Rick Boettger Columns
Sunday, December 20, 2009
The next crash?

By Rick Boettger Special to The Citizen

Many of you have learned that stocks alone are more risky than you thought. You may be wondering how to better protect your retirement, and if you ask around, someone will be sure to try to sell you an annuity.

Before you buy one, please consider what I have to tell you.

What I learned from the mortgage and housing crash applies to annuities. If you're not in the mood for a scary warning, think of how happy you'll feel 10 years from now if you follow my advice and end up saving a big chunk of your funds from financial disaster.

A friend of mine recently inherited about a third of a million dollars, and sure enough a credentialed "financial adviser" drove all the way down from Fort Lauderdale to try to get her to put it all into one of his annuities.

Three times in the half hour I was there he enthused, "It's just like a pension." Well, maybe a bankrupt Chrysler pension. It is so not like a pension that they can't say that in writing, but in speaking, it's like a mantra.

An annuity is simply a bunch of high-cost mutual funds and a lot of expensive insurance. I dare you to find their high commissions and fees listed in the literature they show you, but when you ask, they have to tell you.

How high? My friend wanted to get 5 percent per year on her money. To get that, the annuity seller would take out nearly that much, 4.95 percent in fees every year: almost $6,000 in insuring the payout and principal, $6,000 for the high-cost mutual fund managers, and -- here's why they'll drive down from Fort Lauderdale and buy you lunch -- more than $4,500 for the "contract cost," the commission for the salesman and his firm. That's every year you live, so it better be a great lunch.

"So what?" you ask. "As long as I get my guaranteed 'pension.' "

Here's what I found out that scares me. They're betting that the stock market over the next 30 years will perform as it did over the last. They show you complicated tables listing how your annuity would grow and shrink in the future, saying, "No one can predict the future, but here's how your money would look based on what's happened in the past."

But 30 years ago, the Dow Jones average was under 1,000. It was easy for annuities to pay out 5 percent for you and 5 percent for them when, for the first 20 of those years, the stock market was going up an average of 12 percent.

The big problem is, over the last 10 years the stock market has pretty much stayed the same. My best guess is, over the last 10 years corporations have had to pay their executive salaries with stock options in order to get a tax deduction, which has led to their issuing so much more stock that the market is diluted. And this will continue.

So how can annuities keep it up? "We're insured," they say. But by whom?

The subprime mortgages were insured by AIG, the toxic credit default swaps. They felt sure everything was OK because, like the stock market, housing prices kept rising. I fear the annuities market has done the same.

So hey, if you buy an annuity, be ready to lobby the feds for another giant bailout somewhere down the road for whoever is insuring your annuity. Otherwise, just put a chunk of your change in some nice Vanguard stock index and bond funds. They don't pay insurance or commissions to anyone.

Rick Boettger was a business professor before writing his book and hosting a talk radio show on political economics. He has done tax and financial advising in Key West since retiring here in 1996. Questions, information and differing opinions are welcome at rd.boettger@gmail.com.