Annuities and the Secret behind the Guaranteed 9% Return
The annuity business is booming for the right and the wrong reasons. At the very basic level, annuities give risk averse investors something that they can’t get at a bank with a CD. Fixed annuities pay much higher fixed guaranteed rates than CD’s. Investors that want the guarantees at least have better alternatives than the banks with their pitifully low interest rates.
Then there is probably the most popular annuity right which is the fixed indexed annuity. The pitch for this one is always the same. You get to participate when the market goes up. However, when the market loses money your principle is protected. Let’s face it – that is a pretty good marketing pitch. Who wouldn’t want their cake and eat it to?
I will have to hand it to the insurance industry. They finally created a decent guaranteed model with the fixed indexed model. It is definitely better than the equity indexed annuity model which benefited the insurance industry more than the insured. I guess all of the lawsuits finally woke the industry up!
The problem with the fixed indexed annuity is the annuity sales machine and its overly aggressive sales people. For example, you can’t turn the radio on AM on a Saturday morning and not hear a pitch for an easy way to make money. You take no risk and get a guaranteed 9% return. If that existed, I would stop managing money all together and just put my client’s money into these magical investment products. The problem with any of these irresponsible sales people who make these claims is that their 9% is not the same as your 9% return. Their 9% return is clocked in smoke and mirrors and fine print.
The 9% you are looking for is an investment return that you make year in and year out without any “gotchas” on the other end. Of course, that doesn’t exist. Once again it is highly irresponsible and perhaps even unethical for any financial professional to even insinuate that to be the case. Yet it happens Saturday morning after Saturday morning on the radio.
Then there are the aggressive assumptions that are made on future return. Fixed Indexed Annuities are based on a formula that creates the return. Formulas have variables. Advisors are notorious for selling annuities based on “non-guaranteed” aggressive assumptions. Said another way, if I show you an illustration where the guaranteed annuity averages 8% a year due to me using the absolute best case scenario you are likely going to want to invest your money. The problem is the best case scenario has a less than 10% likelihood of actually occurring.
Bottom Line – Annuities can be a good investment for the safe money, conservative investor. There are two things you need to know. First, understand that there are good annuity products and there are ones that benefit the advisor and the insurance company more than the client. So, chose wisely! Second, make sure you are working with an advisor that is more interested in advising and guiding you to what is in your best interest versus “selling” you a product. If you are unsure about your annuity plan, you are always welcome to send me the information through Ask Bob and I can give you an opinion.
Bob Brooks is host of The Prudent Money Radio Show, Financial Advisor, and active money manager that consults and helps people plan.