The trouble with annuities
CNN, June 30th, 2009
With the uncertainty of the market these days, a lot of investors
are running for cover with their retirement funds. No wonder sales of
fixed annuities surged 74% for the first three months of 2009,
according to research association LIMRA.
These insurance
products provide tax-deferred growth at a fixed rate - higher than that
of CDs now - with the option to later turn the money into guaranteed
income for life. It's a compelling pitch. But there's a costly catch.
Getting into a fixed annuity today may force you to miss better
opportunities tomorrow.
Know what's being sold
First,
a clarification - because the world of annuities is anything but clear.
The term "fixed annuity" typically refers to a deferred annuity. That's
different from an immediate annuity, for which you turn over a lump sum
to an insurer and start getting regular payments within a year.
Deferred annuities are more like CDs; in fact, insurers often promote
them as a higher-yielding alternative.
Aimed at retirees and
pre-retirees, deferred annuities may promise a high teaser rate - based
on prevailing interest rates - in year one, then readjust yearly based
on market conditions, with a guaranteed minimum. Or they may offer a
more modest fixed rate for longer. For example: In May, Mutual of Omaha
offered 4.65% the first year for contracts of $100,000 or more, with
3.65% in years two through five. (That's compared with an average of
2.19% on a five-year CD at the time.)
While there's no term on
either type of contract, you're hemmed in for five to seven years by
surrender fees, often around 7% initially. (Some do allow yearly
fee-free withdrawals of up to 10% of the account value, however.)
Read more of this article.
About Reverse Mortgages: Learn all about reverse mortgages at NewRetirement.com
Professional Financial Advisors: Find out what a financial advisor can do for you at NewRetirement.com.