Answer: The most liquid place you could put your money would be under your mattress, or maybe a checking or savings account- so why don’t people put all their money there? The answer is obvious- because they need a return that will grow their money and fight inflation, in addition to giving them an income at the same time.
If you have your money in the Market now in stocks, bonds, or mutual funds (or worse still real estate) aren’t you locking yourself in? Of course you can sell at any time but if you called your broker now and asked him to liquidate your account, how much of what you gave him would he be able to give back to you? Let’s say you gave him $100,000 and he sent you back $60,000 because the market had gone down. You call him and ask him how long it would be before he gave you back the other $40,000 he gave you. He’ll tell you you have to give him back the $60,000 he just sent you and then wait a long time till that grew back to $100,000 – in other words you have little or no liquidity.
With a Fixed Indexed Annuity you know going in exactly how much your account would be worth in the worst possible scenario with the stated surrender charge schedule-which typically declines each year you hold the policy.They all start under 20%, most substantially less, usually in the 9-12% range for a 10 year product. Often even that can be offset to a great degree by bonuses and guarantees on principal. In fact there are products with return of premium guarantees, and also products with surrender periods as short as 3 to 5 years. In addition to that, you generally have the opportunity to withdraw 10% ANNUALLY with no surrender fees after the first year, so that all of your original premium could be back to you in about 10 years. Do you have a plan in place to spend all of your principal in 10 years?
Answer: Surrender charges apply to many financial products- they are just not as clearly stated in most products as they are in Annuities, so people tend to overlook them in other investments. Printed surrender charges let you know going in what the worst case scenario could be, and in most cases it is only a small portion of the money invested. But also, with Annuities, surrender charges are voluntary and self-imposed- they are always at the control of the client! For example let’s say you have $100,000 in an Annuity and you need to withdraw $20,000 for an emergency. Well the first $10,000 would be penalty-free and then there would be a penalty on the second $10,000- let’s say 20% or $2,000. Let’s assume you made 8% on that account’s growth that year- effectively what you’ve done is reduced the 8% growth down to 6%, which is not so bad, is it?
On the other side people sign prospectuses all the time that state they could lose everything and they think nothing of it because there is not a printed schedule of the market’s volatility charges. How many people have lost 50% or more of their money in an investment but because those losses were not explained in print in the form of a penalty schedule before they bought, they bought anyway without any consideration of “surrender charges”? Remember the market’s volatility charges happen to you involuntarily!
Answer: While it is true that from a tax standpoint of tax-deferral there really is no advantage to having an Annuity inside an IRA, 401(k) or any other qualified plan, that is far from the only reason for having some of your funds in your qualified account inside an Annuity. In fact we have devoted 2 whole sections to discussing why Annuities are ideal products for your retirement planning- click on the tabs “Annuities in 401(k) Plans” and “Annuities are Ideal for IRAs” for more detailed explanations!
Answer: While it is true that you don’t get all of the upside with an Indexed Annuity it really is not a disadvantage to get some of the up and NONE of the down, compared to what most people get. If you have a diversified portfolio, not only are you not getting all of the up, but you are participating in some of the down. Obviously if you had put all of your money only in the winners you would have made more money, but because we can’t know the winners beforehand we diversify allowing losers to be offset by winners- but that results in an average return that is less than the broad market’s performance in most cases.
For example, the S&P 500, according to Dalbar, had averaged 13.2% gain for the 20 year period of 1988 to 2008. This type of return would double your money 4 times over the past 22 years. In other words, if you had started with $100,000 in 1988 you would have $1.6 million today! If your accounts have not given you this type of return then you know that you have not been getting all of the upside in your accounts. So, with that in mind, getting some of the up with none of the down should not bother you, because you’re only getting some of the upside now, while you’re also participating in the downside. In addition to that, with the introduction of Income Riders you can guarantee a growth rate of 7% or higher every year in your income account, regardless of market performance or interest rates! This is money that you can access without fear of outliving your retirement nest egg through withdrawals or downturns. Don’t outlive your money- know that your income will always be there for you!
Answer: Actually, while Wall Street brokers will tell you that fees are high on Annuities, the truth is that there are NO fees on Annuities, unless an Income Rider is added on, and then the fees range from 0.00% (no fee) to 1.10%. Fixed Annuity commissions to agents are paid by the Insurance Companies from the spread between the gross of their bond portfolios’ yields and the net credited to their clients’ accounts- similar to how the banks make their money. In this way 100% of a client’s money is working for him or her from day 1! Compare this to brokerage accounts where generally money under management is being charged 1% or more per year, Mutual Funds expenses, including hidden fees, can be as high as 2% or more, stocks are charged a commission every time they are bought AND sold, and Variable Annuities that they offer can have fees as high as 4% a year or more!
Answer: Although Annuities are used by Millions of people to supplement their income needs, these products are used by many others who do not need income. Some of the most common uses, outside of income needs, are protecting your money from market downturns; locking in gains in up years so you do not have only “paper gains” but “real gains” that you can never lose; and having guaranteed growth of your money for wealth transfer.
Answer: That is a real problem, isn’t it? If there is an option for you to eliminate or reduce fees, protect your principal , participate in market growth without exposure to market loss, have guaranteed growth towards lifetime income payments, and have a guaranteed lifetime of income that you can’t outlive, why would someone NOT tell you about that? Is it because they are not knowledgeable about these products? Is it because they don’t have access to them because of restrictions their company or broker puts on them because they don’t get trail commissions? Is it because the guarantees on these products compete with other products that provide better long-term compensation for them? If you move your money from the risk of the market to the safety of Indexed Annuities, you have ceased to be part of your financial planner’s income stream. Tens of Billions of dollars per year move into Indexed Annuities, as baby boomers fear another correction that could years to recover from.