If you’ve been receiving any of my newsletters over the years, you would know that I am a very avid saltwater fisherman. I enjoy fishing on shore, surf fishing, pier fishing, and offshore during the summer.  During the summer, I will normally take some of these long-range party boat trips that go out 100 to150 miles out and stay for a couple of days.

When I do go out, we are targeting large fish like grouper. Some people will bring reels and rods that look like you could pull up a whale out of the water because that’s the kind of equipment you need to use to pull up big grouper from deep waters.  And now and then someone will show up on the boat for the first time bringing some sort of light spinner rod, which is something they might catch a 5-lb. Bass with it. And you’re saying, “Uh oh, this isn’t going to work for them.”

There’s nothing wrong with a spinning rod, but I can guarantee you that you are not going to pull up a 50-60 pound grouper or amberjack with it. In the same vein, it’s not that FIA’s are good or bad. Sometimes people just have false expectations of what their returns are going to be for the year.

Liquidity

You can’t put money in and out of these things.  These are not short-term trading vehicles because they all come with different surrender charges and so, they’re not 100% liquid. Well, these annuities will charge you much more than that.  So, you should have enough liquidity in other areas.  I would stay with the 6, 7, 8-year type products.  I would not go toward the ten years, and in some states, you can do 15 years.  I would stay away from those.

False Expectations

I’ve worked with these products since ’94 or ’95. I don’t think I have ever seen double-digit returns here, but I have seen 3-6% returns. Don’t expect a home run or high double-digit returns and don’t expect market-like returns. It’s like you can’t take a light spinning rod offshore and expect to catch a 50pound grouper. So don’t expect these products to capture 100% of the index it's tracking- they were never designed to do that. They were designed to give you capped upside participation with no market risk.

Put The Minimum Amount Into an Annuity

Don’t put any more in here than you have to.  If you can hit your goals by putting no more than 20%, do not put more than 20%.  If you maybe have to go to 30%, okay.  But I would start questioning why you’d have to do more than that.  The whole point of this is as an investment advisor/CFP; you need to have enough money in longer-term growth to win the retirement game.

Contrary to popular opinion, you’re going to need just as much money in your eighties as that you’re going to need in your sixties.  Unfortunately, most of this money is going to be going into the health care system, and you are not going to be going on the cruises.

Lifetime Income Options

Annuities have lifetime income options unlike any other product out there.  But some years ago, the companies decided to promote this feature more and many annuities have what is called income withdrawal benefit riders.  You’ve got to be very careful with these things. On your statement, you’ll have a value that shows your accumulated value.  Of course, that’s minus any surrender charges or any withdrawals.  But you also have an income withdrawal benefit value.  Well, folks, that’s not walk-away money.  So, yes, they’ll use that value to calculate your income stream for the rest of your life.  But don’t walk around thinking that your accumulated value (your walk away money) is going to make a guaranteed 7%. I’m just saying don’t get lured into that.  There is nothing wrong with the income withdrawal benefit if they’re properly used, but I would venture to say the fixed indexed annuity primary benefit is more of an accumulation vehicle with no market downside risks.

If you do purchase an income withdrawal rider benefit, your walkaway money is the accumulated value. You can go back and see Roger Ibbotson’s study of when he compared FIA’s to the other major asset classes like equities, bonds, and Treasuries.

Is your current annuity not performing? You know, the market has been giving double-digit returns for years. However, you’re not 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®