We last left you as Mr. Otter was passing the Mic to his colleague Ben Levisohn with the observation that annuities were now being bought more than sold, thus signifying a shift in the attitude of the consumer.
Mr. Levisohn is a deputy editor at Barron’s. He is a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg, and Business. A smart guy when he stays in his lane. He is about to move awkwardly out of his lane as he picks up the thread from Mr. Otter to discuss annuities, reading from notes all the while. Not exactly reassuring.
Ben replies to Jack, “It really has, and I think partially it’s because of the way people have been retiring has changed. We don’t get pensions and these things are insurance products and they pay you really pretty nicely, they give you an annual payout that stays the same until you pass away, and they have been hot. Right now, last year we had a surge of 23% to 312.8 billion of these were bought and sold. And it’s because they are offering very nice yields, 5.2% and that’s compared to about 4% on a 5-year Treasury. And so, you get this steady payout and that is very attractive, and it’s been helped by these higher rates from the Fed.”
Let’s stop here and examine what Ben has read from his notes. Agreed Ben. The way people retire has changed. Generally, however, they have not saved enough money to generate the income they need at inflation adjusted, relatively low fixed yields, so they end up chasing yield. But in doing so they take on massive market risk and many of them got clobbered last year. And, no, the market does not always come back. And when it does, getting back is always more difficult than falling. An extreme example will illustrate my point. If your portfolio drops 50 %, a 100% recovery will be required to get back to zero. That’s asking a lot. At a 20% drop, a 25% recovery will be required just to get back to zero. In these cases, there will be no net gain.
Ben cites the features of a SPIA, a single premium immediate annuity, but does not bother to identify them as such. Again, we do not recommend SPIAs in the current economic environment. He says, “they give you an annual payout that stays the same until you pass away…” Ben…most people who have SPIAs take monthly payments, not annual payments. Secondly, you mention only one settlement option, called life only. There are others you fail to mention such as Joint and Survivor, 10, 15 and 20 years certain, and the refund option. Incredibly, the one you do mention is the worst of the bunch. Under a life only option, the annuitant gets the highest payout because the risk to the insurance company is less than with the other options. And the fatal drawback for the life only option is that if the annuitant dies anytime after the contract is consummated all payments stop and the money you spent to buy the SPIA is gone, gone, gone. Here you are, Ben, worried about shadowy fees, yet you fail to point out this hazard.
My experience has been of late that the annuities that are “hot” are, in fact, deferred annuities and not SPIAs. Also, Ben, the current 5.2% rate you quote as a reason for annuities being “hot” does not explain the 23% surge in sales you also quote from 2022 when rates were incrementally much lower.
Ben continues: “You have to watch for fees; they can be very expensive. The Barron’s list—we had a top 100—look for ones with very low fees. You also have to remember that they’re tax deferred, so the money you put in you’re not paying taxes, so don’t put them in your IRA.”
Fees. Hmmm. Throughout the video no one mentions exactly what the fees are or what they are for. All we know is that anything but free is a fee and ought to be avoided as much as possible. I assume they mean commissions (which are paid by the company to the agent and are not a charge against the annuity contract), surrender charges (which only occur if the deferred annuity contract is surrendered before the agreed upon term of the contract, usually 5,7, or 10 years), and rider fees which can be avoided all together by not having any riders on the contract (we do not recommend riders). On Variable Annuities there are management fees from 2% to 4% depending on the separate accounts you choose within the contract, but none of this is ever mentioned until the final seconds of the show. So much for “fees”.
The, I must say, most ignorant thing said about annuities in the entire video is Ben saying, “so don’t put them in your IRA”. Absolutely astounding. That is precisely where they belong, and it is where most retirees 401ks and traditional investment portfolio IRA funds belong—in a Fixed Indexed Annuity safely tucked into an IRA.
The fact that annuities are tax deferred is a consequence of the IRS code and is not a feature for which there is any charge or fee. It is inherent in the contract. IRA, 401k, or pension money, also known as Qualified money, can be transferred, rolled over, or 1035 exchange (similar to a 1031 exchange in real estate) with no taxable event occurring.
Ben continues: “I think the best way to think about these is as a supplement to your social security. If you have payments to make on your house or on your car and things like that, that’s a great way to make sure you have an income to pay for it and you can let the rest of your investments do what they need to do.” What those investments need to do is grow, but without the massive market risk retirees assume at their peril. Fixed Indexed Annuities offer upside gains if and when they occur while guaranteeing your principal (which is on your balance sheet and not consumed by the Insurance company as in SPIAs) against any market loss. Note that nowhere throughout the entire video are Fixed Indexed Annuities mentioned.
Here, Ben is again talking about SPIAs even though he fails to mention so. And he has reduced annuities to the roll of a sinking fund out of which to pay one’s fixed costs of living; as he says, a supplement to Social Security payments. But even Social Security payments have an annual cost of living adjustment. SPIAs do not. Why would, for example, a 65-year-old widow spend her, say, $500,000 to buy a fixed income flow for life only to have it consumed, in the case of a life only option, the minute she passes? Or alternatively, what advantage would be had by collecting a fixed payment when she is 90 in 2048 in 2023 dollars when those dollars may be worth one half, perhaps, of what they are today? Madness! Remember, when you buy a SPIA you have spent your money in exchange for a cash flow. The insurance company now owns your money, and you own a cash flow. DO NOT DO THIS!
To be continued…
