The Jimmy Carter annuity dream
Even though interest rates are at historically low levels, too many annuities are being purchased by people thinking that they somehow have locked in a high rate from the Jimmy Carter era.
My grandfather worked in a textile mill, farmed, and ran a corner store to survive and support his family under the “whatever it takes” motto that most of our ancestors adopted. I remember as a young kid hearing my dad talking to my grandfather about buying CD’s at the local bank that paid very high rates like 12% and 15%.
To this day when Jimmy Carter’s name is mentioned, my father starts gazing off in the distance … I’m sure dreaming about those CD rates he enjoyed during the late 1970’s.
Whether by design or accident, annuity agents and carriers continue to evoke the interest rate ghost of Jimmy Carter by offering high-percentage riders to policies that sometimes fool the traditional CD buyer into having a rate flashback to the 70’s. When it comes to high interest rates, our favorite Georgia peanut farmer should be in the rate Hall of Fame.
Unfortunately, it seems like Carter is the current poster boy for too many annuity sales. With interest rates as high as 22% during Carter’s presidency, today’s baby boomers and retirees remember the good old days of them or their father’s buying high yielding CD’s. Today’s common annuity sales pitch usually involves high income rider percentages that takes a lot of potential annuity buyers back to the memory lane of legitimate high yield.
We all know that if it sounds too good to be true, it is … so let’s take a look how not to get trapped in the annuity high interest rate dream and understand the realities of the product.
Pavlov’s annuity seminar
I’m convinced that some evil psychologist turned annuity agent created the annuity “bad chicken dinner” seminar to evoke the Pavlov drooling dog triggers by combining food and annuity sales pitches with unsuspecting senior citizens. The emotional annuity reactions are typically caused by the agent using phrases like: 8% upfront bonus (drool), 7% annual income rider returns (drool), no downside with market upside lock insurance (drool). I’m actually waiting to see annuity brochures with a picture of Jimmy Carter, or maybe a portrait of him subtly hanging at the seminar to evoke high interest rate emotions.
Unfortunately, I get calls from too many people that sign the annuity application thinking they own something yielding 7%, when their “not as smart” friends are buying 1.5% CD’s at the local bank. The reality is that they own an income rider, and can’t access that high rate in a lump sum like their beloved CD.
Income riders are not yield
These attached benefits that can be added to deferred annuities (both fixed and variable) are suitable if used solely for guaranteeing income at a future date. For example, for someone like me, I use income riders and plan on deferring them for up to 20 years so I can contractually know to the penny what my lifetime income stream will be at that time. That’s how income riders work and should be explained, but it’s important to know that the high percentage calculation can only be used for future income — and nothing else.
Monopoly money with a catch
The reality of Jimmy Carter getting a second presidential term is the same as an annuity owner being able to access an income rider total in a lump sum. Neither are going to happen! If you own an annuity with an income rider that compounds annually at 7.2%, that calculation will contractually double (rule of 72) every 10 years. Sounds pretty good, and it is if the goal is income at a future date. However, if you pass away before turning on your lifetime income stream, this large dollar amount goes “poof.” There are some income riders that can also be used for a death benefit, but they are few and far between. The bottom line is that these high income rider percentage growth numbers are pure monopoly money unless used for income. Don’t fall into the trap of believing the high interest rate dream.
The reality of the 10-year Treasury
With rates hovering around the 2% levels, there is not some actuarial quant genius hidden in an annuity company closet that has figured out how to offer 6%, 7%, or 8% yield on your money. That logical thought progression is somehow left at the seminar door when people hear what they want to hear when purchasing an annuity. Unfortunately, many agents will allow you to latch on to the high percentage number without you completely understanding how the contractual guarantee actually works.
As you surf the internet, you will see pop up ads and annuity promotion videos claiming annuity returns of 6.5% to as high as 15%. Your local radio and TV ads (where they never say the word annuity) will also promote these high percentage teaser rates as well. You are smarter than that, I hope. Jimmy Carter is not the president. Interest rates are low with all financial products, including annuities.
As a once popular rap song repeated over and over: “Don’t believe the hype.”
Originally published by MarketWatch.com 6/18/2013 – http://www.marketwatch.com/story/the-jimmy-carter-annuity-dream-2013-06-18