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Annuity Sales Are Up As Investors Look for Guaranteed Income
But Watch Out for Big Surrender Fees and Other Important Charges
I mentioned on a previous program that one of the most popular investment products out in the marketplace today are annuities. They've hit a new record. $74 billion have been invested in these things in just the last three months. Why are so many people throwing so much money at annuities? Well, it's pretty obvious, isn't it? Annuities offer a guaranteed return. Compare that to the stock market, which not only isn't guaranteed, has been losing double digits this year. Bonds are down double digits this year. Crypto is down double digits this year. Real estate is beginning to fall in value.
So increasingly, investors want a safe guaranteed return and they're turning to annuities to get them. New York Life, for example, they're the biggest seller of annuities in the country. They offer an annuity that's paying 3.2% guaranteed for three years. That's a better return than you're going to get into a bank account for sure. And it's guaranteed by New York Life, which is a pretty good guarantee, frankly, although the guarantee is technically only as good as New York Life. If they go broke, the guarantee is worthless. I don't think anybody's worried that New York Life, a 100-year-old company is going to go broke in any foreseeable future. So wow. Guaranteed 3.2% per year. Guaranteed for three years. Here's the problem. If you buy that annuity - and I'm not beaten up in New York life specifically here - but just annuities in general.
With Today’s Inflation, Are You Losing Money on That Annuity?
If you buy an annuity with a guaranteed 3.2% rate of return, you are guaranteeing that you're losing money. Think about it. Inflation right now is 10% this year. If the annuity is offering three, you're losing 7% a year guaranteed. This is why I am so concerned that so many people who are so focused on current levels of safety end up with the biggest losses. Because if you throw your money into a bank account or a Treasury or an annuity or a guaranteed bond in an effort to obtain safety.
Well, congratulations. You're guaranteeing that you're going broke safely. In this case, you're losing almost 7% this year. That's the issue. You also have to recognize in the world of annuities that they are designed as retirement vehicles. Meaning once you put your money into an annuity, the IRS says you can't take it out until you're 59 and a half. If you do, you're going to pay an IRS penalty in addition to the interest. And New York Life has a penalty as well. When you put money into that annuity, they won't let you withdraw it for seven years. There's a surrender charge of 7% if you withdraw it in the first year. And that surrender charge lasts four years, even beyond the guaranteed three years of that 3.2% interest, which means at the end of three years, they may lower that guarantee of 3.2% to a lower number.
You're stuck with it because if you liquidate it, you'll pay a surrender penalty and maybe an IRS penalty on top of that. Before you buy an annuity, make sure you get good advice from a financial advisor. Naturally, I'd recommend the advisors at Edelman Financial Engines.
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Retirement Security
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