A one size fits all answer to every situation is fundamentally flawed. It is also the case that one option that some people don’t like doesn't make that position bad for every investor. Ken Fisher runs ads that he “hates annuities” and there was an interesting article “The Strong Case Against Annuities” on June 23, 2016 in the Chicago Tribune. The article reported that a 70% stocks & 30% bonds portfolio from 1997 to 2014 would have seen $100,000 grow to nearly $300,000 which was proof that such a portfolio will work in retirement. Don’t you wish it were just that simple. But you know it’s not.
In 2017 Baby Boomers turn 71 which means that the IRS requires annual withdrawals be taken from traditional retirement accounts that cannot be stopped, and in fact the Required Minimum Distribution withdrawal rate increases every year for the rest of life. If 4% withdrawal income had started in 1997 adjusted for 3% inflation, the portfolio was worth about $118,479 in 2013. That’s the good news. See the details in the chart below.
But when we look closer under the hood in the real world and factor in a yearly 4% withdrawal with a 3% inflation adjustment starting in 2000 we see an entirely different story. This investor’s account ended 2016 with $57,382. Starting annual withdrawals three years later cost that investor nearly 52% in less than 16 years. The Tribune made two common errors. First, it clearly cherry picked one very favorable time period from which to draw conclusions. Second, it ignored the reality that many investors add and subtract from their portfolios. Such simplification can be very dangerous. It’s one of the reasons I often apologize for my peers. That ‘buy and hold’ mantra my peers and I taught investors doesn’t always work so well.
That’s one of the problems with simplicity. Just because it’s easy doesn’t mean it’s right for your situation. The securities industry has been helpful in recommending that investors diversify their assets. But if the portfolio mix is 70% stocks and 30% bonds that constitutes two asset classes. If I were in the business of underwriting stocks and bonds or I owned such a company I imagine I would ask you to believe that kind of diversification is as good as it gets. When independent financial advisors share the data after studying institutions and endowments it’s not uncommon to see six to eight different asset classes. Clearly an 8 legged stool is stronger than a stool with 3 legs. To help smooth out the roller coaster ride of investing, one of the best lessons to be learned is for investors to diversify unlike they ever have before.
A survey of 400 financial advisors was conducted via Internet interview between March 13 and March 16, 2017 by The Insured Retirement Institute (IRI) and Jackson National Life Insurance Company, provided by Research Now.
Nearly one-third of advisors report having had three or more clients exhaust their investable assets. More than 89% of advisors say that a guaranteed lifetime income features have had a positive impact for their clients and one-third say it is the most impactful feature of annuities.
Creating a paycheck using annuities can help control spending and ensure there is an income source that can’t be exhausted or outlived, as long as the owner abides by the contract.
A survey of consumers was conducted by Internet interviews between March 14 and March 19, 2017 in two stages by Full Circle Research. The first sample was of 1,000 respondents who were age 25 or older with no less than $20,000 in retirement savings. Another group of 300 respondents was at least 25, had at least $10,000 in retirement savings, and owned annuity and/or a financial advisor.
When told that guaranteed lifetime income is a feature of annuities, more than 90% of consumers believe it’s an appealing characteristic of the product.
Eight out of 10 consumers don’t believe Social Security will be enough and only 21% expect any kind of pension to provide significant income in retirement. It’s fair to say that most consumers understand that they will need to rely on their personal savings for supplemental income and they are willing to pay more for income certainty. Further, consumers are more likely to say they value the benefits an annuity can provide than they are to say they like annuities themselves. The challenge for the industry and for consumers will be overcoming this bias. This is not a blanket recommendation of annuities. While I don’t hate any investment vehicle I want you to know annuities are like every option; there are some we like a great deal as well as some annuities for which my team and I have no respect.
More than 90% of consumers are very or somewhat interested in lifetime income. When the features and benefits of annuities are described in isolation, rather than expressed as features of annuities, consumers express strong interest and are even willing to pay more for those features. Tax deferral and death benefits also resonate strongly with consumers.
The IRI study shows that consumers are aware their retirement savings are, or will be, a vital source of retirement income. They lack, however, clarity as to how they will use those savings to generate sustainable income, and to some extent, their beliefs about how to meet income challenges in retirement are at odds with their expectations and plans.
Every situation is unique and everything is complicated. Be wary of the ideas that will have you believe all of anything is 100% bad or good. Do kick the tires to see what vehicles can be customized to help you reach your financial goals or maintain your lifestyle. This time is different.
The proof is in the planning®.
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Securities offered through Securities America, Inc. (SAI), Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Investors Advantage and SAI are separate entities.
Annuities are long-term, tax-deferred vehicles designed for retirement. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before 59 1/2.
Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses, which are contained in the same document, provide this and other important information. Please contact your representative or the Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money. Guarantees are backed by the claims paying ability of the issuing insurance company.
Guaranteed lifetime income is available through two different options, annuitization and optional living benefits. Please note that not all optional living benefits offer guaranteed lifetime income, are not available on all annuity products, and may have an additional charge.
Tax deferral offers no additional value if an annuity is used to fund a qualified plan, such as a 401(k) or IRA, and may not be available if the annuity is owned by a “non-natural person” such as a corporation or certain types of trusts.