Why the Motley Fool needs to be schooled on retirement income
March 11, 2015 by Kevin Startt
As a Motley Fool subscriber and part-time admirer, I have to admit that I was a little disappointed at their recent hosing of Tony Robbin’s new book, “Money: Master the Game.” Robbin’s first book effort in nearly 20 years shows why we are both getting old. We will never be tried by a jury of our peers because soon there will be none. The ones that remain, however, should realize that indexed annuities are a good solid way for the right client to create a personal pension or as a bond substitute. In our industry’s case, the peers are older than ever and continue to grumble about the viability of indexed annuities in a diversified savings and investment portfolio.
Meanwhile, brokerage giant UBS rushes out to join the rest of the wirehouse sales forces, who are frantically training their reps to offer this income-for-life solution for retiring baby boomers. The Department of Labor is also escalating efforts to include income annuities in defined contribution retirement plans.
I was blessed to spend half of the last 36 years on the bank and wirehouse side, much of it internally running sales forces, and recruiting and designing products. I know from board-level positions how laughable it is to see mutual fund families and stock analysts design entire marketing campaigns around rolling performance numbers and gimmicks to attract inflows. These shenanigans right around St. Patty’s day always give me a sense of appreciation for not only the reason behind the first four letters of the word “analyst,” but also why figures lie and liars figure.
I am just as embarrassed, in turn, by how the life and annuity business-builders play games with illustrations, dividends and caps on everything from whole life to fixed indexed universal life. So what is Mr. Self-help Tony Robbins up to that would cause Motley Fool to declare index annuities the scourge of the earth and be so dastardly?
There is no doubt that the opportunity cost of not being fully invested in the current fourth-longest bull market in history makes the upside potential of an indexed annuity seem inconsequential relative to the full return of the S&P 500, especially with cap rates stuck in an annual point-to-point range of 3 percent to 5 percent for the last three years. That’s not why savers are pouring tens of billions per annum into FIAs, however, as Motley Fool conveniently overlooks.
Annuity savers buy for two simple reasons: peace of mind and the comfort of knowing that they cannot outlive their income. Investors buy Motley Fool recommendations from their court-jesting crew of crack analysts for a simple reason: They want to grow their money to assure a reasonable return over the cost of future living. That’s why investors subscribe to find out whether dozens of lawsuits will impact the chip-maker for Apple Watches, or if a contrarian bet means payday for speculators when we are wearing Tim Cook t-shirts with two Apple Watches on our hands and feet to check calorie counts from head to toe.
Motley Fool fails to point out differing motivations for the two contrasting options available to savers and investors. One — the annuity — is a savings vehicle, and the other one — stock — is an investing vehicle. While Motley Fool is beating up indexed annuities and therefore indexed life about their opportunity costs in a roaring bull market, they fail to point out two additional calculated reasons why some investors may opt to have a portion of their investments in indexed annuities.
While the Fool is talking about how much investors would have lost in opportunity cost through not being invested in stocks the last six years, they fail to emphasize that bonds have outperformed stocks for the last 30 years, according to Barclays, and that because rates are so low, one or two small steps for the Fed to increase rates could set conservative bond investors back with losses more than any other bear market for bonds since the Civil War.
One could look at the low-yielding Japanese bond market in February 2015 and see that a 60 basis point move in Japanese rates upward caused the Japanese 10-year note to drop 6 percent in one week, according to Barclays. FIAs make a good bond substitute.
Maybe Tony Robbins and I do burn the midnight oil until 9:00 p.m. now, but his two chapters on indexed annuities explain why safety and lifetime income as a pension alternative to stocks and bonds will not be burned over the next decade.