My college-aged daughter happened to be standing in line at a convenience store when she heard the man in front of her say, "Annuities are for people who don't know how to manage their money."
Most teenagers would have ignored that statement as just another fragment of the semi-foreign language that adults speak. But my daughter's dad wrote "Annuities for Dummies," so she remembered the comment and reported it back to me.
I am inured to such slurs by now. "Don't judge him too harshly," I told her, trying to turn the incident into a fatherly teaching-moment. "He's probably just repeating something his financial advisor told him."
Along with sex, politics and religion, annuities are a topic that can spoil a party. I fell into them accidentally. Back in the '90s, when my boss at Vanguard asked for volunteers to cover the annuity beat, I didn't step back as quickly as the other writers did. One thing led to another and now I'm as soaked in annuities as a baba is soaked in rum.
The opaque complexity of annuities, for one thing, tends to put some people off. If you've ever tried reading a 200-page variable annuity prospectus, you know what I'm talking about. And indexed annuities don't even have prospectuses.
Annuities can also be expensive. They're a form of insurance, after all, and insurance is an expense, not an investment. Like other types of insurance, annuities involve contracts written in legalistic jargon. Who can explain exactly what a "mortality and expense risk" fee pays for?
Few people know a deferred annuity from an immediate one, or a variable from a fixed. Deferred annuities aren't even real annuities. They're tax-deferred investments that we call annuities only because investors can convert them to annuities. But almost no one ever does.
Annuity marketers and wholesalers themselves often gripe that the very term "annuity" is a kiss of death. That's why ads for Fidelity Investments' deferred variable annuity with a lifetime income rider never even mention the word in large print.
But I'm here to praise annuities, not bury them. In future installments of this column, I'll argue that financial advisors who hope to serve the huge cohort of "mass affluent" boomers can't afford not to understand annuities.
As millions of boomers (and their savings) pour out of defined contribution plans over the next couple of decades, all but the wealthiest will need a distribution tool that somehow hedges their risk of going broke before they die.
Income annuities and guaranteed lifetime withdrawal benefits (GLWBs) are two major contenders for that job, and actuaries are patenting new, more flexible kinds of annuities - like hybrids of long-term care insurance and life annuities - even as we speak.
Sure, there's an iota of truth to the remark my daughter overheard in the convenience store. But, as I'll explain in this space over the coming months, it's also true that advisors who know how to manage money do use annuities, and use them to manage their clients' retirement assets better.
Kerry Pechter is editor of the online magazine www.retirementincomejournal.com.
