For many millions, Jane Bryant Quinn is the principal – and for some, the only – source of financial education. It's therefore a good bet that these consumers, at the least, will heed what the trusted personal finance commentator has to say about annuities — to which she devotes 35 reader-friendly pages — in her new book, "How To Make Your Money Last: The Indispensable Retirement Guide" (Simon & Schuster). The tome is No. 5 on The New York Times Bestseller List for the month of February.
It's naïve to assume that Quinn, who writes monthly columns for AARP Bulletin and AARP.org, would pass up the opportunity to caution folks against certain types of annuities; and she does so in both the book and an interview with ThinkAdvisor. (Generally, the veteran journalist has harsh words about "greedy financial salespeople [who] go after the retirement accounts of people in midlife and later," as she writes.)
Variable annuities with living-benefit guarantees get the red-flag treatment; in the book, Quinn brands them "sexy, confusing, high-commission annuities that financial advisors love to sell."
However, the personal finance expert, who penned a column in Newsweek for 30 years, reveals that, in researching the book, she "developed a new respect for immediate-pay annuities" and praises those from TIAA-Cref and Vanguard, in particular.
For her annuity chapter, she consulted with several industry experts, including Moshe Milevsky, finance professor at York University in Toronto; Wade Pfau, professor of retirement income at The American College of Financial Services; and Michael Kitces, partner in Pinnacle Advisory Group and author of the popular financial blog Nerd's Eye View.
Quinn, author of bestseller "Making the Most of Your Money NOW" (Simon & Schuster 2010), has written for The Washington Post and Bloomberg.com. She is an Emmy winner who has hosted PBS telecasts and appeared extensively on CBS news programs. As a young reporter during the consumer movement, she wrote for The Insider's Newsletter, published by Look Magazine.
ThinkAdvisor chatted recently with the New York City-based Quinn, 76, whose comprehensive new book covers changes in Social Security and health insurance. Toward the end, there's a chapter called "Investing for Income: Not What You Think," which talks about asset allocation, and stock and bond funds — and which, interestingly, is twice as long as the one with all the annuity pros and cons. Here are highlights from our conversation:
ThinkAdvisor: Annuities have taken a bad rap over the years. Are they starting to be seen in a better light?
Jane Bryant Quinn: I hope so. People are looking at their friends who have pensions and saying, "Gee, I wish I had a pension." My answer is: "Well, you can buy yourself one."
You write that financial advisors and stockbrokers are salespeople who want to sell their most expensive products so they can earn the biggest commissions. That's a widespread image.
I understand that [some] people make their living selling commission products, but my job on the consumer side is to point these things out. This has been a running problem with annuity sales. I give the talks – I hear people stand up and say, "My 90-year-old mother was sold this annuity…" You say that "fundamentally, annuities are not an investment even if they're tricked out to look like one. They're management tools."
Yes. Their purpose is to guarantee that your money will last for life.
What advice do you have for advisors who sell variable annuities?
They should make sure they have a deep understanding of the product and know where consumers are confused. They should make very clear how much it costs – though you can't find that out, in full, with a fixed index annuity – what the guarantee means and how good the market has to be over periods of time when you can get something [above] the guarantee. Explaining it fully ought to be advisors' duty, though they would have fewer customers if they did that. But it's also the customer's duty to find out about the annuities from an independent source.
What type of client could be a good candidate for a variable annuity with living benefits?
Someone who understands the product and knows exactly what they're getting – which, I believe, eliminates 99% of [consumers]. It would be for people who think the costs are low enough and their timeframe is long enough to have a chance of getting more than the minimum guarantee. But you're not going to get anything much out of variable annuities with a living benefit as an investment because of their 3.5% — and higher — fees.
You point out that living benefits are paid with the consumer's own money first – in other words, you're paying yourself.
Yes. If you're using the guarantee, you're getting your own money back in 5% increments. You have to live well past life expectancy before you start using the insurance company's money. Most annuity buyers, in general, think they're earning a guaranteed 5% on their money. Usually they're shocked to discover that's not the case.
You write about confusion of nomenclature, noting that with fixed index annuities, such beclouding "makes it dangerous for the average person to stray into what amounts to the financial industry's worst neighborhood" and that FIA advertising "has been rife with misleading claims…" You say: "Stay out of expensive investments that tout 'no loss, all gain.' It's a snake pit down there."
All true.
Do you think the industry purposely obfuscates?
Well, look at equity index annuities. They were sold as being linked to the stock market and that you could make some market gain. But as soon as the regulators started [scrutinizing] that, the name was changed to fixed index annuities. So I'd say that was purposeful. There couldn't be a clearer case of being purposeful. Why, primarily, do you like single-premium immediate annuities?
Immediate annuities are very good in certain cases. If you have plenty of money to live on for life, you don't need an annuity. Or if you receive Social Security and have a small amount of savings, I don't think you should buy an annuity because you might need that savings – you've got to have flexibility. But for people who think their money will last for life but then in, say, two years, they're not so sure and start worrying, that's a very good case for taking money out of the bond part of their investments and using it to buy an immediate-pay annuity. I'm hoping more people will take a look at those.
