Two Sides of the Fixed Annuity Story

Annuities in general are difficult for the average baby boomer to fully understand. It doesn’t help that different stakeholders in the annuity industry have different stories to tell about the features, benefits, and costs.

I have no personal interest in variable annuities as part of a retirement portfolio. Years ago our firm’s 401(k) plan was wrapped in a variable annuity product. When I closely examined the high costs relative to other investments, I successfully lobbied for a change in our plan.

I have more interest in fixed annuities because of their potential for providing “pension-like” retirement income for life. Therefore, I read a lot about immediate and deferred fixed annuities, including newer products intended to address some of the cost and liquidity concerns.

Recently the Best Life column in the U.S. ┬áNews and World Report Money section ran a short series titled “What You Need to Know About Annuities.”

The National Association of Fixed Annuities (NAFA) read the U.S. News piece and published a “reply” article. The reply document focused on clarifying the important differences between variable and fixed annuities. Obviously, these clarifications were intended to project fixed annuities in a more favorable light.

In summary, these are some of the points I found important as told in both stories:

  • An annuity – fixed or variable – is not a true investment. Rather, it is a contract between you and the insurance company that issues the annuity.
  • Fixed annuities protect against market declines whereas conventional variable annuities do not. This explains why retirees with fixed annuities fared better during the recession compared to owners of variable annuities.
  • Although conventional fixed annuities carry a risk of principal loss from an early death, there are income riders and optional policy terms that can reduce this risk, for a price.
  • Mutual insurance companies (owned by policy holders) may have better financial stability than stock insurance companies.

I encourage you to read more about fixed annuities yourself, rather than relying on a sales person to educate you.

The first article in the U.S. News annuity series can be found here. The second article is here.

The reply paper from NAFA can be downloaded here.


Comments

  1. Marc says

    Thank you for making this information available. The original article was clearly written by someone with a limited knowledge of annuities, but he was trying to be fair. The paper from NAFA is much more in-depth and more accurate.

    The big problem with annuities is that Wall Street hates them, stockbrokers don’t understand them or like them, most journalists know very little about them, most salespeople only sell those from their company, and AARP only likes those they make a profit on.

    So what you end up with is everything from “the work of the devil,” to just plain uninformed ramblings. It’s very hard to get the adequate information you need to make a truly informed decision.

    The only way you’ll ever get the whole story is to find a Registered Investment Advisor – who has a fiduciary duty to you, and who understands market investments, too – and who knows a lot of different companies and a lot of different types of annuities.

    If you can get by that hurdle, you’ll find an amazing array of financial vehicles that will do things for you that you never imagined.You’ll also be angry that no one ever told you about these before.

    If you make the assumption that you have read some articles, listened to some “talking heads,” talked to a stockbroker, your neighbor or your barber, and now you know all about annuities, you will be doing yourself a huge injustice. This is your life savings we’re talking about. Do you homework.

    Marc

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