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Annuities Risk: How Annuities Transfer Risk

Stan Haithcock
February 9, 2023
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Today we'll be talking about how annuities transfer risk. Annuities are insurance policies, and insurance companies exist to make a profit. That is absolutely correct. I always say life insurance companies and annuities companies, which are one and the same, have the big buildings for a reason because they know when we're going to die. But yes, these are companies that are going to make a profit, period.

On average, your total lifetime payout will be much less if you annuitize your 401k versus investing it yourself and managing it actively. Well, that's apples and oranges. When you annuitize money for a lifetime income stream, annuities are the only product category on the planet that can pay you for the rest of your life as long as you're breathing. You could take a 401K asset and annuitize it for a lifetime income to combine with the annuity you already own called Social Security. Of course, if you managed it in the markets, there's potential for you to do better than an annuity contract. But you're accepting the risk of managing the money in the markets. With an annuity contract, regardless of the type of annuity, you're transferring the risk, and in this case, in this statement, you're transferring the risk for a lifetime income stream. Then the question is, what's the return on investment on a lifetime income stream? I don't know that until you die. You either want to transfer that risk and have that income stream coming in for the rest of your life as long as you're breathing or joint life the rest of your lives for as long as each of you are breathing, or you don't. If you want to manage the money for market returns, do it, but you can't compare the two.

Banking Collapse

Annuities are also only as secure as the financial institution that issues them. In the event of a banking collapse, you can potentially lose all of your money in the market. Let's give an example. In 2008, the last little hiccup we had, annuity companies did fine. There were real issues with some banks and brokerage firms, but annuity companies are highly regulated. There were no issues, and you can't compare investment or brokerage banks to annuity companies. Annuity companies have to abide by specific rules. With Fixed Annuity companies issued by life insurance companies, they have to have, by law, 100% of your money on hand and liquid day one in investment grade bonds. That's just the law. To look at the risk profile of an annuity company and compare it to non-annuity companies is apples and oranges, period.

If we have high inflation, your Fixed Income Annuity's purchasing power will rapidly become worthless. Little drastic. Here's the thing about inflation, people are still determining what inflation's going to be. No product on the planet, including the annuity world, can adequately address inflation because no one knows what it will be, period. Don't say markets or stocks or ETFs, no. You don't know what will happen with that either, as they can go up and down. Inflation is something that no product can adequately address. You can use annuities to address inflation by either having laddered start dates of income or at the time you need to solve for an inflation dollar amount for your monthly income floor; you can buy an Immediate Annuity at that specific time. And yes, Immediate Annuities or some other annuity types have inflation and cost of living adjustment increases, but annuity companies don't give those away. They lower the initial payment when you add that to the policy. I understand the statement, and I understand that the purchasing power of any income stream, whether it's an annuity, your pension, or Social Security, whatever those income streams are, the purchasing power will be less with inflation or hyper-inflation, but don't just throw it all on annuities.

Annuities are just like Social Security and your pension. They're not going to address inflation properly, and you're going to have to do that in a myriad of ways. One of the ways is to buy an Immediate Annuity and reverse engineer the quote to solve for that dollar amount at that specific time you need the payment. Annuities do an excellent job of addressing inflation compared to all your other choices.

Risk Example

I had a phone call the other day, and they believed it's better to stay in the market or invest in other inflation hedge assets. Those assets could be precious metals or crypto, etc. A part of me will agree with that because if you can manage your money or don't need to transfer risk, you don't need an annuity. Remember, annuities are contracts. They're transfer of risk contracts that primarily solve for, and I've got an acronym: P.I.L.L. Principal Protection, Income for Life, Legacy or Long-Term Care, Confinement Care. But to throw in inflation hedges and crypto, which I have nothing against crypto with blockchain technology, but, boy, is that volatile.

If you can manage your own money, if you have a professional that's good at managing your own money, you do not need an annuity of any type. I'll be the first one to say that. But for the do-it-yourselfers out there, you got to be really careful. It's very easy and cavalier to make disparaging comments about contractual annuity guarantees in a raging bull market. See, I've been around the block. I used to work for Dean Witter, Morgan Stanley, Paine Webber, and UBS. I've seen markets go down, I'm that old, and markets will go down again. Everybody's got a little bit of selective memory since 2008, and I remember in 2008, everyone said, "I'm never, ever going to forget this, Stan. This has left a scar." The same people are leveraging themselves to the hilt to get into the market, and they might be right. The markets may go up forever, but I don't think so. To make that comparison, yeah, you should never look at annuities for inflation. Just buy the crypto and buy the stocks and buy them all. Again, apples and oranges, annuities are contracts, transfer of risk contracts, and you cannot compare a contract to an actively managed investment; that's just common sense.

Back to the call and the person saying this is an all-or-nothing approach. Either manage your money or put in annuities; there's no combination. What I'm saying is there's a combination. I have futures and commodities traders with Single Premium Immediate Annuity lifetime income streams as the income floor, and then they invest the rest and be risky. There's a place in your portfolio for risk and transfer risk, and you're probably nodding your head, so it's not all or nothing. There are many people out there, the 10,000 baby boomers, that are hitting 65 every single day, and many want to avoid managing their money. They agree with these statements that the managed money would do better than an annuity contract. Yeah, that's common sense, but a lot of people in chapter two of their lives, which is about lifestyle, which is about them, which is about them enjoying their life, there are no U-hauls behind hearses, they don't want to follow the markets. They don't want to watch CNBC. They don't want to watch Fox Business. They don't want to track it. Transferring the risk makes sense for those people but only makes sense for some. Annuities are not one size fits all. Market products are not one size fits all. What I want you to put in the back of your head is maybe there's a combination or a percentage or a proportion allocation for you that makes sense, that will give you the guarantees that you want and still provide that growth opportunity with non-annuities.


I think if you ask me what's the biggest thing I bring to the table as Stan The Annuity Man®, America's Annuity agent®, licensed in all 50 states, the top agent out here, is because I've sat on the other side of the table with Dean Witter, Paine Webber, Morgan Stanley, and UBS. I understand the growth part from a Wall Street standpoint, but I also understand the contractual guarantee standpoint from a transfer of risk standpoint. When you talk to me, you're going to find out that you can't be all in with annuities, and you might not need an annuity. But from a transfer of risk standpoint, annuities, and once again, solving them for Principal Protection, Income for Life, Legacy or Long-Term Care, or Confinement Care, can be a good fit in combination with those growth non-annuity assets.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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