Many questions have been asked about the problem with annuities.
They seem to be a almost sure way of getting a 5% return, which seems wonderful in today’s low-interest environment. Actually, I was sold annuities so well that I had bought annuities with many major insurance companies. This includes Pacific Life, Voya, Jackson National life, John Hancock and Nationwide, to name a few.
The key operative words are that annuities are are sold to customers who do not have the insights to ask the right questions about them. They are marketed as amazing products, with many bells and whistles. The average customer is so overwhelmed by all the marketing hype that they do not know how to ask the right questions.
Here are some key questions that are seldom asked.
1. What are the true costs of an annuity?
Typically, there is about a 5%-plus sales charge and a 3.5%-plus annual fee. All those wonderful riders have fees attached to them. These are pretty hefty fees.
2. Despite great stock market returns, I seldom got much more than the guaranteed rate of 5-6%. Why is that?
I think it is because of high annual fees.
3. When you start taking out the money from the annuity, what is the rate of depletion of your cash value?
This is a vital question that is seldom asked, because this rate is very high, very little cash value is left that goes to your heirs. So the deal is that the normal person puts in money for about 10-plus years. Then he starts to withdraw, normally at the age of 65 or greater. If the withdrawal rate is 5%, most people only get their own money back, before they die.
4. What is the real return from annuities?
We estimate that it is between 1-2% in most cases.
5. What is the rate of decline in cash value of the annuity after the withdrawal begins?
Notional values after 10 years are about double of the original investment. Let us say that the market is giving a 6-7% return, depending on the funds that you have chosen. If the payout is 5% (of the notional value or 10% of the original value) and the annual costs are 3.5-4%, the rate of decline is very rapid.
Normal experience is that too many things have to go right,for an annuity to be a winning investment. Of course, it helps, if the market does well and you live a very long time. But remember that the insurance company is always the winner. It is called the law of large numbers.
To quote leading financial investment guru Ken Fisher, he has never sold an annuity … and would never sell an annuity. Fisher says that whatever an annuity does for you, there are better ways to accomplish the same things. I agree with Ken Fisher. Once I truly understood annuities, I have sold all my annuities.
If you want a true assessment of your annuities, I am happy to provide you an unbiased opinion.