Annuities In Your Retirement Income Plan Are They A Scam | News or Noise

Viewers, there is as much bad information out there about annuities as there are types of insurance.  Some well-known RIA’s even advertise that they will never sell you an annuity product as part of their marketing schtick.  They will never incorporate an annuity into your retirement plan.  While at the same time, they invest significant sums of their client’s money in insurance companies that derive a ton of their own business from annuity products.  Go figure.

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group.  And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources, and ask, “Is it News or Noise?” This week’s topic is annuities and why they all should not be considered four-letter words, as some in the media would suggest.

Before we continue, please take a moment to hit that subscribe button and the notification bell so that you’ll be notified when we upload new content.

Viewers, let’s be blunt.  Annuity and retirement insurance products generally are highlighted in the media in a negative fashion.  I’d go so far to say that a lot of people think that the term annuity should be a 4-letter word.  Even I used to think the term was toxic.

Why?  Because like most everyone else, I had heard the stories.  I heard and read the stories about how they were pushed by unscrupulous one “tool” insurance salesmen who had no other solution for your financial situation.  I read about the stories of variable annuities over-promising “stock market” returns with no or low risk.  I read about the lack of flexibility and high fees, and I personally had blackballed the whole industry and the entire set of products as a set of tools for retirement.  But remember, people, there are many types of annuities.  There are literally hundreds.  Just like there are 100’s of stocks.  100’s of ETFs, 100’s of mutual funds, 100’s of RIAs.  And upon further research and due diligence, this is what I have found.  There are many good annuities out there and many very good financial planners out there that use them on a limited basis as “tools” to round out your financial plan by providing an element of safety.

What am I talking about?  I’m talking about this.  The entire annuity industry is insurance-based.  They are products of the insurance industry, designed as tools of safety first and upside return second.  They are not and should not be compared directly to the equity markets and the tools of the brokerage industry, which is an industry of taking risk.  Annuity tools, which our own social security happens to be, can be complements to a financial plan not a supplement.

This is how I personally gained peace and understanding with my own firm’s use of how we can sometimes incorporate these tools in the toolbox of a comprehensive retirement plan.

Insurance companies are some of the most highly regulated and well-capitalized financial institutions in the world.  Their capital requirements are amongst the highest of any financial firms in the markets.  Unlike banks and brokerage firms, insurance companies’ financial leverage is amongst the lowest of any financial intermediary.  Why?  Because regulators require it.  What are the types of assets that insurance companies own on their balance sheets to offset their liability of issuing you an insurance policy or annuity?  Their balance sheets are made up almost entirely of intermediate, longer-term bonds and real estate which they use to fight future inflation.  What do these asset classes have in common?  They have projectable or stable and growing cash flows.  What don’t they own a lot of?  Public equities and other volatile risk-based assets that may not return the cash needed to meet their financial obligation back to their clients when their client needs it.

In laymen’s terms, when you purchase an annuity product, or your advisor uses a tool like a FA (Fixed annuity) or FIA (Fixed indexed annuity), you are essentially securing a place in the safety of the insurance companies existing balance sheet and their current assets with a bit of future upside.  In return for that safety of return, you must give up the notion of competing against the overall stock market.  Why?  Because most insurance companies do not own large baskets of public equities due to their short-term volatility.

You give up upside return for the safety of lower risk.   In addition to giving up upside return potential, you give up some liquidity.  Why?  Because that insurance company who issued the annuity can’t sell those apartments it’s invested in the moment you decide you want your money back because your friends stock fund is outperforming your safer annuity.  In my opinion, these tools are better thought of as fixed income substitutes, not as stock substitutes.  Because of this, you should expect lower returns than the markets.  If someone is promising you full long-term equity returns with little to no risk, they are not being honest.  That business model or retirement tool doesn’t exist.

I’ve had others argue about the lack of liquidity factor of these tools being a detriment.  Viewers, if you are comparing these tools to a portfolio of bonds, I 100% disagree.  In 25 years of investing for other people, I have not once met anyone who built a 5- or 10-year laddered bond portfolio and then traded it for liquidity purposes over the structured holding period time.  In my eyes, retail bond portfolios should be built around visibility and certainty of future cash flow and not capital appreciation or depreciation.  The mark to market gains and losses you see along the way to a bond maturing in the future on your portfolio holding report should be nothing more than optics.

What’s this mean in terms a retiree or near retiree can understand?  It means that firms that use blanket statements like “I’ll never sell a commissioned product” or “all annuities are bad” might be limiting your retirement plan from lower risk and a more stable, comfortable retirement, because when modeled and chosen appropriately, an annuity or other insurance tool may make sense to round out the safety in your retirement plan and achieving a comfortable and less stressful retirement.  Viewers, I ask.  Are you trying to meet your needs or your greed’s in retirement?

News or Noise:  Neither, Emergency Alert Warning!

Viewers, feel free to give us a call here to speak to one of our advisors.  Let us help you craft a financial plan that meets your retirement goals and needs first, and your greed’s second. Call us at (877) 896-0040 we are here to help you on your financial journey into and throughout your retirement years.

I’m Chris Perras and Have a great week!

 

 

Disclaimer: This content contains general information and express the views of Oak Harvest Investment Services. All data, articles, and information cited are believed to be reliable at the time of creation; however, Oak Harvest does not warrant any information contained herein to be correct, complete, accurate or timely.

Oak Harvest provides links to content produced by other websites that OHFG does not control, and Oak Harvest does not necessarily approve or endorse such content and does not guarantee its accuracy. Nothing in this content constitutes personalized investment advice. Any charts, indicators, or graphs included or referenced in this content have limitations, and no such material is able, in and of itself, to provide a buy or sell recommendation for any security. Strategies and ideas discussed may not be right for you, and views and opinions expressed may change without notice. Strategies and ideas discussed will not apply to all client accounts or portfolios.

Nothing in this content constitutes a recommendation, or an offer or solicitation to buy or sell securities. Oak Harvest makes no assurance as to the accuracy of any forecast or projection made. Not all past forecasts or projections were, nor future forecasts and projections may be, as accurate as any forecasts discussed. Indexes like the S&P 500 are not available for direct investment and your results may differ. Past performance is not indicative of future results. Investing involves the risk of loss.