Annuities – Friend Or Foe?

Since the government implemented their Zero Interest Rate Policy over eight years ago, I’ve spent thousands of hours trying to find ways to help readers invest with one hand tied behind their back. Today both stocks and bonds are fraught with risk.

When a friend sent this to me, I thought my head was going to explode:

In 2011, using information gathered from the Freedom of Information Act, Bloomberg reported:

“The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP.

Add up guarantees and lending limits, and the Fed had committed $7.77 trillion, as of March 2009, to rescuing the financial system, more than half the value of everything produced in the U.S. that year.”

The government is destroying the retirement dreams of several generations, yet all we hear about is the Fed’s “additional accommodation” for the banks. They ignore the pleas of those who worked hard, saved their money, paid their taxes and played by the rules. After a couple of aspirin and a blood pressure pill, I finally calmed down.

I was head pounding angry about something over which I have absolutely no control! Well meaning friends say, “Let it go” because getting that angry does nothing but hurt us. Focus on solutions, you can’t change the past – “Let it go!” I thought I had done that, not even close!

I finally threw in the towel and concluded; we’re screwed! I’m trying to do the impossible; find enough safe, good income type investments for the average person to retire comfortably. How much further outside the box do I have to go?

Why am I angry?

The government bailed out the investment banks, and will continue doing so at the expense of the retirement plans of several generations – and there is not a damn thing we can do about it!

I’ve ignored questions from friends about annuities for months; I felt they are a rip-off! I’ve run out of options to explore. Reluctantly, I decided to contact a friend and industry recognized expert, Stan The Annuity Man. I planned to do an interview for my weekly column.

Stan made me take every objection, fear and annuity bias I had and put them up for discussion. His reasoning was simple; I speak for my readers. If he is going to answer questions, we should be addressing your concerns.

That was the beginning. Things grew from there. With Stan’s encouragement, I decided to take the bull by the horns. I spent all summer developing a Guide about annuities. Do not fear! The Guide is not designed to sell annuities – quite the opposite in fact. I will fill you in on the details later.

DON’T STOP READING EVEN IF YOU HATE ANNUITIES LIKE I DID. This is one of the most eye opening interviews I have ever done in my career. This is information I thought I knew – but didn’t. I didn’t know what I didn’t know and that is dangerous. I let my readers down by being biased and not keeping up to date. Don’t make the same mistake I did.

After this interview I’ll fill you in on all the details. Like the old commercial, “You will like what you read, I guarantee it!”

Take your time and read it through.

Annuities – friend or foe?

When I retired in 2005 I felt annuities were moneymakers for insurance companies but who needed them? You could earn good yield with safe, fixed income securities, and keep up with inflation by diversifying into the stock market. I believed once you forked over your annuity premium your heirs are out of luck when you die. Why risk it?

A bleak picture for those even thinking about retiring emerged. The 2008 Troubled Asset Relief Program (TARP – bank bailout) was supposed to be a quick fix. Interest rates would quickly come back to normal.

What a bunch of malarkey; since 2008 safe fixed income investments with decent yields no longer exist. The stock market soared, setting new highs despite a sluggish economy. Junk bonds, with their high default risk, are now paying less interest than government insured CDs did in 2007. Desperate investors looking for yield have few choices available to them.

Every pension plan, 401(k) and IRA is now at risk. People are scared and who can blame them? The valid alternatives to an annuity have disappeared.

It’s time to calm down and take an objective look

One of the most frequently questions I’m asked is “what about an annuity?” It’s time to set aside our past prejudice. Can a properly structured annuity product be of value to a retiree today?

I contacted Stan Haithcock, much better known as Stan The Annuity Man, hoping he would give us some time for an interview. I like Stan because he lives up to his reputation, “Stan The Annuity Man has been referred to as the ‘walking middle finger of annuity truth’, and has been called the nation’s ‘annuity consumer advocate’ for all things annuity.” Stan is my kind of guy – he tells it like it is.

What I thought was going to be an interview and weekly article turned into much more. Stan not only calmed me down and helped me adjust my “attitude”, he convinced me I needed to take on a summer long project. Here is where it began.

DENNIS: Stan, on behalf of our readers, thank you for taking time to educate us about annuities. Let’s get right to it. As I mentioned, the traditional options available for retirees to live out their life without financial worries have disappeared. I want to start with two questions.

What about the common fear that you pay a huge premium, then die prematurely and lose all your money? What do you say to guys like me who were prejudiced and summarily dismissed the idea of annuities in the past?

STAN: Dennis, first of all thank you for inviting me.

What you just described is a lifetime income annuity policy that is structured “Life Only.” The reason that people mistakenly believe that all annuity payments are structured “Life Only” is that was primarily the only way you could buy them in the 1950’s.

Today that is only one of over 15 different ways to structure a guaranteed lifetime income stream (regardless of how long you live). You can also stipulate in the contract that 100% of any remaining money in the policy when you die… goes to your listed beneficiaries on the policy. In other words, the evil annuity company never keeps a penny.

As to your second question – it is time to be open-minded. Baby boomers have worked hard, saved and played by the rules and want to retire comfortably. The safety net of top quality bonds and CDs has been jerked out from under them. Investing your life savings in junk bonds or today’s stock market is a huge risk!

I also blame the annuity industry for doing a poor job in fully educating the public of how annuity contractual guarantees can be fully customized to match a person’s specific needs and goals while reducing other market risk.

DENNIS: In your book “The Annuity Stanifesto“, you candidly take on the industry and what I suspect are some high commission products.

What about annuities that offer market growth? They promote both growth and principal protection. You take a strong position about only buying annuities for their contractual guarantees. Please tell us why.

STAN: Dennis, it’s very simple. Annuities are contracts. You should own them for what they “WILL DO”, not what they “MIGHT DO”. Buy the contractual realities, not the dreams pitched by an over-zealous agent. Buy worst-case scenario. Buy annuity Armageddon. Buy the contractual guarantee.

However, most agents improperly sell them with non-guaranteed return scenarios typically attached to high commission indexed or variable annuities. It amounts to the “too good to be true” sales pitches that people will hear. Annuities, regardless of the type, should NEVER be purchased for market growth. If you want market growth, you should NOT buy an annuity.

Now that this fact has been established, the two major product type culprits that people hear about are variable and indexed annuities. The pitch is that you can ‘have your cake and eat it too.’ Nothing could be further from the truth.

With variable annuities, the hopeful growth component is attached to mutual funds (aka: separate accounts) inside of the policy. I always tell people that if you want to buy mutual funds, then go buy them.

You do not need a variable annuity wrapper with an average fee of 3% annually for the life of the policy to own mutual funds. Yes, I said 3% annual fee for the LIFE of the policy. In addition, when you add ANY guarantees to a variable annuity policy (i.e. income or death benefit riders), most carriers severely limit your fund choices. I could keep going with the factual bad news, but you get the point.

With indexed annuities, the fraudulent pitch is you can get market growth or “participation” with no downside. Indexed annuities (aka: fixed index annuities) were designed in 1995 to compete with CD returns, and that is EXACTLY what they do. And by the way, if some idiot agent uses the made up word “hybrid” to describe the product, they are just putting semantic lipstick in the indexed annuity pig.

DENNIS: You sure don’t mince words. I doubt your industry would nominate you for the “Man of the Year Award”. You are reinforcing many of the fears a lot of people have about the entire industry.

STAN: Fortunately, I am not totally alone. I recently interviewed Sheryl Moore, who is a flat out annuity expert. I mean she helps the ‘blind see the paintings’. She works with all of the carriers from product design to consulting. She is a true ‘small print and big picture’ expert. She has made quite a career in reigning in the ‘overly exuberant’ cowboys in the industry. We discussed variable and indexed annuities and how they are marketed. She does not mince any words either:

“I’m very frustrated that what I tend to see advertised and promoted about indexed annuities are the products that have double digit commissions, … there’s only a couple of those products. But those tend to be the ones that we see marketed and advertised a lot.

Nobody should be promoting indexed insurance products to have market-like returns. They are limited in their potential. … Folks, there’s just no way that you can purchase an indexed annuity that’s going to give unlimited potential for gain. That’s not how the products are priced and it’s not how they work.”

The bottom line is that if you want income guarantees, then go buy them and shop all carriers for the highest payout. If you want growth, then don’t buy an annuity. You can’t have both, and you can tell the next annuity agent you speak with that fact as well.

Buying an annuity is a transfer of risk strategy that comes down to 2 basic questions:

1. What do you want the money to CONTRACTUALLY do?

2. When do you want those CONTRACTUAL guarantees to start?

From those 2 answers, the type of annuity you need becomes clear, and you then go shop all carriers for the highest contractual guarantee to meet your specific goals.

DENNIS: You have mentioned fees a couple of times. Most people associate fees with mutual funds or paid money managers. How do annuities get away with charging what appears to be outrageous fees?

STAN: First of all, most annuity types have NO annual fees. Yes, that’s a fact. For example, Single Premium Immediate Annuity (SPIA), Deferred Income Annuity (DIA), Multi Year Guarantee Annuity (MYGA), and Qualified Longevity Annuity Contract (QLAC) have no annual fees.

Indexed annuities only have fees when riders (i.e. additional guarantees) are attached to the policy at the time of application. Variable annuities are the fee monsters, with the average annual fee (for the life of the policy) of more than 3%. This includes a mortality fee, expense fee, mutual fund fee, and attached rider fee all inserted in the small print of the policy.

Don’t confuse fees with commissions; the amount of money the agent is paid who sells the product. All agent/advisor commissions are “built in” to every type of annuity. If you put $100,000 into any type of annuity, you will see $100,000 on your statement even though there was a commission paid.

Remember this; the less moving parts, the lower the commission. More complicated means more commissions, the simpler the product, the lower the commission.

Variable and indexed annuities pay the highest commission, which is why most agents are always leading with these types regardless of how you answer the 2 annuity buying questions.

It’s not just commissions. Insurance companies are known for great incentive plans, trips, bonuses, and awards. The high-profit products always carry the highest incentives. The concerns about the best product for the agent not always being the best product for the customer are justified.

DENNIS: I’m very concerned about inflation in the future. How do people with annuities protect themselves from what could be a huge loss in buying power?

STAN: If an agent says that they have an annuity that adjusts for inflation, politely ask them to leave and never speak to you again because they are just trying to sell you the dream. There is not an annuity type on the planet that legitimately addresses inflation. Let’s destroy those sales pitches once and for all.

If you add a Cost of Living Adjustment (COLA) or Consumer Price Index (CPI-U) increase to the income stream at the time of application, the annuity company drastically lowers the initial payment to make up for these increases. Typically, there is a 6 to 9 year break-even point when compared to the exact annuity without a COLA or CPI-U increase.

The same contractual reality applies to indexed or variable annuity gunslingers that promise increases in the income stream based on market performance. Once again, the annuity company significantly lowers the initial payout. Remember, annuity companies have the big buildings for a reason. They DO NOT give anything away!

I feel the only rational way to use annuities to combat inflation is to buy numerous annuity contracts, and have income starting (staggered) at future dates. In other words, laddering the start date.

Fortunately, everyone already owns the best inflation annuity on the planet. It’s called Social Security.

DENNIS: In the spirit of full disclosure, I want to tell readers that this interview led to several hours of in-depth discussion with Stan. He encouraged me to write an inexpensive Guide and volunteered to help me in the process.

When we discussed inflation, the following question sparked the discussion. “It looks to me like an annuity buyer has to get it right the first time. They need income today, yet they have to factor in inflation so they can pay their bills for the rest of their lives.

Is it possible a buyer could trade an immediate income shortfall for a much bigger problem in a few years when they can no longer pay their bills and no longer have a lot of capital or the ability to get a job?”

Stan, you mentioned to me a large number of people call and ask, “I have $100,000 to spend (or some round amount), how much income will that buy me?” Shouldn’t they be starting with the income and working back to the cost of the annuity?

STAN: I always go back to the 2 annuity buying questions:

1. What do you want the money to CONTRACTUALLY do?

2. When do you want those CONTRACTUAL guarantees to start?

That is the starting point for all annuity purchases. If you answered “market growth” or “reasonable rate of return” (a favorite of indexed annuity hucksters), then you do NOT need an annuity.

Contractual guarantees can be shopped for in 2 ways:

1. Lump sum $$ amount

2. Solving for a specific $$ amount

Either way, it’s important to remember that annuities are commodities, and should be shopped for the highest contractual guarantees with all carriers.

In your Guide, the chapter, “Engineer from the Beginning” is one of the best, easily understood step-by-step recommendations I have seen for people trying to figure out where to start.

While one approach does not fit all, I would encourage readers to look at it. It’s a comprehensive, yet simple approach to tailoring the right guaranteed contract annuity to fit your needs. Adding some contractual inflation protection to your annuity might help, but there is no annuity I know of that offers total inflation protection.

DENNIS: Annuity – friend or foe? You have convinced me that people buy annuities to transfer the risk of running out of money to the insurance company. It looks to me like a properly structured annuity is a friend if it does that and the person is reasonably “set for life”. In today’s investment world, the “safe, reliable friend” we had in good yielding safe bonds or Certificates of Deposit no longer exist. A well-structured annuity can certainly help take up some of the slack left by that void.

It can also be a foe if it only helps pay the bills for a few years; then the individual is no longer able to pay their bills looking for ways to make up the difference.

Stan, am I off base in thinking a properly structured contractual guaranteed annuity can be a friend, while one that is not properly structured can become a foe?

STAN: It all comes down to what a person wants to contractually accomplish. Annuities are not investments, and should NEVER be compared to them. Annuities are transfer of risk strategies. You are transferring the risk to the annuity company to solve for, in most cases, lifetime income.

In a perfect world, lifetime income guaranteed annuities should be part of the “income floor” you build to cover expenses. Social Security, pensions, dividend stocks, etc. all provide an income stream. Income annuities can be used to fill any needed gaps in that income floor. I have many senior citizen clients today who thank me for helping them build that income floor.

DENNIS: Stan, on behalf of all our readers, thank you for taking your time today to educate us.

STAN: My pleasure. I hope your readers will take advantage of the Guideyou produced. You are right; most of the simple, good retirement options have been taken away from Baby Boomers and retirees. They will have to do their homework, but it is still possible to have safe, contractually guaranteed income, allowing seniors to focus on enjoying the rest of their life.

I hope you appreciate Stan’s blunt honesty as much as I do. When I called him, I was frustrated. I had mentally thrown in the towel; concluding that most retirees could no longer “live off the interest.” With safe investments yielding such low interest rates, seniors are cutting back and watching their expenses. Despite all the government efforts to spur spending, those with capital are playing it safe.

I believe for some retirees, a properly structured guaranteed annuity should be part of their retirement portfolio. While that is easy to conclude, getting the job done becomes the challenge.

The Miller on the Money Annuity Guide is not a promotional report. You will not find anything at the end that says, “Call this number for a quote”.

Annuities are expensive, and (in many cases) the decision is irreversible. Let’s set the record straight: annuities are not for everyone.

The Guide is available as an electronic publication (PDF). It’s reader friendly with 60+ pages of information you are unlikely to see elsewhere. The sole purpose is educating our readers. You may take the quiz in Chapter One and decide an annuity is not right for you, not right for you today (as Jo and I concluded), or it could be a good asset and you should investigate further.

Should you decide an annuity is not right for you, we are happy. The Guide has done the job. Should you feel an annuity might be a good fit for your retirement portfolio, you will be an educated shopper. Either way it’s a big decision and you have to get it right the first time.

Should you want to investigate further, we go into great detail about how you can work with qualified, licensed advisors to tailor an annuity to meet your needs; while rejecting the high commission options being pitched by over-zealous sales people.

My attitude about annuities has changed. For some, a properly structured annuity could pick up some of the income slack the government took away when they bailed out the banks at our expense.

It’s time to unveil the result of a lot of time and research and announce something VERY SPECIAL: (Drum roll please!)

Miller “On the Money” Annuity Guide

Annuity GuideIt’s a comprehensive 63-page educational Guide available as an electronic publication (PDF). We will shed a new light on annuities and how some may be able to make the best use of them.

One of my first discoveries was that most of the educational material was written by people who sell annuities. I felt a void, not in what they presented; but rather what may have been left out. Their goal is to convince the reader to contact them and sell an annuity and earn a nice commission.

  • Why can’t they paint the entire picture rather than just painting their favorable highlights?
  • Why can’t we get education without the pitch?

My goals are different. I am not licensed or qualified to sell any insurance products. I hope to educate just as many readers not to buy an annuity as those who may choose to buy one.

Personally, after spending hundreds of hours on this Guide, Jo and I decided we don’t need an annuity now; however when I turn 80 there is a good possibility I will buy one.

My financial motive is to sell an inexpensive Guide to help offset some of the cost of my FREE website.

Betty R., retired professional proofreader
for many well known financial newsletters, writes:

“This is the first ‘how to’ Guide I have read and understood perfectly and I have read a lot of them.

Thanks for the opportunity to read this as I have three children, who are in this bracket and need this education. I would’ve paid at least $30 or more without hesitation.”

Here are just a few of the issues we discuss:

  • What is an annuity?
  • What are the risks associated with annuities?
  • Am I a candidate for an annuity?
  • What is ‘income certainty’ and how do I achieve it?
  • How does an annuity fit into an overall retirement portfolio?
  • How do I determine my real needs?
  • Is it possible to tailor an annuity to meet those needs?
  • How do I protect from high inflation?
  • How do I find a reputable agent?
  • How do I keep from getting ripped off?

We have devoted an entire chapter to an easy step-by-step approach to walk you through the process of determining your needs – without being pressured by a salesperson to buy anything.

Here is what just a few readers had to say:

Joe J. writes:

“My wife and I read the Annuity Guide together while on a road trip a couple of weeks ago. I drive and she reads. We also read an assortment of other articles that people have written on the subject. Your guide is by far the most objective and very thorough. The most meaningful take away for me was buying an annuity for what it guarantees not for what it could be. I am checking the annuity I bought about 8 years ago and of course it is not structured the best way. I really appreciate what you are doing and wish you the best.”

From Al W.:

“I just finished your Annuity Guide. It’s clear and easy to understand. I feel like I know all I need to know about annuities. I’m confident in my ability to make the right decision and be an educated shopper.”

Courtenay W. writes:

“When Dennis asked if I would help edit his Guide I told him I have a built in bias. I have always been skittish about annuities since so many advertise, “guaranteed income for life – never worry again!” I might not be objective.

His response was, “Perfect! You think just like most of my readers, that is exactly what I want.” I am grateful Dennis asked me to help. I learned a lot, my bias is gone and I’ve concluded one day a properly structured annuity might be the best choice for us or for my wife.”

From Stan The Annuity Man:

When Dennis began our interview I encouraged him to do more. He is the perfect person to take the complicated subject of annuities and explain them in easily understood terms from the perspective of the average person. I’m glad he agreed to take on the project. His Guide is a no-nonsense, common sense guide to annuities. I recommend it. It’s money well spent!”

Mel K. writes:

Thanks so much for the Annuity guide. You made a somewhat complicated subject easy to understand. The Guide was very informative. I would advise anyone who has an interest in annuities to read Dennis’ Guide. Great stuff.”

From V. K.:

I just finished reading your Annuity Guide and my first comment is, where was this 10 years ago when I bought my first annuity? I appreciate your honest approach and your no-nonsense way of explaining it. You are right, if we don’t get it right the first time many of us do not get a second chance. I recommend your Annuity Guide to anyone, even if they are not looking to buy an annuity. This is the best explanation I have ever heard and certainly not from the salesman trying to sell me one.”

Alex D. writes:

Dennis has managed to demystify one of the most arcane financial products. Read his guide and it will be crystal clear if an annuity is right for you, and how to buy one without getting ripped off. If only all other financial decisions were as simple as Dennis makes this one.”

From Fred S.:

I teach a class on Financial Peace at our church. After reading the Annuity Guide, it is a must addition to our subject material.”