The 15 Biggest Mistakes When Buying Annuities - Part 1
Great topic. It was requested by a very high-level person in the industry because they wanted my take on it. What are the top 15 biggest mistakes people make when buying, or at least thinking about, annuities? In this blog I’ll explain the first five of the fifteen.
So here we go—number one. Swallow the food, not the sales pitch. A lot of you get invited to these bad chicken dinner seminars. Now they're like expensive steak dinners, high-level places you'd never go because the steak prices are crazy, but you get this invitation to hear about the travails of retirement and how to have market upside with no downside and, "It just sounds too good to be true, Stan." My advice to you, and the biggest mistake I see people doing out there, is they're not just swallowing the food; they’re swallowing the pitch as well. When you go to these, swallow the food, don't swallow the pitch, because the majority of the time, majority, the agent, advisor, master of the universe, the person up there that's providing this very, very expensive food, has one product that they're trying to sell you. They’re going to jam it down your throat, one-size-fits-all, regardless of what your needs, hopes, et cetera is. So number one, don't swallow the pitch when you go there. Just swallow the food. That's a big mistake. Don't swallow both.
Number two. Only buy an annuity for the contractual guarantee, not the hypothetical, theoretical, back-tested, projected hopeful sales pitch that you're going to hear. Just be smart. You got to be smarter than that. If you ask yourself, "You know what? I'm in Vegas. I don't know who the sucker at the table is. Who's the Rube at the table, at this poker table?" If you're asking that question, it's you. You don't want to be that.
You want to buy the contractual guarantees. Remember, annuities are contracts, okay? If you don't believe that, buy one from me, hopefully. You're going to get a policy in the mail, and you're going to go, "That policy looks like a contract." Because it is, buy the contractual guarantees. Buy an annuity for what it will do®, not what it might do®. The "might do" sounds great, but there's a better chance of me getting six-pack abdomen muscles, which by the way, is never going to happen. Okay, there's a better chance of that happening than you getting the dream scenario pitch that's being pitched to you. So remember, own an annuity for what it will do, not what it might do, and the "will do" are the contractual guarantees of that policy.
All right, the third mistake I see all the time is people buying annuities for market growth. Now, there are two types of annuities out there that are pitched for market growth. One is a variable annuity. I do not sell variable annuities because I don't sell anything that has the potential to go down in value. There's nothing against variable annuities, but a variable annuities, in essence, is mutual funds. The industry calls them separate accounts for whatever reason, but they're mutual funds wrapped in an insurance wrapper. The problem with that is you have a limited choice with those mutual funds, and in my opinion, if you have limited choices for market growth, then it's not market growth, right? And for variable annuities that have fees internally, some of those fees can be very, very, very high.
Fixed Annuities and Indexed Annuities
The other products sold for market growth, which is a joke, are Fixed Indexed Annuities, and indexed annuities. These are life insurance products that are fixed annuities issued at the State level; they’re not even securities. The word "market" should never be used with indexed annuities. They return CD-type returns. They have since their inception in 1995, but one of the biggest sales pitches you'll hear out there is "market upside with no downside" or "market participation with principal protection." If market returns with principal protection were true, then that's all whoever's running the Fed would buy. You have to be smarter than that. So the third biggest mistake I see with people with annuities is they are mistakingly buying them for market growth. If you want market growth, do not buy an annuity.
Okay, the fourth biggest mistake I see is people trying to time interest rates. Now, at the time of this taping, people can argue that interest rates are low or interest rates are high, depending on how you're looking at it. I think this is the new normal, but just remember this, when you're buying lifetime income, and that's Deferred Income Annuities, immediate annuities, Qualified Longevity Annuity Contracts, income riders, life expectancy, and mortality credits drive the income pricing. Interest rates play a secondary role. Interest rates play a secondary role. Interest rates play a secondary role. I hammer that three times because people always say, "Well, I'm just going to wait until interest rates rise, and then I'm going to buy my lifetime income stream annuity." Okay, if you're going to do that, you have to factor in the payments you missed while you were waiting to buy the income annuity at the perfect time, okay. Mortality credits and life expectancy are the driving factors for a lifetime income.
You cannot time interest rates. You can't even time interest rates with principal-protected products like Multi-Year Guarantee Snnuities or indexed annuities. Those are CD products. I would just tell you to ladder the maturities. In a MYGA situation, which is the annuity industry version of a fixed annuity, you could ladder a three-year, four-year, and five-year duration. You don't know where interest rates will go, and don't cavalierly say, "Well, they have to go up, Stan." Well, they've been saying that to me for the last six years. Interest rates could go down. I don't want them to. Interest rates could go to zero. I don't want them to. Interest rates could go negative. I don't want them to, but they can.
Let me give an example of people who call me all the time and say, "Hey, should I take income from my social security at 70 or 65?" There's no good answer to that because obviously, at age 70, it's higher. Why? Because your life expectancy is less, there are fewer payments, which means the payments are higher. So if you take it at 65, that's great, or if you take it at 70, that's great, but if you wait to 70 instead of taking it at 65, you have to factor in those 60 payments you missed, those 60 monthly payments you missed, and how long it's going to take for you to make up for that. So the fourth biggest mistake is saying, "Well, interest rates, I'm going to wait until interest rates..." right, trying to time interest rates.
You can't time interest rates. You can't beat the annuity company, and if you think you can, you can't. I don't care how good you are. You can't. Annuity companies have big buildings for reasons. Life insurance companies that issue annuities have big buildings for a reason. Why? Because they know when we're going to die and they price things accordingly, if the contractual guarantee looks good to you based primarily on your life expectancy and mortality credits for lifetime income and interest rates play a secondary role, then lock in those guarantees. So the fourth biggest mistake I see is people trying to time interest rates. I can't. You can't either.
The fifth biggest mistake that I see people make when buying annuities is believing the sales pitch, okay. I don't blame the carriers. The carriers do a good job putting out the products, putting out the contractual guarantees, then they hand those products out to the army of agents and advisors out there and they cannot oversee and police what those agents and advisors are saying, so a lot of times you'll hear a too-good-to-be-true sales pitch. You just cannot believe that sales pitch, okay, period.
What I would advise you to do is if you're getting a sales pitch that just sounds great and you're nudging your spouse and going, "That's great. Look at all this stuff. Upfront bonuses and all that stuff..." By the way, I call upfront bonuses "candy for the stupid." It's like buying a car for the stereo system and not the engine.
What you need to do, and the only, I guess, protection you have from a consumer standpoint to an agent or advisor's sales pitch to an annuity that sounds just really too good to be true and your radar goes off a little bit, is obviously you call me first, but if you don't want to do that and your brother-in-law is selling you the annuity, or your sister-in-law, then write down every single thing that they say, to the T, just as you understand it, as they presented it, as you think the product's going to work. Write it down and be very, very, very detailed and go point by point by point by point by point, however long it takes, and at the end when you say, "Okay, this is what I think that they're trying to sell me, this is what I think that they said, this is what I think that they promised," sign it and date it, flip the page around and have them, the selling agent and advisor, sign and date it as well.
Guess what? They're either telling the truth and they sign it or they're pushing the truth and they have to cross out a few things and clarify, and at that point in time you get up and just leave, period. But in essence, you have them. They've signed off on it, and if they don't sign off on it you've got your answer. But you need to think about that for a second. If it just sounds too good to be true, it is almost 100% of the time.
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.