In response to Jane Bryant Quinn
November 14, 2017 by Stephen Kelly
Recently, Jane Bryant Quinn wrote a column for the AARP Magazine and website trashing fixed index annuities. While many of the points Quinn states are in fact accurate, that doesn’t make them true. Accuracy and truth are not automatically one and the same. In fact, accuracy can be used to twist the truth and support complete falsehoods. We’ve seen it thousands of times in our politics. People on both sides of the aisle taking comments from the opposition out of context, packaging them convincingly in a provocative ad, often juxtaposed with an unrelated image, accurate but false; facts without truth, spreading lies and causing significant damage.
I don’t have enough space in this column to address everything she said, so I will just tackle a couple. If you want the full story, you can read it online at fmgblog.com.
To begin, Quinn states, “You buy the annuity with a lump sum, which goes into the insurer’s general fund.” So far so good, however, after that many of her claims are empty:
Low returns. First, it’s important to understand these are not securities. When compared to the market, 3-4 percent does indeed sound low. However, FIAs are safe-money insurance products. She said it herself, you buy the annuity and your money goes into the general fund of the insurance company. The same general fund that every dime of fixed annuities, whole life, universal life, etc., goes into. These general funds are managed for safety, growth, and stability.
Better yet, no one other than policyholders has claim on this money. No one, be it creditors, stockholders, or even the IRS may dislodge your preeminent claim on this money, making it incredibly secure.
Typically, insurance companies make their money by taking about two percent a year on the total value of their general fund holdings. In this low-interest rate environment, the general fund yields around 5 percent.
The insurance company deducts the first two and that leaves three to pay the policyholders. So, 3 percent payout from a very safe treasury or CD equivalent. That sounds like pretty high returns to me. Where else can you purchase a CD or treasury and make 3 percent?
High fees. This is another red herring. Mutual funds, 401ks, REITs, variable annuities; these have high fees; fees that are deducted from your accounts every year; fees that reduce your return significantly (up to 80 percent if you believe Jack Bogle, the founder of Vanguard) but don’t buy you anything. Annuities have commissions. One way to distinguish between commissions and fees is commissions are typically paid by the seller, whereas fees are paid by the buyer or recipient of the service.
Agents are paid a commission by an insurance company. That commission is built into the pricing of the product and comes out of the 2 percent the insurance company takes off the top. If you stay in the contract, you won’t pay the commission, the insurance company does. If you should get out early, you will have surrender charges that will cover those costs. And yes, they can amount to as much as 5-7 percent, one time, for the duration of the contracts, which often last several decades.
However, the fees you pay on mutual funds and the like come out of your pocket every year, year after year after year. And not just on the initial deposit like with an annuity. No, those fees are based on the full value. So, if you lose money, you will pay fees, but if you make money, you will pay even more. Over a 10-year period, a mutual fund could cost as much as 20 percent or even 30 percent of the initial deposit, as opposed to the 5 percent to 7 percent commission paid on an annuity by a third party.
Lifetime benefits. Quinn derides the lifetime payout of FIAs, however, the most serious problem most people have with retirement planning is not knowing how long to plan for.
Because of that, market-based planners have traditionally advised limiting your payouts to around 4 percent to avoid running out of money. Over the past decade, that’s been reduced to 3 percent. If you have $500,000 saved, you would only be able to get $15,000 to $20,000 in starting income.
Insurance companies do the calculation differently, based not on returns, but life expectancy. Think of fire insurance. If you were to have to save enough to replace your home, most of us would never get there because we are dealing with only one house. However, by pooling the risk with many other people, we can drastically reduce the cost of paying for our home in the event of a catastrophe.
Quinn takes issue with the fee charged for the guaranteed lifetime benefit, representing it as a fee the insurance company keeps. This is flat-out false. With a traditional immediate or fixed annuity, lifetime income requires you to give up control of your money.
In the above example, this would mean risking the full $500,000. If you live a long time, great, you win. But if you die earlier, both you and your beneficiaries lose. An FIA does not do this; it gives you your money back should you die before it runs out. But that means there is no money for those who do live longer, hence the fee. The fee is not charged to enrich the insurance company, it is to protect your beneficiaries!
There is a lot more you should know before making a decision about these products. You can find my full rebuttal on fmgblog.com.
Stephen Kelley can be heard, along with his co-host Mark Perkins, on the Free-to-Retire Radio Hour on Saturday at 7 a.m. on 610 WGIR and Sunday at 12 p.m. on 980 WCAP. Steve conducts workshops on Maximizing Social Security and The Other 60 percent – More Now, More Later. He is the author of several books, his latest ones being “Ready-Set-Retire” and “Tell Me When You’re Going to Die and I’ll Show You How Well You Can Afford to Live.” His financial planning practice, Safety First Financial Planners is located at 33 Main St. in Nashua. He can be reached at 603-881-8811.
Read more: http://www.lowellsun.com/news/ci_31448045/response-jane-bryant-quinn#ixzz4yQmYxZ5D