Part III: Annuity Solutions
The first six or seven years of my career in financial services was not always easy but it was simple. I learned the basic fundamentals of good planning and figured out how to look at things critically in order to find solutions for those who were able to think outside the box. In the early years, everything I was taught focused on accumulating assets for retirement but my independent research uncovered new ideas for distributing assets in retirement.
Every time an annuity wholesaler came to our office they would emphasize the lack of consensus in regards to retirement income. I consider it to be something of an annuity arms race. Every company out there is rushing to create new products that appeal to the populace so you will happily entrust them with your life’s work. I knew that ALL annuities are built on the same foundation so it stands to reason that you can do about the same thing with any one of them. The problem: most new contracts are built for a special purpose. The more specific the objective of a contract, the fewer additional options you have. More options means more control. Keep it simple.
I can’t necessarily say that it was a mistake to start this website but it didn’t come without sacrifice. The compliance department at my broker dealer wouldn’t approve my website because there was a dollar sign in my logo. Compliance standards and regulatory changes are well-intentioned but the result is that it forces most advisors to treat grown adults with kid gloves. The regulatory bodies don’t think you can handle big decisions. And to be fair there are plenty of scumbags that are held in check by the rules.
The sales process is an even bigger problem. The industry push to sell products to your generation is strong and there are plenty of solutions that meet the regulations but land outside the scope of good common sense. In the past two weeks I’ve met another four or five people who got a few years into a contract before they really knew what they had. There are hundreds more from the past and I just give them a little information and send them back to have a very difficult conversation with whomever sold the annuity.
Almost exactly twelve years ago I was online with the first version of this website. Because of ridiculous technicalities with the SEC, I could stay with the current firm or go independent with the website, but not both. It was a hard decision but as good as those guys were, we had our differences in style. Plus I was learning as much on my own as I had learned from them so it was time to be a big boy and leave. The first few years were extremely difficult because of the complex nature of the independent sales business. It opened my eyes as to what the average consumer faces when exploring this market.
Rates dropped and it was hard to find value. Fixed annuities were still competitive when analyzed the right way but those who didn’t want 7% a few years before, definitely didn’t want the same thing at 4% in 2010. Index annuities became competitive but I stayed away from them because I had something else. We made a living selling structured settlements for a few years. Discounted purchase prices created effective yields far higher than could be found in the primary market. I was beating traditional guaranteed income and in a big way. Different elements are at work in that market and there’s relatively little product available so when institutions found the asset class it drove the prices up and yields down. It’s based on supply and demand more than prevailing interest rates.
My friend Doug who had purchased several structured settlements, called one day and said he wanted to try something different and asked about index annuities. I was hesitant at first and started a free trial for a database that showed me all the products. It was a whole new world to me because I could finally do my own research and uncover where so many had steered me wrong for several years. I had always been trying to beat income projections because that’s all everyone told me to sell. But no, there was opportunity for growth in several contracts and plenty had zero fees. Why was no one talking about this? Don’t get me wrong, some people were doing that but marketing from the industry was certainly not pushing in that direction.
I picked a contract for Doug that looked like a reasonable deal and he bought it. After the first year he made a little over 5%. The rates didn’t drop in the contract and the company didn’t magically add any fees. Most of what I had heard about them was misguided. The next year he made about the same yield with the same results. It was a good, simple contract for safe money with reasonable growth potential and he could get money out of it if he wanted it. Many people were not suited for structured settlements and with those rates dropping we were running out of other options. People were still calling about index annuities and I had several ways of analyzing outcomes so my goal was to tell everyone how much can be accomplished with a simple contract that grows.
It was a natural fit because of how my career had started. All who came to me had been pitched a guaranteed income contract and I compared it to a growth contract using free withdrawals. It wasn’t for everyone but many liked the idea of having more discretion over the funds. Some wanted protection and didn’t need income while others needed income and wanted more control. Again I was in the position of simply trying to show people how to get more for their money.
It all comes down to your biggest concern…
Income- how about 20% more?
Market volatility- how about stability and more growth?
Inflation- bonds aren’t going to do it.
Fees- don’t pay ’em if you don’t want!
Legacy- combine all of the above in the right strategy and it’s an afterthought.
In the past ten years or so I’ve seen the good and bad in the annuity industry. I have consistently shown people how to create protection and income in retirement while spending less. From the beginning of my career 18 years ago the message is still the same. Get the most for your money. Products have changed but fundamentals have not. Once again, it’s simple. If you use an annuity to protect assets in retirement, how do you want to get your money back? Some people want it done for them while others want control. It’s up to you.
There is an annuity solution for every problem in retirement. It comes down to nothing more than you deciding how much money you want to protect. From there you can grow it, spend it or leave it for the kids. If you do it the right way you can grow more, spend more or leave more. Those who want control usually find the answer pretty easily.
Have a great weekend…