Oh, the irony. Annuities are taking a bad rap these days, at a time when they should be held up as the ultimate retirement solution in many cases. Over the last decade, annuity products have evolved tremendously, offering features previously unheard of; while during the same period, the market has driven seniors away in droves. After the blind optimism of the late 1990’s and the inevitable market landslide since, retirement priorities have returned to what they should have always been; long-term perspective and safety. While the vast array of annuity products today offers so much more, the basis of the annuity remains the same; the offer of safety and, as necessary, the guaranty of never outliving one’s assets.
There is no safer vehicle than a fixed annuity. Insurance companies are required to maintain reserves far greater than those of banks and credit unions, and state guaranty funds provide higher protection limits than the FDIC. AIG, for example, has been completely solvent in terms of annuity deposits and claims paying ability, even though the company was in tremendous financial trouble. Even without the government bailout, no AIG annuity holders were ever in any danger, even if the company had completely dissolved. While variable annuities (VA) do not all offer the same safety of principle as fixed annuities, they offer other advantages, including tax treatment roughly equal to qualified retirement plans such as traditional IRAs and 401(k)s; and a death benefit that guarantees that even in the event of market losses, one’s heirs will not suffer those losses. Some VAs, however, do in fact offer principle and/or minimum gain features that make them the optimal choice for persons who wish to remain in the market but need certain assurances.
Finally, this modern era of guaranteed investment products has introduced the equity index annuity (EIA), commonly referred to as the fixed index annuity (FIA); emphasizing that it does not actually invest in equities, but offers credited gains relating to any of several available indices of the investor’s choosing. One has the opportunity to profit from market gains with no risk of financial loss. Over the last decade, the S&P index has just about netted a zero gain; in the last five years, it has fallen very slightly; in each of the last three years, it has lost nearly three percent on average. Three years ago, this article’s author transferred one of his father’s retirement accounts into an indexed annuity that has averaged about 6.2 percent annually, tax deferred, with ZERO RISK! When the lowest an account can yield in a given year is zero, the potential is phenomenal. The buzz phrase in the industry is “zeroes are heroes.”
Detractors of the annuity cite such criticisms as high expenses and commissions. In actuality, annuities have expense charges commensurate with the risks they are insuring against; and the commission structure reflects the fact that an advisor gets paid only once for the management of his client’s account, rather than racking up management and trade fees continually throughout the lifetime of an account. Also, the returns on annuity products are illustrated net of fees; they could not possibly be more transparent, and there is no incentive for the advisor to engage in unnecessary and potentially costly transactions.
So, should annuities be a part of every retirement portfolio? Certainly not every one; but they are certainly appropriate for most people. As with ANY financial product, annuities are not better or worse than other options; they are better for certain individuals in certain situations. Select an independent financial planner or advisor who specializes in comprehensive planning, particularly in retirement and senior planning.
My name is Rob Drury, and I am the executive director of the Association of Christian Financial Advisors, headquartered in San Antonio, TX. The ACFA is the nation’s largest nonprofit financial planning network.