Retirement Expert Rants: Annuities Are Not Bonds

Hi, my name is Stan The Annuity Man, America's annuity agent. I keep seeing some fictitious promotions about annuities that I have to address. I'm wearing the I Heart Annuity Haters shirt today because it's hilarious that people say they hate annuities. Still, they love their Social Security payments, which are annuities. Hypocrite much? So, let's talk about annuities and bonds. I see agents pushing that this annuity is like a bond. This Indexed Annuity works like a bond. This Single Premium Immediate Annuity works like a bond. This Deferred Income Annuity works like a bond. This Multi-Year Guarantee Annuity works like a bond. No, it does not. And I'm even reading from respected retirement experts, and I won't mention their names because some of them are friends. I'll talk to them in person and in private about what they're putting out there because they start making other correlations with annuities and bonds, and it's utter garbage. All that tells me is that they have never managed bonds. They've never bought bonds. They don't understand bonds. I do. I have worked on Wall Street in a previous life before I was Stan The Annuity Man, but under no circumstance, none, should annuities be compared to bonds.

Agent Pitches

Most annuity agents selling Indexed Annuities are not licensed to sell securities. They're life insurance licensed people. There's nothing wrong with that. But they should not be commenting on bonds when they don't know what they're talking about. There's as many or more bonds than there are stocks. Bonds are traded in a lot of cases, and you can buy them and sell them in an open market. You cannot do that with any type of annuity. So, the bond annuity correlation is not valid. Now, a lot of the time, you'll read people and some of the pundits that I cannot believe that they're hanging themselves like this factually.

They'll say a Single Premium Immediate Annuity is like a bond. No, it's not. With a bond, you are not touching the principal. You are peeling off the coupon, which is the interest if you need that income or you're just letting it grow. But with a Single Premium Immediate Annuity, you're getting a lifetime income stream, or an income stream based upon the return of principal plus interest. When I see Single Premium Immediate Annuity payout rates listed beside bond rates, that's so misleading; it's almost fraudulent. In fact, I think it is fraudulent because the public doesn't know. The public's trusting what they're reading, the public's trusting what they're hearing. But a bond with a 5% coupon compared to a Single Premium Immediate Annuity with a 6.5% payout is Apples and freaking oranges. It's not even close to being the same thing. I'm wearing shades today because you don't want to see the anger in my eyes. I've done these before where I've got emotional and literally started crying because I was so mad, and I'm pretty mad about this one, too, because bonds have their place.

Apples and Oranges

They're fantastic when people understand them and how to manage them. And annuities are the same thing, but they're entirely different products. Going back to the correlation or the example I just gave, which was a 5% coupon bond versus a 6.5% payout Single Premium Immediate Annuity, the 6.5% does not represent interest. It represents the life expectancy of the person owning the Single Premium Immediate Annuity. It's an apples and oranges comparison. With a bond, if you peel off the 5% interest and hold it to maturity, you get all of your money back. A Single Premium Immediate Annuity is a transfer risk product, a lifetime income product, annuities are the only product on the planet that can provide that lifetime income stream that you can never outlive that money. And it solves for longevity risk, which is the fear of outliving your money. But that's 6.5% attached to that SPIA, Single Premium Immediate Annuity. That's not yield.

Multi-Year Guarantee Annuities

The 5% on the bond is yield; that's not yield on the Single Premium Immediate Annuity. In my world, in my factual world, where I've actually been on the other side of the table managing bonds, it's a payout. It's a return of principal plus interest, and if you outlive your life expectancy, there's going to be zero in your account. That's okay because the annuity company's on the hook to pay, but you cannot make that correlation. The other correlation I see out there is with Multi-Year Guarantee Annuities and bonds. Now, this is the closest one that you could actually wink and nod and say, "You know what? It's close, but it's still not close enough." Multi-Year Guarantee Annuities, the correlation, and the example of what they are are pretty much the same as Certificates of Deposit and CDs. Multi-Year Guarantee Annuities are the annuity industry version of a CD, not a bond.

Misleading the Public

Now, people say, "Well, the bond's paying a coupon, and the Multi-Year Guarantee Annuities paying this guaranteed interest rate," which I guess they're saying as a coupon. Still, Multi-Year Guarantee Annuities cannot be sold, traded, or liquidated, and there's no open market for them. Once you buy it, you hold it to maturity. It's really that simple. You can't make that correlation. But the one that really blows the top of my head off is when they say Indexed Annuities, Fixed Indexed Annuities, equity index annuities, whatever you want to talk about. Even some yahoos are out there calling them hybrid. Hybrid's a plant, hybrid's a car, hybrid's a mattress, hybrid's not an annuity; it's a made-up word out of midair to try to sell more Indexed Annuities. It's garbage, complete and utter garbage. But when you say that Indexed Annuities are like bonds, and I've read this in so many places by people that I actually respect their opinion in a lot of cases, but they have absolutely no clue what they're talking about. It would be like me commenting and writing an article on ballet. I don't know anything about ballet. I can watch ballet, but I don't know a damn thing about it, so I'm not going to comment on it.

When they say Indexed Annuities like bonds, tell me how that works again because it doesn't work. Bonds have a guaranteed coupon yield. Indexed Annuities don't. The return on an Indexed Annuity is non-guaranteed. That's okay, the principal is protected. It's a CD product. It was developed in 1990 for CD-type returns, and that's exactly what it's done since inception, but it doesn't have a guaranteed yield or coupon on that return scenario. Anybody making the correlation that an Indexed Annuity is like a bond is not only a fool; they're misleading the public, and I'm going to give them a little bit of a pass that they just don't know what they're talking about or they're just trying to sell stuff. But that's not an excuse for misinformation and misleading the public.

Understand this. Fixed Annuities are not securities. You don't have to have a series seven to sell Fixed Annuities. So, with bonds, it's an apples-to-orange comparison, and I'm begging the industry to reel this in. I'm begging the pundits to do their homework and understand that annuities aren't bonds. I don't care what type you're talking about. Annuities are not bonds. Period. End of story. If you want to argue with me on this, go for it. Bring it. By the way, I'm going to win the conversation because bonds and annuities are not the same and annuities are not bonds. Period.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.