My personal life consists of three things: family, pickleball, and orchids. I guess I could also throw in my sweet puppy, Penny.
Wherever you go to play pickleball, the courts are designated based on skill level. You can play on the beginning, intermediate, and advanced level courts. I am happy to announce that my wife, Dalanee, has moved up to advanced. In our house, that is very exciting. You wouldn't believe how addicted people get to this sport. I play with many people who play 2-4 hours daily.
Right now, I have sixty-five orchids in bloom out of over 200. I'm at a point where I am very exact with my watering, fertilization, temperature, and light. Every kind of orchid has different requirements, and some species are especially easy to kill. Orchids are very tough plants, but if you really want them to thrive, they have very specific needs.
My wife and I went to an orchid sale on my birthday, where she found a unicorn (this is a one-of-a-kind unique find). The picture above is of Dalanee and I shopping.
With the present market volatility, annuity salesmen are out in full force. They take advantage of people like you, using fear as their main selling point. During scary times, they know that their message will get more attention.
Recently, I’ve had a few clients move their money into annuities, which is upsetting. It's time to set the record straight.
They are moving their money from a diversified portfolio of stocks and bonds- a powerful, long-term growth strategy- to a far inferior product. Moving money into annuities will cost them considerable gains over time.
I’ve heard the same pitch over and over. Maybe you have, too.
"You don’t want to lose all your money, do you?" they say. "This could be another 2008. Back then, people lost all of their money. You are retired now. Are you willing to take that much risk?" By the way, stocks recovered very quickly after 2008.
"Don’t you want guarantees on your money? We can offer guarantees!" they proclaim.
It sounds great, right? Who doesn’t want guarantees on their money?
But the devil is in the details.
These products can only be sold by brokers, not fiduciaries such as myself. Brokers get paid commissions. Fiduciaries do not. Brokers can put you into products if they are loosely suitable for your situation. Fiduciaries are bound by law to put your interests ahead of their own.
The commissions on annuities are high. Usually around 7%. That’s right. If you put $100,000 into an annuity, the salesman receives $7,000 in compensation—no wonder they give you such a hard sell.
Brokers are also notorious for churning accounts. This means they move people from one annuity to another to get paid repeatedly.
Annuities come in all kinds of flavors, sizes, and colors. I would argue that annuities are the most complicated product on the consumer financial market. I’m going to make this as simple as possible.
The definition of a pure annuity is actually pretty straightforward. An annuity is a contract that guarantees you a set amount of money each month for the rest of your life.
Social Security is an excellent example of an annuity. The federal government guarantees you a check for the rest of your life. Once you die, the checks stop. That is the very definition of an annuity. A teacher’s pension is another example of an annuity.
However, the financial industry likes to take straightforward concepts and make them incredibly complex.
The most common types of annuities being peddled right now are variable annuities and equity-indexed annuities.
Variable annuities are complicated products that allow you to invest in variable accounts — similar to mutual funds. A variable annuity guarantees a certain monthly income while still investing your money in the markets. The prospectuses for these things are hundreds of pages long.
Variable annuities have significantly higher fees than index funds and exchange-traded funds. When I say "more," it is pretty extreme. The low-cost funds I use charge an average annual fee of 0.1%. Variable annuities charge fees anywhere from 3-4%. That’s right. Annuity fees are thirty to forty times more expensive.
Insurance companies make huge profits from this vehicle, and consumers get minimal benefits if anything at all.
Equity-indexed annuities are a hot topic, as I see them being sold at nearly every "free" steak dinner seminar in town. The sales pitch is: you can’t lose any money if the stock market goes down, and if the stock market goes up, you get some of the gains.
They don’t tell you that while you won’t lose any money if the markets go down, you are very limited in how much you make if the market goes up.
This year, the S&P is up 17%. Most equity-indexed annuity holders will make between 0-3%. Doesn’t sound as good. Sure, you can't lose any money, but at what cost? Just put the money in a CD. You'll get more guaranteed interest over time, and they are much more flexible.
Here are some more things you should know about annuities before deciding.
Annuities are taxed in a relatively inefficient manner. All growth in an annuity is taxed as regular income. Generally speaking, income taxes are higher than capital gains rates. An increase in stock price is taxed as a capital gain.
Want some money out of your annuity? Not so fast. Most annuities charge you a significant penalty if you take over 10% of your money annually. Most penalty periods can last anywhere from 5 to 15 years. Penalties for withdrawals over 9% are common. In other words, once you buy an annuity, you’re stuck.
If you've had an annuity for a while and it no longer has a surrender penalty, it might make sense to look at other options. The people I've helped move these things have been happy with their decision.
You must be at least 59-½ to withdraw money from an annuity, or the IRS assesses a 10% penalty.
So what do you do if you are pitched an annuity at a free steak dinner? Be wary, chew your food, and take your time. Of all the annuity owners I’ve met, few, if any, understand them. Try not to listen to the hype.
I can’t help but go back to the fact that a diversified portfolio of stocks and bonds has unparalleled historical success. Why reinvent the wheel? Why make something more complicated than it needs to be?
Feel free to get your steak, but pass on their offer.