A Boring Investment Makes an Exciting Comeback
WHY YOU SHOULD CARE
Because building your nest egg is harder than ever.
Annuities may well be the dullest investments in the world. They don’t increase in value, for the most part; neither do they fall. They just are, year after year. Fittingly enough, annuities are sold by those dynamos of modern finance — insurance companies — who saddled them with a name that could put you to sleep before you’re done pronouncing it. The word is so boring you can actually say it without moving your lips.
Yet the world’s least interesting financial product — an important part of retirement planning for many — is staging a surprising comeback. Thanks to some bad press and high fees, annuities were as unpopular as they were boring for a while. (Quick annuity definition: You basically trade a big chunk of cash now for much smaller dollops of cash later on.) Now, even dorks who couldn’t care less about their future are getting pitches from financial advisers. The result: Last year, sales were up 4 percent, their second straight year of annuity growth since the Great Recession. Millennials still haven’t quite caught the bug, but their fretting parents are in a frenzy, with affluent boomers holding almost half of all annuities last year, according to research by Market Strategies International.
These big bets are a pretty big deal, because an annuity large enough to keep you in greens fees through retirement typically requires you to fork over a huge chunk of your life savings. (Insurers make money in this business by investing your cash and betting that you’ll die before they have to pay it back.) That in turn limits your ability to play the stock market, take the plunge into real estate or catch the gold bug. Forgo those opportunities and you could still end up with an annuity income that’s become eroded by inflation or that otherwise falls short of what you’ll need for your (possibly not-so-) golden years.
Monotony can still be murderous to your portfolio, particularly when it stems from mind-numbing complexity.
It’s not the greatest deal around — but what is? Most of the options Americans have traditionally banked on to secure their future have lost their mojo. Pensions went the way of lifetime employment a decade or two ago; as for your 401(k), the overall stock market has returned only 9 percent annually over the past 10 years, considerably lower than its 11 percent annual return over the past half-century. Homes turned out to be lousy investments for many, thanks to the housing crash, and near-zero rates have turned the venerable savings account and the “miracle” of compound interest into a joke. And rarely do our financial advisers, including the new craze of robo-advisers, have many answers for us.
But while tedium is in, buyers aren’t entirely asleep at the switch. Insurers have long loved variable annuities, which promise higher payouts if their underlying investments rise in value, because they saddle them with high commissions and fees. Sales, though, have fallen more than 10 percent since their recent peak in 2011, according to data provided by the Insured Retirement Institute, and some carriers are getting out of the market altogether. “If something sounds too good to be true, it probably is,” says Stan Haithcock, an annuities specialist and critic.
Utterly anodyne “fixed” annuities, by contrast, are on the rise, as are so-called longevity annuities, formally known as “deferred income annuities.” These latter products amount to a bet that you’ll hang on much longer than anyone else you know, since you start receiving income only once you’re in your 70s or 80s. (Alternatively, you can think of them as insurance against outliving the rest of your savings.) Since you can now add a longevity annuity to your 401(k) or IRA, roughly twice as many insurers now offer them, compared to 2012; their dollar sales have also doubled over that period.
Monotony, however, can still be murderous to your portfolio, particularly when it stems from mind-numbing complexity. All told, there are 15 different types of annuities, each with an encyclopedia-length disclosure statement written to protect the insurance company, not the consumer, says Allan Roth, founder of the investment advisory firm Wealth Logic. Even worse are the fees. Not only will you pay a commission that could be as high as 10 percent, says Roth, but you’ll also get dinged for things like return of premium in case of death and cost-of-living adjustments. You might also take a costly hit if you change your mind and decide that you want to do something else with your investment. Worse still, in some instances, you won’t be able to get your money.
Roth also adds that annuities can be very tax disadvantageous in the long run. The money grows tax-free, but once you start receiving payouts, they’re taxed as ordinary income — which is higher than the long-term capital gains rate (what is applied to withdrawals from mutual funds).
Betsy Bishop, a 62-year-old children’s librarian from Granite Springs, New York, heard the annuity siren call when she scaled back her working hours in January, thinking the guaranteed income might help her better plan her future. Bishop ultimately decided to hold off, largely because the interest rate wasn’t high enough for her. But the fear of losing her next egg in another market crash still haunts her, making the security of an annuity still tempting. “I’ll probably only get more worried about it the older I get, and the next time we go through a downturn,” she says.
Robin Ngai contributed reporting to this story.