G&G Associates Tax & Financial Consulting
e-Newsletter
Annuities 101
Karibu (Welcome) G&G Readers,
Since it seems that the majority of financial consultations I've been having lately have involved individuals getting ready to or are looking for an opportunity to retire in the next couple of years. The conversation always arises about the thought of annuities in their investment plan.
So, I thought it would be a good time now to give people a run down on just what an annuity is and the different types that are presented to the masses. This is not an attempt to sell you on the idea of an annuity, just to educate you on them so that you can hopefully make the right decision if ever asked to invest in one.
** Remember…"Liars can figure but figures don't lie, the key is can you figure out if he or she is lying or not."
Annuities have long been considered an investment that insurance salesmen push on unsophisticated clients, not something that smart investors seek out. While annuities may offer tax-deferred earnings and, often, a relatively secure stream of retirement income, many of them also tend to feature steep fees and commissions, inflexible distribution rules and impenetrable complexity.
Example: many investors who purchased "variable" annuities in the 1990s thought they were obtaining an ultra safe investment…until they endured steep losses from 2000 through 2003, when the stock market plunged.
Yet some annuities can have a place in a wise investor's portfolio. They can serve as a welcome safe haven in a time of stock market and real estate volatility. They can reduce the odds of outliving retirement savings in a time of shrunken nest eggs. They can offer an opportunity to defer taxes. And in recent years, several of the more reliable insurance companies have made a few changes that tackle some of the drawbacks.
Instead of simply relying on the advice of a commissioned insurance or investment professional, start by reviewing the various types of annuities listed below. If any seem like they might help you reach your financial goals, shop for the best terms using buying strategies provided here or hire a fee-only financial planner to help.
Annuities often are discussed as if they were a single type of investment. In fact, there are several different types of annuities, each appropriate for different investors and investment goals.
VARIABLE ANNUITIES
WHAT THEY ARE: Variable annuities essentially are a way to invest in mutual funds except that the funds' earnings are tax-deferred and withdrawals can be scheduled as monthly payments that are guaranteed to continue for as long as you (or your spouse…or someone else designated) live. Many of the variable annuities sold these days also feature a component that limits potential capital losses. This feature is an attempt by insurance companies to attract investors who were scared off by the losses suffered in variable annuities a decade ago. Unlike some annuities, variable annuities do not offer a guarantee about the amount that you will receive during retirement when you purchase the product. The size of the distributions depends largely on the performance of the mutual funds you select within your annuity.
Problem: High fees. The typical variable annuity charges annual fees in the neighborhood of 2%, and some charge 3% to 4%. Onetime commissions of 5% or more are common, too, as are surrender fees of 5% to 6% or more if you attempt to withdraw money in the years immediately after investing. Also, investment gains within the variable annuity are taxed as income when the money is withdrawn, not as capital gains, and withdrawals made prior to age 59 ½ are subject to 10% penalty.
Appropriate for: High-tax bracket investors younger than 55 who maxed out 401(k) s and IRAs for the year, who wish to do even more tax-deferred investing and who will not need this money for a t least 15 to 20 years. It takes decades of tax-deferred growth for the advantages of variable annuities to outweigh their additional fees.
Buying Strategy: If you do purchase a variable annuity, do so through a large, low-fee mutual fund company or discount broker, such as Fidelity Investments, Charles Schwab or Vanguard. These tend to charge lowered fees and commissions than do commissioned agents. Select aggressive investments within the variable annuity, and do not withdraw this money for at least a decade, preferably two decades or longer.
-----------------------------------
Internal Sponsorship
With the falling dollar and the explosion in gold, silver, oil and other natural resource prices, you need to stay on top of your game and manage your "OWN Finances."
Become a GGIS subscriber now and you'll be sure that we make sure you stay on top of your Tax and Financial Future to make sure your BUSINESS … AT HOME is protected. Remember…most people look after their bosses business, but fail to look after their own business at home.
To become a member of the G&G Investment Society newsletter subscription, send an e-mail to GGIS@gngassoc.com and/or visit our website at www.gngassociates.net and click on the "Products & Services" link and we'll get you signed up right away.
DON'T WAIT ANOTHER DAY!
- 1 year subscription - $99
- 2 year subscription - $189
- Lifetime subscription - $399
** If you sign up for a 2 year or Lifetime subscription, you'll also get a free one hour Tax & Financial consultation (a $200 value).
If you need a one-on-one consultation to evaluate your financial situation, contact me to setup an appointment and get 2011 started off on a good note.
Until the next time,
IMMEDIATYE ANNUITIES
WHAT THEY ARE: Immediate annuities operate much like traditional pensions. In exchange for a lump-sum payment, you will receive a fixed amount each month, quarter or year for the rest of your life…or the rest of your spouse's life…or for some predetermined number of years, depending on the distribution option you select.
Problem: Low returns. The fixed payment you receive from an immediate annuity was purchased – and interest rates are extremely low right now. A 60-year-old man who puts $50,000 into an immediate annuity, for instance, currently could receive a monthly income of just $280 for the rest of his life.
Immediate annuities also are likely to reduce the size of the estate you leave to your heirs, particularly if you die relatively young. Some immediate annuities do make payments to heirs when the annuity purchaser dies within a predetermined time frame, but adding such a provision further reduces the size of the distributions that the annuity owner receives during his/her life.
Appropriate for: Retirees who want an ultra stable source of income with no market risk and/or retirees who fear that they might outlive their savings, perhaps because they come from families whose members tend to live long.
Buying strategy: If the security of an immediate annuity appeals to you, wait to buy. Interest rates are likely to rise in the coming years, increasing the distributions offered by immediate annuities. The distributions you receive also will increase the older you are when you purchase your annuity.
If you don't want to wait, at least "ladder" your way into presumably rising rates, putting only 20% of the total amount you intend to invest into an immediate annuity this year, then adding an additional 20% in each of the coming four years. One place to obtain annuity quotes is www.ImmediateAnnuities.com.
Alternative: Longevity annuities, a relatively new product that has become available in recent years, are similar to immediate annuities. Rather than make payments immediately upon the purchase of the annuity, however, longevity annuities do so only when the annuity buyer reaches some advanced age--- often 75, 80 or 85. Buyers who die before this age receive nothing, but those who live long enough receive much, much more per month than from an immediate annuity. A longevity annuity is a viable option if you fear that you will outlive your money but your financial situation seems secure for the first 15 or 20 years or retirement.
Example: A 65-year-old woman currently would receive a monthly income of around $140 from a $25,000 investment in an immediate annuity—but she could receive $1,169 starting at age 85 from a longevity annuity.
EQUITY-INDEXED ANNUITIES
WHAT THEY ARE: Equity-indexed annuities (EIAs) are deferred annuities, so their distributions do not begin immediately but rather at some predetermined future date. The size distribution is determined in part by the performance of an underlying stock market index—often the Standard & Poor's 500 stock index of the Russell 2000 Index. But unlike index funds, EIAs come with safeguards against losses—there's usually a guarantee that the principal won't decline much or at all in value, plus a guarantee minimum annual return of 2% to 3%, so your investment could make money even in years when the underlying index falls. There's often a death benefit, too --- a designated heir receives a check if the annuity owner dies before receiving some predetermined amount.
Problem: Complexity. Insurance companies that offer EIAs use extremely complicated formulas to calculate these annuities' returns. That makes it very difficult for investors to compare EIAs or to predict how much they can expect to earn from one. Investors should not expect to receive the full returns of the underlying index—EIA returns generally are capped at the 6% per year. On top of this, steep EIA annual fees, surrender fees and commissions eat in profits.
Appropriate for: Conservative investors who seek stock gains but who do not want to risk losses.
Buying strategy: Ask the financial pros you speak with for data on the past 10 years of annual returns on the EIAs that they recommend. Compare those past returns to get some idea as to which EIAs truly offer the best returns and/or lowest risks. Also, compare commissions and annual fees.
CHECK RATINGS
Don't buy annuities issued by an insurer rated lower than A by A.M. Best (www.AMBest.com) or Moody's (www.Moodys.com). A low-rated insurer is more likely to fail.
Now…if you want to see what I really think about the rating agencies, see my newsletter archive and view the Dec 27, 2010 issue "By Far the Most Important Development of 2010"
Click below for archive:
http://ezinedirector.com/admin/publisher/archive/public/?fuseaction=a&e=7944575E0843077440
Until the next time,
Ankh Uja Snb (Life, Health, Strength),
Asar Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
757-251-0174 office
866-361-3872 toll free fax
www.gngassociates.net
G&G Associates & G&G Travel are on Facebook, join our fan page.
"Any fool can make something complex, but it takes a genius to make something simple"
Woodie Guthries
P.S. If you're not a GGIS Paid Subscriber reader yet, it's not a bad way to start the year. Currently, our GGIS portfolio is packed with great plays to kick-start your portfolio for 2011.
P.S #2 If you are looking to Travel and looking for steep discounted travel, visit www.gngassociates.net, click on the "G&G Travel" link and let your travel planning begin. Let us know where you want to go and we'll do our best to find you the best deal your money can buy. Become a Fan of G&G Travel on facebook.
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.
Change Subscription:
http://sub.ezinedirector.net/?fa=m&s=123321332&c=964979279
Cancel Subscription:
http://sub.ezinedirector.net/?fa=r&id=123321332&c=964979279
No comments:
Post a Comment