Earlier this year, annuity guru Stan Haithcock released his book The Annuity Stanifesto. Haithcock is a well-known annuity expert, often lauded for his independent advice and transparency about the realities of the annuities market. He started his career in New York City and worked with many big firms, but left about eight years ago.
“Annuities are sold improperly by most brokers,” Haithcock tells me. “It’s basically the wild, wild west of financial products. And now that the Internet is up and running, the wildness is increased.”
Haithcock says he’s the only person he knows that exclusively pushes guaranteed-only annuities. “You have to view annuities as contracts,” he insists. “You have to look at what’s actually in them rather than relying on the hyped promises. Others sell what an annuity might do. I focus on what an annuity will do, as stated in the contract.”
As a result of his philosophy, Haithcock has developed different strategies for incorporating annuities in investment portfolios. He maintains that there are plenty of good annuity products, when properly understood and properly sold.
Where Do Annuities Belong in Your Portfolio?
“Many investors want market growth, but they are worried and want fixed instruments to protect them from the downside,” Haithcock says. “Agents say that you can have both growth and downside protection, and that’s inappropriate.”
He says that indexed annuities were designed to compete with CDs, not with the actual stock market. “The returns are going to be two to four percent, not guaranteed, with variable annuities even worse,” says Haithcock. “You can get annuities with guarantees, but then the annual fee is right around three percent and you have limited choices on separate accounts. Add something like a death benefit rider, and it becomes even more costly.”
Instead of investing in annuities for growth, Haithcock preaches that they should be considered a transfer of risk. “Annuities are for principal protection, life income, legacy, or for long-term care,” he says. “If you don’t need one of those things, you don’t need an annuity.”
Haithcock also points out that part of the problem is that people don’t understand where annuities belong in a portfolio. Instead of expecting an annuity to provide you with stock-market-like growth while protecting you from downsides in the market, it’s important to understand that an annuity actually ranks with Social Security and company pension plans.
Once you understand what an annuity is for, and whether it really does fit into your long-term plan, you can start looking. “You have to understand what you want the money to do,” Haithcock says. “Ask what, and then ask when.” And make sure that you are only using an annuity to protect your principal, create income for life, set up a legacy, or cover your long-term care needs.
Avoid Annuity-Buying Mistakes
Once you figure out what you want your annuity to do for you, it’s time to make the right purchase. “The biggest risk with an annuity is choosing the wrong type,” says Haithcock. “The next biggest risk is putting too much money in your annuity.”
From an asset allocation standpoint, Haithcock thinks it’s impossible to put too much money in an annuity. “These are non-correlated assets in my opinion,” he says. “What you have to be careful of is putting too much in one annuity in a low-rate environment and locking it in.”
To avoid locking in low rates, Haithcock suggests laddering annuities. “A good broker can help you look at laddering so that you can take advantage of rising rates later, and better manage your income timing. Right now, we’re basically treading water. You buy six rates and then hopefully catch it so that things are better later.”
When choosing an annuity, your first step should be to ask what risk you want to transfer. “Ask what you want the money to do,” says Haithcock. “Are you trying to secure life-long income? Do you want to make sure you have what is needed for long-term care? Are you trying to protect your legacy for your heirs?”
“I’ve told clients, when they tell me what they want their money to do, that an annuity is the wrong vehicle for them,” he continues. “You really need to have an understanding of where an annuity fits in your portfolio before you sign on the dotted line.”
Next, you need to see what contractual guarantees there are in the annuity. This is where things get a little hairy. A salesperson might say that an annuity could do something, but that’s all just hype.
You need to look into the contract and see what’s really in there. “An annuity won’t do everything,” Haithcock says, “but some are designed to make you think that they will. Many of these products aren’t regulated by anybody. In a securities world, if somebody did some of this stuff, they’d take your license.”
Haithcock says that you should write down what you understand the annuity will do, and then ask your agent to sign off on it. On top of that, you also need to take advantage of your state’s “free look” period. “Every state has one of these periods, usually ranging from between 10 and 30 days,” Haithcock says. “It’s your chance to get out.”
Take the annuity contract to a knowledgeable third party that you trust to help you sort through the legalese and the jargon. “The industry isn’t going to oversee it, and if they won’t protect you, you need to protect yourself,” Haithcock points out. Review the annuity within your state’s “free look” period, and if you aren’t comfortable with it, call and cancel. By law, you get your money back.
“Annuities, even indexed annuities, are great when people understand them and they are placed properly,” says Haithcock. “But you have to really understand what you’re getting, and make sure that the annuity will help you accomplish your big picture money goals.”