Crash Proof Retirement has been promoting itself the way it
currently is - quite successfully - for decades. Annuity General is doing
things a bit differently, most notably by using the word 'annuity' in its name,
but the truth is both companies are alluding to the same thing in their
advertisements. One is doing it overtly. The other is doing it subversively for
very reasonable purposes. These two examples are especially useful for the
purpose of demonstrating the ‘what,’ ‘why,’ and ‘how’ of the services and
products they are promoting.
Frankly, I think Crash Proof Retirement has been doing a terrific job for as long as I have been aware of the company while Annuity General is an example of how the marketplace for these products and services are currently being received. There was a time not exceptionally long ago when using the one word in question, annuity, was virtually forbidden. Crash Proof Retirement has been on my radar for far longer than Annuity General has, and that is enough justification for me drafting this article. Crash Proof is endemic of the times within which the company was founded. Annuity General is indicative of the current environment and the unique way a financial services organization can promote itself. Frankly, Annuity General is overtly advertising that thing which years ago insurance agents and financial advisors were reluctant to mention.
I have been a financial advisor, a 'stockbroker' originally, since 1989 but I did not get introduced to the products both companies are promoting until the mid to late 1990's and did not get deeply into it until I joined Fidelity Investments in 1999. Fidelity Investments was and, I believe still is, perceived as a mutual fund/asset management firm. It has a branch office system but those branches, at least when I was there, were placed in cities where Fidelity had large institutional relationships, relationships with companies for whom Fidelity managed 401ks and other retirement plans. These plans were often exceptionally large with each containing hundreds of millions to billions of dollars in assets under management. Fidelity developed its branch system primarily to retain those assets after the participating employee retired or changed jobs. Plan participants would typically, post-retirement or after quitting a job, roll the money from their 401k or 403b or other retirement accounts into IRAs and annuities. Having branch offices nearby companies that had large institutional relationships with Fidelity enabled Fidelity to keep the assets from rolling out of Fidelity managed 401ks and other retirement accounts by ensuring they rolled into Fidelity IRAs, not IRAs at competitor firms.
I am telling you this because what I did as a Certified
Financial Planner in several of those branch offices was roll the money out of
the institutional account - 401ks, 403bs, pensions, etc. - typically to an IRA
and then did financial planning with my clients. Most commonly I would do
Retirement Income Plans and Estate Plans in addition to asset allocation and
other common considerations. My clients needed to know not just how to invest
the money they had saved in their 401ks but how live on the money they had
accumulated during their working years. And by 'live on it' I mean live on it
AND not run out of it before they died. They also needed to know how to ensure
that their loved ones received what remained of their assets upon their death
in the most direct, unimpeded, and tax efficient manner.
What you, dear readers, need to know is that both companies and others advertising in similar fashion to Crash Proof Retirement and Annuity General are promoting are, in fact, annuities and when it comes to Crash Proof Retirement, they are specifically alluding to Indexed Annuities. If you go to their website you'll find the statement 'The Proprietary Crash Proof Retirement System only utilizes the most consumer driven financial vehicles found within the Financial Life Insurance Industry - offering guaranteed principal protection, zero market risk, and peace of mind for investors approaching retirement.'. They us the term 'Financial Life Insurance Industry' which I suspect is their own creation intended to preemptively influence the readers mindset. Life insurance and Financial industry is disconnected in the minds of much of the public. It also suggests that what they will be recommending is not 'just' a product of a life insurance company but also a financial industry product, an investment, if you will, as well. There is nothing wrong with this. But it is a 'tell', an indicator of what it is they are promoting. Again, there is nothing wrong with this. But it is demonstrative, and it is important for you to understand. Later I will explain in detail what an Index Annuity is and what benefit it provides but first I want to ensure that you understand that using the word 'annuity' is like saying the word 'car'. If I say I own a car you can assume I own a vehicle with wheels, doors, and seats that I drive on roads. Other than that, you really do not know what I own. It could be a Jeep, a limousine, or a super-subcompact rechargeable vehicle that can only contain two people. You do not know whether it is gas-powered or electric. You do not know if it seats two or twenty. You certainly do not know what it cost to manufacture. And you cannot know what it is made from, how long it will last, and whether it will kill you or protect you without receiving guidance from the manufacturer or from an outside source. 'Car' is a hugely general word that is applicable to countless variations and iterations of something one can describe as a vehicle that people get into and drive from place to place.
This the same for 'annuity'. In general, an annuity is an investment contract issued by an insurance company. That is about the only description that is applicable to all annuities. More specifically, annuities come in two sub-sets - deferred or immediate. A deferred annuity is invested in to be held until some date in the future. Deferred annuities come in many different variations. There are variable annuities which invest in mutual funds which provide growth potential but are not guaranteed and can lose money. There are fixed annuities that pay interest on a principal amount that is free from risk. Immediate annuities are invested in the receive guaranteed payments back - principal plus interest - for either a fixed time-period usually defined in years - 5-year, 7 year - or until the initial principal amount has been extinguished. Immediate annuities also come in fixed and variable variations and are utilized most when the client is at retirement. The client may have a 401k and wants to use it to provide guaranteed lifetime income to coincide with his pension and social security payments. Annuitizing the 401k is common for people seeking retirement income.
Please not that ALL annuities have limitations on how and when the money invested can be withdrawn. This is laid out for you when the contract is initiated. Please read the fine print and ask questions. Annuities have tax benefits and drawbacks. If you plan to access the money you are considering investing in an annuity before you reach age 59 1/2 you may not want to invest in the annuity. Distributions prior to age 59 1/2 can be subject to an early withdrawal penalty imposed by the IRS the same as you would be penalized by an early withdrawal from an IRA or 401k.
But they are legitimate and beneficial products when used properly and for an appropriate client. Not unlike selling a Corvette to a little old lady, not all annuities make sense for all people. What the companies mentioned earlier are promoting, among other things, are 'Indexed Annuities' also known as 'Fixed Indexed Annuities'. These are legitimate products but they, like all annuities, have some limitations that you need to know about in addition to understanding the benefits of these annuities.
The 'Crash Proof' part that Crash Proof Retirement named itself after is indicative of Fixed Indexed Annuities. These annuities are fixed accounts that credit interest to your annuity based upon the performance of a stock index or indices. This is great in that you are not invested in the index, so you do not carry any risk of loss. You receive a credit to your account most commonly once each year which is determined by the results of the index which your account is tracking. However, the amount of the credit to your account is 'capped' meaning that no matter what the actual return is you will not get more than a maximum, predetermined amount. Caps vary greatly but you might see a fixed indexed annuity capped at 8 or 10 or 12 percent. If your cap is ten and your index, the NASDAQ perhaps, is up 25 percent you only receive ten. However, there is also usually a floor. You might be limited to a 0 percent loss, so your principal is guaranteed, or you might suffer no more than3 percent regardless of the magnitude of the indexes declines. An annuity like this would be invaluable during the stock market disaster of 2008. Where people invested in the NASDAQ or other indices received 40 percent or greater losses and investor in a fixed indexed annuity may have lost nothing. On the other side, however, when the index is up a ridiculous amount, like the late '90s, you would still only receive your cap while investors in an index mutual fund or ETF would have received the full benefit.
The way to think of these products is that most investors and financial planners model their plans around a target rate of return. Whether it is pre- or post-retirement most investors have an idea about what they need to earn. Wise investors and advisors use sub-ten percent numbers when doing planning. If I am to retire with a certain amount of income and need to generate 8 percent per year, then a fixed indexed annuity with a 10 percent cap is fine. If I need fifteen percent per year in retirement, well, that is a shame and foolish way to plan, but an annuity with a twelve percent cap will not be sufficient.
These products are legitimate, can be useful, and
beneficial. But like cars you need to shop carefully. Annuities, and cars, with
similar features can still perform quite differently. I advise investors to do
some prep work, educate yourself about the products and the benefits, and
compare annuities. If you have an advisor, or prefer to work with one, please
ask questions so you can be confident the advisor knows what she is talking
about. Advisors, even well-meaning ones, make mistakes and overstep their bounds.
Shop carefully and always. Both fixed-indexed annuities and financial advisors
can be beneficial when you find and utilize the right ones.
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