From the October 2010 issue of Investment Advisor • Subscribe!

Annuities: A Better Answer Than Social Security

The biggest fear of all retirees is running out of money before they run out of life.

Annuities don't exist in a vacuum, yet critics voice concerns as if annuities are compared to utopia, something akin to high returns, no risks and no fees. I'm still looking for that one myself.

Annuities are the only thing that can guarantee income for life, the most important factor in retiring. Yes, they don't guarantee principal, but neither do stocks, whether individual stocks or in mutual funds. Unless held to maturity, neither do bonds, unless those were GM or Lehman Brothers bonds!

Certificates of deposit guarantee principal, but not income. The 11th Commandment for retirees is Thou Shall Not Spend Principal. The CD investor in 2000 earned 6%, or $6,000 per $100,000 CD, and that same investor today earns 1%, or $1,000 per $100,000. Investors have their principal but they can't afford to live on what it earns. CD rates, and therefore CD income, fluctuate greatly. This big swing in income is of greater risk to retirees than any other since they live on their income. Today's income is one-sixth of what it was 10 years ago

In "Should annuities be an option in 401(k)s?" Drew Denning, vice president of income solutions at Principal Financial Group, opines that annuities may be too complex. Well, arguably the most successful retirement plan that exists is Social Security, future funding issues aside. People certainly understand here they have no principal guarantee and all they get is a guaranteed income for life, no matter how long, or how short, "life" is. Many argue that Social Security is too complex--do I start at 62, or full retirement age (whatever that is), or wait until 70 when I get the most? People are confused about the best course of action with Social Security yet they only get one chance to make a determination.

Death benefit? Not with Social Security, which many think is such a successful program, though it has zero residual value. Any participant who dies before age 62 will have paid in all their working life for something with zero return. Is that such a wonderful deal?

I'll argue that Social Security is a bad deal for the poor. Why? As a generalization, they don't have the same life expectancy of someone better off and better educated. The poor pay in and get less back. The wealthier pay in for the same period, then live longer, and end up collecting more.

With an annuity, they are guaranteed income for life, the same as Social Security, yet they can also pass on a residual value if they have never collected the income. As all annuities feature a guaranteed death benefit, for those who paid in and never collected there is a major benefit for the client's family, unlike Social Security.

Critics complain that annuities have higher costs. Right, higher costs for higher benefits. Mercedes Benz cars have higher costs because they have higher benefits--better chance of surviving a crash. Yet Mercedes perform the same basic function as the least expensive cars--they get you from one point to another. Annuities have higher costs for the same reason--better chance of surviving a crash.

The biggest fear of all retirees is running out of money before they run out of life. There is no other investment alternative that provides that guarantee.

Finally, consider this: If all the money that was withheld for FICA over your lifetime was systematically invested in an annuity, fixed or variable, you would have your own real account, to fund your own retirement. Plus you may pass a valuable asset to your loved ones. There wouldn't be an unfunded liability facing us all.

Victor Connor

President

Connor Financial Group

Wellington, Fla.

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