I thought this was going to be another pitch for what’s lately been teased very aggressively as invisible “770 Account” participating whole life insurance by the Palm Beach Folks… so I almost tossed the email (there are only so many times you can run through that story).
But this is a little bit different — the tease is from a different publisher, and it’s a different product (though there are some similarities). So what’s the deal? Well, the ad is from Ryan Cole and it’s a pitch for his Unconventional Wealth newsletter… and this is how he introduces it…
“Did you know that one of America’s most beloved founding fathers left behind an account that grows your money tax-free… pays a lifetime income of up to 61 times more than savings accounts… and in some cases, offers stock-market-like returns with no risk to your principal?
“And here’s the best part…
“Regular Americans are already cashing in on a modern version of this account…”
Oooh, intriguing! Whatever could it be?
Here’s a bit more from the tantalizing tale…
“On June 23, 1789, 10 months before his death, Benjamin Franklin decided to add an addendum to his will.
“In this text, he left an obscure account to his personal heirs and to his native city of Boston.
“This specific Boston account turned $4,400 into $5.5 million… never lost money in any single year… and paid income for 200 straight years, until the local government decided to close the account and cash out.
“And over the past few years, this account has taken on a life of its own and evolved into something new — what I call Franklin IRAs…
“It’s a little-known retirement account that…
- Gives you exposure to the growth in the stock market, without its downside risk
- Pays up to 61 times MORE than the average savings account
- Grows your money tax-free, saving you thousands of dollars over time
- Offers guaranteed growing income for life
- Has a guaranteed minimum return in some cases that can be as high as 6–8%
- Has no management fees.”
Who wouldn’t want that, right? But it does sound like one of those structured products that, like whole life insurance, is sold on commission and has lots of hidden costs and is very non-standardized and difficult to compare. Still, we should check it out, right?
And apparently it has also gotten a bit of an endorsement, at least, from academics — here’s some more from the ad:
“I came across a study from professor David B., from the widely respected Wharton School of University of Pennsylvania.
“Like myself, he was skeptical at first.
“Which is why he decided to launch a two-year, in-depth study to verify if the benefits of these accounts were real.
“He and a team of five other Ph.D. financial economists looked at real returns, not just hypothetical gains, from 1997–2010.
“They actually collected copies of real customer statements from 172 different accounts.
“After analyzing the most comprehensive data ever assembled for real returns of what I call “Franklin IRAs,” they reached a shocking conclusion…
“‘Franklin IRAs’ Managed to Beat CDs, Bonds and Stocks”
OK, that’s true. And it means that what Cole is teasing here is a form of annuity — an insurance contract that, in exchange for up-front payment that’s either surrendered to the insurance company or tied up for an extended period of time, provides a promised return. In this case, the study he cites is from Jack Marrion, Geoffrey VanderPal, and David F. Babbel and is called “Real World Index Annuity Returns” — you can download it here if you like… it’s quite readable and brief, not academic gibberish. And that study was specifically about index annuities, which do offer a guarantee against market losses and some market participation, so that’s presumably what Cole is teasing.
"reveal" emails? If not,
just click here...
It’s somewhat spurious to say that these annuities have “no management fees,” because they’re sold differently than mutual funds or other “managed” investments. The fees in annuities are related to the risks they’re insuring (stock market loss, particularly, or mortality risk for some annuities) and to the commissions or salaries paid to their salespeople (annuities are not generally sold direct to individuals, they go through brokers or agents), and they are not necessarily taken off the top of the contract like they are for Whole Life insurance, so they’re not obvious… in many cases, even if there isn’t a specific annual fee or management fee, the “fees” by some other name are earned from the spread between what the insurance company can make on the money you give it, and what the insurance company pays you. That makes comparing annuities, which are insurance products, to investment products difficult at best — and because rates and returns and specific terms (which greatly impact long-term results) can be different for each provider, it’s exceedingly difficult to comparison shop.
That’s not true of all annuities — fixed income annuities that you’re using to generate a fixed income that you can plan on, whether immediate or deferred, are different, and far more popular and “accepted” by mainstream financial folks, than annuities which are used to build and compound a nest egg. People often use income annuities to effectively turn a chunk of cash into a lifetime monthly “pension” check when they’re either retired or are looking at retiring within a pretty brief time period, like ten years or so… or as “longevity insurance” to make sure that they don’t run out of money if they happen to live into their 90s (for example).
Here are the quick basics on fixed income annuities, which are really not what Cole is talking about, though most annuities are designed to go through an accumulation phase and then an income-paying phase — for a lot of income annuities, the “accumulation” phase is just “roll over your 401(k) into an annuity contract to turn it into an income stream:
You buy an annuity contract with a lump sum payment, and in turn you receive a fixed monthly payment until you die. That’s the basic idea. There are variations based on whether the annuity covers two people (ie, if you die but your husband survives for a decade you can buy one annuity that covers both your lives, sometimes with a different payment after one person passes away), or that are designed to offer guarantees against dying “too soon” before you get much income from the annuity.
An immediate fixed income annuity means you buy the annuity contract now, send the lump of cash to the insurance company now, and the income starts now. A deferred fixed income annuity, which is much cheaper, means you buy the annuity contract now, send the cash to the company now, and you start to receive the income at a set date in the future (ie, you could buy at 55 to make sure you have a set monthly income starting at 65, or you could buy at 65 when you retire in order to make sure you have a minimum income level from age 85 on if you’re worried that your other savings might run out). Deferred annuities seem very common for folks who are in the final stretch of retirement planning, modeling out how their golden years might go and taking, for example, half of their 401(k) balance ten years before retirement and buying a deferred annuity with it to lock in some level of future income.
The payment terms are all spelled out in advance, and guaranteed by the claims paying ability of the insurance company you deal with, and — as you might expect — terms look kind of lousy right now because interest rates are so low. Insurance companies can’t create money out of nothing, your annuity income is from a combination of pooled insurance (ie, the people who die before they get back their premiums in the form of annuity income) and investment income that the insurer can make on the cash they hold. Insurance companies diversify broadly and invest in all kinds of things, including stocks and alternative investments, but a huge proportion of their investments are in high quality fixed income (bonds), because they are making strong promises about the future availability of that money and have to limit their risks… so when interest rates are low, they offer low returns on annuities. Plus, it’s what the market will bear and the market is generally determined by interest rates — if a five-year CD or municipal bond offered you 5% annual income plus guaranteed return of principal after those five years, you might not have much interest in an annuity that promised 5% annual income for life but no return of principal (that’s roughly what an immediate annuity for a 60-year-old man would get you now).
Annuity rates offered at any given time change as interest rates change, and as life expectancy or other underwriting calculations change, but for the most part they are also fixed (you can buy annuities with CPI-based inflation protection — but, as you would guess, they’re more expensive