Annuities are very very complicated creatures in the investment world but break down into three major categories. A fixed annuity is like a CD, paying out a fixed rate that is guaranteed. Variable annuities are like mutual funds that can get you a higher rate of return if you can stomach the higher mutual-fund like risk. Lastly, there are the hybrid annuities which breaks up your investment into fixed and variable so you get a guaranteed but also get a taste of the hot hot stock market. That seems simple enough until you get into the various species of annuities, the little games they play, and how the fees are structured. Some annuities have commissions as high as ten percent!
CNN Money took a look at three annuities you must avoid at all costs: Equity indexed annuities, IRA rollover annuities, and an annuity swap.
Equity Indexed annuities (EIA) are a bad idea because while their returns are based on a market index, such as the S&P 500, your total gains may be capped percentage-wise or dollar-wise and you may not earn the dividends from the holdings (since you’re not actually holding the stock). Take that and the fact that you’ll suffer penalties if you withdraw within a specified time period, typically calculated in many man years!
IRA rollover annuities are even more ridiculous because they aren’t even necessary. Salespeople will pitch these ideas on the hopes of preying on your weakness while they take high fees which can run as high as 3%.
Lastly, an annuity swap is where the salesperson will tell you your existing annuity is outdated, bad, low-returning, but he or she has one that will beat it and he or she will give you a couple extra percent of your investment right on the spot! The downside of this is that you still pay surrender fees on your old annuity and the new annuity may not be much better.
via CNN Money.
Comments
2 responses to “Avoid Equity Index, IRA Rollover, and Swapping Annuities”
This is dangerous disinformation. Automobile salespeople are also paid on a commission basis – is that a good reason to avoid buying a particular car?
Variable annuities are dangerous, and I recommend against them, but fixed-rate and indexed annuities are safe.
The author clearly has no idea how equity indexed annuities work, because even with caps and participation rates, someone who invested in an indexed annuity in 1990 would have done far batter than someone who invested in anything else.
Perhaps what the author doesn’t understand about indexed annuities is that when the index on which they’re based declines, there’s no loss, even if there’s no interest income for that period. By comparison, when a mutual fund’s value declines, those holding it must first wait for the loss to be recovered before they realize any gain.
People who attempt to advise others about such critical subjects as retirement planning should first learn and understand the facts involved before attempting to explain them to others.
Many years ago (10 to be exact), I was offered the option of investing my money into a fixed index annuity. I opted not to move forward, for all the reasons mentioned by the author. I moved forward into the direction of income producing bond funds and dividend producing equity mutual funds. Today, I have indeed received my income, but at a very, very, costly price. My principal has eroded at least 40% with no recovery in site. In retrospect, the insurance agent who advised the index annuity was right and I was wrong. There is a place for these vehicles! Had I listened, I would not have lost one penny and still would have received income! Index annuities are good for folks who have a timeline of ten years. But so does a ten year cd which pays practically nothing. Surrender charges are not an issue for people who have other liquid assets. I just opened my first equity index annuity today and received a $5000 bonus. I will maintain this annuity for at least 10 years. The least I will make is 1% per year. The most I can make is 21% per year. I anticipate an average of 6-7% per year for the next ten years. After ten years, I will either surrender the policy; pay my taxes, or take a 1035 exchange and reinvest and make other income arrangements. At 7% interest credit, I anticipate my principal to double. Think twice before you walk away from an index annuity. Just keep in mind, that some are better than others and each one must be examined carefully. Go to http://www.anuityadvantage.com for more info. I did and those folks were wonderful.