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Annuities in the News

Mr. Insurance Man, Tear Down This Wall!

Author: Anthony Isola

The article compares variable annuity’s surrender fees to the Berlin Wall—creating high early exit costs as a way to keep people locked into their contracts. It also notes that surrender fees are often used to recoup losses from the commissions paid to the salesperson. Moreover, many variable annuities come with high annual fees, a hard sell, convoluted contracts, leaving many investors confused about what they bought.

Lastly, the article discusses when it may be an appropriate time to purchase a variable annuity: primarily when you have maximized your 401(k) or 403(b), and your traditional/Roth IRA, and you still want tax deferred investments. However, this applies to a small amount of investors, as someone who has maxed out all retirement account options is not as likely to need to add more for retirement.

We agree variable annuity contracts are some of the most complex out there, often costing the investors 3% to 4% a year in fees and containing high surrender penalties for early exit. But what the article doesn’t address is a performance comparison of a tax deferred annuity vs. a taxable equity portfolio—a topic we cover in Tax Deferral Can Be a Double-Edged Sword. In reality, tax deferral may not justify the purchase of variable annuity, even when you’ve maxed out your retirement account options.   


How to time annuity purchases

Author: Stan Haithcock

In Stan’s view, it is impossible to time the purchase of an annuity with accuracy—and we agree. However, we disagree that laddering annuities is an efficient use of your investment money. For one, it is referred to as “treading water” or “killing time”. In our view, most investors need growth—not killing time!

Additionally, Stan states the shortest duration for a fixed annuity is three years, which may not help you if interest rates rise in the next two years, or less! In our view, a sound laddering strategy is available with bonds and CDs at 6, 12, 18, 24 or 30 month laddering intervals. This will protect you if rates are moving up in the next three years.  It also allows a portion of your money to come due in a relatively short period of time—taking advantage of higher rates.

Using a laddering strategy may make sense when committing a portion of your portfolio, but you might not have as many shorter term options with using a fixed annuity to ladder your investment.

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