Insurance companies have pushed annuities with 7% guaranteed riders for two reasons: low interest rates and volatile stock markets. I encourage investors to make sure that they understand the term “guaranteed income” before buying such an annuity.
Annuities that sound too good to be true often are, according to a leading U.S. management investment advisor. The dirty little secret about these annuities is that the “guaranteed” returns associated with them may only equal 1-2% per year no matter how many times they use the word “guaranteed.” The penalties to withdraw early are huge. As a financial advisor in Tennessee I have written extensively about the dangers of annuities for retirees.
I have a particular issue with the so-called “guaranteed income” riders, which he says are touted during slick lunch and dinner seminars aimed at retirees who are looking for ways to invest smartly.
I have The Wall Street Journal and The London Financial Times interviews to my credit. I have warned that the popular 7% Income Guarantee Annuity can destroy your retirement and undermine any hope you had of financial security for the rest of your life. It’s no wonder that I have not been invited to participate in any seminars where these annuities are sold!
I have sounded the alarm bell over annuities with guaranteed income riders since 2006, and I have written a book, a special report and the Allianz Masterdex 10 report to repeat his message in various forums. I cite an alarming knowledge gap between how retirees think such annuities work and how they actually do work. After hearing from a large number of people considering these products, they all have the same understanding, it makes me question whether those selling annuities are accurately representing them.
The major investments management knowledge gap is the actual amount that a “guaranteed” 7% return will yield. Once the 4% “service fees” often attached to these variable annuities is subtracted, they have little or no true return over several years, even when the stock market is healthy. Many annuity holders may only earn 2-3% per year given market health, depending on their life span.
If the market continues its up-and-down pattern of recent years, the likelihood of a “guaranteed” return grows even more dim. Furthermore, when a person chooses to actually draw on his annuity as part of his management of wealth, the account dries up much quicker than investors assume.
I have found, in my experience, that when retirees learn about how their annuity’s “guarantees” truly work, they lose interest in the product. Consequently, I urge anyone considering an annuity with an income “guarantee” to perform due diligence before signing a long-term contract that could cost him tens of thousands of dollars to renege on, in most cases.
Talk to your financial advisor for more information. As part of your due diligence, consider my report on annuities, which explains these agreements in plain language.
For a more comprehensive explanation of the dangers of annuities, buy my book here. Another book full of sage investment advice, How Successful Investors Tripled the Return of the S&P 500 is available here.
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As a financial services industry veteran with more than 20 years experience, I have been interviewed by The Wall Street Journal, CBS MarketWatch, The London Financial Times and the Christian Science Monitor. I have patented revolutionary risk management and portfolio software systems that has already helped hundreds of clients make the money they need to retire comfortably. I am a former syndicated newspaper columnist and the author of two ground-breaking books: How Successful Investors Tripled the Return of the S&P 500 and Why Variable Annuities Don’t Work the Way You Think They Work. He accepts a limited number of new clients in his personal money management practice. My wife Julie and I live with our seven children in Johnson City, TN. I am heavily involved in my local church and has done missionary work in Hungary and Cambodia..