6 retirement-income resolutions for the new year
In between buying those gym memberships and setting personal goals to begin the new year, it’s also a good time for potential annuity buyers to make important resolutions before signing that application.
Annuities once again set a sales record this past year, and with over 10,000 baby boomers retiring every day for the foreseeable future, more people will be looking at the validity of these sometimes confusing products. Below are 6 basic annuity-buying resolutions for the new year that should help you navigate the sometimes treacherous annuity sales-pitch minefield.
1. Buy simplicity
A good rule of thumb to use when buying annuities is that if you cannot explain how the entire strategy works to your spouse (or better yet, to a 10-year-old), then you probably shouldn’t buy it. Warren Buffett would shake his head in disgust if he saw the incredibly complex annuity products that too many consumers are buying. Complicated does not mean you are getting more bang for the buck. Don’t be sold bullet points, or a broad overview of how the policy works. Every annuity has good and bad aspects, and all have some limitations. An important correlation to remember is the more simple the annuity structure, the lower the fees, and the lower the commission to the agent. Simpler is always better, and that certainly applies to annuities.
2. Transfer some risk
In my opinion, annuities should never be looked at as a typical investment like a stock, bond, mutual fund or exchange-traded fund. Annuities should be allocated only as transfer of risk strategies that solve for specific solutions like lifetime income (aka longevity risk). In essence, you are transferring the risk to the annuity company instead of shouldering it yourself. It’s really that basic. So the questions that only you can answer are: how much risk (if any) are you looking to transfer, and what do you want that risk transfer to specifically solve for.
3. Don’t believe the hype
Annuity sales practices and subsequent sales pitches go largely unregulated by the states, so you will be aggressively sold the dream if you allow yourself to fall into that trap. If you go to an annuity seminar, swallow the food only. Internet ads and videos along with local radio and cable TV spots are where you need to be the most careful not to leave your common sense at the door. Some of these ads are so egregious and over the top, they are an insult to any person with any IQ or real- world investment experience. However, these annuity-sales cowboys are specifically targeting the dreamers, the uninformed, and the greed mentality that thrives among too many do-it-yourself investors. Just remember that if it sounds too good to be true, it always is with annuities.
4. Go elsewhere for market growth
Annuities are not growth strategies, even though the overwhelming majority of annuities sold are variable or indexed products that include the non-guaranteed dream story of market-type growth. Indexed annuities were designed to compete with certificates of deposit, so that growth dog doesn’t hunt. Variable annuities have limited investment choices and, typically, high annual fees for the life of the policy. That’s also a non-starter from a growth standpoint in my opinion. If you want real growth and legitimate upside potential, then don’t buy an annuity. Even the best no-load variable annuities have limited separate account choices, and restrictions on how often you can reallocate the money. Don’t buy the growth dream, always own the contractual realities.
5. Take your time and shop around
There is not an annuity on the planet that carries a sense of urgency to buy. If you are being told that a specific product is going away, or something is being changed within the product, then so be it. One of the most common buy-now tactics being used concerns the upfront bonuses on some contracts. Remember that bonuses come with an annual fee for the life of the contract, so run the hard math numbers on it. Buying an annuity for an upfront bonus is like buying a car for the stereo system. Be wary of the urgent income-rider pitch as well. Once again, those come with an annual fee for the life of the contract, and should be fully understood before adding to a policy.
It’s always a good idea to get quotes from numerous companies for the exact transfer-of-risk solution you are trying to solve for, and be sure to have any tax questions answered by certified tax professional.
6. Base your decision on the contractual guarantees
Always own an annuity for what it will do, not what it might do. The “will do” elements are the contractual guarantees of the policy. If you are considering a variable or indexed annuity, always ask to see a worst-case-scenario proposal. Have the numbers run at “0” or the guaranteed minimum (if there is one), and make your decision solely on those contractual numbers. Hypothetical, theoretical, projected, or back-tested return scenarios can be manipulated to make any annuity proposal look fantastic. However, those non-guaranteed numbers mean nothing, in my opinion, and should be looked at as nothing more than a sales distraction.
The fact is that annuities are not for everyone, and are not one-size-fits-all solutions. Hopefully, these 6 annuity resolutions will help you decide if adding a specific annuity strategy in the coming year could actually compliment your current portfolio.
Originally published 1.2.2014 by MarketWatch.com – http://www.marketwatch.com/story/6-retirement-income-resolutions-for-the-new-year-2014-01-02