Today we’re welcoming Stan Haithcock, aka Stan The Annuity Man, to the blog. Stan The Annuity Man is a nationally recognized independent annuity expert (and critic) known for his crusade against improperly sold annuity products. He has made it his mission to educate Americans about the good, the bad, and the truth behind annuity products.
Annuities are the most misunderstood and improperly sold product in the financial world, with the frequently overhyped “too good to be true” sales message going largely unregulated. There are at least 15 different types of annuities available, and they have been around since the Roman times and sold in the U.S. for well over 200 years. In 2013, there were over $200 billion of annuities sold in America, so it’s important to know how to evaluate if an annuity is right for you, the key questions to ask, and how to structure these strategies in a low interest rate environment.
Annuities are, in essence, transfer or risk products that contractually solve for a specific goal. An easy to remember acronym to find out if you even need to consider an annuity for your situation is the word P.I.L.L.
P stands for Principal Protection
I stands for Income for Life
L stands for Legacy
L stands for Long Term Care
If you don’t need to contractually solve for those 4 things, then you don’t need an annuity. It’s really that simple. Annuity products should not be purchased for stock market type growth potential, even though that’s how the majority of them (variable & indexed annuities) are unfortunately pitched. Annuities should always be owned for what they “will do, not might do” which means only for the contractual guarantees. Don’t buy the agent’s dream scenario, buy the contractual realities of the annuity policy.
Never be pressured into signing an annuity application, and always make your decision on your time frame, not the agent’s. Below are the top 5 questions to ask before signing any annuity contract.
Another key consideration in evaluating if an annuity is right for you is the current low interest rate environment. Just like with CDs and bonds, fixed annuities can be laddered in order to potentially take advantage of rising interest rates. The duration should be no longer than 5 years in my opinion, and a current popular fixed rate annuity ladder has 3, 4, and 5 year durations with all providing a contractually guaranteed annual yield. Outside of an IRA, interest will compound and grow tax deferred with this fixed rate annuity strategy.
You can also ladder contractual income as well with fixed annuities to enhance your guaranteed payout with the combination of rising interest rates (hopefully), and you being older each year you buy an annuity. All annuity payments are based on your life expectancy at the time you take the payments, so the older you are, the higher the payments. An annuity income ladder would have you buy a Single Premium Immediate annuity every year for multiple years, or staggering future start dates using income riders and Longevity Annuities.
All annuities aren’t bad, just like all restaurants aren’t bad. Annuities are not for everyone, and are not one size fits all. The contractual realities of the annuity policy will eventually reveal themselves, so if the transfer of risk guarantees solve for your specific situation then an annuity might be a positive addition to your current strategies.