Q&A: "There is so Much Hype About Crashing Markets and the Need for Annuities as we Approach Retirement Age. Which Annuity Would be the Best?"

Question and background: 

There is so much hype about crashing markets and the need for annuities as we approach retirement age. Which annuity would be the best? Also, if the markets fall apart, wouldn't they take the insured annuities with them? Wouldn't the same apply if there are currency problems?

Answer: 

All great questions. Annuity salespeople DO use a lot of hype about crashing stock markets when pitching their products...especially with fixed index annuities -- the kind where you might earn a little return if stock markets increase but where the insurance company "backstops" your investment so you don't lose money. But it's not a foregone conclusion that you need an annuity. It depends on factors like these:

• your particular situation and needs
• your current retirement and investment assets
• how those assets are invested
• whether those assets will be invested strategically or tactically
• your tolerance for fluctuation in the value of some or all of your portfolio
• what you anticipate your retirement living expenses will be
• how much of those retirement expenses can be covered by social security (which essentially IS an annuity) or a pension
• your health and whether you have longevity in your genes

In my view, financial assets (stocks and bonds) ARE overpriced, mostly due to monetary policy on steroids thanks to global central banks. And historically, when the long-term valuation measures of US stocks have been as overpriced as they are today, the next 7 to 10 years has usually resulted in very poor returns (1% to 3%, for example). But that doesn't necessarily mean that markets are going to crash as hyped by annuity salespeople. There are other ways to avoid losses on your retirement income pool, such as tactical portfolio management and drawing income only from stable investments.

The respective insurance company is on the hook for any guaranteed products--which would include immediate annuities, fixed annuities, fixed index annuities, and any riders guaranteeing a certain income or withdrawal benefit. (Variable annuities do not have underlying guarantees re: the principal values of the subfunds.) State regulators have certain reserve requirements of the insurance companies. And their investment portfolios tend to be relatively conservative, with a heavy emphasis in bonds of various types. So in theory, if financial markets fall apart, insurance companies should be able to meet their obligations. But anything can happen, of course. 

As a second "backstop," each state has a Guaranty Fund that the insurance companies must pay into. It protects promised insurance/annuity benefits up to certain limits. So if an insurance company fails and there isn't already another company standing in line to take over the obligations, the respective state Guaranty Fund would be next in line.

As for currency problems, if any insurance company is investing outside the US, presumably they'll take appropriate hedging measures. For your part, assuming that you purchase a US annuity and that you continue to live in the US, your primary worry would then not be a currency hit to your annuity insurer, but rather inflation in the price of goods and services in the US.