Myth: We Make Rational Financial Decisions

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Posted Dec 06

Very few aspects of our financial decision making are rational, if any (depending on the person!).  Despite history, despite having been burned over and over and over, I see the same patterns repeating and it actually is making me nauseous this time.  This isn’t out of self-righteousness or superiority; I’m as bad as anyone, if not worse in some cases.  Except when it comes your, my clients’, money.
For example, variable annuity sales this quarter are the highest they’ve been since 3rd quarter 2007 according to the Insured Retirement Institute.  Yes, that’s right.  Just before the last huge bubble burst.  People are chasing returns again, against all odds, laden with hope and desperation, just like in most casinos I’ve visited.  (I don’t know about you, but I’ve never seen anyone smiling in a casino, usually not even the scantily clad “hostesses”).  We’re buying high so we can later sell low, compounding our losses.
Why do I make this claim?  Because you would think in the midst of record demand for their products, annuity companies would be throwing open their doors.  But yet another major variable annuity vendor is walking away: John Hancock.  (Variable, by the way, means that your returns can vary, up and down.  Pay attention to the “down” word.).
My preferred product at this point in the game is equity indexed annuities (EIAs).  Here’s a great little video explaining the basics:  Reinventing Retirement Savings.
But even EIA companies are scaling back their guarantees, charging more for them, and reducing their minimum interest guarantees.  One of my primary carriers, American Equity, is knocking- another -half a point off all its guarantees.  Aviva, my favorite, is still hanging in there with its 2% minimum interest rate, several market indexes in which to participate, their unparalleled 7.2% income rider & high guaranteed payout rates on the income distribution side.  Plus, no one else doubles that guaranteed income if you need long term care (a few conditions apply so you should read the full disclosure).  All this for an annual fee of 0.75%, about half the average mutual fund fee for which you get no principal protection and no guaranteed income!
I expect a continuing trend of fee increases and benefit reductions as we head into the next bubble burst this coming year.  Once your contract is in force, however, most of the provisions cannot be changed.  Don’t wait!