Economic forecasting is like trying to drive a car blindfolded and following directions given by a person who is looking out of the back window.  It seems rather curious, however, that the last two Federal Reserve Governors, Ben Bernanke and Janet Yellen, along with ardent annuity adversary, Senator Elizabeth Warren, would all own annuities as part of their own investment portfolios. Warren’s first crusade, as head of the newly- created Consumer Finance Protection Bureau’s, was to lambast the sales practices of over 15 annuity companies and brokerage general agencies, sometimes known as Independent Marketing Organizations(IMOs) that market a fast- growing product called a fixed index annuity(FIA) and its sister product fixed index universal life(FIUL). Last year, middle class- Americans bought over $250 billion of annuities. As the self -ordained crusader for the middle class, despite a net worth, according to disclosures of over $15 million, Warren has quoted a plethora of sales incentives that drive the $250 billion annuity market such as exotic trips and stock options. Can the financial crusader be both for retirement income annuities as a solution for middle class retirement and be against them? It’s kind of like saying your part Cherokee indian and later saying you are not. My friend’s wife is part Cherokee Indian and fair as a white sheet but she is fair in not taking advantage of the 5% of her DNA that is indian. Come on Miss Warren.
There are some abuses that have been dealt with on an ongoing basis by the industry and the states that regulate annuities. There are now over 40 states that regulate surrender periods, surrender charges, and commissions. Annuities continue to receive high consumer satisfaction ratings by publications like Barron’s and consumer service organizations like JD Power because they deliver on the primary purpose they were intended for when they were created hundreds of years ago: They deliver tax-deferred accumulation, safety of principal and a lifetime of income for the owner and beneficiaries of a contract. In addition, most agents now use them as a bond substitute which is prudent given the fact that according to money manager, PIMCO, interest rates remain below historically normally levels of around 4% as they have been for 10 years since the debt bubble of 2008.
With long- term care policy costs skyrocketing and companies pulling out of this market, annuities can be also be used as a storehouse of future value for assisted living or confinement costs.  Bonds offer the following risks as well that annuities can reduce:

  1. Rising interest rates create paper losses. In the 1970’s rising inflation and interest rates knocked 40% off the price of a 10 year 1974 Treasury Bond prior to maturity, according to Bloomberg.
  2. Rising inflation affects the buying power of a bond so that it buys less in goods and services.
  3. Bonds can default whether they are public or private. I.E. Washington Public Power and Greece.
  4. Bonds can suddenly become illiquid as witnessed with Lehman Brothers in 2008.

Recently, one of the most accurate bond pundits of the last decade and leading money manager, Jeffrey Gundlach of DoubleLine, said that Federal Reserve will raise interest rates “until something breaks”. Gundlach, who was one of the few economists that predicted a Trump victory may have meant that to include your stock and bond portfolio, including so-called safe Treasury Bonds, defensive utility stocks, Income REITs and other assets that suffer when interest rates rise. Annuities, as Warren, Bernanke and Yellen know, hedge against this inevitability.
According to financial disclosures, Warren has a total of between $1 million and $7 million invested in several accounts through TIAA-CREF. This is by far her largest allocation but she also has a fair amount of her portfolio invested in variable annuities tied to the stock market outside of her retirement plan. Warren has had the largest share invested in an annuity, which is like a private pension.  Fees are collected by the insurer, TIAA-CREF in exchange for this guarantee. In fact, as the Wall Street Journal pointed out on March 9, 2018 private companies are offloading the risk involved in carrying pension costs on their books to insurance companies in record amounts. Probably, the biggest Federal endorsement of annuities can in the disclosures by former Fed Chair,Ben Bernanke, who had on his last disclosure in 2014 more than 80% of his portfolio in annuities. Bernanke is an unabashed conservative investor, whereas current Fed Chair, Janet Yellen, also has some of money invested in annuities. Yellen has followed the age- old advice of “not fighting the Fed” and is a big beneficiary of near zero interest rates and a booming stock market. Yet even Yellen is not yelling about the diversification benefits of annuities in a well-rounded investment portfolio.
North of the border in our beloved border neighbor of Canada is a small radical group who refuses to speak English so that no one can understand them. They are called Separatists. In this country, we have the same kind of group. They are called economists. Fortunately, the one’s running our country’s monetary policy at the Fed understand how valuable a stream of assured lifetime income can be and put their money where their mouth is. Did I mention that apparently one politician and former American Indian from Massachusetts does as well?

Investment advisory services are offered through MasterPlan Retirement Consultants, Inc. doing business as MasterPlan Retirement Consultants. MasterPlan Retirement Consultants is a Registered Investment Advisor in the State of Georgia. Insurance products and services are offered through Fricks and Associates, Inc. doing business as MasterPlan Retirement Consultants. MasterPlan Retirement Consultants, Inc. and Fricks and Associates, Inc. are affiliated companies. All written content is for informational purposes only. Opinions expressed herein are solely those of MasterPlan Retirement Consultants, Inc. and our editorial staff.  All information and ideas should be discussed in detail with your individual adviser prior to implementation. MasterPlan is not affiliated with the Social Security Administration or any government agency.