Why Call Them Tax-Deferred Annuities?

I know I sound like a broken record, but–wow, have things changed in the financial industry! As I’ve pointed out before, annuity agents used to sell tax deferral with illustrations showing how your $1K will grow to $1 billion with the help of tax deferral, better known as compound interest. On a side note, that was when interest rates were 7%.

It was a different era in American history. It was a time when people saved for retirement and wanted a better life in their golden years. However, to be fair, back then almost every American worker could count on pension income when they retired. Americans paid less for health benefits, so it seemed that more money could be applied toward their pensions. We worried less about income because we all had pensions. Unfortunately, that’s no longer the case. And I hate to say it, but many seniors with pensions may be supporting a son or daughter with kids who can’t support him or herself.

As a result of having lifetime pension income and a modest way of life, tax-deferred annuities were bought for accumulation purposes. An annuity was for the rainy day that never came. So, the annuity value was just passed on to their sons and daughters. “This is for them,” they would tell me, and they liked that their children paid the annuity tax buildup as well. “It’s found money; let them deal with the taxes when I’m gone,” seniors would tell me over and over again. And they were right. Seniors never touched this asset called an annuity, and it sat at the insurance company until they passed. It was the age of accumulation. It was the age when insurance company, brokerage firm and mutual fund ads showed older Americans on the beach or in a hammock.

But it’s 2012 now, and seniors can’t put away tax-deferred annuities for their heirs anymore. They’re spending their money. Turning assets into an income stream is what matters most. It’s all hands on deck for paying their bills and helping their kids pay the bills. Their annuity contracts are being liquidated as a result. And tax deferral is meaningless when withdrawals are taken from the annuity. Tax-deferral buildup only works after years of not touching your money.

Insurers anticipated the need for income so they created the popular guaranteed withdrawal benefits attached to index and variable annuity contracts. It’s the age of income, and accumulation is now a thing of the past.

Pay-it Forward:

There’s no law that says your daughter can’t work more than a 40-hour work week. Weekend jobs can really help cash flow. And when she’s working, she’s not spending. A part-time job developing a skill like cold-calling can be a real learning experience. Yes, it’s challenging, but it can really build character.

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

More Posts - Website - Twitter