Did your annuity salesperson guarantee you that you wouldn’t lose money in your annuity? Did he/she tell you that even if the market tanked, you wouldn’t lose a dime? Well I’m here to tell you that you may be losing money in your annuity and not even know it. It is true that with an indexed annuity you will not lose principal (as long as you keep it in place for the 10-12 year surrender period), but many annuity owners are not getting the returns they thought they would. They were told that they would participate in the returns of the S&P 500, but for some reason they are only eeking out a 3-4% annual return. What’s worse is that many annuity owners don’t even know what they are getting, they just know their account is going up. And annuity salespeople know this, which is why they put a portion of your money in a fixed account, that way if the S&P 500 is down for the year you will still see your account move forward, even if it’s only 0.1%.
So how are you losing money in your annuity? You are losing it in the returns they take away from you! What I mean is that the insurance company gets paid handsomely for the guarantee they give you. Just try to figure out how they calculate the credit they give you at the end of the year. It’s insane…I even have a hard time figuring it out and I have been in the business for over 17 years. Let’s just say that they will win and you will lose no matter what. I know of one annuity that had a cap of 4.5% for 2013. That means that when the S&P 500 goes up 32% (like it did in 2013), the annuity owner only gets 4.5% of it. See, the insurance company wins!
“But wait!” you say. “If the S&P 500 goes down 37% (like it did in 2008) the annuity owner doesn’t lose anything.” I agree, but most retirees are not investing their money for one year. Most retirees will have their money invested for 15 years or more. The question to ask is why does the annuity tie your money up for 10-12 years? It’s because the insurance company knows that they can be confident that they won’t lose money over that period of time. Let me give you an example (and I won’t show you a best case scenario like many of the annuity companies do).
Let’s look at a Moderately Conservative portfolio (50% stock mutual funds/50% bond mutual funds) during the “Lost Decade” from 2000-2009. While the S&P 500 lost 46% from 2000-2002 and again lost 37% in 2008, if you would have stayed invested in the Moderately Conservative portfolio over that time period you would have earned an annual return of 5.29%. And this was from the worst decade ever for the stock market! I say this to shine some light on the value of the annuity company’s guarantee. Most retirees aren’t afraid of the temporary declines in the stock market, they are more worried about an economic collapse. Well who do you think guarantees your money in an annuity? The insurance company! And what is likely to happen to the insurance company and your guarantee should the company go bankrupt?
So before you decide to put your nest egg into an annuity, talk to an advisor who doesn’t earn a big commission for selling it to you. Talk to a fee only Certified Financial Planner! (http://www.cfp.net/utility/find-a-cfp-professional)
