What’s the best annuity right now?
The No. 1 question that I get about annuities cannot be answered without knowing a lot more about the person asking the question.
Last week I was speaking at a national financial trade show where my company also had a booth in the exhibit hall during the three-day event. Without fail, the most commonly asked booth question was “What’s the best annuity right now?”
To me, this is the most illogical question that could be asked — but would be considered red meat for most agent’s “one size fits all” selling approach. After hearing that question, too many annuity salespeople would launch without hesitation into a full pitch about their “favorite” annuity. Sad, but true.
I understand the genesis of this type of question, because most investors are always on the hunt for the best stock, the best exchange-traded fund, the best bond, the best option, or the best whatever to make them fast easy money. It’s human nature to yearn for a leg up. We all know that there are no “short cuts” when it comes to investing success, and the same reality exists within the large complicated world of annuities.
If you remember one thing about annuities, remember this: Annuities are transfer of risk solutions that solve for specific goals.
In my opinion, annuities should be owned for their contractual guarantees only and should not be purchased for any projected or hypothetical return scenarios. Most fixed-indexed annuity (now incorrectly hyped has “hybrids”) and variable annuity agents still inappropriately sell the dream of market returns as the primary reason to own annuities.
Person after person came by my booth and without thinking asked me “What’s the best annuity right now?”
I had to quell my continuing frustration with this brainless tire kicking before I turned the focus back on the questioner. My response was always, “I don’t know. Tell me what you need your money to do or what you want it to solve.”
I also added after that statement that based on their answer, an annuity strategy might not be for them. Gasp! Yes, I said it, annuities aren’t for everyone and shouldn’t be promoted as such.
In my world, annuities primarily solve four specific goals and I have created an acronym that you can easily remember to determine if an annuity strategy should even be considered. That word is P.I.L.L.
P = Principal protection
I = Income for life
L = Legacy
L = Long-term care
If you don’t need to contractually solve for these transfer of risk solutions, then you probably don’t need an annuity. Yes, I said it again! Even if there is part of P.I.L.L. that applies to you, it is important that the annuity solution compliments your overall portfolio and is allocated at an amount that reflects your age, your goals, and your risk tolerance.
The P.I.L.L. strategy goes against the grain of most annuity sales today, which are primarily deferred variable and fixed-indexed annuities. Those strategies would presumably fall under the letter “G” for growth, which I think is the wrong reason to buy an annuity, and why I never include growth as the primary justification for an annuity purchase.
As I have mentioned in previous articles, the only possible exception for “G” is the no-load variable annuity structure that offers full liquidity day one and allows you to take advantage of the original reason variable annuities were even developed in the 1950’s — tax deferred growth. Vanguard and Fidelity have solid no-load offerings, but my personal favorite is from Jefferson National. Mitch Caplan, Jefferson National’s current CEO and former E-Trade CEO, is by far the innovative leader here and is seriously redefining this no load category.
In my opinion, load variable annuities (with annual fees ranging from 2% to 4%) aren’t competitive with their no-load cousins when it comes to tax-deferred growth. And last week, the average annualized fixed-index annuity returns for 2007 to 2012 were released by Advantage Compendium. That number was 3.27%. So much for the bad annuity lunch seminars and Internet promoters touting “ton’s of market upside and no downside.”
Fixed-indexed annuities are good strategies when placed properly and appropriately used with target-date income riders. However, the public needs to know that indexed annuities were designed and developed to compete with CDs, not the stock market. The 3.27% annual return number pretty much validates that design theory.
So instead of asking for the best annuity, ask yourself if you need to transfer the risk to a carrier to solve for P.I.L.L. When an agent or adviser starts launching into a specific annuity product sales pitch, ask that person about the contractual guarantees of the policy so you can apply the P.I.L.L. strategy filter to see if it would actually compliment your portfolio.
Asking “What is the best annuity right now?” is the biggest softball that you can throw at a person who sells annuities. Believe me that too many agents will give you “their version” of that answer. Instead, tell your agent or adviser exactly what you are trying to contractually solve for and then ask if there is an annuity with a highly rated carrier that can help you transfer that specific risk.
Orginally published by MarektWatch.com 5.21.2013 – http://www.marketwatch.com/story/whats-the-best-annuity-right-now-2013-05-21