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Investors with sufficient assets may want to cut out the middleman and deal direct.

Mark Levitt
By Mark Levitt

This article appeared originally in the November 2016 Levitt Letter.

Annuities can substantially improve a retirement plan, but they’re not for everyone and sometimes less optimal than salespeople claim. www.ImmediateAnnuities.com is a helpful resource for comparison shopping, though many investments can surpass even the best annuity returns. Annuities’ strong points often include tax advantages and safety.

Here’s one definition of annuity: a form of insurance or investment entitling the investor to a series of annual sums. And another: a contractual financial product designed to grow funds and then pay a stream of payments.

Earlier this year, financial columnist Scott Burns wrote two related articles. Here are their major points.

1. Annuities Only One Part of the Retirement Puzzle. It’s important to weigh the impact of the income remaining fixed for life, which means inflation will likely erode the benefits’ purchasing power down the road. Few investors calculate how long they must live before receiving any funds beyond what they originally paid.

A life annuity paying 6%, for example, would take 16.67 years before paying back anything above the original principal. A 69-year-old woman would have to live beyond her 17-year life expectancy (past age 86) just to do better than break even.

2. Are Annuities Good or Bad? Depends on the Type. Burns describes six options in two categories, more and less favorable.

Several kinds can be useful:

  1. Single-premium immediate annuities provide guaranteed lifetime income.
  2. CD-like annuities offer secure tax-deferred accumulation of interest.
  3. Term annuities are like reverse loans, returning your principal and interest over time.

Other varieties primarily serve, he explains, “to transfer your wealth to an insurance company if that’s what you want to do:”

  1. Variable annuities that wrap mutual funds in expensive insurance contracts
  2. Fixed-index annuities that hide costs but often disappoint investors
  3. “Living benefits” riders that often accompany both of the above

Rock-bottom interest rates have hurt the earnings of insurance products and led to extreme disappointment for some policyholders. The August 14 New York Times article “When Your Life Insurance Gets Sick” spells out a disturbing new quandary for “companies that sell policies that run for decades, like life and long-term care insurance…how to fund policies…how to back a promise of 4% in a 2%-or-less world.”

Today’s universal life policies no longer guarantee 4% or greater returns. Instead, they’re “loosely tied to the growth of the stock market.” Consequently, investors with sufficient assets may want to cut out the middleman (the annuity / life insurance company) and deal direct, so to speak, by opting for no-load, broadly diversified mutual funds with a discount firm such as Vanguard. Or split the difference by not putting too many eggs in the annuity basket. Of course, long-term financial planning will matter only if the Lord tarries (Matt. 24:14–30).

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