchasing a 6% immediate fixed annuity. We show that for the next 16 years and 8 months the insurance company may simply be handing you back your own money, so the “return” on your investment for that time is negative. Thus, 16 years and 8 months later, you may have what you paid them in the first place, gaining nothing.
A Challenge To The Financial News Industry
Publishers of financial news should be more discriminating for the content they publish from those associated with the annuity industry. Unchallenged and even unquestioned, this article by Stolz diminishes the objectivity of ThinkAdvisor.
And if you are one of those consumers for whom the word “annuity” is enough to make them tune out a sales presentation, congratulations! You have have probably correctly understood the real challenges these products face.
Photo by Jerry Kiesewetter on Unsplash