Annuity Mumbo Jumbo – Fast Talk Masks Bad Information
Chances are good if you're at retirement age or close to it, you've been pitched annuities. You may have gotten a mailer promising free dinner to attend a “retirement seminar.” Or, you've seen TV ads with senior-age celebrities touting products with improbable returns. Or, you may even have received a phone call from somebody’s nephew who just became an expert financial advisor and is offering a once-in-a-lifetime opportunity.
First, a reminder. There are many good agents who sell good annuities every day to thousands of satisfied customers who really do sleep well at night. The right annuity plan is nothing like snake oil, and it’s usually easy to understand when it’s explained well.
I’m here to tell you: If it sounds too good to be true, it probably is. Here are two examples of what I mean.
“Hersh, I definitely need more income than Social Security will pay me. And, I’m embarrassed to admit this, but I needed it to start yesterday. So I spoke with an advisor who told me to purchase an indexed annuity instead of an immediate annuity because the rates were too low. What do you think?”
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
It’s true, the payments from an immediate annuity are lower today than they used to be because bond interest rates are near 30 year lows, but it’s still the right choice. In fact, if you want income now, it’s truly your only choice. Although it may be surprising, for income-now needs, the contractually-guaranteed payment from of an immediate annuity will always beat any other annuity. It turns out that indexed annuities pay much higher commissions than immediate annuities which may account for some of the bad advice.
“Hersh, with interest rates so low, I’m really interested in my agent’s recommendation. She showed me an 8% hybrid annuity. It has a maximum growth cap of 18% a year and it’s guaranteed not to lose money. If the S&P goes up, so will the rate, and we can change to a fixed interest rate at any time. With no fees and an 8% bonus to buy, how could this 15-year annuity be a bad idea?”
Everybody is trying to sell equity-indexed annuities these days. The pitch sounds so good. No less than 18%! Who wouldn’t be interested? It turns out that your agent did some clever math, and while it wasn’t technically a fib, it is a terrible distortion. That type of return quoted for this type of annuity has never happened. Ever.
In reality, you should plan on a 2% to 5% return with a hybrid or equity-indexed annuity. Similar rates are paid on an immediate annuity. You should also understand that it’s likely you will not realize the upfront bonus until the tail end of your policy. Most aren’t payable until the policy has run its course – in this case, 15 years. Finally, this type of annuity always comes with fees. If you are told otherwise, hang up the phone.
For those of us who deal in real annuity solutions for real customers, it’s difficult to listen to some of the misinformation that our customers have been told. It can also be challenging to sell realistic expectations after someone has heard “18%!” We all want to hear great news about ways our money can grow, but the only way to keep your money safe is to keep it real.
Whether you buy from me or not, I encourage you to pick up the phone to check out the truth of any annuity sales promotion you hear. If it’s bad information, I’ll tell you. No pressure, no unwanted callbacks, and no confusing details.