Many consumers and most agents assume that because interest rates are at an all time low and thus cap rates are at an all time low, the fixed index annuity is no longer a viable alternative to other investments such as CDs and the stock market. However, this is an extremely narrow point of view and one that could seriously damage a client’s future retirement income.
See, my opinion is that a retired person should be more concerned with their income than with the growth of their assets.
You can't eat your house
As an older gentleman once told me, “the only stock I can eat is chicken stock”.
Income is far more important to most retirees than assets whether they be accepted that reality or not. And this will only become more true as the baby boomers continue to retire without the luxury of pensions like their parents had.
Now my intention is not to get into the minutiae of guaranteed lifetime income riders offered by any number of different annuity companies. But to merely discuss a reality that is being overlooked by too many consumers and advisors.
Most of the time, I see fixed index annuities compared to certificates of deposit, which is somewhat disturbing to me. Sure, they do share some similar characteristics in that you will have a guaranteed interest rate earned four a predetermined period of time. But honestly, that’s about as far as the similarity goes. Oh yeah, I forgot to mention that both come with a principal guarantee as well.
A fixed index annuity is not like a CD
Now, I’m not going to argue that any one particular investment is better than another. I believe that CDs and annuities have their place. And that a person doesn’t have to choose between the two, in most cases they probably should have both – -collective gasp!
So please stop comparing the interest rates of CD’s and fixed index annuities, it’s not even like comparing apples and oranges, it’s more like comparing apples and chicken – -you can have both and in fact you need both.
More than ever in our history, retired folks need a vehicle that will guarantee an income stream that they can’t outlive. Guaranteed lifetime income riders were conceived for that purpose and are present on most index annuity contracts available in the marketplace today. These riders provide an attractive way to fill that very definite income need.
I don’t know about you, but I’ve not met anyone who was over the age of 60 in the last few years who told me that they’d love to have more equity in their house. But I have met dozens and dozens who have told me that they have really had to make some very tough decisions due to a reduction in their income. In many cases, retirement dates have been pushed back, assets have been sold, and quite a few have even picked up part time jobs to bridge the gap.
Want the lump sum or income stream?
Think about it this way, that if you’re retired and you're 65 years old, would you rather have $200,000 that earns 3% (and subject to the whims of the Fed) or $200,000 that will pay you an income of $11,000 a year for the rest of your life? Well, I know this depends on what your particular situation is but if I’m having this conversation was someone, it’s typically because they are looking for a solution to their income problem.
If someone tells me they have $200,000 set aside in CDs that is earmarked to leave to their grandchildren, then any type of annuity would be inappropriate. In that case, a single premium whole life policy would be a much better alternative – -assuming I’m talking two someone who is relatively healthy. But I digress.
My feeling is that too many agents only view annuities as an accumulation vehicle and have forgotten about the wonders of using them as a distribution tool. Viewing them only in terms of their guaranteed interest rate is far too limiting and really misses the boat. Fixed index annuities don't have to return more in interest, they have safety and security of income that far exceeds that of most alternatives.
Don't Buy Performance, Buy Security
Advisers should be recommending and selling fixed index annuities for the right reasons(income guarantees) to the right people (the people who need more income). We all need to not worry so much about whether they will outperform or do as well as other investments. The Fixed index annuity is a tool that allows a person the ability to buy insurance on their income, not a tool focused on accumulating wealth.