Would you be interested in guaranteed income for life, a guarantee that you will never run out of money? Now, legally, I am required to tell you that there are some conditions to qualify for the guaranteed income for life. When you decide you want to start receiving the stream of income for life, you will have to relinquish both ownership of the annuity and the accumulated value within the annuity to the annuity issuer. When you die, the annuity issuer, not your heirs, receive any residual value within the annuity. And one last thing, once you being receiving the income for life, there is no guarantee that you will receive a commensurate return for the amount you invested in the annuity. But remember, guaranteed income for life.
Would your decision be influenced if you knew that there are nimerous alternative sources of retirement income that do not impose such harsh requirements, that make you potentially subsidize the annuity issuer at the expense of you family and other heirs.
What most consumers do not understand is that the odds are usually against an annuity owner even breaking even on most annuities. With going into a lot of technical terms, consumers can calculate how lomg it would take to break even by simply using the Present Value function in Micorsoftr Excel. Present Value discount future payments based on the concept of the time value of money, i.e., a dollar today is worth more than a dollar ten years from now.
The odds of simply breaking even become even worse if the annuity owner’s mortality risk factor is considered. The mortality risk factor considers the odds that the annuity owner will be alive to receive any future payments. More often than not, once PV and mortality risk are both factored into the investment question, the annuity owner will never break even.
Note: Do not rely on online annuity breakeven calculators. Let’s just say their calculations “have issues.” Trust yourself and use the Microsoft Excel Present Value function to perform your own PV calculation. Compare your PV calcualtion to the online break even calculators and you will understand why you should do your own PV calculations.
There are several posts in the “Blog” section which provide further example of the inequitable aspect of annuities. Just use the search box to search for annuities. My advice to people considering is invest in a fairer investment, one that is not structured in such a way as to favor to product distributor with provisions that impose excessive fees and various terms that restrict the annuity owner’s actual return.
As with any investment, remember that costs matter…a lot. Annuities often impose a “spread” or fees of 1-2 percent off the top. The annuity industry often likes to play a game of semantics, claiing that an annuity does not charge “fees,” while knowing that the anuity issuer take a spread off the top, reducing an annuity owner’s realized. Anything that reduces an annuity owner’s realized return is a “cost” to an annuity owner.
Annuity owner’s like to minimize the impact of a spead by saying “it’s only 1 or 2 percent.” IF you purchase extra benefits or so-called “riders, the cumulative fee can easily reach 3-4 percent. The General Acountability Office has stated that each additional 1 percent in fees/costs reduces an investor’s end-return by approximately 17 percent over twenty years. Costs matter.
Two good posts to read before investing in an annuity are
Investor Alert: Variable Annuities and Fixed Indexed Annuities
CommonSense InvestSense 