Steve Sjuggerud, whose name I think I have probably spelled half a dozen different ways in the last couple years, has a new ad for his True Wealth newsletter — and it’s teasing yet another compelling investment idea with a made-up name and an incredible promise.
Here’s how the ad opens:
“Take 10 minutes to sign a “Guaranteed Retirement Contract,” and you could get $2,250 per month… for life
“This alternative to stocks, bonds and mutual funds is now offered by more than 100 U.S. companies. Your payouts are guaranteed not to drop in value, and will be delivered EVERY SINGLE MONTH for the rest of your life. The only question is…
“Do you qualify?
“It’s a scary world out there for American retirees.
“Stocks and real estate are plummeting. Government bonds and CDs pay a measly 3-4%. If that weren’t bad enough, pension plans are falling apart… and even supposedly “safe” banks and Wall Street brokerage firms are collapsing.
“But there is one very safe solution few Americans have considered…
“In short, I want to tell you about what Barron’s calls, ‘The new way to retire.'”
So that sounds pretty exciting, no? Personally I’m a ways away from this kind of product, and I can’t retire as long as writing for folks like you is this much fun … but the idea of guaranteed ANYTHING really gets folks to look up from their Sudoku and pay attention.
Which is, of course, no surprise to the marketers — it’s not a coincidence that we see an ad like this during a week when many people are afraid about the safety of even boring ‘ol stuff like money market accounts.
So what is a “Guaranteed Retirement Contract?”
“For one, the money you receive as a result is guaranteed by a company that (unlike almost any other business in America) is required by law to have enough cash on hand to meet all future obligations. Your money is also guaranteed (typically up to $100,000) by a “Guaranty Fund” regulated by the government.”
OK, so that’s where the “guaranteed” part comes in. Not bad.
What else do we learn?
That your income can go up, but never down. Again, who wouldn’t like that?
“It will be sent to you for the rest of your life, and can even be passed down to your heirs.”
And we get an example of one company (though it’s not named, of course) …
“Right now, there is a hi-tech, publicly-traded company in West Chester, Pennsylvania, which is revolutionizing one of the most important industries in America.
“BusinessWeek recently called the company a ‘pioneer.’
“This cash-rich business has been growing incredibly fast. They made $8 billion in profits in 2005… $9 billion in 2006… and a whopping $14 billion last year.
“You can buy the company’s shares on the New York Stock Exchange (NYSE). The problem is, you have literally NO IDEA how this stock or the stock market in general is going to perform over the next few years.
“Even if this great business continues making millions, there’s no guarantee the company’s share price will rise… or that it will continue to pay out its twice-yearly dividend.
“Few investors realize that instead of buying this company’s ordinary shares on the stock market (which of course come with no guarantee), there’s a way to use this company as an investment and guarantee you’ll have enough money for as long as you live:
“Simply put: Instead of buying the company’s shares on the stock market, you can invest in one of the firm’s “Guaranteed Retirement Contracts,” which give you guaranteed payouts that CANNOT drop in value.”
So … this is getting a ways away from the Gumshoe’s wheelhouse (does anyone say wheelhouse anymore? Maybe I should be more sophisticated and say “sphere of expertise”)
But these Guaranteed Retirement Contracts are, as you may have guessed, just annuities.
Or perhaps I shouldn’t say “just annuities,” because there are enough different kinds of annuity contracts that it can quickly become incredibly confusing.
For those who don’t know anything about annuities, don’t even start looking at them unless you’re at least 40, and most people who buy them do so immediately before or during their retirement. They are essentially insurance policies where you pay the whole premium up front, and get a monthly income stream in return.
There are lots of different variations of annuities, and I have never researched them in any real detail, nor have I ever been an insurance salesman. Probably the most important thing to note is that while lots of financial advisers recommend annuities as part of a retirement income solution and they can be an extremely valuable and comforting tool, there are also many horrible, expensive, and near-fraudulent annuities and annuity salespeople.
The basic immediate fixed income annuity is what is usually referred to as a safe way to make sure you don’t outlive your nest egg — you buy an annuity for, say, $100,000, and in return you get a fixed monthly payout, starting right now, for the rest of your life. There are lots of places online where you can enter some data in a calculator and see what kind of income might be possible — I just checked out one of these sites, you can try it yourself here, and found that if I were 40 years old and plunked down $100,000, I could get something like $475 a month for life — that works out to something close to 6%. For a 60 year old the payment would be $550, so more like 6.5%.
You can compare that to things like long-term CDs, which give you a lot more flexibility in getting your principal back if needed and carry similar limited insurance (from FDIC, in this case), but usually yield far less and have a shorter contract term. You can get 5% on a five year CD now — will inflation drive rates higher in five years when want to reinvest, giving you a chance to keep up with inflation? Or will we be at .5% rates like Japan by then and looking back lustfully at those 6% payout annuities? You need a time machine to know for sure what the best path is, which is why many folks buy an annuity for a portion of their retirement, and invest the rest to try to keep up with inflation and maintain flexibility.
And don’t forget, when you buy a CD or most other investments, it’s easy to either sell them later on or get the cash back in the end; when you buy an annuity, usually the only thing you get is the monthly payments until you die (or until your spouse dies, or sometimes for a fixed period for your heirs) — the actuaries are busily trying to figure out exactly when you’re going to die, so probably the best way to get your “money’s worth” with an annuity is to be really healthy and live for a long, long time. Even if it doesn’t end up being the best financial decision it might still be useful to consider, though — the value of the peace of mind that guaranteed lifetime income gives is different for every individual.
And as to the specific example in the teaser, which was a monthly payout of $2,250, that’s certainly possible too — if you’re 60 years old a $2,250 monthly payout for life might cost you about $400,000 … if you’re 80, it will probably cost you half that much. Keep in mind, if inflation keeps to the average of the last 25 years or so (4%+ a year), you’ll need something like $3,500 in 2020 to buy what your 2008 brain thinks is worth $2,250.
Guaranteed income does sound appealing, and if you’re trying to not outlive your money, and bring some monthly guaranteed income, it may be great for you — especially if your parents or grandparents are 90 years old and going strong. But the devil is in the details — if you ever look at an annuity, please be careful. Variable annuities of any kind, which might be based on investment returns, or inflation, or give different payouts in different years, or let you take out lump sums, all have different rules.
Fixed income annuities themselves, though more easily understood and compared, also have lots of different rules — is it an immediate annuity, or are your payments deferred for a few years? Is the coverage for a single life or coverage for a spouse for their life, too, or payouts for heirs or beneficiaries for a certain number of years after you both pass from this mortal coil? Is it really an unlimited lifetime annuity, or is the time period fixed in some way? Those are just a few of the many variables a wise annuity buyer would probably want to consider.
This is one case where I’d think it would be extremely advantageous to talk to a financial adviser who you trust — an annuity is usually a single, sometimes huge investment that’s often hard to get out of, and the differences among the available products could make a big difference in the amount of income or flexibility you get. And please choose a disinterested financial adviser, like one who works for you for an hourly fee, not one who depends on commissions for insurance contracts — most horror stories you read about variable annuities probably originated with an uninformed investor and a commission-hungry insurance broker who made unreasonable promises or sold the wrong product (I know, they’re not all bad — sorry).
As Sjuggerud makes clear, these are, in part, investments in individual companies — that’s because the real value of an annuity contract depends on the financial health of the company that sells you the annuity. The example above, for the high-tech company in West Chester, PA, probably refers to the big internet bank ING, which has an annuity operation in that town. If you buy an annuity from ING, you are counting on their ability to be around for the rest of your life (or for the term of the annuity), and to have the financial wherewithal to keep sending your annuity income payments.
There is more of a backstop than just the company’s solvency, as folks who are holding AIG annuities are probably frantically researching right now (though I haven’t heard any mention that regular policy holders at AIG are going to end up having any real problems). Annuities are guaranteed to some extent, like most insurance policies. Every state has some kind of Guarantee Fund, you can review the rules for your state if you want to make certain what kind of backstop precisely exists in your state — it’s true that most state funds have a guarantee of up to 100,000 in present value for Annuities, as part of coverage that includes all your other insurance, like life insurance, up to $300,000 total in many cases (a few states offer significantly higher protection levels).
I’m sure that’s not the full story, and every state regulates slightly differently, so you should certainly learn that info yourself if you’re an annuity buyer (or owner). One place to look for this info is at the trade association NOLHGA, which allows you to search by state here.
If you’d like to see that Barron’s article that Sjuggerud quoted about the “new retirement”, there’s a reprint here (the article came out in the Summer of 2007) — it’s about one of many kinds of hybrid annuities that exist, in this case the combination of an annuity and a long term care insurance policy. You’ll also see policies that combine life insurance and annuities, and that’s all I’ll say about that because I’m just slightly informed on these products and I’ll probably steer you wrong if I go into detail.
So … you’ve probably heard of annuities if you’re anywhere near retirement (or if you’ve won the lottery jackpot), and they really are Guaranteed Retirement Contracts. I’ve never seen an investment newsletter tout annuities before, but if you’re about to retire and are wondering what to do with a lump sum of money this is one of several investments you can consider.
If you’ve had personal experience with annuities, either good or bad, I’m sure folks would like to hear from you instead of from a half-informed dilettante like me, so comment away!
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