Index annuities, like all the tools in an advisor’s tool box, are neither good nor bad; they are merely one tool among many, which–when properly used–can solve a myriad of problems for older baby boomer clients.
Example: On our recommendation, my client, a retired Army colonel, invested in several securities products from 1997 to 2000, doubling her individual retirement account. Then we recommended, and she agreed, to move into cash. Later, in July 2002, we recommended she move into an index annuity. In the next 7 years, her index annuity account credited over 49% interest–this during a period when the S&P 500 actually lost 4% (July 1, 2002 to July 1, 2009).
Thus, this retired officer has out-earned the S&P index by an astounding 53% in 7 years, earning index-linked interest during the gain years, and retaining that interest during the current recession.
She is typical of many in our client family. Yet despite many such stories, annuity-averse advisors still disparage and even vilify index annuities. Some say the products have no place whatsoever in a baby boomer’s retirement portfolio.
Let’s examine several of their favorite objections:
Those awful surrender penalties. Most annuities allow account owners to take up to 10% of contract value out each year, penalty-free, after which they will incur a surrender penalty on the excess. Logic dictates that retirees who spend down 10% of their IRA each year will run out of funds within 12 years, far sooner than the +20-year retirement most plan for.
By comparison, if a boomer were to lose–as many have–30% to 40% of their life savings in equities, wouldn’t that also “penalize,” even jeopardize, that boomers’ latter retirement years?
Those unsuitable products. Critics ignore the fact that the Model Suitability Regulations that the National Association of Insurance Commissioners passed in 2007 established suitability guidelines. Indeed, today’s insurers often reject business that places more than 50% of a client’s investable assets into any annuity.