Buy Annuities and You'll Never Outlive the Regret

Annuities are among the highest commission products an insurance agent or financial planner can sell to you. They are also among the worst possible choices for the people buying them. The various annuity products are perfectly legal, but highly ineffective in helping achieve long-term financial security. Annuities are meant to provide a guaranteed stream of income that you cannot outlive. In that, they succeed. How they do it, though, makes no sense for the average investor. Let me show you why. Barron's ran a featured story on annuities on July 23 highlighting what it called The 100 Best Annuities for Today's Market. We are all going to die. We just can't know exactly when. The Federal Social Security department provides us this actuarial view of what might occur. 65-year old men have average life expectancies of 84.3-years. 65-year old women make it to 86.6-years old on average. Some people will die sooner, some later. Here are details on three of Barron's highest rated, and recommended, annuity classes and the actual payouts they were offering recently. The simplest plans are described first. Buyers put up a lump sum of money and start drawing monthly payments after just 30-days. All Barron's examples assume a $200,000 starting sum. Annuities are marketed by showing prospective buyers how much they will receive in spending money for the rest of their lives. The annual payout rates shown are based on annual income as a percentage of the lump sum purchase price. Seeing 5.24% to 6.72% in spendable cash appears generous compared with interest earned on bank CDs, money market accounts or bonds. That's the baited hook which annuity salespeople use to lure in customers. The data below are for a 70-year old man or woman (single-life examples) and a 70-year-old man with a 65-year old female spouse (joint life examples). The monthly income is after purchase of a 10-year certain rider. That rider commits the issuing company to continue paying out any remaining principal to heirs if the annuitant(s) die before collecting for a full decade. It is not a lump sum payment. How much money would have been paid to the annuity owners over the first 10 years at the indicated monthly amounts? The best of the six would have paid out just 67.19% of the original $200,000. The worst of them would have distributed only 52.36%. Why did my table's title call that rider worse than worthless? If they'd never bought the annuities and simply kept their money in an insured bank account, they could have withdrawn all the 10-year cumulative distributions and had plenty left over for their heirs anyway. If the you fail to survive 10 years, the insurance company would have had use of your nest egg for a full decade, while paying your family absolutely nothing. They would simply eventually return your original lump sum with zero earnings. Is there any reader who thinks that is a good deal for the annuity buyer? Just asking. How about if a male buyer actually makes it to age 90? He would have collected a cumulative total of $268,740 from the very best annuity Barron's could find. What was the annualized rate of return on his $200,000 over the 20-years? A paltry 1.49%. If you die young, you made nothing. If you live a much longer than expected life, you locked in a return that would not even come close to overcoming inflation. Is that the type of investment that appeals to you? Here's the scoop on another variation of a basic immediate annuity. Instead of just a 10-year guarantee on full return of original principal the Cash Refund Annuity makes that permanent feature. Every rider has a cost, though. Notice that monthly income on these is substantially lower than in the previous 10-year certain annuities. The table below shows cumulative distributions to age 85 for men or age 87 for women. I used those to reflect slightly above average life expectancy ages. Way more than half of all men will likely die before even getting back all their original lump sum investments. An even higher percentage than that of the second to die annuities fall into that same category. Single-life annuities for women would show barely positive total returns at age 87. That would make the promise of any return to heirs moot. On either of the best female-based cash refund annuities the annualized rate of return would be south of 0.5%. A growth rate of less than .5% is almost certain to devastate your true buying power over time. Whenever the annuity is completed, the insurance issuer would have had the use of your money interest free for at least 15 to 17 years. The next strategy, Deferred Income Annuities (DIAs), require depositing your money with the annuity issuer well before starting to take out any distributions. Annual income is higher than with the other types as life expectancy (read: years to collect), from age 70, is much lower. The total income to age 90 appears impressive at first. The best one now available, From CNUA Mutual, actually represents a putrid 1.95% annualized rate of return over the full thirty years from age 60 through 90. Here's the math on that. Note, too, that the worst of the best second to die annuities actually provides just a 1.14% compounded rate of return if one spouse is lucky enough to live to 90. Is there anyone reading this today that would be enticed by a sub-2% rate of return for the rest of their lives? Keep in mind that the returns shown, according to Barron's, were the very best available. Many companies offer even less than the ones illustrated. The only winners in the annuity game are the salespeople and the annuity issuers. That is why folks over 60 get multiple invitations to attend educational retirement seminars offering free meals at fancy venues just for listening. Caveat emptor. I own no annuity products (duh).

Buy Annuities and You'll Never Outlive the Regret

Here's why annuities make no sense to the average investor.

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