If you Google the words what’s
wrong with annuities you’ll find a list of resources answering the
question posed. So, here’s the short of what’s wrong with not only standard
annuity contracts but also the more costly version, the variable (“investment”)
annuity: high fees, surrender fees, early withdrawal penalty, tax punishment of
survivors, and (above all else) severe losses in long-term value because of
inflation. Inflation steals varying amounts of purchasing power from an annuity
each year. In 15-20 years, the annuity’s remaining purchasing power can be about
half as much. I am among the many looking for 1980-era inflation to return
within the next few years.
In theory, your best friend the insurance salesperson will
tell you, variable annuities protect your money from inflation erosion by
shifting some of your incoming cash to mutual funds (“subaccounts”)
that may or may not earn supplementary money for your annuity. Trouble is,
subaccounts are load funds paid with when a part of the annuity balance is
shifted into a subaccount.
Yes, both standard and variable annuities have been
increasingly popular ever since the American economy started going to hell
around about 1970 and exceptionally so since stocks tanked in 2008. When hard
times blanket our country, the insurance industry excitedly sells boatloads of
annuity contracts to the ill-advised
and unsuspecting, possibly including your parents, yourself, and/or your
children.
The smart alternative to lifelong income is investment.
Trouble is, as your commission-compensated insurance friend will remind you,
real estate profits can be eaten by maintenance and repair (and insurance
premiums) and stocks move up and down like elevators in the Empire State
Building.
To me, the smart alternative is Social Security income (with
or without its yearly increase to cover losses to inflation) supplemented by
educated investment choices. Income from a side bet on securities or realty is
hardly a bad idea for a successful do-it-yourself portfolio manager.
One example of a steady investment suggested by Glenn Ruffenach
in Smart Money: Vanguard’s
Wellington Fund, which has been (till now) a remarkably steady no-load fund
(no sales commission).
Another example, I’d suggest, is a
diversified portfolio of stocks
and/or ETFs
paying steadily increasing dividends.
