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JULY 18, 2013

If Guaranteed Income Sounds Too Good to Be True...It Just Might Be

As life expectancy continues to increase, baby boomers are reaching retirement age at a staggering rate. In fact, it is estimated that roughly 10,000 people in the U.S. reach age 65 every day.1

While longer life spans may appear to be good news for those who are leaving their employment years behind, poor returns in the stock market has led many to seek more financial guarantees - especially as it relates to the safety and security of their retirement assets and income.

The Annuity Mirage

One financial vehicle that has become particularly popular among retirees who are seeking to supplement their income from Social Security and other investments is the fixed annuity. At their most basic level, these fixed annuity products promise their holders income payments and a set rate of interest throughout the life of the contract. Generally, the holder of any annuity can also choose to receive income from the annuity for the remainder of his or her life, regardless of how long that may be, through a process called annuitization.

But fixed annuities are oftentimes sold under the guise that other traditional asset withdrawal methods will not be sufficient to last throughout a retiree's lifetime, causing them to outlive their retirement savings. It is this fear based approach that has led many retirees to take the bait and dive in to fixed annuity products.

The Growing Concern Over Guarantees

Traditionally, fixed annuities have been sold to consumers with the promise that their funds are backed by the full strength and credit of the issuing insurer. Over the years, most insurance companies have been able to meet the income demands of their annuitants.

But insurers are finding that guarantees made 5 or 6 years ago may not be tenable in the current sustained low rate environment. Many are taking every action available to lower their future obligations on some pre-2007 contracts.

Other insurers are starting to sell off their fixed annuity components to investment companies that are picking up these assets at bargain prices, feeling that the return on their own investments in private equity funds and mortgage bonds will be more than sufficient to cover the guaranteed income payments that are due on their newly acquired annuity business.

While those who are close to the various investment companies state that most of the assets invested in possess high credit ratings, there is still a great deal of concern going forward as the number of insurers with ties to private equity entitles are up from only 4% in 2012 to approximately 15% today.

A recent concern from regulators and insurance companies is that if the economy worsens down the road, the investment in the annuity business could end quite badly for investors and annuitants. And, while only time - and investment return - will be able to truly tell if investment firms can make good on their long-term promises to annuity holders, placing one's life savings into a fixed annuity is a risk that many retirees may not want to take.


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