Annuities

Disadvantages of Annuities

July 5th, 2011  |  Published in Annuities  |  7 Comments

I have had some posts recently that discussed the advantages of annuities. In the interest of being balanced I will share some of the disadvantages in this post.

1.High Management Fees – This depends on the annuity but in general annuities have high fees.

2. Surrender or Withdrawal Fees – These fees can be avoided but if you find yourself in an unforeseen situation you might face these stiff fees.

3.IRS Penalty for Early Withdrawal – Withdrawals before the age of 59.5 are charged a 10% tax penalty by the IRS unless you meet certain exceptions.

4. Low Liquidity – You are limited on how much you can withdraw from an annuity.

Those are some of the disadvantages of annuities. If you want to mention any other disadvantages or advantages of annuities please feel free to share them in the comments.

Talking With Your Family About Retirement

June 14th, 2011  |  Published in Annuities, Retirement  |  2 Comments

Americans for Secure Retirement (ASR) has suggestions on how to discuss retirement with your family. The questions they suggest you use to guide your discussion are: When am I hoping to retire?, Am I making use of an employer-sponsored retirement plan?, Am I on-track with my retirement savings?, What will my expenses be in retirement?,Where will my retirement income come from? How reliant am I on personal savings?, and How should I manage my retirement savings?

Coming up with the answers to these questions isn’t easy. It is clear that many, many Americans face challenges in preparing for a secure retirement – in particular ensuring that their savings last. ASR feels that annuities are the only product that can provide Americans with a guaranteed stream of lifetime income through retirement – a “paycheck for life” – to ensure that they will not outlive their income. To learn more about the need for guaranteed lifetime income please visit: http://www.paycheckforlife.org/.

Annuities Not FDIC Insured

March 16th, 2009  |  Published in Annuities  |  1 Comment

Your annuities are not FDIC insured. If the insurance company goes bankrupt, you would likely lose a large portion of your investment if your state doesn’t have laws protecting you. Annuities are investments and while their rate of return is guaranteed contractually, the fact is your annuity’s health is tied to the health of the insurance company that sold it to you. It works a lot like insurance, if the insurance company goes bankrupt, there’s are only guaranty associations behind them to pay out some of your claims.

What does this mean you? It means that in addition to reviewing the fees associated with your annuity, one of the biggest reasons why people warn against annuities, you have to review the financial health of the insurance company you’re buying it from.

What are guaranty associations? Guaranty associations are state-level organizations that protect you, somewhat, in the event the insurance company goes bankrupt. Every state provides at least $100,000 of coverage for annuities and some offer even higher limits (New York and Washington go as high as half a million dollars). While the insurance is nice, don’t let it lull you into a feeling of confidence. You still want to review the financial health of the company you’re dealing with.

Completely Understand That Annuity!

April 28th, 2008  |  Published in Annuities  |  Comments Off on Completely Understand That Annuity!

A couple weeks ago Chris Hansen and Dateline’s Tricks of the Trade did some undercover work looking at annuities, specifically indexed annuities, and how the salespeople were deceiving people about how expensive those things are if you withdraw too quickly. I didn’t watch the show as carefully as some others but I did get a sense that there was some deception going on there.

Here is an excellent response to the Dateline NBC annuity post and one that I think is worth reading after you watch the expose itself. I’m not a regular reader of the site but I do think that Mr. Paris makes an excellent point about how the salespeople did verbally mention the fees and sliding schedule as well as provide written documentation. The fact that they didn’t push the fees enough is something I think falls on the shoulder of the consumer.

Before you make any purchasing decision, make sure you have all the facts and that you fully understand them. You should never feel pressured to make a decision and you can always seek professional advice to review the documents. If nothing else, get unprofessional amateur advice from someone to see what they think. And lastly, always review things like annuity expenses very carefully because someone is making money out of this deal – it better be you!

Four Annuity Fees : Insurance, Investment, Riders, and Surrender

September 21st, 2007  |  Published in Annuities  |  1 Comment

Walter Updegrave has a great article out about how the SEC should force annuities to disclose all their fees in plain language, not the billion page prospectus they send and expect you to totally ignore. Anyway, a great part of the article is when he writes about the four types of fees associated with an annuity. By understanding these keywords and the fact they exist, you can have something to key in on when you do scan the prospectus (maybe even search through it online):

Insurance charges, also listed as mortality and expense fee (M&E fee), is the first and they claim it’s for insurance features. In actuality, the fee is for sales commissions and paying the marketing costs.

Investment option specific fees are those fees associated with the investment option you select within the annuity.

Rider specific fees are those that you pay to add features to your annuity, like the promise of a future income stream or that heirs get back as much as you put in.

Surrender fees are paid whenever you withdraw your money.

Keep an eye out!

Ben Stein Advocates Variable Annuities

September 5th, 2007  |  Published in Annuities  |  5 Comments

In his latest “How Not To Ruin Your Life” article, Ben Stein warns that eventually there will be a market correction that is based on fundamentals and not on emotion, like the latest little market dip, and that those close to retirement should consider variable annuities as a hedge against this. The younger and middle aged investor shouldn’t worry, and I agree, because we have the one asset capable of weathering the storm – time. For the near retiree or retiree, a variable annuity puts the risk of a stock market fall on the shoulders of the insurer that sells the annuities and off yours.

A variable annuity is an investment that guarantees a specific withdrawal each and every month for life and the insurer generally invests but it comes at a cost, warns Stein. The benefit of the annuity, besides the financial, lies in the fact that it also gives you peace of mind. Having part of your retirement assets in a variable annuity can guarantee a minimum amount each and every month and can act as a nice starting point for the rest of your assets to add to, plus in a market correction you are still guaranteed that minimum amount despite the performance of your portfolio.

To read more about what Ben Stein’s talking about, check out his latest article titled Anticipating All the Retirement Variables.

Avoid IRA Annuities

June 19th, 2007  |  Published in Annuities, IRA  |  1 Comment

When you retire, should you roll over your 401k into an IRA? Yes. Should you roll over your 401k into an IRA Annuity? Ummmm probably not, says Walter Updegrave. An IRA Annuity is basically an annuity held inside an IRA and it’s probably going to be too expensive for what you’re getting out of it. An annuity is generally very expensive but the benefit is that money grows inside of it tax-free, but it’s not a strong selling point of an IRA annuity because money inside IRAs and 401ks is already growing tax-free – you don’t need an expensive fee generating annuity for that.

So, what’s the other draw of IRA annuities? There are living benefits known as GMIB and GMWB. GMIB stands for guaranteed minimum income benefit which is a guarantee of annual income if you hold the annuity for a pre-specified time period, usually 10 years, even if the market tanks. GMWB stands for guaranteed minimum withdrawal benefit that guarantees you’ll be able to withdraw a percentage (4-6% usually) of the original investment regardless of the market performance.

Ultimately the main knock against IRA Annuities is cost, the fees, and all the rules and restrictions regarding what you can do with an IRA. It’s probably a better idea to rollover your 401k into an IRA and stick it in a nice balanced mix of investments, an index fund, or a target retirement fund.

March 23rd, 2007  |  Published in 401K, Annuities, Fees  |  1 Comment

These are Things Six through Ten of the Ten Things Your 401(k) Provider Will Not Tell You courtesy of those brilliant folks over at Smart Money.

6. “…but you still aren’t diversified.”
One interesting tidbit out of the article was the fact that the two most popular holdings in 401(k)s are stable-value funds and company stock – which basically means you’re really conservative and really risky at the same exact time. In fact, they found that one in five 401k participants holds more than 50% of their balance in company stock… Yikes! Stable-value is way too conservative and putting so much into your company stock is a risk too.

7. “If you quit your job, you’ll have to pay to keep your 401(k) here.”
This one was hard to believe because of all the articles out there discussing the benefits of rolling over your 401(k) into a rolleover IRA, a process I just went through. A lot of folks seem to think the paperwork is a hassle but consider the payoff, if you think your options are limited and could cost you money, magnify that by the number of years until retirement and you’re talking serious money. Would you take $200 to go through the process? It’s likely that making the move, if your current options are limited, will result in a difference, in your favor, of at least that much. At the very least, you can roll it into your new job and save yourself the hassle of managing two accounts.

8. “You’d be better off in a Roth 401(k) — too bad your plan doesn’t offer it.”
This is something you can’t really control because the Roth 401(k) is optional, your employer doesn’t have to offer it. However, a Roth 401(k) isn’t necessarily better than a regular 401(k) because the two are two totally different animals. One offers tax deferred investing (regular 401k) and one offers tax free investing (Roth 401k), you should have a good mix of both. Unfortunately, it turns out only 5% of company plans give their participants a choice… which is a travesty.

9. “You want to see some outrageous fees? Try a variable annuity 401(k).”
This only applies to a limited set of folks because a lot of 401k’s don’t offer the opportunity to invest in variable annuities, which is good because its an expensive option. Why? “The insurance company slaps a fee on top of the expense ratio you pay for the mutual funds in the annuity.” Should you be in a variable annuity? Probably not, there are other options out there that are cheaper and possibly better.

10. “Your nest egg could be a whole lot bigger.”
This one is a little bit sensationalistic but it revolves around the fact that people don’t pay attention to their fees and don’t realize how much of a difference a few fractions of a percent in fees makes. “Consider this: Brent Glading of the Glading Group, who used to sell 401(k) plans for Merrill Lynch and Dreyfus but now negotiates better plans for company clients, typically can shave 0.20% to 0.40% off a plan’s expenses. That doesn’t sound like much, but it can translate to $100,000 per employee over 20 to 30 years.” Wow… $100k? That’s huge.

Source: Yahoo Finance

Four Types of Annuities: Fixed & Variable Deferred, Fixed & Variable Immediate

January 3rd, 2007  |  Published in Annuities  |  2 Comments

USA Today posted an article today about the four types of annuities and admitted that, while they aren’t the best game in town, they’re the only vehicle, outside of pensions and Social Security, to guarantee a lifetime flow of income in retirement (and you could argue the guarantee-ness of your company’s pension and Social Security). I’ve written about fixed income and variable rate annuities in the past and this post looks to expand on the basics introduced by that post.

To recap, an annuity is a contract with an insurance company that sets up a pension-like income stream for the consumer. In addition to fixed income and variable income annuities, there are two additional versions: fixed deferred and variable deferred. I’ll just discuss the deferred versions since the immediate ones have been covered before.

According to USA Today, Deferred variable annuities are the most complex of the four and should be a last resort for investors (if you’ve maxed out everything else). You can think of them as a mutual fund inside an insurance policy. So your money grows in the stock market as it matures, if you die before you start withdrawing money, then an affordable life insurance provision pays out a guaranteed amount to your heirs that is at least equal your investment. There are significant drawbacks to a deferred variable annuity. The fees cost about 2.3% of assets compared to an average fee of 1.3% with a regular mutual fund. The annuities also tie up your money for a minimum period of time, up to 15 years, and will impose a hefty fee, up to 15%, if you want to take your money out.

Deferred fixed annuities grow at a set interest rate, adjusted every few years, and you can withdraw the money in this annuity in one lump sum or as a stream of income, your choice. Unfortunately, you can’t withdraw your funds until you reach 59.5, or face a 10% penalty.

Also, some withdrawals from both deferred fixed and variable annuities count as a “return of your principal.” That means it’s not taxed (because this money was taxed going in). That is also important if you’re drawing Social Security benefits. Up to 85% of your Social Security payouts may be taxed if you have other income, but annuity principal doesn’t count in this calculation.