Of those advisors surveyed, 69% believed that purchasing an annuity was the best way to meet that particular need. "I think retirement income will be the market for the 21st century," said Robert MacDonald, chief executive of Allianz Income Management Services. "The companies that can solve this problem will emerge as the leaders."
Shocking, isn't it, that the CEO of an annuity provider would make such an outlandish statement?
In this case, however, there might actually be some truth to it. Annuities are good products for those earning mega-incomes who just can't put enough away in a traditional retirement plan. Good options for many of those people might include opening Simplified Employee Pensions (SEPs) or, for a few, even creating their own personal Defined Benefit Plan. But many high earners who don't control the business structure they work in may not be able to create these tax preferred structures. For them, rolling a big bunch of money into a tax deferred annuity and letting it grow tax deferred for a long time (to offset the relatively high fees in this products) can make sense.
The other folks who ought to be looking at the annuity products, however, are on the opposite end of the spectrum. In retirement, with not a lot of money and little tolerance for taking risk, these investors ought to consider a plain vanilla "immediate annuity" that will pay them an income stream for life.
These annuities take a lump sum investment and each year pay a portion back to the annuitant, for life. The risk facing the elderly is that they outlive their financial resources. An annuity transfers that risk to an insurance company, which can better afford to take the risk because they can spread the risk out among millions of customers.
Other tools in the planning kit include reverse mortgages and better comprehensive financial planning. A good plan should separate income oriented investments from "growth" oriented investments. The income oriented investments are all about wealth preservation and income generation. These include bank CD's, money market funds, bond portfolios, and annuities.
Growth portfolios ought not focus primarily on income generated. Long-time market commentator Ray DeVoe of The DeVoe Report wrote many years ago that, "more money has been lost 'reaching for yield' than at the point of a gun." Many high yield investments provide great current income, until you realize that what you thought was "income" was really "return of principal," and not even all of your principal was ultimately returned.
It is interesting to me that in the energy industry, some of the most expensive assets are those paying the highest dividends. They may only pay 6% now, versus 10% a few years back before their stock prices rocketed skyward, but 6% is still better than a Treasury bond so it sounds good, even if you will lose principal in the long run. That 6% dividend may represent 110% of earnings, but we like dividends because they are a "sure thing," at least until they're cut in half.
"Income" is the ultimate goal for most retiree portfolios. Annuities are a simple approach. Many of the closed-end funds being marketed to income oriented investors are high-risk high-fee products developed primarily in order to scoop up retiree assets while the scooping is good.
Caveat emptor. Buyer beware. Don't confuse a "return on equity" with a return OF equity. Watch out for the business end of a slick high yield packaged product. It could kill you.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.
Posts
