By KAREN HUBEJune 20, 2015Fixed-income annuities have never paid out so little, and yet had so much appeal. These annuities, which provide a lifetime of guaranteed income, are paying out 12% less, on average, than in 2011, and 25% less than in 2007. And yet sales jumped 17% last year, to their highest level in five years.
Source: The Best Annuities – Barron’s
The writer’s perspective: “It’s no wonder that with interest rates at such miserly levels, the enthusiasm for annuities has been rising. I’ve had a client and even some prospects mention them to me lately asking my opinion. Candidly I have never thought too much about annuities in recent years. The last time I was insurance licensed and could sell them, I never did because they were such poor long term investments for my clients. The only clients in my book that were suitable were NFL players who would be best served by almost anything that kept them away from their own money. The temptation to blow a quickly and newly gained fortune is pretty overwhelming for young financially illiterate ball players. Seasoned investors though should know better.
So I read this article wondering if the product had changed in ways that benefited the customer. I have to admit, this article gave me no answers because as always the devil is in the details with these products and there were very few details in this article. I would urger readers though to read the comments on the Barron’s article.. I extracted a few below. It reminds me of reading books about how to play table games at Vegas. Yes there are some games that have better odds than others but make no mistake, the House always prevails. This is precisely the way I feel about insurance companies and annuities.
”
Jeffrey Harris wrote:
I like to think that I am a pretty intelligent guy. I earned a Ph.D. in psychology and completed many statistics courses. And, nevertheless, I can never fathom annuities. The instruments always seem like “hocus-pocus” or like a shell-game. It always appears as if the “small-print” is so inscrutable that you are forced to rely upon “the translation” to be offered by your sales person (who of course “has your best interests at heart”). In the end, — I walk away and conclude that I’d rather manage my own portfolio, re-balance when necessary and pay close attention to inevitable changes in long and short term interest rates. In the end I conclude that annuities are structured to ensure the advantage for the insurer and not the purchaser. It’s like you’re being asked to step up to the craps table and someone is going to assure you that you will be a winner! It rarely works in Vegas and I suspect it will rarely work in your bank account.
William Dwyer replied:
Well said, Jeff!
Herman Unanski replied:
Right on Jeffrey. The slogan for annuities is “Never give a sucker an even break!!!” From Nathan Detroit, a top annuity salesman.
Lee Roggenburg wrote:
Jeffrey, not everyone has your risk tolerance nor your investment savvy. Sweeping generalizations against annuities are just as bad as sweeping generalizations in their favor.
Bill Greenstein replied:
Jeffrey is correct. Unless and until insurers make these products much more transparent, they will keep the lousy reputation they well deserve. Like Jeffrey, I have a high degree of investment knowledge, read incessantly on the subject and absolutely cannot decipher the annuity products. And, like him, basically, I have given up trying.
Frank Pecarich wrote:
“Clearly, there’s a caveat. With a Treasury bond, you collect the yield while you own the bond, and your initial investment is returned at maturity. With an annuity, your initial investment, or premium, is returned through your annual payouts.” End of story…
Marc Feldman wrote:
And with annuities you pay Taxes, mostly front-loaded, on return of your Own money.. after waiting for years!
This is NOT pure ‘return’ of a stated percent. If you’re in a high bracket, it’s ridiculous.
One is better off buying a Bond Fund, or Muni bond fund and immediately getting tax free money.
Dennis Barnes replied:
Not true. You pay tax only on the portion attributable to earnings on the original fund, not on your original investment. All perfectly equitable.
Ben Lucas wrote:
The math does not seem to work here for annuities (Did I calculate it wrong?):
Without earning any interests and at 5% payout rate, a 65-year-old retiree would JUST get his/her own money back by age 85, above the same age of life expectancy.
Assuming just earning 2.3% 10-year Treasury and at the same 5% payout rate, it would take 27 years (at age 92) to consume all the money.
Additionally, most annuities are not indexed to inflation, 5% today may be worth only 2% 20 years later. Can any one live with a 2% annual income during your life time?
Michael Cooper wrote:
Ben,
Your calculations are right on. Annuities are designed to reward the Insurance company over the long term, the seller with a high commission and take advantage of unsophisticated buyers. That this article appears in Barron’s is another example of the decline of the editorial efforts of this publication.
Herman Unanski wrote:
You have to have rocks in your head to buy an annuity. The only people who profit from an annuity sale are the salesman and the company who sells it to you!!! Ever hear of Baldwin United or Metropolitan Life, annuity companies that FAILED!!!
M B Blum wrote:
This author has written about annuities in the past and was treated with skepticism by readers then. Could it be that Barron’s continues to produce this type of material by an uncritically thinking author such as this one because it’s target audience is the seller of these annuities not the buyer?
In the fixed income portion of this column the author writes: “Mathematically speaking, investors would come out ahead if they replaced their entire fixed-income investment portfolio with income annuities, Pfau says”, where Pfau is the name of a professor of retirement income at the American College. Either the professor was quoted out of context or the author was not sufficiently knowledgeable to be writing on this subject to know that the professor is incorrect. It behooves Barron’s to get the author to respond to some of these comments because it seems the author has failed in her job to keep Barron’s readers accurately informed.