Part II: My Annuity Evolution
Like I said last week, it was all fixed annuities for me in the beginning. It may sound boring but if those same rates were available today then I’d spend every hour of the day completing applications. The pain from a market correction in 2001 was real and several people understood the value of asset protection but the market rallied back in a big way and greed made just as quick a comeback. As silly as it sounds now, it was really hard to sell a true 7% guaranteed rate to most people. But for those who didn’t care for risk, it was an easy choice and solutions were simple, just like my career in the first few years.
Sometime around 2006 a wholesaler came to our office and started talking about variable annuities with a guaranteed income rider. From that point it became one of the most difficult products to understand and it still is. Most people by now can explain the difference between an account value and income value but thousands of people before got the two mixed up and ended up regretting a purchase. This is where Annuity Straight Talk came to life.
When the wholesaler talked about the contract he put focus on the fact that no matter what the market did, the income value was guaranteed to increase at 7% annually. The account value would float up and down with the market but the contract owner could take lifetime income from the ever-increasing income value, regardless of what happens in the stock market. After the market correction in 2001 this sounded pretty dang good to anyone thinking about retirement.
I was confused because my fixed annuities guaranteed 7% growth. Which 7% would you rather have? Do you want growth on your money or growth on a phantom value? The superior value of the fixed guarantee seemed obvious to me but it would take a little more math to bury the argument from all angles.
The only real argument anyone could give me was that the phantom income value offered guaranteed lifetime income whereas the fixed annuity did not. Well I knew that wasn’t true because EVERY SINGLE annuity can be commuted in value for lifetime income, whether you have an additional rider or not. And you can buy guaranteed income at any time in your life through an immediate annuity. To that point I had only sold one SPIA and the payouts were much higher than what was offered in the variable annuity. It stands to reason that if you can literally grow your money just as well as the phantom value will grow then you can get more income when you need it.
Back to the library I went to look through the books one more time and run the numbers from every possible angle I could think of. My idea was mathematically better, not to mention the additional benefits of zero fees and far more control over the money. I was just a kid so the older guys didn’t listen to me and started churning out variable annuity contracts. They were selling and I was advising. I didn’t make as much money selling fixed annuities but I did feel better about myself for disclosing all the information to prospective clients. My solution produced more income so it wasn’t hard for a critical thinking person to understand.
Fast forward several years and I can tell you there is one major advantage to maintaining flexibility and control over your safe assets. Everyone who has gone this route is not spending what they thought they would in retirement. Some people dialed it back and don’t need as much and others found they needed more. A flexible solution that can produce more income or none at all if you don’t want it seems like the logical path for every material reason you can imagine.
I had lunch with one of my mentors a couple weeks ago. He’s a tremendously decent human being and I love him like family. He made a lot of money selling variable annuities with guaranteed income. Wanna know what he’s doing with them now? He’s replacing them all with fixed annuities because most of the people who bought them don’t need the income and don’t like the fees. It’s a similar story for millions of people across the country who bought an annuity in the past 15 years.
From 2006 to 2008 I stuck to my guns and kept doing what I felt was right. Money kept rolling into the office from variable annuity sales and I wanted no part in it. That’s not to say all variable contracts were bad. To the contrary, many of them have done quite well over time but the market crash in 2008 put many of them in trouble. Hartford nearly failed, AXA started offering buyouts for the variable contracts and Ohio National stopped paying management fees to advisors who sold the contracts. All of them underestimated the actuarial cost of the guarantee when the account value dropped by 40%. The credit bubble was a black swan event that no computer simulation could predict.
2008 made me look like a rock star and I had my best year ever. Even so, the sales pitch for variable annuities was a hard thing to battle. The seasoned agents had more money and influence in our community and I’ll admit it’s not easy to convince people to ignore trends. I had to cast a wider net so I started a website.
Around this time, index annuities became very popular and of course I was skeptical. As interest rates changed, however, I was running out of options to maximize income but I had learned a lot about the context of different planning situations. It truly was an evolution in my thought process and if you understand the basics it will open up much more opportunity for you in retirement.
Stay tuned for part III next week…