How To Buy Annuities

March 16th, 2009  |  Published in Retirement  |  2 Comments

Annuities aren’t all bad. They get a bad reputation because some of them charge high fees and are bad investments, but the idea behind an annuity isn’t bad at all. For many, it’s a way to turn retirement savings into a constant and reliable stream of monthly income similar to a pension, so that you can plan your finances more easily. The big key to watch out for when it comes to annuities are those fees – between the administrative, mortality and expense, and other fees, you could pay through the nose if you’re not careful.

Types of Annuities

There are several types of annuities. Fixed annuities will offer a fixed rate of return and variable annuities will offer a variable rate of return based on the investments in the annuity’s portfolio. Equity-indexed annuities offer a mix of both, you get a minimum fixed rate plus a variable rate based on that stock index (though the rate will be capped at less than the index’s return). In addition to the fixed and variable aspect, there’s a deferred version (and immediate version) of both. Deferred means you’re putting off the earnings until the future, whereas immediate means you’re getting a monthly cash flow today.

In addition to the deferred/immediate aspect and the fixed/variable/indexed aspect, there are add-ons you can get that will cost you even more. It’s like selecting the flavor of your ice cream and then picking the toppings afterwards.

Fees

On their own, annuities aren’t bad ideas, it’s only if you get one with big fees. Annuities will always charge an annual management fee, which according to Morningstar will average 2.37%, though you can find low cost alternatives at firms like Vanguard. In addition to annual fees, you may have a surrender fee if you sell your annuity in the first year or two. Finally, there is also a “mortality and expense” fee that pays for the insurance part of your annuity, commissions, administrative expenses, etc. The average M&E charge is 1.15% according to the National Association of Variable Annuities (NAVA).

If you keep an eye out for the fees and understand what you’re buying, annuities aren’t dangerous at all.

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!