3 annuity mistakes to avoid «
If you’re comparing annuities to other investment products, you’re making a classic mistake—and it’s just one of three major errors that consumers and financial experts make when evaluating annuities, according to a panel of experts at a recent MarketWatch Retirement Adviser event in New York that focused on income strategies.
“Both immediate and deferred annuities have been shown to have a very positive role in an overall retirement-income strategy, but the deployment of these instruments is often hampered by some very fundamental misunderstandings,” said John Olsen, president of Olsen Financial Group, and author of a number of books on annuities, including “Index Annuities: A Suitable Approach.”
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• See the full special report/conga/story/2012/11/retirementadviser1112.html 234851 The panel, moderated by MarketWatch senior columnist Robert Powell, also featured Farrell Dolan, principal with Farrell Dolan Associates, and David Blanchett, head of retirement research at Morningstar Investment Management.
Mistake No. 1: Unfair comparisons
One such misunderstanding—and it’s often made by financial experts, Olsen said—is to assess the value of a variable deferred annuity as though all of its costs “are nothing but pure overhead.” That can lead consumers to view such annuities as unreasonably expensive.
Instead, he said, those costs “are charges for the transfer of risk from the shoulders of the buyer to the insurance company.”
Consumers need to remember, Olsen said, that “any insurance product on the planet will not pay off on average. If the average buyer of any insurance product profits from purchasing it, the insurance company will go broke. That’s something we need to recognize when we analyze risk-management strategies.”
Olsen was quick to point out that insurance costs shouldn’t be ignored. They might be too high or too low. But insurance shouldn’t be compared to other products.
Click to Play Don’t make these annuity mistakesInvestors often think of annuities as investment products, but that’s the wrong way to view them, says John Olsen, president of the Olsen Financial Group and a panelist at a recent MarketWatch Retirement Adviser live event.
“When you compare, as some bad analysts do, a non-qualified mutual fund that has no such insurance benefits with a deferred variable annuity that does, and then say, ‘Well see, this is more expensive.’ Why not compare apples with oranges? Fundamentally, it’s a misconception,” Olsen said.
MarketWatch’s Powell noted that one reason people misunderstand annuities is that financial experts and the media have focused on saving for retirement and, to a large extent, investment returns and “return management,” rather than risk management and, specifically, the risk of outliving one’s assets.
“We’ve been telling people to save for retirement, but not really told them how to convert assets to income,” Powell said. “People have to get their arms around this different way of looking at retirement. No one ever had to think about outliving their assets years ago.”
Mistake No. 2: Focusing on returns
Another mistake people make in evaluating annuities: allowing prevailing interest rates to be a deal-breaker. It’s true that lower interest rates can mean a lower payout, but Olsen said that’s the wrong way to approach annuities. Read related story: Buying annuities in a low-interest-rate world.
The reason to buy an annuity is because you “want the absolute insurance of having that income in your checking account every month,” Olsen said. “Saying, ‘I don’t like the return on investment’ or the internal rate of return misses the whole point. Annuities aren’t about internal rate of return. They’re about the absolute assurance of an income that you cannot outlive.”