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Posted: September 17, 2013

The truth about annuities

Seedy -- or suitable?

Ron Phillips

 It happens all of the time. You see an ad for a free lunch held at a nice restaurant. And while you’re there, enjoying your perfectly prepared steak, you can talk about the economy and investment markets. Sounds innocent enough, right?

Nine times out of 10, they are there to sell you an annuity. It might be the right thing for you. Or you might want to back away slowly -- and start running.

WHAT IS AN ANNUITY?

Annuities have earned a somewhat seedy reputation throughout their history. They’ve been abused for years by dishonest stockbrokers, insurance agents and bank representatives without regard to client suitability. 

An annuity is similar to either a mutual fund or a CD combined with a retirement plan. It also has life insurance attached to it. It’s both an investment security and an insurance product. They’re complex.  Many times you can talk to a stockbroker, advisor or insurance agent and THEY are confused!  That’s because there are hundreds of different companies offering them and they ALL have various policy details. 

Being the fair guy that I am, I’ve listed both four pros and four cons of these often-confusing products. REMEMBER: read the fine print of an annuity, especially regarding the different fees.

DRAWBACKS TO THESE HYBRID INVESTMENTS

(1) They have high annual fees and multiple layers of fees.

(2) You must wait until age 59 ½ before withdrawing all of your money or face penalties and fees.

(3) Unscrupulous brokers, agents and bank reps try to sell unsuitable annuities.

(4) They have high surrender (exit) penalties.

WHY YOU MIGHT CONSIDER AN ANNUITY

(1) You can create lifetime, pension-like income without the government or working for a large company.

(2) Your assets grow tax-deferred.

(3) Annuities are insured and have various guarantees.

(4) They can grow with the stock market and economy.

*     *     *    

Here are some examples of people that should and shouldn’t consider annuities.

WHO THIS COULD BE WRONG FOR

• Someone with no other assets to fall back on
• Someone who doesn’t understand the various fees
• The majority of people who are in low tax brackets
• Investors who haven’t maxed out their retirement plans

WHO THIS COULD BE RIGHT FOR

• High income households that want to defer more investment gains
• High tax-bracket households that benefit most from tax deferral
• People who have maxed out their retirement plans
• Business owners and individuals who are trying to create their own pension-like income

As you can see, a lot of us fall into the category of avoiding this product. Most people are in lower tax brackets or haven’t contributed the maximum to retirement plans.

Proceed with caution and order a free copy of my latest report, The Truth about Annuities.
 

Ron Phillips is an Independent Financial Advisor and a Pueblo, Colorado native. He and his wife are currently raising their two sons in Pueblo. Order a free copy of his book "Investing To Win" by visiting www.RetireIQ.info or leaving a message on his prerecorded voicemail at 924-5070. Simply mention Promo Code #1001 when ordering.

Enjoy this article? Sign up to get ColoradoBiz Exclusives. The opinions expressed in this article are solely that of the author and do not represent ColoradoBiz magazine. Comments on articles will be removed if they include personal attacks.

Readers Respond

you are incorrect about the fees. the only annuities that entail fees are variable annuities. fixed annuities do not have fees. Also, some annuities do not penalize you for withdrawing before 59 1/2.... there are contract annuities that may require a 5 or 10 year contract with penalties for early withdrawal, but if your 35 and you put your money in a 10-year Annuity, you can start withdrawal when you're 45 with no penalty. you need to do more research. By Leslie P Olson on 2013 09 17
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