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Call it anything but an annuity

By Barbara Whelehan · Bankrate.com
Friday, June 24, 2011
Posted: 12 pm ET

What would you prefer: A financial product providing a 4 percent return guaranteed not to lose value? Or would you rather invest in a product with an 8 percent return that is subject to the whims of the market and may lose principal as a result?

Three out of four Americans (76 percent) voted for the safe 4 percent option in a recent "refresh" of a 2010 study by Allianz Life. The insurer's president and CEO Gary C. Bhojwani said in a press release that the new study "confirms that a 'new normal' mindset has dug deep roots in the minds of boomers. With the vast majority still in favor of more security for their savings, boomers tell us they are not interested in going back to return-chasing behaviors."

That may be wishful thinking on the part of insurance companies. Boomers may say one thing in a survey, but when given the option to purchase an annuity for retirement, they tend to back off. As Jennie Phipps points out in Bankrate's story on annuities in 401(k) plans, employees are "somewhere between stone cold and lukewarm to the idea" of investing in annuities.

What Americans want

Bhojwani, who authored a white paper based on the study, acknowledges that the word "annuity" conjures up negative perceptions by the general public -- even though Americans long for the five things that only annuities offer. According to his white paper, we want:

  1. A stable, predictable retirement standard of living.
  2. Guaranteed income stream for life.
  3. Guaranteed not to lose value.
  4. Protection against market downside.
  5. Don't need to think about it, stable, and predictable.

I can't help but notice that the fifth point is the same as the first; the word "guaranteed" is used redundantly, and the third and fourth points say the same thing in different ways.

The image problem of annuities stems from negative impressions formed 10 or 20 years ago, says Bhojwani in the white paper. "Many of the negative impressions of annuities were created by those who oversold the product or tried to portray it as something it was not." Also, he writes, the negative views "may be reinforced by commentators in the media who have reflexively attacked annuities, often without understanding them."

A tough sell

Let's face it, annuities are difficult to embrace. The immediate annuity requires you to relinquish a large sum of money in exchange for an income stream that lasts for life. To get a joint life annuity of $2,000 per month, for example, a 65-year-old couple would have to pay $372,446, according to immediateannuities.com. That's a lot of cash.

And yes, it's still risky. What if you and your spouse buy an annuity today and then get hit by a truck tomorrow? The insurance industry has a solution -- for only a few thousand bucks more you can get a guarantee that if you should both die within 10 years, your beneficiaries will get the payments until the end of the 10th policy year. They come with other bells and whistles, like inflation protection, also at an increased cost (or a reduced payout).

I'd rather try to generate income from my own portfolio or perhaps buy a retirement income fund.  Stories about both of these topics as well as annuities appear in Bankrate's special feature on Retirement Income Products. But I have to admit that the term "guaranteed income" does hold strong appeal.

A recurring theme in that special feature: The experts say a small percentage of one's nest egg should be invested in annuities to guarantee an income floor.

Annuity is kind of a nerdy name, you have to agree. The financial industry has begun crafting euphemisms like "longevity insurance" and "retirement insurance" to make this product more palatable to the consumer. Maybe they should call it what it is -- a product that preys on consumer fears and increases shareholders' wealth.

Nah -- that's too long.

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Follow me on Twitter: @BWhelehan

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3 Comments
Rich
June 27, 2011 at 6:19 pm

re: To get a joint life annuity of $2,000 per month, for example, a 65-year-old couple would have to pay $372,446,

372/2=186 months to break even. That's 15.5 years which puts the couple at 80. A 65 year old couple has a 50% chance one spouse lives to 92 and 25% one lives to 97. If you're in good health an annuity is a good bet.

Rich
June 27, 2011 at 6:12 pm

Index annuities outperformed the S&P 500 from 2000-2010 which is a pretty good return on the safe side of a portfolio. If you're middle class and retired and don't have an annuity in your portfolio you're making a mistake.

Homeless
June 27, 2011 at 8:06 am

Being in this industry, I often hear people talking out of both sids of their mouth. They want to earn 8-12% on their investments, but they want to be protected from any downturns. You can't have both ways. Reward comes with risk...that 4% of SAFE returns sounds all fine and dandy, but factor in taxes and inflation and you are actually losing. Are annuities right for everyone? NO, but if they are used properly for the right person and EXPLAINED thoroughly, they CAN be a good product for some people. There are no investments that can be all things to all people. The key is to find an advisor you TRUST and listen carefully to ALL of the terms involved with an investment and if you have other advisors (attorneys or CPA's) or family that you trust, bring them along to hear about the products. A GOOD Financial Advisor welcomes others at the table so you all have a good handle on what you need and how you can get there.