The Annuity Game

Many prospective clients have got got said that they have already met with a financial contriver or insurance agent and were encouraged to do the purchase of a large rente for tax benefits. The ground the agent desires to sell an rente is how moneymaking the committees are on these products.

Annuities may work in your portfolio but normally they won't unless you have shares in the company pushing them. The most common style is the tax deferred annuity. In the lawsuit of a postponed annuity, you pay up front or with a series of installments, and you don't have got to pay taxes on the addition until you withdraw. You will then have regular income.

Do you acknowledge this scenario? Retirement bes after such as as an individual retirement account can prorogue tax twenty-four hours until after your investings have got compounded. This fact alone do tax-deferred annuities redundant Why bargain them, then? Except for some of import exceptions, you normally should go through on annuities.

Here is the lawsuit against annuities, as made by the Assortment Fool, business magazines and certain Fee-Only investing advisors:

1. Tax-related arguments other than that mentioned above. Capital additions that you do in the market are taxed at a lower rate when you throw your pillory long adequate before selling, currently a year. The Internal Revenue Service handles rente payouts as ordinary income.

2. Most rentes charge too much in fees and commission. When you add everything in, you make not enjoy the same low fees over the old age like you would through a Fee-Only planner or Vanguard-style index fund. Annuities also charge you for things like "mortality and disbursals charges."

Don't even believe about cashing the rente out early - you may pay a resignation charge as high as seven percent.

Then there are management fees, just as with a common fund. Normally they will be lower but still more than than those of an index fund. When it's all said and done, your annual fees may attain two percent - nearly twice what a Fee-Only planner would charge.

3. The insurance coverage that rentes offer isn't that great, etiher. They also don't work out very well as death benefits. Luck states rentes are "an inefficient manner to purchase life insurance, and almost no 1 accumulates on it anyway."

4. To turn your investment, the rente suppliers often utilize merchandises producing less than leading in yields. A fixed rente intends you are guaranteed a certain return, but then it's so low rising prices could overpower the earnings..

With a variable annuity, you can make up one's mind to a limited extent how to put your money. But it will have got to be placed in what amounts to as an in-house common funds. Sounds a spot like the dealings of certain brokerages where not-so-objective planners direct you to their ain dogs?

Another pick could be an equity-index annuities. You'll be guaranteed a tax return of respective percent, but your top is limited, too. If you're a long-term investor, why not put in the finances yourself?

5. Annuities necktie up your money so you can't put it somewhere more than profitable.

I According to the Assortment Fool, rentes "are desirable lone for those who:

* "Have contributed the upper limit to their 401(k) bes after and IRAs and desire additional tax recess on investing gains."

* "Prefer investing in common finances as opposing to individual securities.

* "Will maintain the rente for at least 15 to 20 years." But, allow us add here at ElderAdo, that statement is rather irrelevant to most people who are retired or stopping point to it.

* "Are in a 28 percent or higher income tax bracket today, but anticipate to be in a lower income tax bracket in retirement."

* "Don't need the rente return prior to age 59 1/2.

* "Are unconcerned that inheritors must pay ordinary income taxes on any appreciation.

* "Desire a 'guaranteed' income for life in retirement."

The future statement can be very powerful and persuasive. Remember the tradeoff. When history repetitions itself, the "guaranteed income" will be much smaller than the rewards of proper investment in the stock market.

The second is examining the marketing stuffs of the biggest investment bankers of annuities, including, states Forbes, ING Golden American, American Skandia and Allianz Life. It quotes Alice Paul Roye, director of the agency's Divsion of Investing Management: "The industry is on notice."

That states it all. If you experience you must purchase an annuity, be certain that the individual recommending it is not going to have a commission. Boldly inquire how he or she will profit directly or indirectly from a sale, and ticker out for the fees today and down the road.

RESOURCES

* Annuity Gratuity, Carrie Collidge, Forbes, Feb. 19, 2001.

* Annuities: What's to Like?, The Assortment Fool, July 5, 1999.

* The Money Manager: Finally, a Warning about Annuities, Carolyn T. Greer, Fortune, July 5, 1999.

* The $6.4 Billion Ripoff, Barron's, March 27, 2000.