When I started this website it was all about fixed annuities. A good fixed rate will solve any problem in retirement and beat the projections of every long-term guarantee. Running the numbers and learning how to analyze solutions provided the inspiration to start spreading my message. Unfortunately it wasn’t long before rates started dropping. Multi-year guarantees that started over 6% steadily decreased and in just a couple years it was hard to find something over 3%.
The rate wasn’t the only thing that changed. In order to keep a competitive yield in contracts, insurance companies had to limit liquidity. Most quality fixed annuities came with a full 10% free withdrawal but that changed and now most offer interest only withdrawals and some come with no liquidity at all. It works fine for parking some money but you can’t do any sort of dynamic planning with it.
Before someone calls me on it I need to tell you that 10% free withdrawals are still available in some fixed annuities. The problem is that you’ll sacrifice yield to get it. New York Life will give you the full free withdrawal and a whopping 1.5% over seven years. That rate is an educated guess as I didn’t take the time to look it up.
Since fixed annuities were the first contracts I ever sold there will always be a special place in my heart for them. In the early years I got people into contracts with a 7% guarantee over ten years. In the mid-2000s those people were comfortable and happy. Others with market exuberance before we hit the financial crisis would consider 7% guaranteed to be a big mistake and some of my clients second guessed the decision. But 2008 happened as such things always do. A return to reality is inevitable, we just never see it coming. That’s when a guarantee makes the most sense.
The really cool thing about those contracts is that after the initial guarantee period there is a minimum guaranteed rate that comes after it. For the early contracts it was 3% and we had no idea in the beginning that would be a competitive rate after the surrender schedule expired. We came out of the recession ten years ago and woke up in a whole new world. With fewer and fewer options for risk averse people, most decided to hang on to the 3% contract. It was fully liquid and could be taken at any time without penalty so staying put made sense. How many of you would take that rate with no restrictions?
This is one of the main reasons why I’ve never replaced an annuity I had sold in the past. The base contract was better than anything available since so there’s no reason to mess up a good thing.
There have been plenty of times in the past 8 or 9 years where others would scoff at the idea of a measly 3% but the last month reminded us all to not be greedy. Things have evened out and the fixed annuity caught up because it never lost money. The old fable of the tortoise and the hare is the lesson here.
On the other side of 2020 is going to be a different world. We have no idea how long this will take but I do know it will take new ideas to prosper from it. There is going to be some incredible opportunity going forward and those who were prepared will get the most out of it. People rushing to safety after the collapse are like the same people fighting over stuff at the grocery store right now.
If you were prepared then pat yourself on the back. This year will be a whole lot easier and you can worry about more important things like spending time with family in uncertain times. That’s what I’m doing. With my back up against the mountains I can look out and see everything going on without being directly affected by it. In a time when the CDC tells us not to get within six feet of another person, maybe the guy who does business remotely from Montana finally has the advantage.
I wish you all the best as we navigate the unknown over the next few months. Rest assured knowing that as things change I’ll adapt to provide ideas so you can be on the front line of the recovery. If you get bored with your social distancing routine then give me a call. I’d like to know how everyone is doing and the phones still work, at least for now.
Do your best to enjoy the weekend and look below for related posts from the past…
One of my favorites because this was so easy: Why I like Annuities
Don’t forget three months ago when many thought the rally would never end: Why Would an Annuity Make Sense in 2019
I’ll be damned if this doesn’t make a pile of sense right now: The True Cost of Volatility
This one shows that last August most people were fairly uncertain. My oh my how that has changed in such a short period of time. A Wild 2019 and How Annuities Fit
That’s it for now… I love you all!