Annuity Abbey Part I: The Bank Notice

It was another beautiful day in Buck Lake. Mary Swanson sat at the kitchen table half-listening to the birdsong outside her open window as she finished typing an email to her daughter. “We’ll be there in time for his birthday party,” she had assured her daughter. After Mary sent the email, she paused for a reflective moment. Was her grandson really going to turn nine next weekend? It seemed like only yesterday he was in diapers and now he was half way to college age. Her reflection was interrupted by the rumble of the postman’s van approaching, stopping, and then driving away.

When Mary brought in the mail and noticed the envelope from the bank, she assumed it was the renewal notice on their $60,000 certificate of deposit. “Well,” she thought, “Last year, it renewed at 0.75%, so how much worse could it get?” She cautiously opened the envelope, attempting to peer at the contents without having to actually touch the tainted sheet inside. Does that say 0.55%? She tilted the open envelope towards the sun. No, it says 0.30%!

Mary sighed and thought back to better days. Was it only four years ago that the same CD was giving John and her $200 a month in interest? Then the CD interest dropped to $100 a month three years ago and then $50 at the next renewal. Now…Mary used the blackboard in her head…currently the bank was paying less than $20 a month. “Oh my goodness,” she thought, “We’re getting less than a tenth of what we used to earn.”

When John and Mary had retired in 2007, the future seemed bright. Even though John’s pension was small, John and Mary had sacrificed and saved and accumulated a tidy sum in their IRAs that they invested in mutual funds, with an additional nest egg that was largely in bank CDs. However, since then, the value of the IRAs plunged and soared and plunged again, and now, four years later, it was still worth less than when they had retired. They could have handled that except the bank interest had also dropped so much.

She recalled that when their CD income fell the first time, they stopped going to Sunday brunch. Last year, they’d stopped subscribing to the newspaper that had been delivered every day for the past 40 years. “We need more than 0.30%,” said Mary out loud, “But where can we go to get it?”

The Invitation (412)

Mary Swanson’s eyes returned to the bank envelope in her hands. This was the first certificate of deposit renewal notice scheduled to arrive. The second big CD would renew in a month and the third one was a month after that. When John and Mary had retired, these three CDs had provided a little over $500 a month in interest income. It was just enough interest so they didn’t need to tap into their IRAs for income. But now, unless a miracle happened and the bank became Santa Claus, the total interest from all three CDs would be less than $50 a month next year and that would mean having to take money out of the IRAs that were already low because of the stock market decline.

John and Mary had always followed the advice given from those financial magazines and columnists. They’d invested only in no-load mutual funds, diversified their IRAs between small and large cap equity and bond funds, staggered the maturity of their CDs, and avoided annuities. Of course, following one columnist’s advice to buy real estate mortgage bonds back in 2005, it cost them $40,000 before they finally sold them. Then the mutual fund investments recommended were worth less now than when they bought them, and the idea of staggering CD maturities hadn’t helped at all, since rates kept tumbling down. The idea that they might run out of money during retirement had always been in the back of their mind, but it hadn’t seemed likely. Now Mary wasn’t so sure.

Mary glanced at the rest of the mail…electric bill…ads…and then an invitation to a seminar on fixed annuities. She put the electric bill by the checkbook, started to pitch the rest of the mail into the trash, and then stopped. What had caught her eye? Ah, the line on the seminar invitation saying, receive an income that can’t go down. That would be a pleasant change. What else does the invitation say? “A fixed annuity protects both your principal and interest from stock market loss…a possible alternative to bank CDs…provide an income you can’t outlive.” “Hmmm,” Mary murmured to herself, “Perhaps annuities aren’t as bad as those financial experts say they are.” “After all,” she continued, “following the advice of these so-called experts has put us in the bad position we’re in today.” With that thought in mind, Mary reached for the phone, called the number on the invitation, and reserved two seats for the next annuity seminar.

The Discussion (467)

“Mary, the last thing I want to do is attend an annuity seminar,” responded John Swanson when informed that Mary had made the reservations. John went on, “You know what those financial columnists say about annuities. That they’re complex and you can’t get your money out. I read in Currency magazine last month, annuities aren’t even regulated by the SEC. We don’t need annuities!”

Mary replied, “John, I thought about all of that, and then I looked at who was sponsoring those financial columns and placing ads in those magazines and they were all mutual fund companies. This got me thinking that maybe their advice was a little one-sided. I think we should do our own research about annuities and make our own decision about whether they’re good or bad. After all, following the advice of those columnists and financial magazines has put us in the pickle we’re in today.”

“I don’t know,” sighed John reaching for his coffee cup, “Things really aren’t that bad, are they?”

“Yes, they are,” said Mary, “You remember how we planned to make our retirement work. We’d leave the IRAs as they were, so they could keep growing and not start taking money out until we were age 70. Since Social Security and your pension weren’t enough to get by on, we’d make up the difference with the interest earned from the bank, but our bank interest has gone from $500 a month down to $50.”

“I didn’t know it was that bad,” said John, “I guess we’re going to have to start tapping the IRAs for income.”

Mary replied, “But since we retired, our mutual fund IRAs have lost money; they’re worth less than they were in 2007. I’m afraid if we start taking money out now, it might not last long enough. Your mom and dad celebrated their seventieth anniversary this year and my mom is 91. I’m worried we could wind up like your Uncle Lars who spent his nest egg and had to move in with his son.”

“You’re right,” said John, “We worked hard all our lives so that we could remain independent in our retirement years. Okay, we won’t touch the IRAs. I guess what I’ll have to do is find a part-time job to make up what we lost from the bank. I heard that the SuperValu at the plaza has openings for baggers and I think I can get on there.”

“Oh John,” smiled Mary, “You’ve worked your whole life and this is supposed to be a time for us to enjoy life. Before we make any decisions, why don’t we go to the annuity seminar and hear what they have to say?”

“All right Mary,” as John reached out to squeeze her hand, “Let’s go and learn about annuities.”