- As 10,000 baby boomers per day turn 65, they share one common problem: how to turn their retirement savings into a steady stream of income.
- That's because the so-called three-legged stool of retirement income — pensions, savings and Social Security — isn't always enough.
- Many are now considering buying annuities, which provide a steady paycheck in exchange for an upfront lump sum.
If you think that Republicans and Democrats can't see eye to eye these days, try sitting in a room with financial professionals who are for and against annuities.
The inability to agree is real. And both sides hold steadfast to their positions.
Annuities are insurance or investment contracts that give investors regular payments in exchange for a lump sum paid upfront.
However some financial professionals argue that they come with high commissions and opaque disclosures. Because that puts individual investors at a disadvantage, they say, some have sworn off selling them.
Yet others, including academics, champion annuities as a solution to help solve a dilemma that many retirees face: how to transform a pool of money into a steady stream of income.
Annuity sales totaled $174.3 billion for the first nine months of 2019, according to the Insured Retirement Institute. That's a 7.5% increase from the same period in 2018, when sales were $162.2 billion.
Now, one industry group called the Alliance for Lifetime Income is adding fuel to the argument that these options deserve a place in everyday Americans' retirement strategy. To push the point home, last summer they brought that message to a Rolling Stones tour as its sole sponsor.
Their take: "You can get what you need, when you have an annuity."
In May, an arbitration panel for the Financial Industry Regulatory Authority, an independent regulatory organization, awarded $3.2 million to an upstate New York family who claimed they were victimized in a variable annuity and life insurance sales scheme.
The products were sold by a former AXA financial advisor whom the firm had "every reason to put ... on heightened supervision," according to attorney Jason J. Kane, a partner at law firm Peiffer Wolf Carr & Kane who represented plaintiffs James and Sandra Fitzpatrick, of Whitesville, New York, and their son Kerry.
"He literally could not pay his taxes," Kane said of the advisor. "The lure of big commissions was just too tempting for him, because it was a solution to his financial problems."
Annuities, in general, and variable annuities, in particular, continue to spark arbitration claims. In 2019, as of November, there were 93 annuities cases sent to arbitration, according to FINRA, and 103 involving variable annuities. That's because annuities are often with mandatory arbitration clauses in their contracts, preventing wronged consumers from suing.
Issues with annuities have prompted some financial advisors, such as Ric Edelman, founder of Edelman Financial Engines, to refuse to sell them to clients.
"One of the problems with many of today's products is that they are ridiculously complicated and complex," Edelman said. "They have features and riders that serve no useful purpose to the consumer, that are both confusing, limiting and very expensive."
On the other hand, there is growing support in offering annuities to retirees, or soon-to-be retirees.
Part of that is because of the sheer size of the baby boomer population, with 10,000 individuals turning 65 per day.
Another reason is longevity. The longer you live, the more money you must have to cover your needs.
And a third reason is math, said Michael Finke, professor of wealth management at The American College of Financial Services, at a recent press event about annuities.
"To an economist, an annuity is the most efficient way to create income in retirement," Finke said.
According to Finke's calculations, for a healthy 65-year-old woman to buy $20,000 per year in income for 30 years, it would cost $414,222 to buy a bond ladder, ie, a series of low-risk investments with various maturities. That does not include asset management fees.
To get the same amount of income by buying an annuity, it would cost much less: $349,135, according to Finke's estimates. That's based on an average of the top five quotes for the purchase of a so-called single premium immediate annuity, according to Finke.
And instead of just 30 years' worth of income with bonds, you would be covered for life with an annuity.
"This is why economists are baffled by the rejection of annuitization," Finke said. "You could have a riskier retirement and it will cost more, or you could have a safer retirement and it will cost less."
In addition, some financial advisors could have ulterior motives for eschewing the products, said David Lau, founder and CEO of DPL Financial Partners, a provider of commission-free annuities.
That's because taking a chunk of money out of a client's portfolio can significantly reduce the advisor's compensation if they're charging based on the total amount of a client's assets.
"That's huge potential lost revenue, which is why they have fought annuities vociferously for so long," Lau said.
Commissions on many annuities tend to drive up prices, cause poor sales incentives and create bad products, Lau said. His company is trying to get registered investment advisors to sell commission-free annuities. Admittedly, commissionable offerings still make up roughly 95% of the market he said.
Jean Statler, executive director at the Alliance for Lifetime Income, said it is possible to pay less over time with a one-time low commission annuity.
Admittedly, there are those who have taken advantage of the commission structure. "We have to weed out the bad actors," Statler said.
To that end, the Alliance is working with both consumers and insurance firms to raise awareness.
That includes efforts to streamline sales language so that individuals can better understand what they're buying. It also means providing consumers with a list of questions they should ask before signing up for an annuity.
That includes who gets paid what, the difference between one product and others, and the scope of benefits over time.
"A knowledgeable consumer is going to be a much better investor and make better decisions for themselves if they ask the right questions," Statler said.
Some financial advisors are also starting to consider annuities more in financial planning.
That includes Megan Gorman, managing partner at Chequers Financial Management in San Francisco. One reason for that is the ability, with some offerings, to add tax-free distributions for long-term care.
"To me, this makes it a very interesting option," Gorman said.
The thinking is that, unlike long-term care insurance, where you pay for a policy you may never use, this type of annuity gives you the opportunity to create a pension-like retirement income stream.
Annuities can be reasonable investments as long as they're used and structured appropriately, Gorman said. It's also important that the client buying one is aware of the trade-offs.
"We talk about the fact that in the portfolio, this is going to be the most expensive item," Gorman said. "We really create a sense of transparency."