Ken Fisher was on TV last week. I know because I saw him. I saw him up there on the tube, trashing the products I use every day to make my clients safe and ensure they have a secure and happy retirement. It’s not so much his message that I object to (though I surely do) as much as the hypocrisy. See, all the while he was proclaiming “we don’t sell annuities and we never will,” he left out the fact that he is a major investor in one of the top three annuity companies in the world.
See, Fisher’s objection to annuities isn’t driven by any real belief about whether or not they are suitable for their clients; it’s all about marketing and making money. How do I know that? Because of his very “never will” position. Because surely there must be someone somewhere for whom annuities must be the best choice. Don’t you think? I mean I have hundreds of clients who come into our offices who make that choice, and I am an ant compared to his elephant. So if I can find hundreds of people for whom they are the best choice, don’t you think he could find one? If so, why would he not provide it as the answer?
Annuities do something nothing else in the market does. They ensure against living too long and running out of money. As it happens, running out of money is the number one fear of retirees and those getting ready to retire. In fact, more people fear running out of money than death. By a two-to-one margin.
So if running out of money is the number-one fear, and there is a product out there that would deal with that number-one fear head on, that was specifically designed to address that fear, and could do it in a way that saved money, lowered fees, and provided two to three times the income that more “traditional” (more about that in a minute) approaches provide, why wouldn’t someone offer that as a choice?
Would you like to know what I think? I think it’s all about the money, and not about the client. Let’s look at his primary objection: high surrender fees and long surrender periods. Okay, I get that. These are a long-term commitment, and once committed you are pretty much, well, committed. But what are you committing to? Dependable and predictable lifetime income you cannot outlive? How do you even achieve that without a long-term commitment? I mean that’s the definition of long-term commitment, don’t you think? If you are buying something that is supposed to make you safe and secure for the rest of your life, why would you want to get out of it? It doesn’t make sense! Wouldn’t you want a product that you purchased for lifetime income to last a lifetime? Why would you want to get out of it?
Another reason people who trash annuities give for doing so is loss of principal. Immediate annuities, which are sold exclusively for cash flow and income, often do require you to give up control of your money. Why? So if you die the insurance company will become even richer than it is? No! It’s how they spread the risk. The job of the annuity is to ensure you have income for life, even after the annuity has run out of money. Doesn’t it make sense that if you live a long life at some point your annuity would run out of money? I mean isn’t that what you hope would happen? If it didn’t, why would you buy it in the first place? After all, the whole point is to provide more income than those “more traditional” approaches do, right? Not only more, but guaranteed and dependable. Predictable. Income you know you can never outlive. If you could do that with a T-bill or a CD, or even the market, you would probably use that, right? The reasons annuities do their job is they provide more income together than an individual could get on their own, and they do that by monetizing life expectancy.
In a nutshell what that means is those who live long lives are subsidized by those who didn’t. It’s a risk pool, just like fire insurance. Fire insurance works because those whose houses do burn down are helped made whole by those whose houses don’t. That means if you buy fire insurance and your house does not burn down, you don’t get your money back. Your money goes into the risk pool and covers the cost of rebuilding houses that do burn down.
Annuities are just the same. If you live past the point of depleting your savings, the savings of those who passed early provide you income until you pass. That’s the point of spreading the risk … allowing you to achieve a goal you would not be able to on your own.
That having been said, it is true that people don’t always want to commit their money permanently, even though the goal is to solve a permanent problem. So, while the goal of having income for life can be best solved by a solution that dies when you do, insurance companies have created actuarial-based solutions that give your heirs whatever is left after you are gone. So, if you don’t spend it all, whatever is left over goes to your beneficiaries.
These new products are relatively new; in fact they have only been around for about a decade. So, to be clear, it is possible to protect your lifetime income needs without having to give up control of your money. That is a new thing that you might want to look at.
What is not new is the whole approach taken by annuities. Annuities have been around since Roman times. In fact the name annuity comes from “annua,” the term given to Roman soldiers’ pensions. So they have been around almost forever. It should not be missed that some other things that we rely heavily on for retirement are also annuities. Social Security, for one, is an annuity. So are pensions. And no one ever gets on TV to trash pensions and Social Security (unless, perhaps, they are a member of Congress!).
So if you are looking for a “traditional” approach to retirement planning, why not look at the original solution? Sometimes things that last a few millennia are actually worth considering!
Article published by Lowell Sun March 19 2017 Written by Stephen Kelley