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Thursday, June 30, 2011

Finally, A Financial Publisher with a Positive Spin on Annuities- Barron's

Go to this link to read for yourself a very intelligent (finally) appraisal of annuities, oddly enough, in the financial press:  http://webreprints.djreprints.com/44207.html
Advisers like myself who have been recommending annuities for the last four years don't need a journalist to tell us how good they are; we have direct experience.  Annuities are ideal for avoiding at least the following risks:
  1. Market risk- Your principal is- or can be, even with variable annuities -protected from downside risk.
  2. Inflation Risk- Stereotypically "safe" havens like CDs & bank savings accounts while FDIC insured nontheless guarantee that you will lose money due to inflation.  The returns on these types of accounts have historically nearly always lagged behind inflation.  Substantially.  Several annuity lifetime income riders available can guarantee increasing income that will outpace inflation.
  3. Longevity risk-  In the days when we only lived 5-7 years beyond retirement, this wasn't much of a risk.  But now that we live 20 or even 30 years after retirement, the risk of running out of dough is substantial.  Laddered annuity income riders can guarantee lifetime income.
There is a caveat.  But it's a good one.  Because annuities are issued by insurance companies, they are regulated by each State's insurance department.  So availability varies widely from state to state.  Oregon is especially tough so a lot of the companies & products listed in the Barron's article are not available here.,
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3 comments:

  1. MrHallidayJune 30, 2011 at 4:55 PM

    Nice stuff, Gary ! I am on my way back to Oregon, maybe I will see you up there.

    The biggest risk I didn't see addressed: who insures that the life insurance company will be solvent in turbulent times ? OK, AIG was bailed out, but will they be the next time ??

    Putting a large nest egg in the hands of one annuity-issuer seems insufficiently undiversified.

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  2. WealthSaverJune 30, 2011 at 9:46 PM

    Thanks for the feedback, Mark. Couple of points in response. First, AIG got caught up in assuming the risk of players in the completely unregulated CDO market. Annuity carriers are regulated by the states, and, insured by each state's guarantee fund. In addition, annuity companies reinsure a good share of their risk anyway. I can find no examples anywhere of anyone who has lost money in an annuity. It may seem risky to trust your money with one annuity carrier. But I am not aware of any annuity company (or life insurance company) that has failed to honor its contracts, even during the Great Depression.

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  3. WealthSaverJune 30, 2011 at 9:50 PM

    Oops. A correction. The sentence "I can find no examples anywhere of anyone who has lost money in an annuity." Should read, "I can find no examples anywhere of anyone who has lost money in a FIXED annuity." You can indeed lose money in variable annuities. I don't use them.

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