Do Yourself a Favor:
Shop Carefully for an Annuity
Baby Boomers spend big on annuities – bigger, by far, than any previous generation.
Baby Boomers spend big on annuities – bigger, by far, than any previous generation. And the investments they make often are one of their biggest financial outlays ever, often second only to purchasing a home. So you might think they are careful shoppers and finicky buyers in a universe inundated with hundreds of choices.
Unfortunately, this simply isn’t true.
A shockingly large number of people don’t know what type of annuity they own and cannot make a good case as to why they bought the annuity they did. If asked, as likely as not they say they bought their particular annuity because a financial planner offered it to them and was convincing. Perhaps the annuity offered a bonus. Perhaps the buyer was familiar with the insurance company selling it, enhancing his or her comfort level.
Things are largely this way because most annuities are not so much bought as sold, commonly at sales presentations that dangle a free dinner and introduce a broker who promotes only one or two products. These are positioned as one-size-fits-all annuities, even though that is a myth. These annuities may be OK for part of the audience, but inherently they are never the best product available for any particular buyer. And annuities not sold at sales presentations are usually sold by financial advisers with whom the customer already has a relationship. Similarly, most of these advisers offer merely a handful of choices.
My Annuity Shopping Experience
I know this sales backdrop to be true based on personal experience, not only on reporting. I live in The Villages, FL, the largest retirement community in the United States and one inundated with many financial planning firms that sell annuities. In shopping for annuities in the past year, I didn’t talk with all of them, but I spoke with enough to know that I had to turn to the Internet to broaden my shopping if I wanted to buy truly good annuities fitting my particular needs..
My exploration started with Fidelity Investments, which has managed my money for decades. My financial adviser thought I might be interested in annuities, and I was. But he initially offered me only one – a joint venture product sold by Fidelity and Metropolitan Life – and I quickly sensed that it provided disappointing payments in comparison to the amount of money invested. The broker’s response? “This product is easy to understand. That’s why most people like it.”
No sale, I told him a few days later. Then the adviser did some homework and offered me a few different immediate annuities – annuities that take your principal but pay more and offer tax benefits. Ostensibly, at least, they are more attractive. In this case, though, the sacrifice of principal was a deal killer. What if something should happen later and I need that money?
My next step was to call a firm, Atlanta-based Ty J. Young, which aggressively advertises on TV that you can invest in stocks, capture much of the upside potential and never lose money. It turns out this is a type of annuity, and one you want to avoid, several independent experts told me.
Without going into detail, let’s just say that the “upside potential” is much too limited. This firm is a classic example of the outsized sales orientation of some annuity vendors. After I talked to Ty J. Young and received their promotional DVD, they called me. Then they called again. And again. And again. I started counting. Over 10 months – yes, 10 months –a firm representative called me 35 times. There was no talk about annuities in general and perhaps finding a good fit for me. There was talk only about buying their annuity.
Continuing my research, I joined other folks in The Villages and attended a free annuity sales dinner sponsored by another local financial planning firm.
This one focused not on a particular product but on a particular buying strategy – purchasing ladders of deferred annuities that kicked in at various points in time and, if properly executed, could provide greater income at a somewhat lower price, particularly if you took more of the income later in life. This strategy makes sense for some but not others. I wanted to cover my bases and so scheduled a meeting with the head of the firm after the presentation. An hour into our discussion, I still couldn’t understand the key points of the strategy. I know more about annuities now than I did then, but the presentation was unclear. I asked why this firm’s strategy was better than others; I received no reply.
Later, I scheduled a meeting with yet another firm. It criticized an annuity I had begun thinking about buying, saying it had run into some minor issues during The Great Recession and was not rated very highly. This firm didn’t sell that annuity. It suggested I consider an annuity that was rated lower that the one it criticized and recommended another offered by AIG — the insurance giant bailed out by the U.S. government last decade. Its problems were overblown, the firm said.
My annuity shopping journey ultimately ended well. Through the Internet, I found a solid, independent firm that did business nationally and had a huge inventory of annuities. It clearly explained the differences among them and why particular ones were best for me.
10 Annuity Buying Tips
To help you avoid the aggravation I encountered, here are 10 annuity shopping tips that can get you to the right place with far less trouble:
- Spring for $25 and buy “Annuities for Dummies,” by Kerry Pechter. It’s, easy-to-understand, comprehensive and an excellent resource.
- Know why you are buying an annuity. They make the most sense as a supplement to a traditional investment portfolio. If the stock market tanks during your retirement, you’ll be glad you own an annuity. The tradeoff is that annuities don’t have the liquidity of stocks and bonds.
- Make sure the benefits of the annuity fit your particular needs. If you are married, for example, you probably want a joint annuity, which means if one spouse dies, the other still receives lifetime income. Instead, many couples are sold single annuities. So if one spouse dies, the survivor gets only the residual cash value of the contract. Single annuities are often sold to couples without discussion because the payments are higher and seemingly more attractive.
- Shop for annuities with at least three financial planning firms and make sure one of them is an independent, full service adviser. An independent firm usually has a bigger inventory because it isn’t “captive” to an insurance company or a wire house and the limited selection of products they sell.
- To determine if an independent adviser fits the bill, ask if he sells securities – specifically, stocks and bonds, mutual funds and variable annuities. If he does, he is associated with a broker/dealer or is a registered investment adviser. Make sure any advisor you deal with has at least 10 years of experience.
- Don’t take information for granted. Ask financial advisers good questions and don’t accept all their answers at face value. Shop for annuities as you would shop for mutual funds, which have different strategies and managers, and while many buy the same stocks, they are purchased in varying quantities. Among the things differentiating annuities are features, benefits and so-called crediting methods. It pays to be knowledgeable about the range of options. In the end, most important is the size of the income stream when you begin withdrawals.
- Compare the major types of annuities – variable annuities, fixed annuities, fixed-indexed annuities, deferred annuities and immediate annuities – and once you decide which one you want, compare several choices in that sub-category. Make sure the salesman fully understands the annuity and backs up what he says with background documents and illustrations. If the salesman is dismissive, that is a red flag.
- Make sure you thoroughly understand the annuity fees. On a variable annuity, for example, a salesman will probably show you mortality and expense and so-called rider fees covering your expenses for an enhanced death benefit and/or income benefit. But he may not mention the fees you pay for the management of your sub accounts (mutual funds) within the annuity. It’s important to know this.
- Be familiar with the surrender fees you would face if you had to liquidate your annuity prematurely. Surrender fees range from 1 to 20 percent. (Some annuities offer zero surrender fees, but they charge higher fees for that.).
- When you zero in on an annuity, check the credit rating of the insurance company selling it. At minimum, go with an investment grade rating. At A.M. Best, the biggest annuity rater, that is B+. The other annuity rating agencies and their minimum investment grade rating is Standard & Poor’s (BBB-), Fitch Ratings (BBB-) and Moody’s Investor Service (Baa).