Would You Risk Your Retirement Savings Over A Steak?

I recently received a postcard invitation to a nice local restaurant as part of a "retirement seminar". You may have found one of these invitations in your mailbox as well. The enticement of a nice steak dinner is alluring, but you really aren't sure what topics the talk will cover and your curiosity is piqued, so you decide to go.

When you get to the restaurant you notice that most of the other invitees are older. Most are already retired, which is odd since this is supposed to be about planning a retirement. Something just doesn't seem right, but you're getting a free meal so it's okay.

As the speaker begins his talk you realize that this is a sales talk. A woman walks around the room with an appointment book and when she gets to your table she asks when you would like to meet with the "planner". "And don't forget to bring any paperwork from your current financial professional."

The speaker tells the room how risky investments are, how global turmoil is going to get worse and basically the world is going to hell in a handbasket. He or she may even have a "team" of professionals, like attorneys and accountants who back the claims of the pending financial apocalypse. 

So what is this whole steak dinner getting you?

In a nutshell, what the whole presentation will boil down to is that you need an indexed annuity.  Or do you? But first, what is an annuity?

Annuities are products offered by insurance carriers in which you give them a lump sum of money and they promise to give you a stream of income, which usually takes place 5, 7 or 10 years later. I have maintained that all insurance products have a need with some people, but not all people need every product. An annuity is great for a certain segment of the population, but in truth, not everyone needs one and in a low-interest environment like we have now, it may not be worth it.

In a previous post entitled "CD's vs Annuities In A Low-Interest Environment", we examined the mechanics of an annuity and who should (or shouldn't) purchase one.  Let's take a nice easy example of how this works.

Let's use the example of a 55 year old person with $100,000 to invest.  In our scenario we will assume that the cap on the annuity is 6%.  That means that's the most the contract will earn in a given period, typically annually.  Using a formula called the rule of 72 we can determine that it would take 11.9 years to double the money.  So we have $200,000 at the age of 67.  At that point, we annuitize the contract (get a payout) of 5% or $10,000 a year for a lifetime. 

To get the original $100,000 back we're waiting another 10 years, which means the client is now 77 years old. Our client, on the best day, waits 22 years to break even!  And we haven't figured in the rate of inflation either.  

Unfortunately, the annuity contract with a 6% cap doesn't guarantee you that rate.  That's just the most it will pay if everything went perfectly, which we know isn't the way the world works.  In this environment, it's safer and smarter to go with either a short-term annuity and wait for interest rates to rise, or to look into a variable annuity with a much better potential for growth. Or put the money somewhere else altogether. 

I recently showed a few friends of mine this example. More than a few were disappointed in the numbers. Some said they could put the money in other investments like real estate and get better, not to mention quicker, returns. The low interest rates which affect the caps were the main issue. My informal survey did yield a consensus that an annuity would be a good fit for a very conservative person. 

My advice to people is that if you are interested in an annuity, never put more than 50% of your assets into it, as they have serious liquidity issues as well as a lot of built in fees and charges. 

Go ahead and enjoy the free dinner, but of course, call us before you make any decisions.

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!

The Issues With Annuities Part 2

In the previous post we discussed Fixed Indexed Annuities (FIA's) and how they work. The basic concept behind them is that you give the insurance company a lump sum of money and after a set number of years, usually 5, 7 or 10, the annuity will start giving you an income stream, typically 5% of the accrued value. Sounds good until you crunch the numbers as we did.

In this low interest rate environment, the caps (the most your annuity can earn) are very low as well. As I mentioned, there are people that this plan can still work for, but at this point I rarely make that recommendation to clients.

Why do so many other agents like selling annuities then? In a word, commissions. I'm not trying to throw any agents under the bus, but for example, if an agent moves $100k from a CD in a bank to an annuity, they can make anywhere from $5000 to $8000 in commissions. Not bad for basically doing some paperwork. And there are no health underwriting questions like life insurance.

Locally we have an agent who loves to sell annuities, mostly to seniors. I've seen his presentation and he weighs heavily on doom and gloom, telling his audience that the world is falling apart (which at the time of this post very well could be) and selling the "safety" of his annuities. At one point he brings out a miniature toilet and says something like, "Here's the sound of the economy!" while flushing it. In case you're wondering, he did this when the economy was booming as well.

And how does he get his audience? He invites them to a nice steak dinner, that's how. And while he's talking and scaring the crowd with his gloomy forecast his assistant walks around the room setting appointments for him. The prospects are told to bring any investment statements with them to the appointment and that's where the real fun begins.

A friend of mine worked down the hall from the agent's office and could overhear the conversations. My friend said that the clients, mostly retired, were told that their current investments were bad and that someone had "ripped them off". Of course the only cure for their problem was an annuity.

Among my peers and colleagues this kind of sales is frowned upon to say the least. High pressure of any sort, and especially to our seniors, makes our industry look bad. Luckily, the vast majority of agents know the difference between working for a client and sticking it to them. But a few bad apples...

In general terms, when should you NOT buy an annuity. Here are a few examples:

• If you are under 50. The IRS will assess a 10% penalty if you access the funds before 59 1/2. 
• If you are over 70. Given that the contracts can take anywhere between 5 and 12 years, do you want to tie your money up when you may need it?
• If you are going to need that money soon. Again, these products are illiquid and have a lot of surrender charges.
• If you are a risk taker or an aggressive investor. Annuities are for very conservative clients.

As I say, there is a place for all insurance products, but not every product is for everyone. If you have questions, please leave them in the comments section. Stay healthy and remember at Surf Financial Brokers, we only do #nopressureinsurance.

Chris Castanes is the president of Surf Financial Brokers, as well as a professional speaker helping sales people be more productive and efficient.

The Issues With Annuities Part 1

There's a lot of concern regarding the stock market right now. As the Coronavirus has slowed down production lines and factories, as well as the workers in those factories getting ill, the demand for services has come to a standstill. And if you watch commercials on the TV for different investment firms, you can easily get mixed messages on retirement products, especially annuities.

Since annuities are sold my insurance companies I thought I'd throw in my two cents on the matter. First and foremost, I want to say that there are hundreds of different insurance products out there, and each one has a need somewhere. With that said, annuities can be a good fit for some people, but to assume that everyone needs one is completely wrong.

Before I get into the weeds here we need to discuss the types of annuities.

• Fixed annuity - Much like a CD at a bank, they tell what kind of return you can get based on interest rates. You know what you're getting.
• Variable annuity -Sold by financial advisors, it has market risk and is much like a mutual fund. There are riders that can be added through some carriers, and those can cost extra.
• Fixed indexed annuity (FIA) - The most common type of annuity, the growth is based on an "index" of the market, usually based off of the S&P 500, but others are available. There's usually a "cap", which is the maximum return you can earn. The floor is zero, so if the stock market drops, you stay at zero instead of going negative.

Sticking with FIA's for this post, there are some points that need to be discussed.

• In this low interest rate environment, the caps on annuities are low, in the 6-8% range at the time of this post. If someone tells you that they have a 15% cap or higher, be very wary.
• These products are illiquid. Cashing them out can incur penalties and charges from the insurance company. 
• There is a tax penalty of 10% if you use the money before age 59 1/2. 

I knew an agent who would want to put every dime someone had in the bank in an annuity. Why? For the commission, of course! But if you want an annuity, I recommend committing no more than half of your retirement funds.

Let's look at an example using round numbers. Assuming that you are 50 years old and have $100,000 in a CD at the bank, we're going to see how long it takes to double your money as well as your distributions. There actually is a formula that shows how long it takes to double your money given an interest rate. This Rule of 72 says that if our cap is 6%  and the markets do well enough to return that each year, it would take 12 years to double your money to $200k.

At this point you are 62 years old. Now you can receive your distributions, which are 5%, so you're now receiving $10,000 each year. In 10 years, at age 72, you're going to break even. And that's if every goes just right. It took 22 years to get your money back. (Of course, there's inflation risk, but I'm trying to keep it simple)

As you can see, I'm not a huge fan. If and when interest rates go up, maybe the caps will improve, but for now, the only people I can see purchasing these products are going to be very conservative and risk adverse.

In the next post, I'll go over how some of these products are sold and why agents love to sell them.

In the meantime, stay healthy and feel free to let us know if you have questions.


Chris Castanes is the president of Surf Financial Brokers, as well as a professional speaker helping sales people be more productive and efficient.