What Van Harlow and a few others (especially in the insurance business) want is the soon to be retired or already retired investor to bail out of securities and buy an annuity that will guarantee a lifetime income. Van Harlow’s beef is with volatility and he feels a retiree’s portfolio is not a place for it.
He goes on to say that retirees should not take out any more than 3%-6% of their savings in order not to run out of money before running out of life. They also should not have more than 25% of their savings in stock or equity mutual funds.
He along with Sri Reddy, senior vice-president and head of institutional income at Prudential Retirement, agree that the investment professional needs to help people arrive at a destination with some level of comfort.
Reddy went on to say that people need a baseline understanding of what they need for retirement. ‘We also need to focus on outcomes,’ said Reddy. ‘Not account values, but how much we need in terms of retirement income.’
That said, I agree that owning annuities have a place in just about all investor plans. But some of the arguments given above do not pass the common sense sniff test. One of the problems that Reddy and Van Harlow neglect is that most income annuity plans only provide 5-6% guaranteed income withdrawal rate while a great many clients need 8% of more to provide a comfortable income from the amount they have saved. These folks have no choice but to take as much as they can out of their savings in order just to live.
There has been and will continue to be from the majority of people a huge deficit in the amount of money they’ve managed to save for retirement. The last decade has not allowed those middle age workers to do what previous generations were able to do – namely accumulate significant sums of money for retirement.
In addition, once invested in an annuity or insurance company it is not so easy to bail/sell/withdraw/move assets to another company as easy as it is to sell a stock, bond or mutual fund. Care most be taken to invest only with the best quality company available. Left to their own resources the majority of investors are poorly equipped to choose a company with a solid balance sheet over another.
Not understanding that some annuity income options leave zero sum to beneficiaries other than spouse.
Investors also have to understand that the guarantee on their money will always be with the insurance company and not with any underlying investments. There is no FDIC on money invested with an annuity. Constant monitoring of an insurance company’s financial health becomes extremely important. If a company fails and another company steps in to service the client’s account the original benefits may not be available.
Some insurance companies sell plans that provide higher benefits to newer clients than they provide existing ones. Those annuity clients who need the higher benefits may have redemption charges that will cost them if they move assets to a more up-to-date policy.
To say an annuity is an easy and efficient method of reducing volatility and without investment risk is a misnomer. Costs, benefits and company financial health all need monitoring just as an investor reviews stock and fund portfolios.
However, for those investors who want to be conservative and put a fence around some assets with a guarantee of safety an annuity is a good choice. This allocation to insured guaranteed dollars may be just the ticket for the retiree (or soon to be retiree) who desires to give up some appreciation for peace of mind and no matter what happens to the economy a guaranteed monthly income. For more information on what plans are available call or write me.
Call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share his blog with someone who cares about their money.
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