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Annuity Primer
My father, who now, God Love him, is in his eighties, has always had an eye toward saving. Growing up in the Depression, which for many people is only a period of long ago misadventure, he formed many of his current cost controls that he know keeps close watch on. What this means is, that my mother (also a big God Love her too) and he still share a tea bag, split a packet of Alka Seltzer, and watch every penny they spend. They have achieved the ultimate in blue-collar retirement. Comfort. They are not rich, but they are not poor. They are comfortable. And this is what I want for myself and my wife, as well as for you. If you retire rich and comfortable; great. If you retire comfortable only; great also. He is a true BlueCollarDollar hero. Someone who has made it to retirement with his health and his happiness.
We talk often, when he's not golfing! He and his buddies sometimes attend free seminars, which is only a sales pitch with a free dinner included. he just got back from one the other day when I called. The subject was annuities.
You no doubt have heard the word. If you haven't, I'm going to tell you the whatfor's of it. Annuities are part insurance, part investment. These are attractive to some investors because of their tax deferred status. That means that any money made (earnings) is not taxed until withdrawn.
Lawyers, champions of class actions, and fresh off an attack on the industry for their selling practices concerning whole life policies, have taken a look towards the practice of selling of annuities. Seems, that insurers are selling the idea that these annuities can be put into a tax deferred account. There is no value here as part of a retirement plan. Why, you ask?
Annuities cost more. A BlueCollarDollar no-no. And putting them into a tax deferred account pays even less and cost more. Often, Annuities are compared to mutual funds. They charge fees that run higher than mutual funds, and they can cost more depending upon what has been invested and the annual return. This cost can sometimes be a percentage point higher! Ouch! Variable annuities, which allow you to invest your money like a mutual fund in stock and bond portfolios according to your investment style will cost a great deal more over the long term. Ouch Ouch!
By way of example, if you had, say, $1000 in an annuity, you would, after ten years have earned $90 less than if you had had the same money in a mutual fund with the same assumed 10% return. That is, by math, 9% less. Now take the $600 billion (of the $1.2 trillion in annuity assets) that investors have in these kinds of policies, and there is potential of hundreds of millions of dollars lost. These insurance guys are a tricky bunch.
This practice of selling annuities like this is portrayed as a benefit for the consumer, and it isn't. Hang with me here.
What the insurers were sued over was the practice of calling on old policy holders who had a cash value and tricking these people into using it (the cash value, which in whole life policies grows quite substantially and conservatively over time) to buy newer and more expensive policies. The appearance of annuity policies being rolled into a tax deferred account smacks of the same type of tricksterism.
Insurance companies argue in return that there are other reasons deferring taxes. Death benefits are one, with their heirs receiving, at least, the money originally invested. And of course, they claim that annuitization, which is a lifelong stream of payments to supplement retirement income. This, according to the industry, is the reason for the higher fees. These expenses are justified by the cost of record keeping and one on one education. A high cost for personalization.
This type of investment is not for the BlueCollarDolllar reader. These plans are not mutual fund equivalents, and the National Association of Security Dealers is looking into the practice of insurers selling them as such. There is supposed to be a suitability test which is an analysis of whether the product is for you or not. The Securities and Exchange Commission is also looking at the practice focusing on whether companies are disclosing all that they should when selling the plans.
These plans have high incentives for agents. Translate that to higher commissions. This commission is paid from the annual fees collected from the investor.
So as the lawyers busy themselves suing these insurance giants, companies such as MetLife have already started to disclose to customers that tax deferral shouldn't be the reason for purchase. These accounts, can not defer taxes twice. The BCD strongly recommends that you look another place for your investment dollar, leaving these accounts for the filthy rich.
Back to my father... He enjoyed a tenderloin dinner with his friends and listened to a brief sales pitch that started with the question, "aren't taxes what we really want to save on?". At eighty five, he doesn't need it. At any age, neither do you. the BlueCollarDollar wants you to invest wisely, informatively, and conservatively. But if they offer you a steak dinner, feel free to take it! Someone, probably a current policy holder, is paying for it.
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