If this isn’t the worst investment out there, then it certainly is one of the worst. That could be said when inflation was less than 2%; it is even worse when it’s over 4%. That it is the worst investment isn’t just my opinion, but the opinion of others as well. Helaine Olen, a financial expert and author of the book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, relates, “In [Suze Orman’s] view and the view of more than a few experts [these investments] are sold for one reason and one reason alone. They ‘make money for the financial advisers who sell them’.”[1] This investment is not usually in the best interest of the client; they are in the best interest of the financial adviser selling them.
Baby boomers are now their primary target market. In the 1st quarter of 2023 alone, sales of this investment product increased a whopping 42%.2
The sales process is always the same. Olen’s book describes it:
We’re facing a new retirement challenge,” [the adviser] tells the now fully engaged men and women in the room, as [they] lead them through a twenty-seven-slide presentation consisting of scary facts about their future. According to the broker’s and Prudential’s slide presentation, Social Security’s future is “uncertain” and “shaky,” and the only way to salvage it is to tax our future benefits “at up to 85 percent.” Health care costs are rising significantly faster than our incomes. And then we come to the scariest slide of all: “47 percent of Americans today ages 55–62 would run out of funds necessary to pay for basic retirement expenditures if they retire at age 65. Are you prepared to create income that will last a lifetime?” “Are you part of the 47 percent that would run out of money?
After presenting all the doom and gloom, the broker presents the solution:
It’s nothing to be fearful of. We can plan for it. That’s why you are here. We have a strategy to deal with these risks,” the broker says before they begin to tell us all about a product that will allow provide a guaranteed income for the remainder of our lives: a fixed annuity.”3 (only the advisor never calls it an annuity – it is an investment vehicle).
It is a hard sell, but annuities are a very lucrative product for the financial adviser. Commissions run from 5 to 14 percent typically, but I have heard even 8 to 10 percent for some advisers. For the firms selling annuities in 2023, fixed annuities have generated $64 billion in revenue for insurance, banking, and brokerage companies.
Fixed annuities are sold primarily for two reasons. The first is that they supposedly offer a lifetime of income. But inflation will every year reduce what that income will buy. Consider that Social Security got an increase of 8.7% in 2023 and 5.9% in 2022. For those who live on social security, the dollars entering their accounts increased; someone living on $1,000 of Social Security in 2000 saw their payments increased to $1,780. That may have seemed like a lot. But for retirees prices increased even more. To stay up with price increases for what retirees buy they would have needed their social security to be $2,410. Last year eggs increased 110%, bread 18%, dental visits 16%, electricity and car repairs 13%.
Even with social security increases the purchasing power from 2000 to 2022 declined by 36%. That was for social security with cost of living increases. For someone on fixed annuities, the purchasing power would have plunged by 70%. That is the same loss people experienced in the high inflation period of the 1960s and 1970s. If inflation persists for the next few years, and we believe it will, fixed income investments are going to be one of the worst places to be and annuities are going to be worse.
The second selling point that agents and financial advisors rely on is that annuities are “guaranteed”. But is it really true? The National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) was formed similarly to the FDIC. For each insurance product, including annuities, the originators pay a small percentage into NOLHGA. That organization will then meet the obligations of any failed insurance company. Or that is how it is supposed to work.
In some sales pitches, buyers of annuities are told that insurance companies never go bankrupt. That is not true, nor is it true that NOLHGA will pay out on the same terms as the failed insurance company promised. Executive Life was the largest insurance company in California when it filed for bankruptcy in 1991. Penn Treaty Network completed bankruptcy in 2017, American Medical and Life Insurance in 2016, CoOportunity Health in 2015, and on and on goes the list of failed insurance companies.
Even the biggest insurance companies can fail. Mutual Benefit Life, founded in 1845, was considered premiere with a conservative approach and A+ rating. NOLHGA took three years to move the annuities to another insurance company. Baldwin United, another of the largest insurance companies, failed. NOLHGA froze all payments for nearly four years and then payments were made at the lowest interest rate possible.
For me, annuities offer hollow guarantees. They are probably more to be feared than all of the doom and gloom that is pitched at those sales seminars.
There is no question that if you are someone who cannot control your spending, then an annuity may be a good solution. A solution to lock up the principle and limit your access. But the majority of people are not in that situation.
Fixed annuities are chocolate covered hand grenades. The idea of a guaranteed income sounds so enticing, but the “guarantee” is only a “probably”, and the purchasing power of the income is going to decline most years – and during inflationary times could decline dramatically.
If you are invited to one of those lunch seminars, don’t go. If you have gone and are considering buying an annuity, banish the thought. If you own an annuity, call us at AFC. For all but a few people, the best response for an annuity is terminate it and take the money out now. Even if there is a surrender charge. You will probably have more purchasing power than you will surrender over the coming years. You can put your money to work for you in what we feel is a much better way. It is not how many dollars you receive, but how much you can buy with those dollars. Inflation robs purchasing power.
1. Olen, Helaine, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, Portfolio; Reprint edition (December 31, 2013).
3. Olen.
