Break away from your underperforming annuity

There’s no real easy solution here, because it depends on partly why you bought the annuity, but even more importantly, why do you own it now.  As the market got more volatile in 20002002 and in 2008 - 2009, annuity sales went up to the highest level ever.  Unfortunately, many of these sales were based on scaring people or were based on the fear that they were going to lost all their money in the market.  Everyone claimed the markets were going to collapse.  So the key question here is, “why do you own it now?”

There are two camps in the investment filed.  The first camp is the insurance agents, who believe annuities will, and can solve any problem known to mankind, from investing to global warming.  If you need investment, buy an annuity.  If you have nine annuities, buy another one.  If you have a toothache, buy an annuity.  I think you get the picture, and the picture's just this:  The annuity is the greatest thing in the world for everybody.  Everybody should have a 100% of their money in there.  This is just totally false.

Now on the other side of the fence are more like the investment advisors like myself, who manage portfolios.  Most of these people hate annuities because many are not insurance licensed and CDs products is a threat to their business.  The fact of the matter is, there's one investment advisor, one of the largest, has spent years and tens of millions of dollars of advertising on TV of the dangers of annuities.  In my case, I don't have any feelings about these insurance products any more than I have of any other investment products.  I've seen over the decades some of the good that they do, but also certainly some of the bad.  To me, it's just a tool in the toolbox.  It's like many other investments.  It may be appropriate or not.  It may be a good product; it may not.  It may meet your needs; it may not.  It all comes back to the reason why you purchased it.  And back to the original question.  Why do you own it now?

Let's Talk About You

I can safely assume the reason you're reading this report, versus doing other things, is that you're uneasy, or you don't understand, or there's something about an annuity you purchased or an annuity you're getting ready to purchase, and you're not 100% convinced.  Here are some reasons:

During the 2008/2009 bear market, the volatility of the market and the constant meaty [ph] pounding of what was wrong.  Quite frankly, scared people out of the markets and the insurance agents were there to help them take all their money and put it in annuities, which they were led to believe would track markets and give them upside, but no downside.

1. How wrong they were.  I mean, they were so wrong, because from 2009 to 2018, we hit the second greatest bull market we've ever seen.  So go back to think of the people that were telling you this in 2008, '09, '10, '11, '12 how wrong were they. 

2. Unfortunately, instead of double-digit market-like returns, you have been getting much lower returns.  Indeed, you've been happy with 2, 3, 4%.  The returns don't match up to the returns in the market, which you were led to believe that you were going to track those returns.

3. Maybe you own an annuity orphan.  The person that sold you the annuity has seemed to lost interest in you, because he's already taken all your money and put it in an annuity, or he's left the business for greener pastures.

4. You were promised 7/8% returns, but for some reason when you look at the market value, the principal value of that annuity, it's never done that.

5. You had never heard of a cap rate, and you couldn't imagine what capping a return of 3 or 4% could mean to you.

6. Your costs are higher than you thought.  You're paying 1 to 2% on riders you don't even use.

7. Surrender charges are limiting your retirement.  Do you remember when most mobile telephone providers hit you with a $300 or $400 charge to get out of your two-year contract?  Due to consumer resistance, most of these kinds of contracts have disappeared.  There's still a few out there.  Well, if that got people upset, which it did, well how about a 10% surrender charge in the first year of your entire life savings if you tried to leave the contract.  Yep, you heard me right.  Not only is the surrender charge high the first year, but they continue for some years.  Normally for 7 to 10 years.  Does that make sense for a 75-year-old to buy a 10-year contract?

8. Did I mention that you're angry because you were led to believe you were going to track an index, and, fortunately, you have other accounts that do track the index, and you could see that the other accounts have gone up in the good years in multiples, compared to your annuity?

9. Perhaps you're wondering if you can get more horsepower out of the contract because there are all these different subaccounts which, quite frankly, you don't choose, and nobody helps you.  The insurance agent's gone.  You call the company; nobody gives you advice.

10. Now you find out the romance of tax-deferral is not so much because when you want to take the money out to enjoy your retirement, the tax man waits.

It seems your neighbor annuity's doing better than your own.  You don't quite understand.  It looks like the same kind of product.  You're wondering if there are better annuities that deliver higher returns.

Annuity Orphans

Lots of annuity orphans that they seem to find me.  They're just looking for some straight talk and maybe some direction.  Very few people in my industry will even talk to you.  If you tell them, you just put all your life savings into an annuity a year or two ago, the interview is over with.  You don't even understand why it is.  You don't even understand.  But the interview is over; the relationship is done.

You know, it's interesting.  I went back through my files over the last 40/50 annuity orphans that came to me for help.  Now the outcome may not be your outcome, but let me tell you what I found, and this isn't a scientific poll.  It's only on 50 people, but in many cases, it's all the same three or four outcomes.

Why is John Qualified to Give You Advice About Your Annuity?

Before I get into the outcome of these 40/50 different orphans, let me tell you why I think I'm qualified.  I've been working with fixed annuities since the mid-80's.  Variable annuities for decades.  And fixed annuity/index annuities since they were rolled out in 1994.  Something else I will do - I will help you unwind these.  I will help you make smart decisions because I don't like to see somebody who has a majority of the retirement sitting there not doing what it needs to be done.  You cannot sit there with a large percentage of the majority of your money not hitting the goals that you need to.  And you're not going to have a successful retirement.

First, just some general ground rules going forward.

1. First, never put more than 50% of your money in not only annuities but any other single investment.

2. I think the maximum most people should be closer to 20%.

3. Don't get mad, do something hasty.  I've seen retirees that after they've understood with what they've done, they get so mad, that they're going to surrender their contract.  I said you couldn't do that.  You might have a 10% surrender charge.  You're going to have all these income taxes, and you're not hurting the company anyway.

So let's go back to these 40 or 50 in my personal experience.  About 20% of them were just orphans.  They just needed help in the subaccounts.  Lots of times these contracts will have multiple subaccounts, and you get to choose once a year, so choose wisely.  About 20 to 25% of the annuity orphans that came to me, we came up with a multi-year strategy of winding down.  In other words, we didn't want to pay all the taxes and all the surrender charges, and I said you're just going to have to be patient.  It might take three or four, five years to wind this down and to minimize these charges to you.  Approximately 30 to 40% of the people were in some kind of qualified plan, with a good percentage of them either with no surrender charge, or very little.  So an IRA rollover can be done into a more appropriate investment.  The other 20 to 25% were integrated into an overall investment plan, with the annuities providing an anchor to balance their other investments.  In other words, we understand that part of the portfolio was going to be playing defense, and we were going to accept small single-digit returns, but that was okay because that allowed us to get more growth-orientated outside of these annuities.  About 15 to 20% were used to fill up their income buckets with a liquidation timeframe to eliminate surrender charges.

What this basically means is that we're going to liquidate maybe 15/20% of the portfolio over 5 or 10 years.  It's also known as the bucket strategy, which was going to allow us to have a longer timeframe to do more growth-type investing.

Is your current annuity not performing? You know, the market has been giving double-digit returns for years. However, you aren’t seeing it.  Are you confused about your income options? Do you have an income rider that you don’t understand? Are you an annuity orphan? Well, maybe I can help. I certainly would be glad to. You don’t even have to come to the office, just shoot me an email or give me a phone call. I will either contact you directly or respond to your email. If you want to set up a time to talk to me on the phone, give my office a call.

Sincerely, John Romano, CFP®