You may have heard investment advisors – or insurance advisors – talk about them in the past. In fact, earlier I described several reasons you should and shouldn't buy annuities.
If you catch me on the street and ask if annuities are a good investment, I'd tell you the short answer is that it depends.
If you press me further, I'd tell you that most of the time they aren't a good investment. But, with that said, here are some great short term investments that I recommend! 🙂
If you demand clarification, I'd probably just shoot you a link to this article – unless you'd like to take me to In-N-Out Burger and pick up the tab. 😉
Here, I'm going to define annuities, show you why some people buy them, present two particular types of annuities, and show you a few alternatives you might like.
Let's start out with a definition of an annuity:
A fixed sum of money paid to someone each year, typically for the rest of their life.
The basic concept is pretty simple. But we're just scratching the surface on the question at hand.
Why Do People Buy Annuities?
Obviously, people buy annuities because there is some sort of perceived benefit. The main perceived benefit is safety.
Safe annuities include the following:
- Fixed annuities
- Single premium immediate annuities
- Deferred Income Annuities
- Fixed indexed annuities
I'd like to cover fixed indexed annuities in a moment, but first let's take a look at an unsafe option . . . .
Are Variable Annuities a Good Investment?
One product isn't on the safety list is the variable annuity. Now, I don't always agree with Suze Orman, but I do agree with her here:
Suze is right. And so are many others.
Here's what Michael Gauthier, CERTIFIED FINANCIAL PLANNER™ from Strategic Income Group says:
Variable annuities are one of the most oversold products in the financial services industry. Especially for people that are in the Accumulating Wealth Phase of their life, these investment vehicles tend to slow down the process of actually accumulating wealth due to the high fees that are associated with these products. Most investors would be better off owning lower cost options in ETFs and/or appropriate mutual funds.
Here's what Todd Tressider at FinancialMentor.com says about variable annuities:
. . . consumer advocates argue some variable annuity fees are so steep it can take more than a decade to outperform more straightforward investments, the benefits are misrepresented, and the restrictive features and penalties aren't adequately understood.
Here's what Alan Moore, CERTIFIED FINANCIAL PLANNER™ at Serenity Financial Consulting says about variable annuities:
Variable annuities are incredibly complex, and are difficult for most financial advisors to understand, so I don't expect the vast majority of consumers to really understand how they work.
Jane Bryant Quinn from the Wall Street Journal has written that she'd like to take all variable annuities and smash them into smithereens. How's that for being blunt? 🙂
John Biggs from TIAA-CREF says it's never suitable to buy a variable annuity.
AARP has written about many of the negative aspects of variable annuities.
Whoa. Big names hate variable annuities.
Let me explain why…
When you're buying variable annuities, you're buying mutual funds through a variable annuity company. While those companies may boast about how many options you have inside of a variable annuity (around 80 to 300 mutual funds), you have many more options if you just open a Scottrade account (around 29,000 mutual funds).
Oh, and by the way, just because you read the word “guaranteed” in your policy, doesn't mean you'll really get a guaranteed return. Take a look at what the SEC has to say:
You may want to consider the financial strength of the insurance company that sponsors any variable annuity you are considering buying. This can affect the company's ability to pay any benefits that are greater than the value of your account in mutual fund investment options, such as a death benefit, guaranteed minimum income benefit, long-term care benefit, or amounts you have allocated to a fixed account investment option.
You read that right.
Companies do not have to be in financial trouble to take away the death benefit or income riders for new policies, and sometimes they try to change existing policies when possible. One company offered a lump sum to tempt people to get rid of guarantees. Another required certain changes to be made or the riders would be eliminated.
More from GFC, Below
That's why it's important to understand that changes in a company's policy may affect your ability or willingness to maintain those benefits.
In summary, guaranteed death benefits and income accounts may have a lot of fine print you should understand before you sign on the dotted line.
Fixed Indexed Annuities
One type of annuity that is on my safe annuity list is the fixed indexed annuity.
The great thing about these are that they actually do have a guarantee that you can't lose the money you put in. Any deposit you make or gains that are credited get locked in at various time increments – that's a good thing people! What this means is that values can only go up, not down.
Okay, so should you go out and buy a fixed indexed annuity? Not necessarily. While they are so much better than variable annuities, there are other options out there! More on that in a moment.
One other common practice of fixed indexed annuities is to place caps on growth. For example, if the investment index goes up in one year by 30%, you may be capped at, say, 4% – and therefore miss out on a 26% gain. There are different caps for each policy, so make sure you research caps related to the fixed indexed annuity you are considering. And by the way, the caps can change over time.
The good news is that you can get a return of premium (ROP) on some of these policies which sometimes states you can get your money back at any time for any reason. That's pretty sweet.
There are also some fixed indexed annuities that are uncapped, meaning there is no limit to the upside potential and some provide two times the payout for qualifying medical conditions.
The other guarantee that fixed index annuities offer are lifetime income benefits. This will allow you and potentially your spouse to have a paycheck for the rest of your lives. And unlike a pension, in the event you have money left over, the remaining balance would be passed on to your heirs.
But again, do all these benefits make sense for you?
Remember that just because there are some great fixed indexed annuities, that doesn't mean you should sign your name on the dotted line.
I meet with clients who read about this or that annuity, thought it sounded good, and decided it was the best investment for them. Instead of taking a step back and considering other investment options, they got excited about a particular investment's benefits and didn't think to examine all the possibilities.
That's why I'd like to take a few moments of your time to discuss annuity alternatives.
Granted, you're probably interested in annuities because of their guarantees. So the question is, how do you protect your money without buying an annuity? Here are some options . . . .
Insured High-Yield Savings Accounts
If you're looking for a guarantee that you won't lose money, this is the best option. In the United States, many savings accounts are insured by the FDIC or NCUA all the way up to $250,000.
That's right, so if the bank or credit union tanks, you'll still have a guarantee that you'll get your money back. That's huge!
I put together a list of some of the best online high-yield savings accounts just for you. But you'll notice something . . . . You probably won't grow your money in these accounts as well as you might be able to in a fixed indexed annuity or the stock market.
Let's take a look at another option . . . .
Stock Market with AssetLock™
AssetLock™ is proprietary software that is only available through a select group of advisors. The software is designed to monitor your stock market accounts every single day.
AssetLock™ will always display four important numbers for investors:
- High Water Value – The highest value the portfolio has ever reached.
- High Water Date – The date your portfolio reached the highest value it has ever reached.
- Current Account Value – The most recent value from the last closing day in the stock market.
- AssetLock™ Value – The predetermined amount of downside (loss) the portfolio should experience during the period of time that the client is invested.
The software takes into account all of these factors to help you avoid a stock market crash. And the cool thing is that you can view this information yourself right on your computer, smartphone, or tablet computer.
You can set your AssetLock™ Value at 5%, 10%, 15% – whatever makes sense for you! If you're more conservative, and don't want much risk, you can set it at 5%. Maybe you're more aggressive and want to set it higher at 15% – it's your choice!
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I am an AssetLock™ approved advisor. It's amazing how the software works, and if you give me the chance, I'd be happy to show it to you.
So, Are Annuities a Good Investment?
Hopefully by now, you have answered that question for yourself. Everyone's situation is different.
I'll say again that most of the time annuities are not a good investment. In those situations, investing in the stock market with AssetLock™ makes a lot of sense as it blends a great deal of safety with potentially higher returns.
In other situations, fixed indexed annuities may make sense when investors want a guarantee that they won't lose any money – the stock market with AssetLock™ can't provide that level of guarantee. But remember, if your fixed indexed annuities are capped, you're limiting your potential upside.
Consider your options, consider your situation, and pick the right investment for you!