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This was submitted on October 1, 2007 to both Mr. Pressman and Business Week editor, Bruce Nussbaum.

To: Aaron Pressman, Business Week
RE: Retirement Made Complicated
FROM: Kim O’Brien, Executive Director

Thank you for your coverage of fixed annuity products, specifically the fixed indexed annuity. Your article was filled with very helpful and informative facts about fixed annuities and how they work. The National Association for Fixed Annuities believes very strongly in these products for those choosing safety and security.

Unfortunately, your story also included some inaccuracies. For instance you stated that “replicating an annuity strategy may be cheaper.” A fixed annuity is an insurance product and the insurance guarantees of lifetime payouts, principal protection, prior earnings protection, minimum interest earnings, tax deferral and gifting without the delays and costs of probate cannot be replicated. Most importantly, annuities protect a person against living too long. The insurance company guarantees that, if and when the owner chooses, the company will make payments to the owner for as long as the owner lives. In short, annuities guarantee that a person cannot outlive his or her assets.

Furthermore, a replication in the form of, say, a zero coupon bond plus an indexed mutual fund is a do-it-yourself approach. While it may yield a higher return in the long run, though there is no guarantee that it will. Both the bond and the index fund are subject to current taxation with no cash flow to assist the owner in paying those taxes. Zero coupon corporate bonds are subject to default risk, jeopardizing a client’s potential retirement income. Indexed mutual fund values are subject to significant swings in value, but so are zero coupon bonds, perhaps even more so. While both instruments are liquid in the sense they can probably be sold quickly and sooner than the term they are structured for, they could result in significant losses because there is no guaranteed minimum value. Some studies that have purported to show that this do-it-yourself approach theoretically could receive a higher rate of return if the owner holds the assets to bond maturity. However, the owner would not have either a death benefit or emergency partial liquidation rights without loss of value, as the owner would have under a fixed indexed annuity. In addition, the owner would be liable to pay income taxes every year where the zero coupon bond provides no cash flow to help cover the taxes due.

Your source inaccurately stated that “indexed annuities are riskier than fixed-rate annuities or bonds but less risky than variable annuities or stock mutual funds.” Indexed annuities are not riskier than fixed-rate annuities. The indexed and fixed-rate annuity owner bears no investment risk that the life insurance company will fail to pay the interest rate calculated with reference to the index. Also, indexed and fixed-rate annuities set in advance the dollar amount of annuity payments purchased by each dollar of contract value and that amount remains the same during the pay-out period. The owner bears no investment risk that the insurance company will fail to continue making annuity payments in that dollar amount. Insurance companies, including many life companies, are among the biggest holders of high grade bonds and the few long term investors left providing capital to industrial and real estate projects. Also, if you recall, insurance companies were instrumental in bailing out savings and loan companies during that crisis.

Your discussion on surrender penalties should clarify for your readers that penalties for early withdrawal are common among financial products and annuities are no different. Still, most annuities include a variety of withdrawal provisions, some of which provide substantial withdrawal rights without penalty…and without exposure to loss of principal through market risk. Among the circumstances that commonly allow for early withdrawal of the entire proceeds without penalty are death, terminal illness, nursing home confinement, required minimum distributions and unemployment. Furthermore, most fixed annuities also allow for a specified annual withdrawal amount without penalty. Most common is a 10%-of-accumulated-value penalty-free annual withdrawal, but other options may include interest (often cumulative) or a specified annual percentage amount that accumulates annually. NAFA is not aware of any other accumulation vehicle that allows the owner to make early withdrawals without penalty fees or market risk to the asset. It is important that your readers are aware of these features so that they may look for them when considering purchasing an annuity.

Mr. Pressman, we note that you also write for which we understand is owned by Jim Cramer. Mr. Cramer wrote the following in his book Some Investing Basics:

“[People] in their sixties want my blessing to keep the vast majority of their assets in stocks. Let's wind the tape back for a second to the spring of 2000. While I sensed that equities were overhauled, had I blessed a nontraditional, nonprudent course of action--staying in equities, particularly the kind of equities people were drawn to in that era--I could have wiped out people if they overstayed their equity exposure. You never know when it is going to be the spring of 2000 again, and you can't allow your judgment to be swayed by the chance to make more money in stocks than they might allow. The desire to let it grow over time, to let the dividend and income streams come your way, is what should drive retirement investing. Only as you get closer to needing the money should your caution take hold so that you don't let a lifetime's worth of savings be wiped out by a swift downturn in the market right before you need the money.“

Also, a colleague of yours, Suze Orman, say this on her website: “if you are willing to give up some upside potential, you can also protect yourself totally against downside risk with an index annuity.” And recommends and indexed annuity to “any who is afraid of losing any money.”

If you are interested in learning more facts about fixed indexed products, NAFA encourages you to read our White Paper available at


Kim O'Brien
Executive Director
2300 E Kensington Blvd
Milwaukee, WI 53211
415-946-3532 (fax)

Last Updated: 10/4/2007 8:03:00 AM