Dear Mr. Berko: The stock market has gone up in the past three years, but our $220,000 conservative brokerage account — which paid us $11,000 a year in 2006, 2007 and 2008 — is worth $183,000, and this income has fallen from $11,000 to $4,100 a year. Making matters worse, we had $140,000 in certificates of deposit that paid $6,600 a year and now earn $1,400. We worked and saved for 43 years. We have five grandchildren and have lived comfortably on our savings and investment income plus Social Security with no debt in a lovely mobile home community. But today, at ages 74 and 77, we are in financial trouble.
In 2005, we put $112,000 in a 6 percent variable annuity with AXA Equitable, guaranteed at 6 percent to be worth $200,000 in 2015. It promised a minimum $12,000 annual income, or $1,000 a month, for the rest of our lives, provided we held it for 10 years. We didn't think we'd need it, but it was good insurance. The guaranteed section of this account is worth $168,000, but the market value section is worth $86,600, and we can't wait 27 months (when the 10 years are up) to take out money. We need at least $9,000 a year immediately, and the broker (not the one who sold us the policy) told us that if we took out that much money, we would lose our lifetime income guarantee of $12,000 a year.
He's a nice man, but we don't understand his explanation. Is this true? How could this be possible?
CC, Vancouver, Wash.
Dear CC: Holy cola, Charlie Chan; I'd have bet all the cheese and tea in China that this'd never happen.
Variable annuity guarantees, if you check the sneaky print, are not guaranteed, thanks to the lawyers. And insurers issuing those guaranteed returns can cancel or reduce the “guaranteed” payments if market conditions make it necessary. That may happen soon. Because of the overwhelming number of policies sold in the past five years with guaranteed minimum income benefits, or GMIBs — combined with the lowest long-term interest rates since the parting of the Red Sea — the camel's back is beginning to be strained.
If your annuity investments were to do well — returning more than the guaranteed minimum (in this instance 6 percent plus annual 3 percent fees) — your monthly checks could be more than $1,000.