28 Sep Annuity isn’t growing as promised. Now what?
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Q. I invested in three different annuities. I was repeatedly assured the return would be 6 percent per year. Now, three years later, it seems not to be happening. The salesman, when I cornered him, said my last year reaped only 3.55 percent. I repeatedly had told him I wanted the principal to grow. What can I do?
— Unhappy investor
A. Annuities are not simple investments. And annuity salespeople have a reputation for not always being clear to their clients.
Our bigger concern here is that it seems you may not have fully understood the products that were sold to you. We agree it’s possible the salesperson mislead you, but we, as investors, need to take responsibility, too. If you’re not 100 percent sure you understand what a product can or can’t do, and the risks, don’t buy.
Before you try to sell out of these investments, make sure to understand any surrender fees that could be imposed. And consider working with a fee-only financial advisor who understands annuities to see the breadth of your options.
Now, you didn’t say what kind of annuities you purchased, but it seems to us that these are deferred annuities and not immediate annuities.
There are generally two values associated with deferred annuities — the cash value and the guaranteed minimum income benefit (GMIB), said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.
Lynch said there are two common types of deferred annuities.
There’s an indexed annuity.
“You get a crediting rate on the cash value anywhere from zero percent up to a certain maximum, generally set annually,” he said. “The crediting rate is tied into an index such as the S&P 500.”
The advantage with this is if the market goes down, you lose nothing, and if the market goes up, you participate in the gain up to a certain amount, Lynch said.
Then there’s a variable annuity.
For this, you invest in mutual fund-type investments that will go up or down every year depending on how the underlying investments do, Lynch said.
Now let’s get to that GMIB rider.
Lynch said if the market is flat or does not grow by a certain amount, your account — not your cash — will grow at a certain amount. That’s probably the 6 percent rider your salesperson talked about.
He said the rider works separate from the cash value and generally off the original investment.
He offered this example: If you started with a $100,000 investment, your cash value is $100,000. If the market was flat during the accumulation phase, the GMIB rider would guarantee your withdrawal value would be $160,000 in 10 years. So your income stream would be off the $160,000 because of the GMIB rider, not off the $100,000 you put in that may or may not have grown with the market. This does not mean you can take the $160,000 as a lump sum, but it would give you a withdrawal value of generally 4 to 6 percent based upon your age and based on the $160,000, Lynch said.
The rider only works if you keep the money with them, Lynch said.
“I would always suggest that you look at how it performs under the worst possible situation — zero percent returns for 10 years — and if the income stream is reasonable because of the GMIB rider, then consider it,” Lynch said. “It almost does not matter what the annuity grows to if the income stream fits for your retirement.”
Lynch had one more note: While retirees care about rates of return, they should be much more concerned about cash flow.
“Rates of return can always change and generally do, however, if you have stable cash flow, generally you can get through anything,” he said. “So having guaranteed income streams like Social Security, pensions and annuities are not a bad thing —unless you have too much locked up in these investments.”
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