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NAFA Clarifies Annuity Info In Response Letter


Late last month, I wrote a blog about Bob Carlson’s article comparing bonds to immediate annuities.  While Carlson concluded that the annuity products are likely a better choice than the bonds, the National Association for Fixed Annuities (NAFA) thought that more information was necessary.  NAFA issued a response letter to Mr. Carlson’s article, “Comparing Annuities to Bonds,” which highlights three aspects of immediate annuities that they would like to expand upon.  In the letter, NAFA worked with their member CANNEX to add information and clarify a few points to Mr. Carlson of Investing Daily.

Mr. Carlson’s article said that in order to obtain the guarantees of an immediate annuity, you have to trade flexibility.  But NAFA says it is inaccurate to view all immediate annuities as being inflexible.  All immediate annuities offer a beneficiary guarantee and 3/4 of today’s products have some type of guarantee for a person’s heirs.  Many immediate annuities allow you to change your payments if your financial needs change in the future and some even allow for a termination of the contract if needs drastically change.  NAFA also stressed that using an immediate annuity as an income floor for paying basic expenses allows for other investments to be exposed to the markets.  Mr. Carlson did point this fact out as well though.

In regards to the return or yield of a fixed immediate annuity, NAFA isn’t sure where the 1.5% expected return came from in the article’s quoted Edesess study.  The U.S. Treasury rates are lower right now than the crediting rates for immediate annuities.  Another thing to take into account is the mortality credits offered with annuities that give payouts above and beyond the principal and interest.  Long term bonds do not offer such a credit.  Another table in NAFA’s letter gives Internal Rate of Returns with this credit taken into account.

NAFA also wanted to offer more information on expected mortality.  There is a 25% chance that a 65 year old man will live to be 94.  If he has a 65 year old spouse as well, there is a 25% chance that at least one of them will live to be 100.  That is decades of time to finance with an immediate annuity and a good chance that you’ll use this insurance against running out of money in your older age.  NAFA stressed in the article that they were happy to see information on fixed immediate annuities out in Mr. Carlson’s article, and they just wanted to expand on the information and offer some clarification.  I am also glad to see so much chatter about annuity products and the ways they can benefit some retirees.

Written by Rachel Summit

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