A common theme in the popular financial press is that indexed annuities are a rip-off. In January, for instance, Bloomberg published an article titled “Indexed Annuities Cap Gains, Obscure Fees as Sellers Earn Trip to Disney.” Money Magazine published the article, “Index Annuities are a Safety Trap” in the “What to Avoid” section of their Investor’s Guide. And The Motley Fool ran an article titled “Stay Away from These Investments,” talking about indexed annuities.
The overall claim of these articles is that indexed annuities are loaded down with fees and lag the performance of the stock market, so they are only purchased by naïve consumers who are approached by predatory salespeople who are primarily motivated by large commissions.
The authors of these articles decry the continuing rise in popularity of indexed annuities as a travesty foisted upon the investing public. While these same writers will readily admit that stock, bond and mutual fund returns are subject to risk, they minimize the importance of the risks, believing that any fluctuations in value will somehow even out over time.
It occurred to me that the people who write these articles are still of working age, that is, they are still in the stage of their lives where their income comes primarily from wages and salaries. So they don’t see investment risks the way that retirees do.
Let’s consider a reporter who is in his working years. If the interest rates drop on bank CDs or corporate bonds, does he really care all that much? Probably not. But to retirees who own bank CDs or corporate bonds and are relying upon them to cover their living expenses, a drop in interest rates can be a crucial blow. It could be the difference between whether or not they can afford the medications they need. In other words, a drop in interest rates does not affect the reporter’s take-home pay, but it directly affects the retiree’s take-home pay.
Let’s suppose that our reporter has not saved enough for retirement. Is this a problem? Realistically, while he is still working, he is not affected very much. He can continue to make his mortgage payment, go to a nice restaurant for dinner with his wife, buy toys for his kids, go on vacations, and so forth. But to a retiree who is no longer earning wages, the amount of retirement savings he has accumulated makes all the difference, because if he doesn’t have enough, he needs to cut back his lifestyle right away to live within the earnings his assets generate.
The same is true of the effect of a bear market wiping out a big chunk of his retirement savings. If it happens in pre-retirement, he will be upset, but it does not change his lifestyle. If it happens post-retirement, it is far more devastating.
Keep in mind that a person’s living expenses are unrelated to interest rates, bear markets or the market value of his savings. But, once he is retired, his income may be very much related to these factors.
As a result, most retirees become far more concerned about investment risks than they were during their working years. They simply are affected by these risks far more acutely than is a working-age person. So they find strong appeal in any product that can provide a stable income that is relatively unaffected by bear markets, changes in interest rates, or anything else.
Guess what? We just described an indexed annuity with a lifetime income rider, which is why they are so popular. A retiree can readily appreciate the value of a product that can provide a stable income that is relatively unaffected by bear markets, changes in interest rates, or anything else, because there are very few products that can accomplish that objective.
I could easily refute the criticism about indexed annuities by the popular financial press, because they are all based on half-truths. But the irrefutable fact is that most people, as they get older, are going to become more conservative with their money, and they are going to value safety more and more. Thus, annuities tend to appeal to them more and more, too.
Brian D. Mann is the executive vice president and chief marketing officer at Partners Advantage Insurance Services. He is a multi-million dollar personal producer, coach and mentor for insurance professionals. Partners Advantage is a national insurance marketing organization that proudly serves as a one-stop shop to more than 20,000 independent insurance agents, financial planners and broker/dealers.