Interesting Book

I've been reading a book called entitled "Pound Foolish, Exposing the Dark Side of the Personal Finance Industry",by Helaine Olen, and thus far its been an entertaining read.  To date I've read about the interesting history of Suze Orman, Dave Ramsey, and others.  I'll share an excerpt from one of the next chapters:
"Here are two things you need to know about variable annuities.  First they are increasingly being marketed and sold to baby boomers who are more and more afraid of outliving their retirement savings.  Second, this is a product so complicated, so difficult to understand, with so many financial penalties should one decide it is not the right investment after all, that Suze Orman, a former annuities saleswoman herself, begs people to stay away from them."

While they may have their place in an investors portfolio, I would tend to agree with her.  They are vastly oversold with little attention paid to their long term costs.

If I were considering a variable annuity purchase, I would ask the following questions:
1) If I cash in my entire policy in 1,5,7, and 10 years, what would be the surrender charge I would pay?
2)  If I invest my money and the market goes down by 50%, and I surrender (cash in) my entire policy, what would I get?  My original investment or something less?
3) If I assume the prevailing investment return in the market will be 6% for the next 20 years, what would my policy be worth compared to a regular investment account that has lower fees. (For this one if they can't put in it numbers for you I would be very cautious- there expenses should include M&E expense and all the costs of any riders).

Annuities: A Great "Guarantee?"

Here is another article about annuities.  Does the word "GUARANTEE?"  make you feel safe?  Jeremy Burri urges you to take a closer look.  To read more about annuities, just click the link at the bottom of this post.

Annuities have enjoyed a profound resurgence over the last 15 years as the average investor’s portfolio has been whipsawed back and forth.

Essentially a life insurance product that insures against outliving income, annuities have brought the investor a sense of safety through their advertised “guarantees.” An investment designed to provide a "guaranteed income" is not new. A hundred years ago you could have purchased what is now called an “immediate annuity,” and you still can purchase one today. A new feature in many annuities offers “guaranteed income for life” while keeping your money invested in the market. Does this sound familiar to you?

Assume you are a 55 year old who plans on using an annuity for retirement income at age 65. You could buy a deferred annuity, with special riders, today and in 10 years (at age 65) have guaranteed income for life. Or you could wait until age 65, buy an immediate annuity, and get that same income for life (again, assuming you are only considering annuities.) Both options can give you what you want at age 65. So how do these options differ? Which is better? Further, what is the insurer actually guaranteeing you, since the stated guarantees on the deferred annuity do not relate to the cash value (like a CD guarantees a rate of return)? How do you translate these guarantees into an actual number you can relate to?

Let’s say you chose option one, and at age 55 you purchased a deferred annuity with riders that guarantee that your “income base” (the amount of money you put in) will grow at 5% a year and that you can receive a 5% income benefit each year, no matter what happens to your contract or to the market. If you start with a $100,000 investment, by age 65 your income base will grow to $162,890. (Remember, this is not cash value, and you cannot withdraw it.)  Based on that income base, you can receive $8,144 per year (5% of $162,890) for the rest of your life.

You could also have chosen option two, waiting 10 years to buy an immediate annuity to provide yourself with the same $8,144 for life at age 65. However, if you only have $100,000 now at age 55, it will need to grow some in order to provide you with the same amount of income in 10 years. How much growth is “enough?” If you wait, you run the risk that in the meantime your investments will not earn enough, or worse yet, decline in value.

Let’s do the math. In order for the immediate annuity to be the better option, over the ten year wait your $100,000 must earn only 3.1% per year. Do you believe that is an attainable goal? If so, then you would be better off not paying for the guarantees of the deferred annuity. These costs, seldom discussed in detail, are very high and have significant impact.  Furthermore, many times once these extras are selected on the contract, they cannot be dropped.

But this is not to say that the immediate annuity is the investment of choice. We believe there are even better, more cost-effective, non-annuity options. If you would like to learn more about annuities and other investments, please give me a call at 920-893-5262 or email me at jburri@veritasinvesting.com to learn more.

Annuities: Buyer MUST be Aware

This is the first of several articles we'll be sharing from time to time about annuity products.  This one is from Margaret Wittkopp, Investment Advisor Representative and President of Veritas Financial Services.


When financial markets head downward, many investors become fearful and look for “guarantees.” Every day I am bombarded with offers from insurance companies that promise me, “easy sales and BIG commissions” for selling indexed annuities and other “stuff.”

Annuities are retirement savings tools backed by life insurance companies. Annuities can sound great, but there are many reasons for caution when purchasing annuities. These include: loss of control (once you annuitize, your decision is final), sometimes unfavorable tax consequences, and hidden costs and fees. These include either “back end” surrender charges (called Contingent Deferred Sales Charges), which can last as long as 20 years and be as high as 13%, or “front end” charges (commissions). You will pay an “add on” charge for each benefit rider. Hidden mutual fund fees are also charged in sub accounts. These charges are buried into the cost of your annuity contract and take away from your returns. Make sure you can calculate your total fees and that they are not excessive.

Annuities offer “guaranteed income.” To receive just $12,000 yearly ($1,000 a month), you would need to invest $264,000 in an immediate annuity at age 60. If you die before age 82, the insurance company keeps the remainder of your investment—not your intended beneficiaries. Consider inflation and longevity--what will $1,000 buy in 20 years? How long will you live?

Here’s something to think about, using data from 1973-1994. Twelve thousand dollars is about 4.5% of $264,000. Invested in a moderate, balanced Free Market Fund, you could receive 4.5% (that same $1,000 a month), and by age 82 your yearly income would have grown from $12,000 to $64,000. Your portfolio value would be $1,486,000.

Complex insurance products and nice-sounding terms like “indexed annuities," “living benefit riders,” and “guaranteed withdrawal benefits” are the trendy thing today. These products make it seem as if you cannot lose. Unfortunately, you may not really win either.

Remember, insurance companies are in business to make a profit. They calculate the risks to assure they do not lose. Annuities can be a useful investment tool if you've exhausted all other tax-deferred retirement plan options, but the buyer must be aware. Companies are collecting outrageous (and needless) charges, and most commission-based financial advisors are highly motivated to sell these products to you. Want to know more? Have questions about your financial future? Call us at 893-5262.