In Fooldom, we believe when it comes to annuities, it's a "buyer beware" marketplace. Buy them if you must, but do extensive comparison-shopping beforehand. What you read in marketing materials may not be (and probably isn't) the whole story.
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Other than that, they aren't bad. I just wouldn't let anyone in my family own one. Well, that's not quite true. I did outline some circumstances wherein they might be appropriate. Those instances are highlighted in the previously referenced articles, so I won't repeat them here. Suffice it to say that most folks won't meet the stringent criteria that justify an annuity purchase.
My distaste for annuities arises because I believe they:
Last week, those of you who read this column via our e-mail subscription service probably saw that the opening lines of that e-mail read "Sponsored By: AnnuityScout.com." Some of you undoubtedly wondered whether The Motley Fool was now endorsing annuities as an investment or AnnuityScout.com in particular. If so, I want to assure you my personal stance on annuities hasn't changed one iota. Neither, to my knowledge, has that of most (if not all) of my Foolish brethren. Why, then, did that advertisement appear, and in the Retirement column of all places?
Well, in answer to that, the best excuse I can offer is The Motley Fool is a business. As such, it has expenses it must meet, my insubstantial and picayune salary being one. (Note to self: Go on strike.) To meet those expenses, we must raise revenue. One way to do that is to sell advertising space, so that's what happened in this instance. Annuities tend to be a popular product for retirees, so what better spot for an ad hyping them than in a column meant for those near or in retirement?
Nevertheless, I'm willing to bite the hand that feeds me to say this: Just because the ad appeared at the start of my column, don't think of that appearance as an endorsement by me or by Fooldom of either the product or the entity selling it. As with any investment, investigate, research, analyze, and understand the product before committing your money.
I went to AnnuityScout.com and did some exploring. All in all, it makes a reasonable attempt to explain annuities and when you should consider the purchase of one. Still, it's geared to sell the product, so the negatives are glossed over. While I can't fault the company for that, just understand that the site's purpose is to sell annuities. Take what you read on the site with a grain of salt.
Start with the seven-question test, Is an Annuity Right for Me? After playing with that module, I concluded all I had to do was say "No" in answer to the question about whether I have taken "...full advantage of other tax-qualified retirement plans and put the maximum amount into your 401(k), 403(b), IRA, or Keogh. " Doing so assured that an annuity was inappropriate for me regardless of how I answered the remaining questions. Try it yourself, and see what you get.
Conversely, by answering "Yes" to that question, all I had to do was answer "Yes" to "Are you already 59 1/2 or can you afford to wait until you are to withdraw your money?" I then learned that an annuity was right for me. Say what? (OK, "What!") But, you got it the first time. Just two affirmative responses to the right questions are sufficient to determine that a questionable (in my opinion) product may be the correct choice for me. Golly, I listed seven requirements for the justification an annuity purchase. But, it seems I really need to meet only two. I don't know who's right, that test or me. I think I'll let you decide for yourself.
Another area that bothered me was that of gifting an annuity, a tactic the site calls "a terrific use for annuities that our clients tell us is one of their favorites." The idea is to give a newborn child or grandchild an annuity through a joint spousal gift of $20,000 that earns 7% annually. The article goes on to say how at age 18 a withdrawal of $10,000 per year for four years may be made to help fund the child's education. Then, at age 30, another $25,000 could be taken for a home purchase. Finally, at age 65 the lucky child/grandchild could begin receiving $20,000 per year, and at age 80 still have more than $800,000 left.
Only in a footnote do you discover that earnings taken from an annuity before age 59 1/2 "are taxable as ordinary income and... may be subject to a 10% federal tax penalty." Nowhere do you learn that earnings are considered the first money out of that annuity, either. Result? In a 15% tax bracket, that $10,000 withdrawal for college expenses (a laughably small amount 18 years from now, given tuition inflation) would only amount to $7,500 after income taxes and penalty.
Was the article misleading? You be the judge. But, in my opinion, it sure left a lot out that a consumer ought to know.
OK, so I don't like their test and at least one article. How about their product offerings? There I would just make the same caveat as I would with any purchase: Shop with care. The offerings available aren't the best in terms of cost, and they aren't the worst. Surrender charges of up to 10 years may apply depending on the product. In variable annuities, product fees average 1.27% per year, plus an average contract fee of $30. Investment manager fees also apply, and will vary depending on the investment selected. It would seem, then, that the average charges of the offered products are higher than the average charges within the industry. All the more reason, in my mind, for interested persons to select their purchases with care.
Do you want or are you interested in an annuity? Then visit our advertisers like AnnuityScout.com. Just don't stop there. Look at other, possibly lower-cost providers as well. Check out the annuities offered by Vanguard, T. Rowe Price, Fidelity, or (in some states) TIAA-CREF for starters. As I said in Annuities: What's to Like?, why pay commissions and/or high expenses when you don't have to? That enriches the fat cats at your expense, and no Fool wants to do that. Keep the money in your pocket instead.
So much for today's rant. I'm sure I made some folks unhappy. But, I'm a Fool, and Fools above all else are honest. I just wanted you to know where I stand.
I will be gone from this space for the next five Mondays. I won't return until September 25. And, before you ask, no I didn't get fired as a result of today's tirade, and I'm not sick, either. I'll be working on a special project, a retirement planning seminar that we will probably offer sometime in October. As the resident (and only) retirement specialist at the Fool, I've got the primary writing task for all the seminar sessions. It's a lot of work, but I'm looking forward to it. If you haven't retired yet, look for our seminar registration announcement. You could learn something. And, if you have retired, point your non-retired friends to the seminar when it's announced. They can benefit as well.
See you after school starts. In the meantime, you can find me -- but only off and on as the project permits -- on the Retired Fools board.
Best to all...Pixy
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