Would You Buy an Investment That Earns Nothing for at Least 12 Years?

Purchasing annuities from financial planners, insurance companies and brokerage firms is something I would avoid. Most of those free retirement planning seminars offering free lunches and dinners at nice country clubs and restaurants are selling annuities, as well. Take the lunch, skip the annuities. Respected financial publications and magazines often highlight annuities as essential parts of your retirement assets on the premise that you'll never outlive your money, no matter what interest rates or the stock market might do. Barron's in it's recent issue has a story on annuities available. The two types illustrated in a graphic in the story are plain vanilla varieties -- $200,000 lump sum purchases of Single Premium Immediate Annuities (SPIA), which begin payments after 30 days and continue to pay until death (for men that start is age 70, for their spouses, 65, in the chart). Annual income offered is lower for women due to their statistically longer life expectancy. The first set of data includes a 10-year certain provision. The second set of illustrations includes a cash refund rider. I'll explain those terms in more detail shortly, but in the graphic, it outlines the returns for 10-Year Certain plans for single-life man (with annual income for life ranging from $15,910 to $16,062; and total income by age 90 from $318,200 to $321,240), woman ($15,099 to $15,494; $301,980 to $309,880) and joint life ($12,925-$13,244; $258,500 to $264,880). For the cash refund plans, those are slightly lower at single-life man ($15,020 to $15,032; $300,400-$300,640); woman ($14,298 to $14,406; $285,960-$288,120) and joint ($12,685-$12,798; $253,700-$255,960). When you buy an annuity you are trading your lump sum payment for a lifetime income stream. That is very different from getting income from a bank certificate of deposit, Treasury bond, or money market account. With those more traditional investments your principal remains yours and is returned at maturity. The 10-year certain policies merely state that the issuing firm will return any remaining principal to beneficiaries if you never got back 100% of what you paid initially. Note: You cannot be paid 100% of your originally invested amount in less than 10-years at the income levels shown. Translation: You, and your family members, would have booked a net loss on your cumulative annuity payments received vs. simply having kept your money in a bank account or its equivalent. Cash Refund policies merely state that if you die before collecting 120 monthly payments that what remains will be refunded to your chosen beneficiary. Translation: This rider also assures your heirs of a net loss vs. what you paid initially when compared to simply having parked your money at the bank. What I just said is not a misprint. Both the 10-year certain and the Cash Refund riders have no applicability if you survive long enough to have received back all your original cash outlay. At the annual income rates shown by Barron's on the best annuities available, you will not have accomplished that feat for at least 12.43-years and possibly not for as much as 13.98-years. That makes both riders losing bets if you die while they are still in effect. Every rider added decreases the amounts you will receive each month of your remaining life. They might save heirs from the total loss of your previous nest egg, but they cannot help you personally. These are the life expectancy years for people who have already reached age 65 as per socialsecurity.gov. Half of all people will die before reaching about 85-years of age. Now check out the years to recoup principal on the following tables. Even the highest paying annuities shown below make men reach over 83 before simply earning even $1 of actual income. Women fared even worse, needing to reach almost 84-years old before any income above their original payment would be paid to them by the issuer. The Barron's chart states that a man who lived to 90 would have earned $121,240 on his original $200,000. That works out to just $6,062 per year (non-inflation adjusted) a full 20 years after he gave up his $200,000 nest egg. Do the math: $6,026 / $200,000 = just 3.03% in simple interest. Not one cent of that would have been paid until after age 83. If that same annuity buyer only lives two years past that, rather than till 90, he would have only collected $32,124 more than he originally laid out. Subtract out inflation and the horrible cumulative returns at 85.3, or even 90 years old, are decidedly negative. There is one more negative to annuity income I haven't covered yet. A small portion of each year's payments will be considered taxable income from the very first year you begin collecting monthly payments. That is despite that for the first 12 to almost 14 years 100% of the money sent to you was already yours. Why then are so many planners, brokers and insurance agents looking to sell you an annuity? They are among the highest commission products on the market. Agents typical earn about 6% of the lump sum purchase price up front. On the $200,000 examples that equals a $12,000 commission. Someone who buys a million dollar annuity generates a cool $60,000 commission for the salesperson and his firm. Now you understand how all those free meals to induce you to attend seminars are paid for. My advice? Never even consider buying annuities. They are among the worst choices you can make in terms of providing for your future retirement expenses. Attend those seminars if you like. Enjoy the food and drinks. Just don't fall for the hard sell sales pitches you'll receive. I know this first-hand: I was insurance licensed when I worked as a stock broker in the 1980s and 1990s. I refused to sell annuities.

Would You Buy an Investment That Earns Nothing for at Least 12 Years?

Don't laugh. Many people do that exact thing every day here in America.

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