Did you see this headline last week?
On Tuesday, February 27th, in big bold RED letters above The Wall Street Journal newspaper name across the top of the newspaper, was the headline, “RETIRE REASSURED, The fear of outliving your money is real, but has a solution been right in front of us all along? See Page A5.”
In tiny letters in the top left-hand corner was the word “ADVERTISEMENT.”
The full-page ad on page A5 begins with the headline, “The Return of LIFETIME INCOME: A time-tested strategy offers hope amid today’s looming retirement crisis.”
This sounds pretty appealing, doesn’t it? After all, it’s “time tested.”
As you may have realized by now, this is an advertisement by Jackson National Life Insurance Company which means we know what this “time-tested” solution is: annuities!
I have to give Jackson credit. The timing of this advertisement is very strategic, i.e. right after a rapid 10% correction in equity markets when the average American, devoid of long-term perspective and planning, has been conditioned to view short-term volatility as a long-term danger to their financial survival.
I can only imagine how incredibly expensive this was for them to run this ad in red color above the name of the newspaper on page one, and then a full-page advertisement on page A5! The cost was certainly into the hundreds of thousands of dollars, if not more!
The Problem and Solution Presented
The problem they present in the beginning, i.e. living longer and potentially running out of money, is right on and certainly accurate, and I applaud them for raising it.
The challenge, of course, is in their “solution”: “Similar to how Medigap fills the void in your health care costs by covering what Medicare won’t, adding an annuity to your plan can provide lifetime income, helping to fill the gap when Social Security, 401(k)s, and other investments fall short……As part of a comprehensive retirement plan, annuities can be a powerful way to bridge the money gap in retirement.”
A few paragraphs down, however, they tighten their grip on your emotions as they zero in on a huge fear they know Americans have. I have taken the liberty of bolding the sentence that is critical. However, the word “only” has been italicized by them for emphasis.
“There are numerous annuity options you can choose that can be customized to meet your needs. For example, some annuities start paying a lifetime income stream immediately, while others allow that income stream to be deferred to a time in the future. And with the purchase of a lifetime income benefit, an annuity is the only investment that can provide a steady stream of lifetime income unaffected by market downturns. In fact, that income even has the potential to keep growing.”
As all insurance companies do when they market annuities, they are preying on the average American’s fear of market corrections and volatility which is a very effective marketing strategy on their part.
You simply don’t want to fall prey to it!
As we have illustrated in great detail over the last few weeks, market volatility and corrections are nothing to fear for the rational, long-term investor if you employ a strategic plan. Not only are they not something to fear, but intelligent investors welcome them!
If you have been a steady reader of my Retirement Coach Blog, you know my feeling about annuities. While they do provide a tool in your planning toolbox, for the most part, the overwhelming majority of annuities marketed today are very complicated, expensive, restrictive, and they are grossly oversold. (One of the reasons they are oversold is they pay very large commissions to agents and advisors who sell them.)
Jackson recognizes these realities, so the ad attempts to deal with them.
“Sound too good to be true? It’s important to remember that unlike any other investment product, annuities were created by insurance companies, which have the unique ability to offer features and add-on options that help protect us against outliving our savings or having to drastically change our lifestyle in retirement.”
“Annuities have been available for a long time, and it’s true that they can be complicated to understand and even challenging for advisors to sell in today’s regulatory environment. But that should never be a reason for investors or advisors to forgo consideration of something so critical as guaranteed lifetime income.” (I have again take the liberty of bolding this last sentence)
Doesn’t the phrase “guaranteed lifetime income” sound so attractive? Who wouldn’t want that???
What is omitted in this advertisement is the cost to you for providing this “guaranteed lifetime income.”
Guaranteed lifetime income comes when you annuitize your money.
When you “annuitize”, you are choosing to receive a guaranteed monthly payment for a period of time, typically for life similar to a pension or social security.
Two caveats (costs) come with this benefit, however:
- Who Owns Your Money: Once you annuitize, your money is turned over to and owned by the insurance company:
- Single Life: When you select the single life option, you choose to receive payments for the rest your life. But, only your life. When you pass away, even if that is in three months, the insurance company keeps the money.
- Joint and Survivor or Period Certain: If you have a spouse who you want to protect, or if the prospect of passing away too soon and having the insurance company keep your funds is a problem for you, you may select a joint and survivor or period certain plan. By doing so, you guarantee payments to your beneficiary either for your spouse’s life or for a certain period of time after your death. However, in order to compensate the insurance company for this added risk, you receive a smaller monthly payment while you’re living. And, when your spouse passes away, the insurance company keeps your money.
- Inflation: Always remember that the biggest challenge we are all confronted with is having our income be able to keep pace in a rising cost world. In 1985, the cost of a first-class stamp was 15 cents. Today, it is 50 cents, more than a three-fold increase in only 33 years.
With most annuities, your monthly payment is guaranteed. However, there is no cost of living increase each year to keep pace with inflation. So, if your monthly payout is $2,000 per month, 10 and 20 years down the road, the amount you will continue to receive is $2,000 per month while your costs to continue your same lifestyle have all increased.
Annuities which offer the ability to “potentially keep growing” cost more, so your monthly benefit is less to start.
The bottom line is to always have your eyes wide open when reading advertisements like this, and to beware of “magic pill” offers.
As much as we would all love a “magic pill” as this Jackson advertisement attempts to imply, there is no such thing.