The National Association for Fixed Annuities’ response to some misinformed advice given by Dave Ramsey is brilliant. Someone wrote Mr. Ramsey asking for advice before purchasing a fixed annuity. Without knowing much about the reader, Mr. Ramsey of course bashed the prospect of the gentleman using a fixed annuity in any capacity in his financial planning. In The Daily Journal’s “A Response to a Dave Ramsey Column,” NAFA President & CEO Kim O’Brien offers some true advice and recommends speaking with an annuity expert before dismissing fixed annuities altogether.
There are strict disclosure and suitability laws put in place for the fixed annuity industry. In order to recommend a fixed annuity product to a client, banks and insurance companies must cover 13 areas of financial objectives to determine if the product is right for the individual. Some of the questions asked include the client’s age, total assets, risk tolerance, and tax situation. The National Association for Fixed Annuities knows that annuities are not the best products for every person and that no one annuity should make up an individual’s entire financial plan. But before making blanket statements about annuities, especially fixed annuities with guarantees, it’s crucial to know the entire financial situation of a client. Personal finances and retirement goals should be the determining factors when it comes to annuity consideration, not the personal bias of the financial expert.
Mr. Ramsey told the man questioning fixed annuities that his annuity would not survive if the economy “went down the tubes”. NAFA points out that in the economic collapses of the 80’s, 90’s, early 2000’s and most recently the Great Recession of 2008, the insurance industry was able to weather the storm. The mutual funds that Mr. Ramsey recommends invest money directly into the stock market, so with their potential gains you are also susceptible to losses. In 2008, almost every single stock market fund tracked by Morningstar lost money. But during the economic collapses just listed, everyone who owned fixed annuity products kept their money. No one lost money with fixed annuities because your premium and interest are guaranteed, regardless of what happens in the markets. It’s true that you have the potential for greater gains with mutual funds or variable annuities. But as we’ve seen, you have the potential for losses as well. These losses are not a concern with fixed annuity products.
NAFA’s President also pointed out that fixed annuities are not investments, as stated by Mr. Ramsey. Fixed annuities are guaranteed by insurance companies. You receive guaranteed lifetime income, guarantees against losing your money in stock market declines, and the guarantee that you will earn a minimum interest rate over the length of your contract. While annuities are not federally guaranteed, they are also backed by the state insurance department. Check with your state to see the amount of the state guaranty. A fixed annuity is not necessarily the right product for the gentleman who wrote in to Mr. Ramsey. But NAFA wanted to prove the point that no one has enough information to make that decision, not them or Mr. Ramsey. The only way to make that determination is by speaking with an annuity expert and giving them all of your personal information. That will help you see if the guarantees offered by a fixed annuity make the product right for you retirement portfolio.
Written by Rachel Summit