Annuities, please go away

“I like to deal with people where I feel a one-page contract would do the job,” he said. “If I have to have 50 pages to protect me against the guy I’m dealing with, I’ll always wonder if I needed 51.” – Warren Buffett

It's something to keep in mind when considering annuities. What would Buffett do if presented with such a complex product? What is buried in those pages and pages of legalese that could affect the investor? When it comes to annuities, it pays to be skeptical.

They're not the hardest thing in the world to sell. Speaking as someone who does not sell them, I make that assertion looking at the sheer size of the industry, at over a trillion dollars. The pitch is around certainty - achieving it, and locking it in. There is irony there: a pitch for certainty, built on complexity.

What happens when that onion gets peeled back?

"No agent selling these or investors buying these has the foggiest idea of how these work,” said Mr. McCann, a PhD economist, said in the NY Times. The Times goes on, "But indexed annuities have to make sense for at least some investors, right? Perhaps for the incredibly risk averse? 'No,' he said, without hesitation. 'Never.'"

McCann employs a small army of PhD'ed researches to reverse engineer annuities for his firm. That is the complexity level baked into these products.

The full NY Times piece on annuities is here, and it's a great read if you have access to the web site. It is 4 years old though the principles and offenses haven't changed.

A fundamental point when evaluating any investment is "what am I potentially giving up, if I deploy my capital in position A instead of position B?" This is the question people don't ask, and it is at the heart of all investing.

Dan Cunningham

1. Insurance Information Institute, 2020.
2. 403b Wise Fact Sheet - Annuities.
3. NY Times: Even Math Teachers are at a Loss to Understand Annuities.

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