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Disposable Income: What About Annuities?


For those with disposable income, if you can't figure out what to do with it someone else would like to. Just make sure you don't get sucked into a scheme that benefits someone else more than yourself.

For those with disposable income, if you can’t figure out what to do with it someone else would like to.

This is what I’ve deducted from the two-three mailings my husband and I get each week. Since our ZIP is known to be relatively high income, financial planners, insurance salesmen, brokerage houses and others invite us to a free meal and their presentation. Though this sounds appealing, think about it. Why would someone you don’t know do something for you free unless he or she expected a return?

And so it is. There is enough of a payback on average for the salesperson to make it worth his or her while to sponsor these events. Our most recent invitation was from Dennis Wood of Warren Steinborn Associates, an employee benefits consulting firm. He invited us to a dinner seminar at Seasons 52 Fresh Grill in Indianapolis. In fact, we were provided with four tickets, I assume so that we could bring friends with presumably similar money to spare.

The title of the talk is “Investing During Uncertain Times: Go Beyond Traditional Investing.” Steve Vaughn, a Director with Jackson National Life, will give the presentation. We are warned that not only will seating be limited, so we should call to reserve a seat immediately, but also that insurance products (i.e. annuities or life insurance) may be discussed at the event and we may be contacted after the meeting by our representative. I assume this is the person that sent the invitation.

Insurance people are trying to pedal annuity products all the time. The reason is simple. There is a big payback. The sellers benefit through upfront fees and, in some cases, continuing pay-backs. Hopefully, their client does too but that is less certain. These are some of my reservations (somewhat modified) that I wrote in answer to a question from a doctor a few years ago about buying annuities. It still stands.


Many companies have been trying to sell me annuities. I have about $2 million in stocks and mutual funds and around $800,000 in municipal bonds. I understand municipal bonds and have been happy with the returns. The question is should I be diversifying my portfolio with an annuity and, if so, which type?

My reply:

Dear Doctor,

Annuities are like butter. They seem tasty, but can be hard on the participant’s physical or financial health. For example, high upfront loads and fees diminish any annuity profit. In addition, whether the money is returned at all depends on the solvency of the company that guarantees them. Think AIG. Lastly, annuity income is taxed at the highest tax rate, not the more favorable 15% for capital gains that is currently assessed.

You are wary and rightfully so. This may be why you stated your question thus, “Many companies have been trying to sell me annuities.” Interestingly enough, your sentence supports the common wisdom that annuities are sold, not bought. By this I mean that most people wouldn’t buy one unless a good salesman was pointing out the advantages, often omitting or downplaying the downside. If you feel comfortable with municipal bonds, they sound right for you.

Diversifying your stock portfolio means practicing asset allocation, rather than replacing an existing successful portfolio asset with an annuity.

When I asked David M. Schwartz, a podiatrist who also works in retirement and tax advisory services, to comment on the above he was kind enough to send me an email with some worthy comments:

Since annuity contracts and subsequent disbursements are expressly exempt from litigation (in Texas), there may be a useful role in the protection of your client's assets. There may also be a beneficial role in estate preservation, for an annuitant or beneficiary who may require guaranteed structured payments.”

Schwartz does specify the disclaimer that he is not an attorney nor does he provide legal advice.

Other states may also exempt annuities from litigation and thereby, depending on circumstances, be appealing to some individuals. Any beneficial role in estate planning should be taken up with an attorney.

So, as always, there are two sides to a story but for me, on average, annuities are an expensive investment alternative.

Read more:

Be Wary of Variable Annuities

The Case against Immediate Annuities

Variable Annuities: Expensive Protection

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Victor J. Dzau, MD, gives expert advice
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