Advisor Perspective

Prompting critical thinking and conversations around issues in our industry. Not intended as personal financial advice.

Are annuities good or bad?

Neither, but they are certainly misunderstood. If you do some research, you will find an abundance of negative articles about annuities and a general public aversion to them. Much of this bias against annuities is the result of inaccurate information, misrepresentations, and broad generalizations. It is a challenging marketplace to digest because of the variety of products that are being offered. Some of the products have a straightforward value proposition while others are quite complex. A common criticism is that some annuities are too confusing for clients. So, why bother? There are a few reasons why an annuity could find a place in your portfolio:

• You want a guaranteed outcome. Only banks and insurance companies can provide you with guarantees. Annuities can offer a variety of guarantees. Some examples of typical guarantees are a particular crediting/interest rate, income for life, or a specific death benefit. (Annuities are backed by the claims paying ability of the issuing company.)

• You are worried about longevity risk. Longevity risk involves the risk of outliving assets or spending too little to avoid running out of money. Back when the majority of retirees had pensions, this was not a big concern. Today, many people look to annuities to create pensions for themselves, as annuities can provide guaranteed income for life.

• You are worried about sequence of returns risk. This can occur when a retiree experiences a down market immediately before, or immediately after, the start of retirement. This downturn can significantly reduce the sustainability of retirement income. Some modern annuity products shift this risk to the insurance company.

• You want more tax-deferred growth. If you have already maximized your ability to save in employer-sponsored retirement plans, annuities can provide the benefit of tax-deferred growth. This can be incredibly valuable for high-income tax bracket investors saving for retirement.

• You want to address legacy goals. Insurance companies offer annuity products with different death benefit options. These can be very appealing for someone who is still trying to grow their wealth but wants to insure a minimum level of inheritance regardless of market performance.

Bottom line: be open minded. Annuities present you with planning options, and why shrink the list of options available to you? Like anything, there are advantages and disadvantages that must be considered. So, are annuities good or bad? If properly matched with one’s goals, annuities can be great. However, annuities are not one size fits all, and when poorly matched with one’s goals, annuities can feel like a costly mistake. So, it is simply a product area that needs to be approached with more care and research, and where a good advisor can add a lot of value. Lastly, many investors aren’t genuinely comfortable with capital markets (stocks, bonds, etc.) and planning using guarantees may be an approach that provides certainty and instills more confidence.

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Important information on current topics

Want to opt out of all that junk mail?

According to a spokesperson for Forest Ethics, 30 percent of all mail delivered in the U.S. is junk mail. Beyond being a nuisance, this junk mail requires the output of an estimated 100 million trees for its creation. If you’re frustrated by this waste of paper, you might be interested to learn of some online resources that can help you minimize the volume of unwanted mail you receive.

• Catalog Choice, a non-profit organization working to stop junk mail, offers two services—one paid and one free.

1. The free service allows you to search for company, catalog, and coupon-book names and either opt out of or modify the frequency of mailings. Keep in mind that some companies may not participate, and others may require you to call them (phone numbers are provided) to change your status. The site also offers tracking capability to record which companies you’ve contacted.
2. The paid service is described as an unlisting service that proactively removes you from lists bought and sold by marketers.

• The National Yellow Pages Consumer Choice and Opt-Out Site makes it easy for consumers to opt out of phone book mailings. The website is designed to help you customize delivery online without having to contact multiple publishers.

• Directmail.com is a website where you can choose to unsubscribe from a host of mailing lists by adding your name and address to the National Do Not Mail List.

• You can also opt out of credit and insurance offers. OptOutPrescreen.com is the official Consumer Credit Reporting Industry website to accept and process requests from consumers to Opt-In or Opt-Out of firm offers of credit or insurance. If you choose to Opt-Out, you will no longer be included in firm offer lists provided by the following consumer credit reporting companies: Equifax, Experian, Innovis, and TransUnion. According to the Federal Trade Commission, opting out of these offers will have no effect on your ability to apply for or obtain credit or insurance.

• Directly contact the company whose junk mail you no longer want to receive and ask to be unsubscribed from its mailings.