I was sitting watching college football, just like you probably have many times, when the TV camera followed the running back after a fake handoff from the quarterback.
Completely unaware of the mistake, the camera stayed on the player without the ball, the wrong offensive threat. I yelled at the dumb TV as I listened to the play develop outside of the viewing area. I share this with you, because in a recent interview with ThinkAdvisor, Stan “the annuity man” Haithcock, like the camera in the story, follows the wrong offensive play.
He favors single premium immediate annuities (SPIAs) and QLACs (a subject for a different day.) On his website, Stan says SPIA’s with a cash refund (I’ll define those later) are like having your cake and eating it too. I may not have the self-proclaimed title of Annuity Man, but Stan has missed the play.
What Your Peers Are Reading
(Related: Wake Up, Dave Ramsey: Your Math Is Flawed)
For the sake of newcomers to this topic, let’s get the financial gobbledygook taken care of first. Jump past if you have been distributing annuities since mood rings were new and it’s too sophomoric.
What’s a single premium immediate annuity?
A SPIA is where you send an insurance company a pile of dough (not literally) and they send you a smaller pile of dough each month as long as you’re alive. Pretty cool unless you die few days later, then it’s not so pretty. To overcome this, the income can be modified to include a spouse’s life, or a set number of years, or inflation protection, or many other circumstances. But every little option adds up, and every additional guarantee reduces the monthly income.
What’s a fixed index annuity?
An FIA is where you send an insurance company some moolah (not the donkey variety) and they put a smaller pile of moolah into your account each year based on how a specified market index performed. Simply, when the index goes up, they give you some moohlah, but it’s much lower than what the index went up by. You agree to take a much smaller share of the gains, in exchange for none of the losses when the index goes down. You are not invested directly in any stock, bond, or market index.
What’s a variable annuity?
A variable annuity is where you send an insurance company some clams* and they use those clams to buy mutual funds you specify, in exchange for you giving them some clams each month, quarter, or year for building the product.
* The Flintstones used clams for money. One wonders: What did the Jetsons use?
Both FIAs and VAs can have a lifetime income benefit rider (LIBR) attached. A LIBR guarantees a monthly income even after your account value is reduced to zero.
Here’s the problem: FIA growth is often overstated, VA fee/internal costs is often understated, and LIBR is often misrepresented as guaranteed interest, or growth, rather than income.
Here’s a very basic way to view an annuity.
Have you ever owned a business? No? Okay, then imagine you own lawnmowing company. You charge $35 per cut for a standard lawn. A condo association contacts you, and tells you they have 100 standard lawns, and want you to mow regularly, but will only pay you $2,500 per cut ($25 each lawn). It’s a reduced amount, but you would still be making money.
Would you take the reduced income per cut? You shouldn’t because you’d be lowering your profit on a lot of cuts. Yet, many businesses will offer a discount for larger and repeat customers. Why? The consistent income gives the business security and assurance they can pay their monthly overhead, even with unexpected fluctuations in sales. Isn’t this reasonable? In essence, this is an annuity.