It happens more often than you’d realize and I saw it again last week. I was meeting with Joe, who liked the idea of protecting some assets but had one major hesitation. The only person Joe had spoken with was recommending he put all his investment assets in a fixed index annuity from Nationwide.
This is something I have seen several times before but it still surprises me to see a salesman stick his neck out so far with a wild recommendation. After the meeting I went back through some notes and found five other people from the last month who dealt with a similar situation. Another salesman had told each of these people to put all of their assets in an annuity.
I’ve spent some time in the past couple months talking about bad product recommendations but I think a bigger problem is what I would call bad allocation recommendations.
You should almost never put all your money into an annuity. It’s only appropriate in a worst-case scenario, when retirement savings are just enough to meet income needs.
Let me tell you a little more about Joe. He owns a successful business and has more than adequate savings in addition to some real estate investments. Joe is not quite 60 years old and doesn’t have a planned retirement date. He plans to work another six or seven years and has a local advisor that manages his portfolio. The local advisor is a friend who has done a really nice job choosing investments and performance figures indicate Joe has done well.
Joe is like almost everyone else. Even if returns have been good he doesn’t want as much risk with his assets going forward. The recommended annuity would eliminate risk but it made him nervous to put all of his assets into one product that would lock up his money for 12 years. He had a good relationship with the local advisor and I think a lot of his hesitation came from the fact that Joe didn’t want to turn his back on a guy who had served him well for several years. I don’t blame him.
I told Joe what I tell everyone. Annuities are meant as an alternative to safe assets. Approaching retirement, close to half a portfolio should be allocated to safe assets. That cuts volatility and risk in half but also limits yield. Traditionally bonds have been used for the safe side of a portfolio but with recent rate increases bonds have taken a hit as well.
Annuities give you greater safety free from interest rate risk. Risk in a portfolio can also be cut in half but with the greater earning potential of the annuity there are less limitations on upside growth.
I am certainly not suggesting that half of your assets should go into an annuity. It works for some but not others. My recommendations are unique for each person and depend entirely on individual parameters. Plenty of people will never believe an annuity can improve their situation and nothing I say will get them to see things differently.
Annuities are sold, never bought. It’s an old saying that kind of makes sense to me. With so many salespeople proposing an all-or-nothing approach to using annuities I can see why the sentiment toward annuities is often negative. The bad actors in any profession get all the news. Just don’t use that as a reason to not explore an annuity strategy. You may learn something you didn’t know before and find a reason to buy an annuity that makes sense. You wouldn’t be the first.
If you have any questions or would like me to review a proposal that seems too aggressive please don’t hesitate to give me a call.
All my best,