Why fixed indexed annuities don't tie up your moneyArticle added by Karlan Tucker on May 4, 2010
Karlan Tucker

Karlan Tucker

Littleton, CO

Joined: August 18, 2006

My Company

Tucker Advisors

The objection I've heard most often in my 5,000 plus interviews is, "I don't like annuities because they tie my money up." I am now going to tell you one of the most effective ways I have ever found to convince my prospects beyond a shadow of doubt that liquidity is not a problem.

This method comes from my many experiences sitting across the table from annuity prospects. These ideas have been proven over and over. They work! I did not read them in a book. I did not overhear them in a conversation. They are the result of thinking on my feet during thousands of interviews.

Annuity terms typically range from five to 16 years. The perception by the public is that you would be tying up their money for up to 16 years. To begin with, let's clarify a few things. The kind of money that is appropriate for annuities is nest egg money, the retirement savings that need to be there for as long as they live. A top priority for nest egg money should not include the need for it to be 100 percent liquid 100 percent of the time. If that were the case, everyone would need to have their nest eggs in money market accounts or something similar. You can't keep pace with inflation with your money there; so, you lose purchasing power, which erodes your standard of living.

Can you think of any account that would ever be 100 percent liquid, offer significant growth opportunities, grow tax-free, provide an income stream that can never run out during your lifetime and impose no market risk on the account holder? I can. It's a fixed indexed annuity after surrenders are up. Who wouldn't want this type of account? During surrenders, the only thing that changes is that temporarily, it's not 100 percent liquid. We have already determined that if nest egg funds are being used, that is not an issue. However, let's look at just how liquid FIAs are during the surrender period.

Ten percent free withdrawals annually are pretty much standard across the industry. Using the example of $100,000 in principal, a 10 percent withdrawal would be $10,000. If you withdrew $10,000 annually, in approximately 10 years, you would deplete all your nest egg. Ask: "Do you have a plan in place to spend all your life savings/nest egg in the next 10 years?" Ask: "Have you ever withdrawn 20 percent, 30 percent, 40 percent or more from your savings?" Nobody does this. The one-in-a-million scenario where you would need to deplete most or all of your savings never materializes because there is only a one-in-a-million percent chance of it happening. And if an event like this happens, the least of your problems is that some of your money is under surrender charges. Early withdrawals of CDs at the bank will also be penalized. For stock funds, you should ask: "Will the market be up or down on the day this unlikely emergency happens?" If it's down, to liquidate would also have major costs. The problem is not that money may have penalties on it. The problem is you just had a one-in-a-million disaster.

So, liquidity is not a problem for your prospects when...
  • nest egg funds are used

  • they are unwilling to spend all their nest egg in 10 years

  • they seldom, if ever, have taken 10 percent annually before you met

  • they need their savings to last a lifetime

  • Their current advisor is telling them that prudent investors don't take more than three percent to five percent annually, so as not to run out of money before they run out of life

  • in five to 16 years, the account will be 100 percent liquid for the rest of their life and the lives of their beneficiaries
Ask them what would happen if they were forced to take out 10 percent every year. They will tell you that they would run out of money. So then ask them if they are going to do that. They, of course, will tell you no. That makes the next question an easy one to ask: "Then, in your opinion, would 10 percent liquidity be enough for you?" In my experience, they always say yes. "So, if I am going to give you more liquidity than you are willing to take, does it matter how long the term of the annuity is?" They say, "No, I guess when you put it that way it doesn't matter." "When the annuity becomes liquid with your nest egg funds, are you then going to spend all of it because you can?" Their answer: "No way!"

It's a free country; you don't have to have surrender charges. I ask if you could have an account that:
  • Is totally safe from market risk
  • Offers great growth opportunities
  • Grows tax free and as a Roth comes out tax free
  • Generates an income/pension you can't outlive
  • Limits liquidity to spending 100 percent of the account in about 10 years
Would you put some money there? I just described a fixed indexed annuity. If you wouldn't, tell me a combination of features found in an investment that are superior to what I just offered you.

Every investment has to juggle:
  • Risk
  • Liquidity
  • Tax treatment
  • Growth potential
  • Income potential
I think the least damaging category to compromise on is liquidity, especially when you are dealing with longer-term funds like the ones retirement dollars represent.

Let me give you one last example...

Ask them:
  • Have you ever had a 12 percent loss in the market? According to the formula above, 12 percent is the worst-case scenario, and you can know about that up front. If the mutual fund prospectus said you may incur charges of 30 percent, 40 percent, 50 percent or even greater, would you have bought the fund?

  • Are you penalizing me for full disclosure up front with a maximum charge of 12 percent to access 100 percent of your funds, which you would only need to do if the one-in-a-million emergency arises? Otherwise you can blow through the funds in about 10 years without any penalties. Additionally, the 12 percent charge is totally voluntary. It won't happen unless you make it happen to yourself. Ask them, "Have you ever suffered a loss in the market of 12 percent or greater?" They always say yes. Then say, "Was that voluntary or involuntary? The FIA gives you complete control over your money -- this may be the first time you have ever experienced this."

  • Do you like this account?

    • 100 percent liquid

    • May lose most or all of the account to risk

    • May credit significant gains that will be taken back if you can't time the market

    • Cannot generate lifetime income that will never run out regardless of market performance

    • Requires you to sell a portion or all of the account before it is of any value to you

    • Requires you to buy when the news is bad and sell when the news is good in order to make money

    • May spend 10 years or more of your life with no gains left in the account by the 10th year, despite the fact you made no withdrawals

    • The broker who sold you the account is assured of making money every year you leave the account with him or her, even though you are offered no guarantees of any profitability and may not make any money over the ten years

    • Offers no guarantees
"Unfortunately this type of account (mutual funds) is what many own and are disillusioned with. The choice is yours. For me, I will limit some of my liquidity to get all the benefits of the FIA. What would you like to do?"

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