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  • Fixed Annuities: Everything Old is New Again

    December 31, 2009 by Jon Greenberg

    By Jon Greenberg on Tuesday, September 15, 2009.

    When stocks tumbled at the end of 2008, it made a lot of casual investors gun shy. They discovered that their appetite for risk was lower than they had thought. The market being what it is, there were people ready to make a buck to meet the needs of the newly cautious.

    NHPR’s Jon Greenberg reports.

    Bill Meyers is feeling a little guilty these days. He runs Meyers Financial in Concord.

    Meyers: I hate to say that I’m profiting from the country’s misfortune but it really has been a motivating factor in a lot of peoples’ situation, looking at their portfolio.

    The sign outside Meyer’s door reads Safe Money Solutions and he’s been selling safety in the form of an instrument that has been around for many decades.

    Meyers: I’m referring to fixed annuities. Plain vanilla, boring as all get out, fixed annuities.

    With this kind of an annuity, you give an insurance company your money and the company agrees to pay you a certain amount on a regular basis. The interest rate is known, in the neighborhood of 4%, and so long as the insurance company remains solvent, there’s very little risk. In addition to relative safety, annuities also come with certain tax breaks that pay off when you retire.

    Meyers says 75% of his clients these days are shell shocked investors on the cusp of or already in retirement. It’s been easier for him to sell them annuities because the insurance companies have been competing. They’re giving bonuses to new customers who buy certain types of fixed annuities.

    MEYERS: Bonuses can be as high as 11 percent. Now if they’ve lost 40% in the market, obviously it doesn’t get it all, but it goes quite a ways to recouping some of that.

    Meyers doesn’t steer everyone to annuities and he tells all his clients to keep some money at risk in the stock market. But it’s clear where a lot of money is going. According to the trade group, life insurance and market research association, fixed annuity sales are up nearly 40% from this time last year – over 62 billion dollars worth.

    LONGO: There is still quite a bit of money that was taken out of stocks and has not found its way back in.

    John Longo is associate professor of finance at Rutgers Business School. Longo says the growth of fixed annuities, not to be confused with variable annuities which are riskier and come with much higher fees, reflects a psychological shift that could last a while.

    LONGO: We’re seeing people who have been burned and they’re not yet willing to go back into the water. And this usually takes several years. I’m not willing to say it will take a decade but we’ve certainly seen an increase in the risk aversion of consumers.

    Longo says this mind set involves enough dollars that it’s likely to put a brake on growth in the stock market. But he says nothing is risk free. The big problem with fixed annuities is that they are — fixed. Longo warns, if inflation begins to rise, the returns on that annuity could be worth a whole lot less than you thought.

    For NHPR News, I’m Jon Greenberg.

    Originally Posted at NHPR on September 15, 2009 by Jon Greenberg.

    Categories: Positive Media
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