A steak dinner and guaranteed money for life. Who could say no? As AT&T employees near retirement age, they are often invited to seminars – dinner included! – to learn about something that can supposedly allay all their retirement fears. That something is annuities.
Annuities are insurance products. They are heavily marketed for very attractive financial bells and whistles, such as income for life and protection from market declines. That sounds great, but the truth is many annuity products are not always what they appear to be when you look a little closer.
Behind the veneer of enticing promises are often secrets buried underneath page after page of fine print. Annuities can be all sizzle and no steak. And some of those serving them up are happy to sell you one whether it is right for your situation or not.
Here are the main reasons we recommend most current and former AT&T employees avoid purchasing an annuity.
ANNUITY GUARANTEES ARE NOT FREE – THEY’RE EXPENSIVE
For annuities, it’s all about those guarantees. Without them, what would be the point of buying one? However, what people are rarely told up front is that most attractive annuity features, such as lifelong payments and death benefits, come with an added cost. These “riders” increase the total cost of an annuity while reducing your return. Essentially, the annual cost you pay for each rider finances the guarantee of that rider. As they say, there is no free lunch.
SOME INSURANCE BROKERS PUT THEIR INTERESTS ABOVE YOURS
If you’ve been told by an insurance broker that an annuity is the perfect product for you, get a second opinion. The fact is brokers earn a commission on each annuity they sell. Commissions can reach as high as 12-15%, depending on the product, according to a New York Times article. While this isn’t proof that all brokers are motivated by self-interest, it is proof that there is a conflict of interest, which may be disclosed or not.
Consider that if you took a $500,000 lump-sum AT&T pension rollover and placed it in an annuity, it could result in a sales commission of $60,000 to $75,000 over time.
Compare that to working with a registered investment adviser (RIA), like Advance Capital Management. As an RIA, we are held to the fiduciary duty, generally understood as always putting the client first. We are obligated by law to: serve the client’s best interest, at all times; act in utmost good faith; act prudently—with the care, skill and judgment of a professional; avoid conflicts of interest when possible and fully disclose and mitigate any potential conflicts; and disclose all material facts.
WITHDRAWING YOUR MONEY EARLY WILL COST YOU
Surrender charges are fees that are incurred when you withdraw money before a specified period of time (surrender period) after you buy it, usually seven to nine years. Often, they start around 6-8%, but can be as high as 15%. They then gradually decline to zero. These fees cover the insurer for the commission paid to the broker. Your principal is protected only if you hold the annuity through the surrender period. If you need money for an emergency, you may have to pay hefty charges to access your money.
INSURANCE COMPANIES CAN DISSOLVE – ALONG WITH YOUR ANNUITY
The quality of an annuity depends on the solvency of the insurance company. Guarantees in an annuity are only as good as the ability of the insurance company to meet them. There is a risk that future contract guarantees might not be paid if the insurer becomes insolvent. Unlike your bank account, there is no FDIC insurance on your contract.
ANNUITY GAINS ARE TAXED AS ORDINARY INCOME
Any long-term capital gains from the investments in an annuity are taxed at your ordinary income rate when you withdraw them. That means high earners will pay higher rates than the more favorable long-term capital gains rate applied to a traditional investment account.
THE BOTTOM LINE
In pursuit of financial security and confidence, people may overlook the fact that they’ve had what they needed all along. AT&T retirees and employees can meet their financial needs and goals with other financial products that are more appropriate for their situation.
There is much you can do with the proper investment portfolio and financial planning that doesn’t come with all the strings attached or the surrender of your hard-earned money. Therefore, we strongly encourage AT&T retirees and employees, when pitched annuity products, to be sure they fully understand what annuities are and to ask many questions about whether an annuity is right for them.
INCOME FOR LIFE? SOUNDS GOOD, BUT DO YOUR HOMEWORK
Learn more about annuities by downloading our easy-to-understand guide: Is an Annuity Right for You? What to Know Before You Buy. CLICK THE BUTTON BELOW. You’ll learn how annuities really work and gain a deeper understanding of three of the most common types: Fixed Annuities, Variable Annuities and Equity-Indexed Annuities.