Well it looks like we have a new “Annuity Hater” by the name of Wes Moss, a highly respected financial advisor, author, radio talk show host, and chief investment strategist.
And although we personally respect Wes and enjoy reading most of his content, his recent article in the Atlanta Journal Constitution titled “The Can’t Lose Annuity Trap” came off as very unbalanced (meaning NOT fair and balanced), and also had quite a few potentially harmful and misleading facts about fixed indexed annuities. To his credit, Wes did expose some of the issues about about indexed annuities, along with some of the problems regarding how these products are marketed and sold, which we will discuss as well.
The purpose of this fixed indexed annuity rebuttal is that sometimes even the smartest and most cherished money experts like Dave Ramsey, Clark Howard, and Wes Moss need to be corrected when they lump any type of retirement vehicle into an unbalanced, one-size fits all beat down.
Let’s go over each of Wes Moss’s points in his article below and break down what is correct and what is false.
By the end of this fixed indexed annuity rebuttal you will learn:
Why indexed annuities truly are bad “investments”
Who indexed annuities are an incredible fit for, and why they should really be bought (and thus how they should be sold and marketed)
Our independent opinion on why we believe Wes wrote this negative article, along with the reason we believe he is most likely irritated with some of the agents and advisors who are selling these fixed indexed annuities.
Wes begins the article with this opening statement about index annuities
“If you’ve listened to the radio for more than about 10 minutes lately, you’ve likely been hearing ads for “can’t lose” investments that promise you will benefit from raises in the stock market with no risk of losing your principal, even if the markets tank.
While the commercials rarely so say, they are promoting annuities – more specifically “indexed annuities”.”
This is one of the few places that Wes is mostly correct. But what confused us is his mention of indexed annuities being classified as investments. For those of you confused, indexed annuities are NOT investments, so we aren’t sure if Wes misspoke here or if the advisor or insurance agent on the radio misspoke. Either way, they aren’t investments; they are classified as insurance products.
One of the advantages of indexed annuities is that the owner of the annuity can actually benefit (partially) from rises in the stock market with no risk of losing your principal, even if the market tanks. But the real reason that indexed annuities should be bought (and thus sold) is either for the contractually guaranteed lifetime income stream or safety, not any pie in the sky returns. Stan the Annuity Man says it best in his recent book “The Annuity Stanifesto” where he tells consumers, “Buy annuities for what they will do (contractually worst case scenario), not what they might do”.
Why all indexed annuities are not really 10-15 years in duration
“At first glance, an indexed annuity seems pretty attractive. You purchase the annuity from a big name insurance company, which promises to return your principal to you “regardless of how the stock or bond market does”. The catch (or at least one of the catches) — there’s usually a 10 to 15 year period of time where your money is locked up – and if you want to pull it out of the annuity, big surrender penalties can apply.”
These fixed indexed annuities are sold by very large insurance carriers, of which most of the larger carriers have great names and have been around for tens if not 100s of years. There is also always a return of principal as the worst-case scenario assuming you stick to your end of the agreement with the annuity carrier and not walk away early.
But then Wes throws a misleading jab and says “there’s usually a 10 to 15 year period of time where your money is locked up – and if you want to pull it out of the annuity, big surrender penalties apply.
To begin, the top selling indexed annuities in the country today are almost all either 7 or 10 years. There are only a couple of fixed indexed annuities that we know of that are over 10 years, and they are quickly becoming extinct as most of the biggest annuity states like Florida, Texas, Ohio, California, and others won’t even allow them to be sold in their states. And we know of only 1 that is actually 15 years. Wes makes it sound like it is very typical to be locked into an indexed annuity for 15 years, which is simply not the case.
Wes could have just said that many of the top selling fixed indexed annuities have 10-year surrender penalties and he would have been correct. It would also be important to mention that the surrender penalties usually decrease each year on a sliding scale. Meaning, the first year of the annuity where the insurance carrier takes the most risk and has the most expenses and exposure, the surrender charge will be the highest. By the final year, the surrender charge is usually a very small percentage, and then after the full surrender charge period is over, your money is free to move without any charges. But none of these positives were mentioned at all in the article.
Now we are consumer advocates here at Retirement Think Tank (and we do not make money from the sale of annuities), but we also understand why insurance carriers have surrender charges. And it isn’t some big negative and scary thing like many people will have you believe. It is a contract, just like a mortgage, a car loan, a lease, a life insurance policy, a cell phone plan, or anything else that has early termination penalties if you don’t play by the rules that you agreed upon when you bought it.
And once you buy an annuity, the insurance carrier can’t legally change the surrender charges, so this isn’t something that should come as a surprise or seem unfair down the road, as you knew exactly what the rules where when you bought the annuity. Same rules apply for a mortgage or any other contract in America. If you break a contract, prepare to pay a penalty. It’s that simple.
Finally, did you know that most of the surrender charges on the top indexed annuities start around 10% and go down each year you own the annuity. So that means if you put in $100,000 into an indexed annuity with a 10% surrender charge and wanted to break the contract and walk away after 3 months, the insurance carrier would give you a check for $90,000.
Although it is usually never a good idea to walk away from your annuity (and NEVER a good idea to walk away after 3 months), think about this statement in regards to other long-term contracts before you think that this is such a rotten deal. For instance, compare it to how much you would get back immediately after 3 months if you bought a house and then tried to break your contract. Do you think that you could get 90% of the total home cost back in just a few months after you factor in taxes, real estate agent fees on both ends, etc? What about a car loan or lease? How about a cell phone plan? No, most of them keep way more than 10% of the total amount you have given them if you break the contract in 3 months. And they should! As a consumer advocate I want them to keep those penalties as it helps them avoid a “run on the bank” and keeps them profitable = they will be around for the long haul.
So how do fixed indexed annuities compare to the stock market?
“From the indexed annuities I’ve seen and studied, the financial upside is very limited. Based on the market’s performance over the past 25 years, annuity owners were doing very well if they earned a 2.5 percent per annum return. Remember, the insurance companies are only giving you small fraction of what the market they are tracking actually returns (these are referred to as “participation rates” and rates that “cap” your upside).
Oh, and by the way, annuities are only required by regulation to return 87.5 percent of your money (not the full 100 percent)”
This is where Wes starts get quite a bit off-course. To begin, recall earlier we mentioned that indexed annuities were never built to beat the stock market, mutual funds, or any other high-risk investment for that matter. Indexed annuities were originally created a little over 20 years ago to give owners a better return than a bank CD or a US Treasury. And since they have been introduced, most of them have accomplished their mission. Moreover, I would be willing to bet Wes used the all-time low caps and rates of today and did a back-test over the past 25 years (even though the fixed indexed annuities as we know them today didn’t even exist back then… and the indexed annuities that existed 15-20 years ago had caps that were a multiple of where they are today due to the high interest rates of the time).
However, today’s indexed annuities are mostly sold for their contractual income guarantees or for principal protection. So going back 25 years on a 10-year annuity is not appropriate to begin with. But the fact that today’s index annuity buyer isn’t buying the it for a big return makes Wes’ point even less relevant even if he found a way to correctly track what real returns were for using the correct caps and participation rates over the last 25 years. However, his point is spot on if he is hearing advisors mislead consumers by inferring that indexed annuity are going to return huge gains each year… because they probably won’t.
I know of a couple of smart financial advisors who tell their clients that buy indexed annuities that they will make zero percent interest for as long as they own it. This acts as a strong reminder that the only reason that they should own the annuity it is to get the contractual lifetime income guarantees that come with the annuity contract. So if the client does get even a modest 2% return, they are pleased as punch because it was more than they thought they would receive from it. Once again, buy indexed annuities for what they will do, not what they might do.
Do you understand fixed index annuity minimum guarantees?
Wes’ next statement about only getting 87.5% of your money in an annuity is WAY OFF. I can only guess he made an error here, or he just doesn’t understand how the minimum guarantees on indexed annuities work.
Let me explain. All indexed annuities must have some sort of underlying minimum growth each year, even if it never actually affects the true value of the annuity (which historically has usually always been the case).
The candid reason for the existence of these minimum guarantees is that this underlying guaranteed growth rate is what keeps these indexed annuities classified as fixed insurance products. Because in order to be a fixed annuity (and not be categorized a security like a variable annuity), the vehicle must have a set, specific, and unchanged contractual growth rate each and every year.
This growth rate is an underlying value tied to the amount of premium that you put into the annuity, but it does not mean that the carrier only has to give you back 87.5% of your money as Wes states. And it certainly doesn’t stay the same throughout the entire contract as Wes implies. For instance, some annuities (not all as this is just one example) have an underlying growth rate of 3% growing on 87.5% of what you put in. After 10 years, 3% compounding on 87.5% of your money would equal approximately 114% of what you put in. So on a $100,000 example, you would have a little over $114,000 as your absolute worst-case scenario if you wanted to walk away then (assuming a standard 10 year indexed annuity). This is a much different story than saying “annuities are only required by regulation to return 87.5% percent of your money”. In fact, it is quite misleading
Important note: We have yet to hear of a single indexed annuity that has been sold in the last 20 years where this minimum guarantee has come into play. Meaning, the indexed annuity always outperformed this minimum guarantee and/or the annuity owner turned on their lifetime income, which makes the minimum guarantee a mute point.
What is the potential upside with a fixed indexed annuity?
“If those annuity owners had invested wisely and consistently in a balanced S&P 500 and government bond market blend, exposing themselves to some risk, their potential upside for that 25-year period was considerably higher, ranging from 6.5 to 7 percent per year.”
This is another example of proving that there needs to be more education placed on understanding the purpose and fit of a fixed indexed annuity. These indexed annuities were never intended to be compared to the S&P 500. They are NOT investments. They are insurance products where their main value is to provide safety and a contractual income stream that you cannot outlive. Last time I checked neither the S&P 500 nor any government bond can provide a contractual lifetime income stream. Not to mention the ideal person buying a fixed indexed annuity does not want any risk. That is one of the reason’s they went to a safe insurance product.
However, I will sympathize with Wes here as I believe the reason he went down this path is due to some of the misleading marketing that he mentioned in the beginning of his article where some advisors (who we refer to as product slingers) are “pitching” these indexed annuities the incorrect way by making them appear as though they will achieve high returns with no downside risk.
How much control do you give up with fixed indexed annuities?
“In exchange for security and the very modest return potential provided by an annuity, you essentially lose significant access to the money you have invested, thanks to page after page of restrictions, lock-ups and handcuffs built into the contract.”
Once again, another example of not truly understanding the goal of a fixed indexed annuity. If you are placing money into a retirement income vehicle that will be giving you a contractual lifetime income stream, then I HIGHLY suggest you don’t put money in that you might need to access in need of an emergency, money to pay bills, taxes, etc. Indexed annuities are not investments, they are not some vehicle where you are trying to buy low, sell high, and get out. This is a long-term contract (example 10 years) that usually has a specific income purpose. And to Wes’ point, if anyone is promising you (or even alluding) that an indexed annuity will return 6-8% returns, then do RUN. They simply aren’t built for big accumulation and big gains. They are made for a safe alternative to bank CDs in regards to returns, but more importantly, built for a contractual lifetime income.
How safe is your money held inside of an annuity at an insurance carrier?
“I completely understand why individual investors remain skittish about the markets. The past 15 years in the stock market have been a rollercoaster.
A lot of folks – some of them deep into retirement –are still trying to piece together nest eggs that were shattered in the great recession of 2008. But if you are looking for a “guaranteed investment”, annuities aren’t the answer – too many restrictions, too much control from the annuity company, and a bet that the annuity company itself will not run into financial trouble – for too little return.”
To begin, he is correct, there is no such thing as a guaranteed investment. But this brings us back to the point of where indexed annuities have their fit in the first place.
Wes, not only do I personally own a fixed indexed annuity (a 10 year indexed annuity where I keep some of my qualified money), but I know of countless others that own them as well and are as happy as I am with the purchase. In fact, there were over $35 billion of indexed annuities sold last year alone in 2013, and less than 1% of index annuity owners ever file any complaints or lawsuits.
More importantly, I know many consumers that bought a fixed indexed annuity back in the years between 2004-2007. Did you know that not a SINGLE ONE OF THEM LOST A DIME when the market crashed in 2008? Let me repeat this because it is incredibly powerful – Not a single owner of an indexed annuity lost a dime when the market crashed in 2008 and 2009. Yet all of these same index annuity owner’s other investments including their 401(k), stocks, mutual funds, real estate, etc. all lost value. So how can these indexed annuities all be so bad?
Wes also throws an overused, yet never witnessed scare tactic about the annuity company running into financial trouble. Since the 2008-2009 financial meltdown over 420 banks have failed in America. Can anyone name me a single insurance carrier that failed during the same time? More precise, can anyone find me a single index annuity owner who lost money or didn’t get what they were contractually promised due to an insurance company going insolvent? You can’t, because it hasn’t happened. And if you bring up AIG, call them up ask them what happened to their annuity contracts they had in place? NOTHING. Absolutely nothing. In fact, AIG’s insurance division was one of their few profitable divisions during the entire debacle. And because the insurance division of AIG is so highly regulated (unlike the investment banking side), they were not allowed to invest in all of the wild derivatives and trash that got our financial sector into the mess in the first place. How’s that for safety?
Here are Wes’s final thoughts in the article:
“Instead, if you really want a “risk free asset” and are willing to leave your money invested for a full 10 years, just buy a Ten-Year US Government Treasury Bond that yields between 2.5 to 3 percent per year and hold it.
Not only does the United States of America back your principal, you would earn 25 to 30 percent in interest over 10 years.
That’s about as close to “can’t lose” as you’re going to find. But run the other way if any “company” promises you a guaranteed investment. What happens if the company itself goes away?”
This is another example of not understanding the value and goal of most index annuities. Now I am not here to comment on buying US Treasuries as they have their place for sure. But I do want all of our readers to understand that there is a HUGE difference between an indexed annuity and a US Treasury.
To begin, Wes is correct to compare the two vehicles if all you were concerned with is a return. But as I have mentioned over and over, if your only concern is a high return with some safety, then why not look at a straight fixed annuity (aka multi-year guarantee annuity) and stay away from index annuities and government bonds altogether. There are some 5-year fixed annuities that are guaranteeing 2.75% compounded yields for each of the 5 years. And then after 5 years there are no penalties to take 100% of your money out. Don’t forget that annuities grow tax-deferred so you will not pay any taxes on your gains until you decide to request the money.
“Buy a fixed indexed annuity for what it WILL do, not what it MIGHT do” ~ Stan the Annuity Man
Finally, Wes’ very last sentence says to run if they promise you a guaranteed investment, and we actually agree on that point. As we mentioned, don’t buy an indexed annuity hoping to see some huge returns. Buy it for what it WILL do, not want it MIGHT do. Also, keep in mind that fixed indexed annuities are not investments, so run if anyone tells you that they are.
And although there isn’t any insurance carrier that is too big to fail like the US Government, there still should be little fear of doing business with an insurance carrier that has a solid rating and good financials. These insurance carriers are some of the most highly regulated and reserve-rich financial institutions in the world. They make many of the banks look like unregulated gambling casinos in terms of how much they keep in reserves for every dollar that they take in.
At the very beginning of this article, I mentioned that I would make a guess as to why Wes is a bit angry with some of the agents and advisors who are selling and marketing these indexed annuities. As it turns out, this is where I believe Wes and I see eye-to-eye. I believe that there are some very misleading messages and marketing tactics being used to promote and sell fixed indexed annuities.
Wes mentioned he is hearing some misleading promises about indexed annuities on the radio and I fully believe him. We have found a very high amount of misleading advertisements, blogs, and online promotions regarding these indexed annuities. Some of them are so blatantly misleading that it is a wonder the people placing them haven’t lost their licenses yet.
So here is our advice to you consumers out there who are looking at annuities for a portion of your retirement savings. Do your research on any product before ever putting a dime into it. And make sure to look at both the pros and the cons and try to find the most fair and balanced articles and research out there. Although we had some issues with Wes’ article being a bit too “one-sided” on the negative side, a “one-sided” positive article on indexed annuities can be just (and in many cases more) damaging if they aren’t telling you about the negatives and the pitfalls to look out for. Because as Wes mentions, these index annuities are far from perfect, but they do have a fit for the right person when you fully understand what fixed indexed annuities are really intended to do.
I think the main problem in the financial services industry is that most advisors need a bit more education on both the pros and cons of these fixed indexed annuities. Are they perfect? Heck no! Far from it. But can you name a retirement or investment vehicle that is perfect, or one that can be a fit for everyone these days? Of course not! But given the right person with the right goals of a safe and secure lifetime income for a portion of their retirement savings (note that I said a portion), fixed indexed annuities can be an incredible fit.
(Read the Clark Howard Annuity Rebuttal here. Read the Dave Ramsey Annuity Rebuttal here).
Disclaimer: Nothing in this article can be or should be construed as investment advice. We are simply giving our independent review on a recent article and there is not enough information in this article to make a sound or educated decision. We strongly urge you to seek out a licensed professional before ever making the decision to buy any type of annuity.
Retirement Think Tank does not have an insurance license and does NOT make any money from the sale of any annuities. Retirement Think Tank is simply an education platform with a goal to make sure that baby boomers and retirees have the correct information when it comes to owning an annuity. We are an independent family owned and operated Think Tank and are NOT affiliated with any insurance carrier in any way shape or form.
We are also not affiliated with Wes Moss or Capital Investment Advisors. The views in this rebuttal are strictly our own and they are in way a negative reflection on Wes or his company.
Video and rebuttal done by Joe Simonds, Founder of www.AnnuityThinkTank.com, www.Annuity123.com, and Advisor Internet Marketing.
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