Fixed Index Annuities? No Thanks!
I have a financial planner friend who came across a client being solicited to roll a TSP(Thrift Savings Account) into an index annuity.
My friends radar went up and suggested I do a video on Index Annuities, which I did. Here I’ll post a blog about my findings.
Some may think I’m biased AGAINST these products because a lot of fee-only, fiduciary advisors, are opposed to all annuities. That is not me.
Annuities have a place in a clients toolkit for sure. In fact, there is becoming a cottage industry of academics extolling the benefits of INCOME annuities for most retirees. However, in this case, after analyzing the brochure for index annuities, I simply do not see the value here, especially when it comes to rolling over ones TSP to it.
I analyze the growth potential of an index annuity using the brochure the insurance company provides. (In part two of this series, I will analyze the income potential of the same annuity.)
It seems to me from a growth perspective, the index annuity leaves a LOT to be desired.
The argument in favor of the annuity is that there is NO downside. You are guaranteed to never lose money.
Unfortunately, with that guarantee, you are not coming anywhere near making the upside of the market either.
In fact, in the example from the brochure, a client putting $100k into this annuity in 1997 would have been MUCH better off by simply purchasing a 20 Treasury bond!
The 20 year Treasury is 100% guaranteed for principal, not by an insurance company mind you, but actually by the Feds themselves.
Annuities are only as safe as the claims-paying ability of the insurance company. So, there is significant more risk in an annuity than a Government bond.
Now, hindsight is ALWAYS 20-20, so there was no way to know that in 1997 the 20 Treasury bond would have outperformed the index annuity, with less risk.
However, we can use hindsight for future guidance.
And given that, at least from a growth perspective, I don’t see this annuity offering much value at all.
In part 2 of my video series on Index Annuities, we tackle the guaranteed income options a specific annuity provides.
I’ll just cut to the chase, this doesn’t impress me. In the least.
Because in this case, while they offer a 7.2% annual increase in the income base for the first 10 yeas, your income does not adjust with inflation after that!
What pays $10,800 in year 10 will pay $10,800 in year 30 PLUS you have no money left over to leave to your heirs.
You have got to understand the difference between the Account Value, what us professionals call your “walk-away money”, and your income benefit account.
They are TWO completely different things. And I don’t believe many investors are aware of the significant difference between them.
Your income base is solely the amount you can draw on each year for the rest of your life. You can NOT get a lump sum from this amount.
Your “walk-away money” is the amount the insurance company will cut a check to you for.
To determine your income amount off your income base, you need to know your age too and if you’re going to have a Single-Life income stream or a joint and survivor life income stream.
In the example this insurance company provides, a 69 year old, SINGLE life recipient will receive 5.4% a year off her income base account, thus the $10,800 previously referenced.
However, because she is taking well more out of the account than the annuity is growing, she has exhausted the cash value by year 11.
Now, she will continue to receive the $10,800 annually, but she has NO money left in the account!
Is that made clear to the potential purchasers of these products? I don’t think it is.
And it should be.
Look, I’m not saying you should NEVER buy one of these things.
I’m just saying you need to understand what you’re getting into.
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