Annuity Abbey Part 3: The Conclusion

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Our story thus far: Retirees John & Mary Swanson, having seen their bank interest income plummet over the last few years, decided to attend an annuity seminar. After hearing all of the wonderful benefits annuities had to offer, they met with the annuity professional and bought a fixed annuity that was perfect for their situation. However, John & Mary weren’t the only ones the seminar made an impact on.

Part III.
The Pondering Of Sven

Recent years had been difficult for Sven Sjovold. He had hoped to use his ice-fishing business to supplement his retirement, but income was way down due to global warming. Sven’s lack of investment skills had not helped his money situation either. Sven’s father had told him that you can’t go wrong following the crowd, so for over 40 years Sven Sjovold had followed two rules: follow the crowd because the crowd is usually right, and the past predicts the future. For the first time in those 40 years, Sven was thinking that those rules might have changed.

The crowd had been wrong about internet stocks in 2000, real estate in 2005, and the entire stock market in 2008. And even if the crowd had been right at times in the past, today they didn’t seem to know where to go. Everyone was offering different advice.

That annuity professional explained that fixed indexed annuities could potentially earn Sven more interest than in the bank if the index cooperated. She also said that since they’re fixed annuities, they are not investments, so you can’t lose what you already have if the index goes down. Sven leaned back in his hammock and pulled the brim of his cap over his eyes. “Well,” he thought, “it’s hard to get hurt if you do nothing, maybe I’ll call that annuity professional tomorrow or next week” and with that he nodded off to sleep.

Later, through the twilight of his subconscious, Sven dreamily heard a voice calling “Sveeeeen…Sveeeeen”. Sven drowsily raised his eyelids, closed them, and then opened them wide. In front of him was an apparition with the likes of which he’d never seen. The creature was dressed in rags, his face had drawn and sunken features that made him look very old, and Sven could see right though the creature onto the shore and lake behind him. “Who are you?” Sven whispered. “I am what you will become if you stay on your current financial path,” replied the specter, “I am Sven of retirement future.”
Continued the apparition, “I was born the day you were presented with an opportunity to change the course of your retirement and you didn’t take it. Since then the value of those Mediterranean bonds you bought sank, your gamble with Las Vegas real estate rolled boxcars, and that investment in the pumpkin farm went to seed because they called off Halloween. You lost your home, all of your savings and became a rowboat person, oaring from dock to dock on this lake begging for handouts.”
“I don’t own a pumpkin farm” stated Sven.

“You will,” said the specter after consulting his hologram-pod, “you bought the farm in 2014. You passed on the opportunity to meet with the annuity professional and chose to continue along the investment path you had been following and ultimately wound up broke and alone.”

“Oh my,” wailed Sven, “this is terrible. Wait a minute. I’m 69 years old, so it could be decades before what you say comes to pass. After all, your hair is white and wispy, your wrinkles are deep, your back is stooped and your teeth are gone. I could still enjoy retirement for many years to come before I have to face what you’re predicting. How old are you?”

Replied the apparition, “I’m 71.”

Continued the specter, “you relied on the old financial pyramid that was based on the perception of risk. The thought was as you grew older you’d put more of your assets in lower risk investments and less in high risk ones, but there were 3 problems with the old pyramid.

#1 – The old pyramid treats an asset with low risk the same as one with no risk of loss. Purveyors of the old pyramid don’t know how to avoid risk so they try to make it lower, but this fails because of the second problem.

#2 – The past does not predict the future. Even though every prospectus in the old pyramid world carries those words, the purveyors of pyramid products really don’t believe this, because their computer models are all based on the past repeating. However, the world doesn’t work like their models because of the third problem.
#3 – People make normal decisions, not rational ones. The scheme for the financial pyramid is built on the outcomes of models that count on the past repeating, but they’re also basing their outcomes on the notion that everyone in the financial world will always make completely rational decisions based on the facts and this simply isn’t true.

You, Sven, have said that you follow the crowd and believe what happened yesterday will predict what happens tomorrow. In the short-term that can be true, but inevitably what happens is people become so optimistic that balloons develop and assets become overvalued. Then the balloon pops and people become so pessimistic that they panic and crashes occur. People then try to look for a safe haven within the pyramid but the purveyors don’t really offer safety because their low risk investments use the same model assumptions as their high risk ones and thus are also vulnerable to loss. The result is the old financial pyramid can fail.  Relying on the old financial pyramid is why in a few years you are living in a boat fighting the geese and grebes for fish scraps.”

“Oh my,” wailed Sven, “what can I do to avoid becoming my future self?”
“The answer is a simple one,” smiled the apparition, “consider using fixed annuities in your planning.” And the specter disappeared.

Sven bolted up in his hammock so quickly that it flipped sideways and he tumbled to the ground. Did that really happen or was it a dream? Did my future self really warn me of what lies ahead if I didn’t change my attitude toward saving for retirement? I need to see that annuity professional tomorrow.
Annuity professional Julie Johnson was seated kitty-corner from Sven Sjovold at her office table. Julie began, “Frankly, I was surprised to get your call. You didn’t seem receptive to the idea of using annuities at the seminar.”

Replied Sven, “I got a visitor that changed my mind; you wouldn’t know him.” Under his breath Sven continued, “and I hope I never do.”

Julie began, “As with any financial decision, you must carefully consider your own personal situation and how you feel about the choices available. No single annuity design may have all the features you want, that’s why it’s important to understand the features and trade-offs available so you can choose the annuity that is right for you. Knowing that it is impossible to predict the future, you must decide what combination of features makes the most sense for you.”

Sven furrowed his brow. “After watching the value of my investments go up and down like an amusement park ride for the last dozen years, I’m much more concerned about not losing what I have than risking it to try to make a lot of money.

Julie continued, “Based on what you’ve told me there are a couple of different fixed annuities that might work well.” And with that introduction Julie relayed all of the pros and cons of the two annuities and Sven made his choice. Julie smiled, “This should be a perfect fit for you. I think you’ll sleep better at night knowing you own a fixed annuity.”

“At least I won’t be visited by any more ghosts,” thought Sven as he signed the application.

Thus concludes Annuity Abbey. Any names used are fictional and have no relationship to any person living or dead.

The above is a hypothetical example and is not intended to be a predictor of actual results.

Jack Marrion is president of Advantage Compendium Ltd providing research and consulting services to select financial companies. He has twice been asked to address the National Association of Insurance Commissioners on annuity issues, his insights on the annuity and retirement income world have appeared in hundreds of publications including Business Week, Kiplinger and The Wall Street Journal, and his research is frequently referenced by regulators.

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