Yours truly used to spout this myth, about betting on the ingenuity and hard work of the American worker, that “productive America”, (which at the time implied Wall Street & the Banksters as opposed to actual workers actually working) would perpetually deliver us the American dream. I also used to- and still do -issue the caveat that past performance is no guarantee of future results. How are those two positions supposed to fit together? They don’t. Which is why I’ve since abandoned the first one. Because there are universal laws which, for example, prevent trees from growing into outer space. And trees don’t lie. Similar “laws” apply to the financial world, and let me emphasize “world”.
As I sit here at my desk looking at the two major indexes- DJI and the S&P 500 -I note that the Dow is now lower than it was at the end of 2006 and has grown a total of 8% since the peak of 1/21/2000! The S&P is at the same level as March 1999. Yet practically all I hear from people is how they’ve “made a fortune” in the last year. Granted, an index does not include dividends. But neither does it include fees & taxes so I think it’s a fair performance evaluation of what Wall Street is actually delivering: astounding wealth to itself.
Suppose, to illustrate, you had invested $100,000 with your broker 11 years ago and paid the low average mutual fund annual fee of 1.3%. In addition, your broker charged you the low average 1% management fee. Right now your money is worth the same as it was 11 years ago. But you’ve lost 25% of what you could have gotten because of commissions and fees (2.3% x 11 years)! Study after study shows an inverse relationship between high management fees and performance. What could you have done instead?
Wall Street “gurus” like Ken Fisher & financial narcissists like Suze Orman like to trash annuities because, as I’ve said before, annuities make them unnecessary, proverbial tits on a boar. And rather expensive tits at that as we’ve seen above. But hey, they’ve shown us theirs, I’ll show you mine!
Let’s pretend it’s 11 years ago and you pay me an indexed annuity premium of $100,000 and opt for the 8% lifetime income rider at an annual cost of 0.45% (yes, less than half a percent), and, the S&P500 index crediting strategy. Other fees, commissions and expenses total . . . zero. Today, your principal balance would be about $172,000. You could also rest assured that it would never ever be less than that in the future, unless you take withdrawals. And, if you were now 65, your guaranteed lifetime income- should you decide to turn it on, without surrendering your principal by the way -would be approximately $1000/mo. Or, you could simply walk away with your $172,000 with no fees or penalties. Aren’t indexed annuities just absolutely evil?! In fact, they are so evil and expensive that Americans gave in excess of $31,400,000,000 to indexed annuity companies last year.
Annuity terms aren’t nearly as favorable these days because annuity companies by nature are extremely conservative; they present themselves as bastions of safety and rightly so. ( I know of no annuity owner who has lost money ever, unless they violated the provisions of their contract, such as excessive withdrawals or premature surrender.) So, they have had to increase fees and/or reduce guarantees. Even so, with $100,000 today at age 55 I can guarantee that in 10 years you will enjoy $11,442 annual income for life. And even if the market tanks or is flat for the entire ten years, I can also guarantee you will walk away with no less than $129,213 if you choose that option instead of the income. Try that with Wall Street or CDs from the Banksters! Impossible.