In Cincinnati.com’s “Thinking more about the labor of money,” Nathan Bachrach and Ed Finke play it the conservative route when it comes to annuities. Many people think that using fixed annuities as your retirement vehicle is the best bet because they historically offer better returns than banks and your interest is fixed. There is very little risk when it comes to fixed annuities and that is just what many people are looking for, including the authors of this article. They say that because of their simplicity, fixed annuities are the best type of annuity in which to invest. This is definitely true for some people; those who are risk averse should not look at variable annuities and maybe not even at indexed annuities. But I think the authors discount the fact that there are many people who like more than fixed annuities and who appreciate some level of risk when there is a reward as well.
Insurance companies have had a tough time lately because of low interest rates. They have guaranteed fixed annuity rates to pay out, but are earning less interest on their investments. In order to keep their profits and commissions at the same levels, they have to lower interest rates for new annuities, stretch their yield in a different arena, or even increase complexity so it seems like their returns are better than they truly are. Obviously you don’t want to deal with a company using the last strategy, but the best insurance companies know how to deal with a low interest rate environment and change their course of action so that they can follow through on their guarantees.
The authors of this article warn readers to ‘stay away from complexity.’ There are definitely some annuities that should be avoided due to their complexity. But they refer to fixed equity indexed annuities as if they were all bad. I don’t believe that to be true because some of their offerings are worth the differences they have with traditional fixed annuities. Yes, most indexed annuities do have a cap, or a limit to how much extra interest you will earn based on increases in the market. What they fail to recognize is that you are still getting an increase in your interest, even if it is capped at a certain level. Fixed equity indexed annuities are good investments for many people, not everyone, but they are a good product. If you aren’t looking for any risk and you wish to have a conservative and simple investment, the authors are right, traditional fixed annuities are a good bet. But that doesn’t mean that other annuities aren’t good for anyone.
Written by Rachel Summit
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