if there is anything that we should have learned from recent full-blown financial crises this century, it is that we need to be extra-cautious about financial products that: a) make extravagant claims that seem too good to be true, and, b) are sold by agents receiving huge commissions.
In the case of annuities, both a) and b) are true, which is precisely why the retiree hoping to spend his or her golden years with a healthy bank balance should proceed with extreme prudence when considering these options for their retirement savings, says Retirement Wealth Specialist Jeff Voudrie, president of Common Sense Advisors.
Voudrie has spent the past several years warning his clients and the general public about numerous annuity features that could spell big trouble for naïve investors. “Insurance companies legally have to give you all the facts,” he says, “but they deliberately make it so complex that even educated, savvy investors can’t figure out what’s really happening.”
The force with which these products are being pushed has alarmed Retirement Wealth Specialist Voudrie and other financial experts. “Annuities are being heavily promoted by advisors/agents on television, the radio and in seminars across the country. I’ve heard that some retirees are receiving 5-10 dinner seminar invitations a week,” he notes.
Despite this abundant pressure to buy annuities, not all investors are taking the juicy bait of signing bonuses and “guaranteed income.” Perhaps many of those who refuse to buy annuities have read one of Voudrie’s many publications detailing their dangers.
As an article in Money said of annuities: “People love them in concept, but they aren’t nearly as enthusiastic when it comes to actually buying these insurance products, which are the only investments that can provide guaranteed income for life. For example, a recent survey by the Insured Retirement Institute and Jackson National Life Insurance Company found that while more than 90% of people 65 and older said they were very or somewhat interested in lifetime income, only one in four planned to buy an annuity.”
“That reluctance is understandable,” the article continued, “There are plenty of valid reasons to be wary of annuities, as many can be mind-numbingly complex and laden with onerous fees to boot.
Voudrie has long unpacked the complexities of annuities and usually urges the public to steer clear of them, noting, “The insurance companies don’t stay in business by giving money away. So, if you do get a bonus for signing up, you can bet your bottom dollar there are higher and longer surrender periods, and the annual fees are higher.”
He especially hates to see retirees with little margin for error fall for bonuses to sign, then have fees and surrender penalties rapidly “explained” in the slick presentations of agents. “So the insurance company gives you an upfront bonus—but then it takes that much and more back over time,” he says. “I talked to someone who only thought they paid 1% a year in fees because that’s what the agent told her. Yet, those fees would easily total 3-4% a year.”
In addition to signing bonuses and hidden fees, the sureness of “guaranteed” returns should also be plumbed for specifics, Voudrie cautions. “Do you realize you are not guaranteed a 7% minimum return each year? In the vast majority of cases, what you will earn is almost completely dependent on the stock market.”
- The guaranteed return will come to fruition if a host of factors fall perfectly into place, including:
- Healthy stock market gains throughout the life span of the annuity
- The annuity owner lives throughout the contribution and dispersal phase (20 years after signing, on average)
- Owner does not withdraw early or take a lump sum at any time
As an insightful Kiplinger article detailed: “Variable annuities and fixed-index annuities introduce higher fees and complicated formulas that many investors don’t understand. And some salespeople take advantage of the complexity, focusing on the benefits while glossing over the fees, surrender charges and complicated rules that can limit access to the guarantees.”
 retrieved 1/12/18. http://time.com/money/4955118/is-guaranteed-income-for-life-the-right-option-for-you
“One of the challenges is that there are an awful lot of guarantees that come with big asterisks that are never fully explained,” chimes in Tim Maurer, a certified financial planner and author of Simple Money. “You have principal protection or high-water-mark protection, but the only way you can take advantage of that is if it’s paid out over the course of many years, and that, to me, is not a real level of assurance,” he adds.
Kimberly Lankford, a Kiplinger editor, echoes Voudrie’s and Maurer’s caution: “Not only that, but you can’t access your benefit base as a lump sum; if you cash out your annuity, you’ll only get your actual investment value.”
In summary, Voudrie urges everyone considering the purchase of an annuity to understand clearly how annuities work, especially the contrast between their actual value and hypothetical value if the stock market performs robustly over the course of the annuity. He also counsels retirees to have all fees detailed to them, as well as how they can exactly receive a lifetime income at the level the annuity promises.
“There is a tremendous gap between how investors think these products work and how they actually work,” he observes. “Insurance companies and agents aren’t lying, but neither are they going to great lengths to make sure you understand. There are millions of investors that have purchased these under false pretenses that will live to regret it.
“Hopefully,” he concludes, “you aren’t one of them.”
Have a question or comment? Contact Jeff at
Jeff Voudrie, a financial planner and money manager in Johnson City, TN has been interviewed by The Wall Street Journal, CBS MarketWatch, The London Financial Times and the Christian Science Monitor. He is 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 investments management practice. He and his wife Julie live with their seven children in Johnson City, TN. He is
heavily involved in his local church and has done missionary work in Hungary and Cambodia.