Safe isn’t always safe, and risk isn’t always risk
Safe isn’t always safe, and risk isn’t always risk

“But is it safe?”

This is one of the most perplexing questions I get from people who are considering using our income planning services. More often than not, they are referring to an annuity or other life-insurance product we sell and are struggling with how safe they are. I know this is a genuine concern. I also know it’s entirely irrational.

“Irrational?” you say. Yep, that’s exactly what I said, and here’s why.

Most of the people doubting the safety of these products are people who have much, if not most, of their retirement savings in — you guessed it — the stock market. In addition, most of these people have at one time or other lost a great deal of their savings in the market and, if pressed, will tell you they expect it to happen again. And yet they are very reluctant to get out for fear of missing the next big bull market.

I have news for you. This is the next big bull market. And what happens after all bull markets? A bear market, right? So here we are, sitting on a pile of winnings from this big bull market, and instead of taking their winnings off the table, these people do what gamblers always do — they double-down.

“But it always comes back,” a prospect told me the other day. “If it goes down again, I’ll just ride it out like I did the last time.” Yeah, this makes a lot of sense, doesn’t it? Last time this guy was still 10 years away from retirement. This time, if it happens again, he will have to delay his retirement for another 10 years, or longer. I know this, because he told me so when I asked what would happen if we went through another 2008. His response was, he’d just wait it out because it always bounces right back, right?

This is just crazy talk. Let’s say you are 67 and getting ready to hang it up. You have $700,000 saved and are feeling pretty good about things. The next thing you know, your $700,000 is $400,000, and instead of getting $28,000 a year out of it, you are going to get only $16,000 a year in income. And if you believe Morningstar, you are going to run a 50% risk of running out of money. (“Low Bond Yields and Safe Portfolio Withdrawal Rates,” 2013, Morningstar)

And you could have completely avoided this “safe” scenario if you had gone with a “risky” income annuity. Here’s why.

First, if you use a fixed, or fixed index annuity, you can never lose any money. Each year, interest is credited to your account and then locked in, becoming the base for future interest calculations. It’s just like a CD or a savings account, only much safer and on steroids.

Second, and even more important, you spread the risk of outliving your money. You do this by putting yourself in a large pool of lives. The insurance company can calculate with near exact precision how long the average life span of the pool will be. The money, which is locked into the pool and stabilized by surrender charges (these really do work in your favor in spite of the noise and propaganda from Wall Street), will earn a predictable rate of return. At this point, it’s a simple calculation: (Initial deposit x predictable rate of return)/life expectancy.

The insurance company can therefore guarantee a lifetime payout. That payout is often two to three times the payout you can safely take out of your investment accounts.

In the $700,000 example above, the retiree could only take $28,000 with a 50% chance of running out of money, but with a split annuity strategy, that same person could have received nearly $50,000, guaranteed for the rest of his life.

Often people will call the strength of the guarantee into question (back to the top of this column). They are often put off by the disclaimer: “Annuity guarantees are backed by the claims-paying ability of the issuing carrier.” Let’s put this one to bed right now. In the history of these products, we cannot point to a single individual who has lost money in a fixed life or annuity contract, as long as they have met the terms of the contract. It’s the most stable and secure financial industry in the world. It has to be. Insurance is designed to protect your assets. Markets are designed to speculate with them.

We take a lot of abuse from our fellow financial professionals over our preference for annuities when it comes to income planning. We get accused of just being greedy, commission-based salespeople who don’t care about our clients. (That’s rich coming from Wall Street, don’t you think?) But what if we aren’t? What if we do this because we know it’s the right thing for the job?

Look at it this way: Assume for the sake of argument you have one store that sells dishwashers and one that sells clothes washers. Now the dishwasher salesman wants to corner the market for all the washers, so he goes on a campaign to discredit the clothes-washer salesman. He points to the fact that if you put your dishes in the clothes washer, they are going to break (duh!). He whips up a frenzy about those knives and forks whipping around. These things are just plain dangerous! Not only that, if you wash your clothes in them, they can shrink and, more often than not, come out wrinkled. Worst of all, think of all that money that greedy clothes-washer salesman is going to make on commissions, especially when he tries to sell you a dryer, too!

But the thing that’s never discussed is the fact that you simply cannot effectively wash clothes in a dishwasher! Nor can you safely take income from a risk-based asset. It all sounds pretty absurd, doesn’t it? As absurd as gambling with your retirement funds? You tell me.

Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, NH, he services Greater Boston and the New England areas. He is author of five books, including “Tell Me When You’re Going to Die and I’ll Tell You How Well You Can Live,” which deals with the problem that unknown lifespans create for retirement planning. It and his other books are available on His radio program, The Free Money Guys, can be heard every Sunday at noon on 680 AM, WCAP.