For Seniors: Mutual Funds, or Indexed Annuities?

One of the criticisms about fixed indexed annuities, often raised by the NASD and others in the securities industry, stems from the liquidation of elderly clients’ stock and mutual fund accounts in order to put the money into an annuity. Moving money from one financial instrument into another is a strategy that has taken on many forms over the years: converting an IRA into a Roth IRA; cashing in a 401(k) early, paying the tax, and investing the money otherwise; removing equity from a home and investing it in a side fund; and liquidating stocks or mutual funds and moving the money into a fixed indexed annuity. Any of these strategies have their supporters and their detractors, but the glaring difference in this list of complex strategies, which need to be evaluated on an individual basis, is that the move of a senior citizens’ money out of a risky stock or mutual fund into a safe and guaranteed fixed indexed annuity, is a financial no-brainer. That is, unless you are the broker or broker dealer who is losing the account and all future commissions to an insurance agent and the company who issues the annuity.

The majority of individuals and couples in retirement begin this phase of their life with a fixed amount of income and assets from which to live on for the rest of their lives. Even those who have done a good job of saving and planning may only have a slightly larger pot from which to dip, and still have to make their limited assets and income stretch for two or maybe three decades. One of the biggest fears expressed by elderly Americans is that they might outlive their resources. With growing uncertainty about the continuation of Social Security benefits, the potential for increases in taxes, the rising cost of medical and prescription expenses, and the looming threat of long term care expenses, seniors have a lot of areas that directly affect the quality of their retirement over which they have no control. To add the possible loss of the principal value of their fixed asset base to this ominous list, due to fluctuations in the market, is not only unwise, but is irresponsible. And any broker or advisor who continues to place these seniors’ assets at risk is the one who should be chastised for endangering the financial security of our elderly population.

Of all the financial avenues available for a senior adult to store their nest egg, there is only one place where their principal is 100% guaranteed, they receive a guaranteed interest return plus a chance to get a higher return, they have good liquidity and access to their money at all times, and they have the ability at any time to create a guaranteed stream of income they can never outlive. This amazingly perfect solution to all of the needs and concerns of retirees is none other than the fixed indexed annuity. This product, and this product alone, resolves the biggest fear of all seniors, that they might outlive their money. While bank CDs and bonds might offer security, they do not have the return potential of a fixed indexed annuity, and they DO not offer a guaranteed lifetime income option.

But this discussion began by pointing out that some in the securities industry suggest that it is inappropriate to move a senior’s money out of stocks and mutual funds into a fixed indexed annuity. The thing that is lacking from these critics is not their condemnation about annuities, but a simple explanation of why securities should ever be construed as an appropriate investment for anyone who is retired or living on fixed assets and income.

Consider that the market continually goes through cycles, and that any senior who lives more than a decade in retirement will likely experience at least one market correction, or downturn. Historically it takes years for the market to return to its original point before it recovers all of the losses incurred in a correction and begins climbing above that previous benchmark. If you are 65, 70, 75 or older, and your asset base, which is providing a portion of your income, suddenly loses a significant amount of its value, your financial security is immediately compromised. First of all, you are no longer earning ANY return on this asset and if your plan was to live off the interest only, that plan is terminated until the market fully rebounds and starts to return a substantial gain. So, the choices to the retiree caught invested in the market are to liquidate principal or reduce their standard of living just to take up the slack caused by the loss of their asset value. The greater the losses in the account value, or the longer the downturn continues, the higher the risk that the asset base can be so badly eroded by the combination of losses and withdrawals, that this person will not live long enough to ever be able to recover financially, and could run completely out of money in a few short years.

When there is a safe alternative that can completely remove all of these negative probabilities, why in the world would any intelligent person ever want to expose themselves to that risk, just for the chance to get a few points more return in a few of the good years? The reason our seniors continue to buy into this false illusion, that the only way they can secure their retirement is to place it at risk, is because of the social pressure to maintain the status quo. Our society carries the greed of our youth to get all the return we can get, right into our later years, when in fact, we should be slowing and making the transition in our investments from risk to security over the last few decades of our working careers. Retirement is not just a continuation of our previous career paths, but it requires a complete shift in goals and priorities, and our financial gears need to shift dramatically from accumulation to preservation by the time we stop receiving earned income.

In discussing this issue of mutual funds for seniors versus fixed indexed annuities, there is no uncertainty. The annuity is the only choice for the retiree. Safety, security, guarantees, versus risk, fear, losses, and potential for financial disaster. There is no argument which considers the complete well being of the senior that can offer any other recommendation than to place their retirement savings in a fixed indexed annuity.

Brokers who continue to prey upon seniors and endanger their retirement security should be held accountable for their bad advice and unsuitable recommendations. Insurance agents, or any other advisors who recommend that a retiree remove the risk from their assets and move their money from stocks and mutual funds into the safety and security of a fixed annuity, should be applauded. The bias of the NASD and the securities industry is rooted in their greed, and ignores the best interests of their clients. I wonder if brokers were made to take fiduciary responsibility for their recommendations, how many would continue to provide such faulty advice to our seniors.