Most regular viewers of financial news on cable TV will recognize the name Ken Fisher of Fisher Investments and his lack of love for annuities. In fact he hates them and is telling everyone who will listen to him as much. You can see his commercial here, where he even says he would die and go to hell before he will sell an annuity. Simply put, he believes they are expensive and only benefit the salesman.
Is he right? Well, even in his 2014 piece in Forbes (first link above), he admits: “Granted, some ‘fixed’ types are okay. But that’s about it.” That distinction is not made in the commercials on TV. The message received is annuities, a contract between you and the insurance company that provides a guaranteed income for one of more lives, are expensive.
Ken Fisher believes, which he has published, that investing in high dividend paying stocks will generate an income throughout retirement. This will be accomplished at a lower cost than an annuity, and without giving up control of one’s assets for a period of time.
Jester Financial is not arguing against dividend stocks or stocks in general. The reality is stocks do provide upside potential, possible protection from inflation, and even income from dividends. Nor are we saying that annuities are totally free.
Rather than get lost in the weeds with who has the better idea and lower cost, let’s look at two knowns.
- What we know about those retired today;
- Federal regulations that have been on the books for over two decades.
According to Social Security.gov, most retirees rely on Social Security benefits for a majority of their income. Social Security’s “Fact Sheet” that was released in December of 2017 reported “50% of married couples and 71% of unmarried persons receive 50% or more of their income from Social Security.”
Because of this high percentage of retirees using Social Security as their primary income source, Irena Dushi, Howard M. Iams, and Brad Trenkamp of the Social Security Administration released a research report titled: “Social Security benefits are the most important source of U.S. retirement income.”
How do federal regulations play a role here?
The first regulation:
To receive any Social Security benefit in retirement, you must accept Medicare when eligible. Meaning that when you are 65 years old or older and are no longer covered by creditable health insurance through an employer or spouse’s employer, you must accept Medicare.
Failure to do will result in the forfeiture of all current, future, and even past Social Security benefits.
The second regulation:
Is that your Social Security benefit will automatically pay for the bulk of your Medicare premiums.
This is problematic since Medicare is inflating at a historic rate of over 7.5 percent, while annual Social Security benefits increases, through the cost of living adjustments (COLA), are going to be no higher than 2.6 percent according to the Social Security Board of Trustees.
The question that must be asked to most retirees relying on Social Security is what is going to happen to Social Security benefit throughout retirement? Thankfully, by law, it can not go down in any given year as Congress enacted the Hold Harmless Act which provides protection to retirees who are receiving Social Security benefits while also being in Medicare.
Under this act no one, as long as they are under the threshold of the Income Related Monthly Adjustment Amount (IRMAA), will realize their Social Security benefit decrease due to Medicare Part B premium increases.
Even though their Social Security benefit may never decrease, there is an extreme possibility that it will never increase the way they are being told…ever.
Below is a graph of a 55-year-old person today, who is planning on retiring at age 67, is earning $75,000 a year in wages, and will enroll into Medicare Part B and Part D when eligible.
According to Social Security’s Quick Calculator this 55-year-old will receive about $27,636.00 in income the first year of retirement. The retiree may expect, best case scenario, a Social Security COLA in future years that will be 2.6 percent and that their Medicare premiums will increase at the historic rate of 7.5 percent.
For most Americans heading towards and already in retirement, they should expect that their Social Security benefit will never be as high as what they have been told it will be.
Therefore, how does one offset this loss of income?
The simplest method is to purchase a type of financial instrument that may provide a guaranteed life income to help offset this loss of Social Security benefits. This instrument is the annuity, which Ken Fisher hates.
Jester Financial understands that Ken Fisher’s expertise with investments, but we also understand the responsibility of being prudent. The laws say one must accept Medicare, if they want Social Security. Medicare’s premiums (and possible IRMAA surcharges) must be deducted from Social Security. Because of these realities, regulations and laws, many retirees will have an income shortfall.
Far too many Americans are relying on Social Security to be a bulk of their income in retirement. The amount of income they are expecting will not be there for them because of mandatory Medicare premiums. Period. They must start planning for their future.
One important component of the solution is to have a guaranteed income source to supplement what Social Security was expected to provide.
Will Ken Fisher guarantee this income? Or will the annuity issuers who may lawfully use the term guaranteed, have the reserves along with pooled mortality credits, help solve the problem?
