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Annuities and You March 21, 2014

Posted by shaferfinancial in Finance, Uncategorized.
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No where in the financial services field are there more folks arguing about where to put your money than in the annuity/mutual fund market. Well known stock salesmen [Like Ken Fisher] put out all sorts of scary information about annuities in hopes that you will give him your money to invest. So I thought I would put out my thoughts.

Annuities have their place in peoples portfolio when there is not enough funds to withstand market downturns or when there are so much funds that a save return is all that is necessary to fund a comfortable retirement. In short, it is my belief that market risk [including sequence of return risk] is the most dangerous risk out there for folks and should be addressed in a rational way. Greed is a constant of human experience and Wall Street has been using that against us for a long time. Their claims, whether mutual fund returns or stock returns, are attractive to us. But what they don’t tell us is what really matters. That is, even under the best circumstances, the stock market is a very risky place to put money that you will need at a certain time. The closer we are to that time, the more risk there is. Of course, for most people their 40s and 50s is when they have the most disposable income to capture for retirement. These two facts collide to make a dangerous stew that has proven to be a poor recipe for retirement income.

Annuities have been recently redesigned to fit into this paradox. As you approach retirement, how do you shed market risk, still get decent returns, avoid sequence of return risk, and deliver lifetime income? There are two possibilities, life insurance contracts like EIULs and annuities. Of the two, only annuities are able to guarantee that lifetime income.

Are there costs to this? Of course. The costs are you leaving on the table some potential market gains in exchange for that market risk reduction. But, here is the fundamental truth, the vast majority of people are not mentally structured to deal with stock market risk and its huge downsides. Most people, at the very least, lose sleep when the market goes down 20% or 25% or even 45%. When we look at the data of individual investor behavior we see many, perhaps the majority of folks selling low and buying high. So most people aren’t able to take advantage of the possibility of better market returns in mutual funds or stocks.

Let me outline it for the reader:
1. Human behavior causes most people to make major mistakes in investing in the market
2. Sequence of return risk, even if they don’t make mistakes, can and probably will damage retirement income significantly
3. Annuities are designed to give good returns [sometimes guaranteed] and high annual income guaranteed for life.
4. As people age, they should significantly reduce risk on money to be used for retirement income.
5. Annuities and EIULs should be considered as part of the financial planning process because of the strategies employed in them reducing market risk.
6. Using insurance products for retirement income is a more conservative choice than using stock market products like mutual funds.
7. Current 401K levels prove the veracity of #1 through #6.

Yes, I am biased because I sell fixed index annuities and EIULs. But I could easily sell mutual funds and stocks if I wanted. But, I have been clear about the dangers of those financial strategies and refuse to go along with the easy way of simply selling what is popular. Follow the popular trend with mutual funds if you want, but you have been warned.

Contact me, I am always happy to talk to people. It makes my day~

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Comments»

1. Dennis & Kim Downey - March 22, 2014

Great info. It seems like annuities aren’t that popular anymore, but they really do serve a great purpose for the right people.


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