Take Another Look at Annuities
10/21/2011 7:00 am EST
Even though their fees have given them a bad reputation in recent years, everyone over 60 should still look at annuities as a great risk-management tool, says Jim Farrish of SectorExchange.com in this exclusive interview with MoneyShow.com.
Should people be looking at annuities, and why?
I think they always should look at annuities. Understand, I’m an advisor, so we don’t sell loaded products, we don’t deal with the commission inside of this. We look at it from the standpoint of the guarantees.
What are you going to get as far as a guarantee? With a fixed annuity, obviously you’re talking about guaranteed income at some point down the road.
People say, "I hate annuities…I hate them!" I say how can you hate them? Do you like Social Security? It’s an annuity. Do you like a pension? It’s an annuity. Those are annuity payments. They’re guaranteed income streams to you.
As we get older in life, let’s face it…I mean, I’m getting older. My hair, even though it doesn’t look like it, it’s getting a little gray. As I get older, even I think about I need some guaranteed income down the road. So I think they are viable.
On the other side, if you want to play the markets, tax-deferred growth and a variable annuity work extremely well as well.
Tell me the difference now between a fixed and a variable in this environment.
The most easy way to put it is that if you’re in a fixed annuity, you get a fixed rate of return. Let’s say it’s 2% in today’s marketplace, but that’s what you’re going to get.
It’s guaranteed, never goes down, works like a CD, and tax-deferred accumulation. Five, six, ten years down the road, you turn on the income stream and it’s guaranteed to you. You can’t outlive it. It’s guaranteed to your heirs if you die early, but it’s a guaranteed vehicle.
Variable annuity? Different animal, no guarantees. Now I know there are products out there that have them run. A variable annuity is for investing on a tax-deferred basis.
So there are companies out there that have no load, nothing to get in. You can take your money out 24 hours after you put it in, so no surrender charges. They charge a flat fee per month and that’s it. You can manage your money in the markets on a tax-deferred basis.
One of the biggest problems people in a market—let’s just say what happened from 2009 through 2011, where the market goes up 100%. Why don’t you want to sell it? Taxes, that’s one of the biggest reasons we hear. In a variable annuity, you can sell it, you get to defer accumulation until you actually spend it. So you can push it down the road.
So variable annuity gives you the market; fixed annuity gives you the guarantees.
Right now in this environment, people are just looking for any port in the storm, and that would be a fixed income?
I think anybody, if you’re…we tell people after you turn 60, you really should look or venture in this world. There is something out there that’s going to help you sleep at night. That’s the whole idea.
My whole theme is risk management. Sleep at night, put your money where…the last thing I should be thinking about is my family before I go to sleep, not my stock portfolio.
My favorite comment by Peter Lynch before he retired was the reason he decided to retire was when he started calling his kids Sallie Mae, Freddie Mac, and Fannie Mae. He decided that it was time to get out.
That’s it. Why do you think there’s such a resistance to annuities?
I think that they’ve gotten a bad name over the years. The commission component of it has been a big knock on them.
It’s a front-load commission, isn’t it?
Yes, big surrender charges, ten-year surrender charges, seven-year surrender charges. I don’t like them. I agree with everybody about that.
But stop looking at the negatives and look at what it does for you. It’s like if we worry about what can happen with our car, we’d never drive it. If we worried about everything around us, that fear factor again, falsely educated, it appears real to us.
Annuities are not a bad thing. You just have to do your homework.
It’s a risk management tool.
It’s a big risk management tool. That’s what we tell everybody. Everybody ought to have a guaranteed part of their portfolio.
There ought to be things where you can sleep at night. When the market falls 500 points in a day, as we’ve seen miraculously enough in the last couple of months, the last thing I want to think about is how much money I’ve lost.
I should be thinking about, what am I doing? Is it going to impact my retirement? Is it going to impact where I am down the road?
We tell people with 401(k) plans, part of yours should be in a stable value, fixed income-type environment, whether that’s bonds or fixed and guaranteed part of it. Even if you buy Treasuries.
I’ll bore you with a great story. I’ve got a client who has a lot of money, and let’s just say I told him: I said if you would have taken $2 million and bought a 20-year Treasury bond at 4%, which they were prior to this market crashing, that would guarantee you $80,000 a year for the rest of your life.
You’re telling me you can live on $60,000, so why do you want to invest in the stock market? I mean that kind of mentality.
It’s a no brainer.
I mean you just have to stop and change how you think.