Don’t Compare Annuities to Unlike Products

Andrea Coombes talks about the “3 annuity mistakes to avoid” in her article for Marketwatch from The Wall Street Journal.  Misunderstandings from advisors and investors alike keep them from using annuity products in their retirement planning.  Deferred and immediate annuities can really be a great addition to many retirement plans, so Coombes summarized the three main mistakes being made.  This is according to a recent panel of experts put together by Marketwatch Retirement Adviser.

First of all, too many people compare annuities with unlike products.  Variable deferred annuities have a lot to offer retirees, despite their higher fees.  If you compare only the fees to the fees of a traditional investment, your annuity might not look like the best choice.  What you need to do is compare the benefits you are receiving for those fees, benefits that you wouldn’t get with most other investments.  Annuities are insurance products.  They insure you against the risk of outliving your money.  And while most insurance products don’t “pay off” when you look at how much you pay in versus how much you receive out, you should be taking risk-management into more consideration than return management when looking at annuities.

It wasn’t too long ago that people really didn’t even need to consider outliving their assets in retirement because of pensions and other retirement plans.  The viewpoint of the public and of financial advisors needs to shift more as it becomes ever important to protect against longevity risk.  Saving for retirement has been a big topic of discussion, but in addition to that we need more talk about turning that money into a lifetime stream of income that cannot be outlived.

The second mistake that people make is having a focus on the annuity returns.  The panel pointed out that getting a huge return on your annuity product is not the point of purchasing an annuity.  It’s true that low interest rates transfer to low rates for annuity products, but that doesn’t mean that everyone should put off buying an annuity until interest rates are higher.  The point of an annuity is more about having a guaranteed income stream coming in throughout your retirement.  It’s a nice bonus if interest rates are high overall, but that shouldn’t make or break your decision about buying an annuity.

Mortality credits are also important to consider when you are comparing annuities.  When a large group of people pool their money together with an insurance company, some will die early while others will live a long time.  As with social security benefits, others’ money is used to make the payments for those still around.  This is a good benefit and is something to remember as a benefit to annuities.  Even if interest rates are currently low, the only thing that matters is your life expectancy when you are in your 80’s and above.  Mortality credits give you a benefit that you can’t achieve by investing by yourself in something.

Finally, the third mistake most commonly made is simply not annuitizing any of your savings.  By using outdated data, people assume they can draw down from their savings and live a comfortable life.  New studies show that annuitizing part of your retirement savings greatly reduces the risk that you will outlive your portfolio.  Using part of your portfolio to purchase an annuity and guarantee a stream of income to last your lifetime is something that is oddly overlooked when people are retirement planning.  Maybe an annuity is right for you, maybe it isn’t.  But when researching the products, make sure your comparisons are fair and that you take these often overlooked things into account.

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