Why Americans Talk Themselves Out of Retirement Security
Who wouldn’t love a stream of guaranteed income in retirement? No one, of course. But many retirees are ruling out a prime source, fixed annuities, based on bad information.
When it comes to retirement planning, 56% of Americans say guaranteed income is their top priority, according to a 2017 study by TIAA-CREF. Another 22% want to ensure their savings are safe, regardless of what happens in the market.
As pension plans continue to quickly disappear, the only other financial product capable of meeting both objectives of safety and lifetime guaranteed income* is an annuity. Yet in the TIAA-CREF survey, of those who say they yearn for safety and guaranteed income, only 13% actually own an annuity. How is it possible that so many people refuse to get what they say they want? Simple. Misunderstanding and misinformation.
Fixed annuities can turn your savings into a stream of retirement income. Just like a traditional pension, they can guarantee a monthly check over a specified period of time, including for the rest of your life, or for the rest of your life and that of your spouse, or combinations of those. They can be structured to start income right away or at some time in the future according to your wishes, not some preset date.
Without getting bogged down in product details, it is essential to understand that a fixed annuity is an account with an insurance company. As such, they are regulated by state insurance commissioners, state-by-state, and anyone who sells them must have a state insurance license.
Many people, especially retirees, consider owning an annuity but in the end don’t, even though they might be better off with one over the long term. In my experience, this commonly comes from one of three sources:
1. You’re talked out of it by your investment adviser.
Investment advisers usually make their living by fees paid from “assets under management.” When you propose to transfer money away from the adviser’s account to a fixed annuity (not sold by the adviser), it’s as though you’re asking, “Do you mind if I reduce your income?” It’s pretty easy to know what that answer will be.
2. You’re talked out of it by articles on the Internet.
Remarkably, nearly everyone is quick to admit the Internet is NOT the most reliable source of fact-based information ... until it comes to reading “I hate annuity” articles that pop up in a search.
3. You’re talked out of it by your kids.
When kids advise their parents, they do so out of a genuine desire to protect them. Subconsciously they believe they know better. Unfortunately, most of the time, the source of their information is a stockbroker, or Internet articles — or what their friends told them … who also got their information from a stockbroker and Internet articles, or from their friends who ... (Remember the grade school game “pass the secret”?)
Sometimes people say, “I used to own an annuity and it was terrible.” But after one bad experience years ago with a product that probably no longer exists, they castigate everything as if one product could accurately represent an entire industry. There are literally hundreds of different fixed annuity products available and sadly, they’re not all equal. Of course, the same could be said for restaurants, doctors, lawyers, etc. Ironically, the same people who denigrate all annuities for one bad experience continue to bank after having a bank account that “paid nothing” or remain in the stock market after losing a third or half of their money in the last crash. They’re using a different standard and for no better reason than banks and stock markets are more familiar. Nothing is perfect — including annuities — but one bad apple does not mean ALL the apples are bad.
Critics sometimes say that annuities are “complex” and “difficult to understand.” I say that annuities are not complicated. What they are — at least the good ones — is sophisticated. They have a lot of flexibility, but it is precisely that flexibility that can make them so attractive. Consider the following: A Model T Ford was a simple car. It had a small, 4-cylinder engine, no heating, no air-conditioning and came in one color, black. Would anybody suggest that a Model T is better than a modern car with all the bells and whistles because the modern car is “too complicated”?
Where the real confusion comes in may be if you’re trying to understand scores of benefits from hundreds of annuities as though they were all one. Given the myriad annuity possibilities in the marketplace, the job of identifying an optimal recommendation should be left to a licensed and skilled professional who will take the time to understand your unique needs and circumstances before recommending a product. Someone who takes the time and care to perform the necessary due diligence before making a product recommendation is a planning professional. Anything less is product peddling. You should seek the former and avoid the latter.
Because skilled professionals don’t come with a “Good Housekeeping Seal of Approval,” it’s not easy to recognize them from appearances alone. The key is to ask questions. What you’re looking for is someone who is independent (not captive to a company or big-name agency), fully licensed in both insurance and securities and who has some professional credentials other than those basic licenses. Look for the presence of any predetermined biases, such as they never recommend products from an entire financial industry. Finally, see if they do (not just “can”) work with other professionals, such as attorneys, CPAs, etc.
There are a multitude of well-meaning but misinformed people in the world, including many who claim to be professionals and should know better. The best way to protect yourself from bad advice is to find a truly independent adviser with the broadest possible access to the world of financial products, including access to multiple service industries.
* Annuity guarantees are based solely on the claims-paying ability of the issuing company and compliance with product terms.
About the Author
Michael Tove, CEP, RFC
President, AIN Services
Michael Tove, Ph.D., CEP, RFC, is a Certified Estate Planner and Registered Financial Consultant and founder of AIN Services, an independent multifaceted financial, estate and retirement planning agency located in Cary, North Carolina.