Written By: Jeremy Smith at Amerishield
I just finished reading a blogged article titled “What is the Right Age to Buy an Annuity?” In this article the author hypothesized that fixed or indexed annuities need to be held for the length of the contract in order to realize the full opportunity for growth. I strenuously disagree. He also explained that in many of the policies there is a penalty for withdrawing more than the allowed amount during the contract period. In some cases this can be fact. Furthermore, the following statement was made:
“We have all heard the phrase “time is money”. This applies to the idea of a younger clientele investing in an annuity. Although annuities have guaranteed return of premium, they also hold you back from potential gains. Over an elongated time span, this could prove to lose an annuitant hundreds of thousands of dollars. If you invest $5,000 over a 40 year span, say you purchased an annuity that turned out to give you an 8% rate of return on your money annually. Your investment would now be $109,000. Say you invest in a stock or bond instead, which ends up getting you a 10% rate of return annually. In that same 40 year time span, you will have $227,000. It’s better to be aggressive early, because you have time to make up for your losses.”
By this author stating “it’s better to be aggressive early”, he is conforming to a very archaic opinion of the market. According to Matt Krantz of USA Today “the rule of thumb that stocks return 10% a year was gospel. Now it’s considered heresy.” The author also blatantly ignores the fact the most annuity owners move their money once the contract period has ended. Many annuity owners, once their contract has been fulfilled, will purchase yet another annuity in order to take advantage of new and innovative features that have been introduced since they purchased their original annuity. It is extremely rare (and fairly short sighted) for an individual to maintain the same annuity for 40 years. If that were the norm then I guess you could say that this author may have a point.
According to LIMRA, the world’s foremost authority on insurance research, less than 6% of annuity owners annuitize their annuity in order to receive an income of some sort. That means the majority of the other 94% of annuity owners do one of the following:
• move their funds to a different annuity that meets their current objectives
• move their funds to another savings vehicle that meets their current objectives
• continue to hold the annuity after it has passed its contract period because the annuity continues to meet their current objectives
Another major point that this author neglects to address is the fact that a fixed or indexed annuity is not capable of losing money in a down market year. This is, of course, not the case with money that is invested directly in the stock market. One thing that people tend to overlook is, for example, if the market drops 10% over the course of a year, then any money invested in the market will have to gain 11.12% in the following year just to get back to even. If the market were to drop 20% in this same scenario then that money would need a rate of return of 25% in the following year to recover from the losses.
The last point I will touch on is an annuities ability to reset annually. If the indexed market goes down, the annuity client will may receive a zero rate of return for that year. At the outset this may look like a bad situation; however, the annuity client has not lost any of their account value where the stock market investor most likely has. This is where the annual reset has considerable value. Since the index dropped in the previous year it will also start at a lower point for the upcoming year. The annuity owner now has the benefit of using a deflated index “start point” for the upcoming year which provides for much greater upside potential. This will allow the annuity owner to capture the index growth on the following year while the market investor may simply be recovering their losses.
It is my opinion that the right age to purchase an annuity is the age at which one realizes that it is more important to maintain steady growth and avoid losses than it is let obsolete opinions and greed light their path. I was just trying to remember who it was that won that proverbial race, was it the tortoise or the hare?
*AmeriShield agents discuss your complete insurance and risk tolerance as well as your goals for retirement and what you plan for your insurance products to do for you and your family before we discuss any products with you. We fully educate you on the differences in the types of fixed and indexed annuities that meet your specific situation and offer you “The Power of Choice” to achieve your goals.