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When Is An Annuity Like An El Camino?

Hal RenigerWritten By: H.A. Reniger, III, in Simi Valley, CA

Several weeks ago, after an expensive repair to our 1999 minivan, we decided it was time to look for a replacement.  We bought the minivan when it was new, and keep our cars for many years after they are paid off.

To my wife and me, buying a new car is like going to the dentist for a root canal, prepping for a colonoscopy, or buying an annuity: The emotional side of your brain wants to avoid the discomfort at all costs, while the intellectual side of your brain knows it is the right thing to do if all the conditions are right.

Our search began with several weeks of visiting car dealers and listening to the promises and doubletalk of the salespeople.  We narrowed the field down to two models after rejecting some as too expensive to maintain, others as too small or with poor visibility, and still others with gizmos that could break and be costly to maintain.

We settled on two models from two different manufacturers: The first car was my wife’s favorite.  It was a ‘popular’ brand; its interior was elegantly appointed and absolutely gorgeous, and, it was fairly priced according to the price guides.

Her emotional side fell in love with it the moment she saw it and drove it.

Then we did the serious research and discovered my wife’s favorite had several recalls for defects; and the electrical systems and computers were such disasters that the dealers could not fix them under warranty with any great sense of reliability.

Her emotional side was crushed.  Yet, she knew, intellectually, that she had to pass on the ‘popular’ one, even though the salesperson ‘promised’ her the problems had been fixed.  It was simply too good to be true, and the salesperson was trying to meet a sales quota at our expense.

During our ordeal, I realized that our experience of shopping for a car is not unlike what our clients must go through when they are looking for a financial advisor.

Most advisors they meet with are nothing more than used car salespeople with letters behind their last name; with a quota of products to sell, whether or not those products are appropriate.

While there are some good annuities and some not-so-good annuities, some of the good ones are sold to the wrong people, for the wrong reasons, which gives all annuities a bad reputation.

The reputation of annuities include ‘high fees and surrender charges’, ‘long surrender periods’, ‘difficult to get your money out’, ‘poor earnings’, etc.  All of which could be true – or not.  It depends on the circumstance of the purchase.

To use another car salesperson analogy, the Chevrolet El Camino is great for a city dweller who wants style and a comfortable ride while driving to the grocery store or the beach on the weekends.  It is worthless to the rancher who needs to haul hay or supplies to the cattle out on the range on a daily basis.

The salesperson who sells an El Camino to a rancher will give it a bad reputation because it is the wrong product for the wrong reason.  The El Camino is simply not designed to haul hay and supplies out to the cattle in the middle of nowhere on a daily basis.

The same is true with annuities:  Some are specifically designed to provide safety and a guaranteed lifetime income that can never be outlived, which may be appropriate for people nearing or in retirement.  Some annuities provide income for a specific period of time, then the income stops.

Other annuities are designed to accumulate money on a tax-deferred basis, and provide the ability to gain or lose in the financial market.  Different accumulation annuities guarantee you will never lose money in the market; while you may not make the same return as the risky one in an up market, you will never lose in a down market.

Still other annuities provide the owner with the tax-deferred flexibility to start and stop contributions or income for any reason.  And, there are annuities that permit you to ‘bail out’ and take your money without any penalties if renewal rates are below the initial projections.

In the appropriate setting, an annuity can be a great IRA for retirement. Or, it can be a great Estate Planning tool that can be programmed to dole out money to grandchildren on a regular basis instead of a lump sum that can be squandered.  And, when it comes to nasty divorces, an annuity can be the perfect vehicle to deliver alimony on a guaranteed basis.

In short, I realized that amid the hype of the ‘popular’ annuity products with pages of disclaimers, there are dozens of less sexy, but very appropriate annuity products for the right person and the right situation.

It all comes down to the advisor and the client.

Both should ask many questions of each-other to be sure the right product is being used for the appropriate situation.  And, it wouldn’t hurt to involve the clients’ CPA or Attorney in the conversation.

What counts is that if an annuity is recommended, it should be able to withstand review and inspection by everyone who has the best interest of the client at heart.

That way, you won’t be seeing any El Caminos in a cattle herd.  In the middle of nowhere…

About the Author: Henry A. (Hal) Reniger, III, is an independent Retirement and Estate Planning specialist. Proudly independent, Hal works for his clients, not an insurance company or a securities brokerage house.  Because Hal is independent, he is free to investigate and recommend any blend of strategies and services that best meet the needs of his clients.  Hal specializes in Retirement Plan Exit Strategies and Social Security Benefit Maximization, and, unlike many in the financial services industry, Hal stresses the importance of working with his clients’ accountant and attorney to create a well-balanced plan of action, for future retirement, estate tax management, or asset preservation.

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