Annuities are terrible. Annuities are great. Well which is it? Watch an hour of Fox Business, CNBC, or Bloomberg and you'll suffer through an endless barrage of annuity commercials all touting different opinions. It's more than enough to make a retirement investor's head spin.
Fortunately, there's an answer to this existential question about annuities. But in order to understand the answer fully, an analogy is useful. Try to imagine for a moment that an annuity were a car or truck. And more specifically, the process of incorporating an annuity into your investment portfolio were similar to purchasing a car or truck. Wouldn't you want to to purchase a "good" car? Or a "good" SUV? After all, common sense dictates that you wouldn't want to purchase a "bad" vehicle of any sort, right?
What if you were retiring in Aspen and needed a sturdy 4-wheel drive to handle the wintry conditions? Would you let the local Cadillac dealer talk you into a 6 speed turbo coupe when what you really needed was an Escalade with snow tires? Of course not. If you did, then you would have purchased a "bad" car....for you. The turbo coupe might have been a "good" car for the investor retiring in sunny South Beach Miami, but it wasn't in your best interest.
Likewise, an investor in need of predictable returns for a short period period of time (say 3 to 5 years) would be idiotic to buy a variable annuity. His needs required a "fixed" annuity and by purchasing a "variable" annuity he just bought a "bad" annuity....for him. So, the first lesson about annuities is that the investor must match the correct type of annuity with desired investment goal or the outcome could be "bad".
Back to the car analogy again. Say this time you will be travelling quite a bit and need a sedan that gets great gas mileage. You're certain you need an electric vehicle and opt for a Tesla and pay $86,000 for it. Did you get a "good" car? It depends. When you find out that your brother in law just purchased the exact same model Tesla as yours, but only paid $72,000 because he went through a wholesaler who shopped the entire country and applied for special EV rebates, you feel deflated. The vehicles are identical. But you overpaid dearly for yours and your family mocks your purchase while applauding your brother in law's.
In the same way, an investor who purchases a $1MM variable annuity with mortality and expense charges of 1.25% annually certainly overpaid and got a "bad" annuity compared to the savvy investor who incorporated a similar variable annuity with M&E charges that are capped at $240/yr (representing a 98% reduction in charges for each $1MM invested). Yes, you read that correctly...a 98% reduction in expense charges for the exact same vehicle. So, lesson #2 about annuities is that they must be implemented through a firm that has a moral and ethical obligation to get you the best price and terms or the annuity may once again end up being a "bad" purchase.
Most people know that cars nowadays are basically large computers sitting on four wheels. They know that they require firmware updates like their cell phones to ensure optimal gas mileage and general overall performance.
Imagine, however, that when taking your Audi A8 to the dealership for upgrades you discover the salesperson who sold you the A8 performing the diagnostics and upgrades. Would you do a double take? Sure you would. The last thing you would expect to see is your high-end computer on wheels being tuned by anybody other than a skilled auto service technician.
Similarly, today's annuities are not your grandfather's annuities. In many cases, variable and index annuities can be very technical in nature with investment components that most sales people don't even understand. If your broker sells you an annuity and applies a "buy and hold" approach because he lacks the skill set to manage it, you could lose your shirt during the next recession. Similarly if your life insurance salesperson sells you an index annuity and constantly allocates to the annual point to point investment option, you could be missing out on big returns coming out of a recession. Either way you lose and a potentially "good" thing could turn out to have a "bad" result.
So, the final lesson about annuities is never add an annuity to your portfolio unless you secure the services of a series 65 securities licensed adviser to maintain and manage the annuity. This will ensure at least a baseline skill set that most insurance salespeople don't have. And will protect against the bias that permeates brokerage firms by ensuring your technician is bound by the fiduciary standard instead of the more lenient suitability standard.
Are annuities good or bad? Now you know the bald-faced truth. Just like any car purchase, it has the potential to be "bad" or "good" depending on the circumstances. To achieve the highest probability of success, it's up to the investor to be mindful of his particular financial goals and delegate responsibility to a firm that has a legal obligation to put his interests above the firm's.
