[AskUncleBill] Sometimes You Have To Put Up With The Bad To Learn Something–Annuities

divpWhat I mean is that this article, which I stole off MarketMinder.com which they got from Money magazine, is pretty boring but useful so try and read it.nbsp; Read it so when you get a call from an insurance salesmen pitching these things two red lights will go off in your brain–high fees and taxes.nbsp; Then say no./p pPay attention to the last couple of paragraphs where the guy has some alternatives, alternatives which Uncle Bill tells you all the time.nbsp; Have a good weekend./p h1 class=storyheadlineEarly nest egg: Say no to annuities/h1 h2 class=storysubheadIf you’re still building up your retirement, steer clear of annuities. They have a function, but not quite yet, says Walter Updegrave./h2 div id=storyLogoa rel=nofollowimg class=img01paddingR height=40 alt=Money Magazine hspace=0 src=http://i.l.cnn.net/money/.element/img/1.0/logos/money_logo.gif width=180 align=right border=0//a/div div class=storybylineBy a rel=nofollow target=_blank href=mailto:asktheexpert@turner.comspan style=color:#003399;Walter Updegrave/span/a, Money Magazine senior editor/div div class=storytimestampOctober 11 2007: 9:23 AM EDT/div div class=NLsignupa rel=nofollow class=boxlinkstrongspan style=color:#003399;Sign up for the Ask the Expert e-mail newsletter/span/strong/a/div div class=storytextpNEW YORK (Money) — strongQuestion:/strong I’m 44, and after maxing out my 401(k) and Roth IRA, I still have about $400 a month I’d like to invest outside these accounts for early retirement. Would you suggest I invest this money in an annuity? – Angie Tyrie, Hinton, West Virginia /p pstrongAnswer:/strong The short answer is no, I wouldn’t recommend you invest your extra savings in an annuity. Although I do believe a type of annuity known as an immediate, or payout, annuity can in certain circumstances play a valid role in a retiree’s portfolio (for details, a rel=nofollowspan style=color:#003399;click here/span/a), for reasons I’ll get into shortly, I don’t think annuities are a particularly good way to build a retirement nest egg, particularly if you plan on tapping that money for early retirement. /p div id=IEContainerRdiv class=IErowimg height=161 alt=walter_updegrave_new.03.jpg src=http://i.l.cnn.net/money/2007/10/10/pf/expert/expert.moneymag/walter_updegrave_new.03.jpg width=215 border=0//div div id=NestedBoxdiv id=magStoryIEdiv id=TopStoriesBoxtable class=topstoriesTable cellspacing=0 cellpadding=0 border=0tbodytr class=headerRowtd class=headerCella rel=nofollow class=relatedboxstrongspan style=color:#000000;More from Money Magazine/span/strong/a/td/tr tr class=contentRowtddiv class=storyLinka rel=nofollowspan style=color:#003399;Harvest a rich 401(k)/span/a /div div class=storyLinka rel=nofollowspan style=color:#003399;Retire Rich: 13 myths/span/a /div div class=storyLinka rel=nofollowspan style=color:#003399;Do it now: Get on track for retirement/span/a /div/td/tr/tbody/table/div div id=TopStoriesBoxtable class=PermaLinksTable cellspacing=0 cellpadding=0 border=0tbodytr class=contentRowtddiv class=storyLinka rel=nofollowspan style=color:#003399;Best Places to Live/span/a /div div class=storyLinka rel=nofollowspan style=color:#003399;Current Issue/span/a /div div class=storyLinka rel=nofollow target=_blank href=http://subs.timeinc.net/CampaignHandler/MOcc5?source_id=37span style=color:#003399;Subscribe to Money/span/a /div/td/tr/tbody/table/div/div/div div class=IErowimg height=24 alt=FIX YOUR MIX src=http://i.cnn.net/money/.element/img/1.0/sections/tools/calc_head_fixmix_220.gif width=220 border=0/br /table cellspacing=0 cellpadding=0 width=220 bgcolor=#dbdee5 border=0 style=BORDER-RIGHT:#7b8598 1px solid;BORDER-TOP:#7b8598 1px solid;BORDER-LEFT:#7b8598 1px solid;BORDER-BOTTOM:#7b8598 1px solid;tbodytr valign=middletd width=14 rowspan=2/td form target=_blank action=http://cgi.money.cnn.com/tools/assetallocwizard/assetallocwizard.htmllt;gt;plt;gt;/p pinput type=hidden name=assetclass/ input type=hidden name=_tpl/ /plt;/gt;td class=headersmTLS style=PADDING-BOTTOM:5px;PADDING-TOP:7px;When do you need the money?br /select class=textTLS name=timehorizon style=VISIBILITY:visible;WIDTH:130px; option value=3-53 – 5 years/optionoption value=5-105 – 10 years/optionoption value=10plus10+ years/option/select/td td width=14 rowspan=2/td/form/tr tr valign=middletd class=headersmTLS style=BORDER-TOP:#7b8598 1px dotted;PADDING-BOTTOM:7px;PADDING-TOP:5px;How much risk can you handle?br /select class=textTLS name=risktolerance style=VISIBILITY:visible;WIDTH:130px; option value=lowNot much at all/optionoption value=mediumA reasonable amount/optionoption value=highAs much as possible/option/select/td/tr/tbody/table table cellspacing=0 cellpadding=0 width=220 bgcolor=#dbdee5 border=0 style=BORDER-RIGHT:#7b8598 1px solid;BORDER-TOP:medium none;BORDER-LEFT:#7b8598 1px solid;BORDER-BOTTOM:#7b8598 1px solid;tbodytr valign=middletd width=14 rowspan=3/td td class=headersmTLS style=PADDING-BOTTOM:5px;PADDING-TOP:7px;BORDER-BOTTOM:#7b8598 1px dotted;How flexible are you?br /span class=textTLSinput type=radio checked name=wiggleroom/ If I miss my goal by a year or two, I’ll still be okay.br /input type=radio name=wiggleroom/ I can’t afford to miss my target.br //span/td td width=14 rowspan=3/td/tr tr valign=middletd class=headersmTLS style=PADDING-BOTTOM:5px;PADDING-TOP:7px;BORDER-BOTTOM:#7b8598 1px dotted;During market sell-offs, do youbr /span class=textTLSinput type=radio checked name=downdraftaction/ See an opportunity to buy more stocksbr /input type=radio name=downdraftaction/ Sell stocks thinking things will only get worsebr /input type=radio name=downdraftaction/ Do nothingbr //span/td/tr tr valign=middletd align=right style=PADDING-RIGHT:50px;input type=image alt=Calculate src=http://i.cnn.net/money/.element/img/1.0/sections/tools/calculate.gif name=submit//td/tr/tbody/table/div div class=IErow/div div class=IErowdiv id=videoIEContainerdiv id=IEheadingContainerdiv class=IEboxHeadingVideo/div div class=linkDiva rel=nofollowspan style=color:#003399;More video/span/a/div/div divtable cellspacing=0 cellpadding=0 align=center border=0tbodytrtd class=videoImagea rel=nofollowspan style=color:#003399;img height=164 alt=Get a retirement check-up hspace=0 src=http://i.l.cnn.net/money/video/moneymag/2007/10/01/do.it.now.cnnmoney.216×164.jpg width=216 border=0 valign=top//span/a/td/tr trtd class=videoBlurbMoney Magazine’s Walter Updegrave gives advice on things you can do right now to ensure you are saving enough for retirement. diva rel=nofollow class=Text1span style=color:#003399;Play video/span/a /div/td/tr/tbody/table/div/div/div div id=quigo220div id=ad-906322 align=center style=BORDER-RIGHT:0px;PADDING-RIGHT:0px;BORDER-TOP:0px;PADDING-LEFT:0px;PADDING-BOTTOM:0px;MARGIN:0px;BORDER-LEFT:0px;PADDING-TOP:0px;BORDER-BOTTOM:0px; /div/div/div pI should add, though, that you’ll get a very different answer from people who sell annuities. They typically portray annuities – and especially variable annuities, which allow you to invest in mutual fund-like portfolios – as an excellent place to stash money once you’ve maxed out your 401(k), IRA and similar plans. /p pIndeed, based on the emails I get from individual investors, it’s clear that some advisers also apparently steer people who haven’t contributed all they can to 401(k)s and the like into annuities, a practice that, in my mind at least, can border on financial malpractice. /p pOne selling point is the old standby that the money you invest in a variable annuity (which is the type most often pitched to someone in your position) grows without the drag of taxes until you withdraw the funds. But there’s a new sales mantra from the annuity industry these days. /p pToday, the killer app, so to speak, goes by the name living benefits. Essentially, this refers to various riders and options you can tack onto the annuity. The one often pitched to someone your age is the guaranteed minimum income benefit, a feature that promises you’ll receive a certain amount of income in the future even if the investments within the annuity perform abysmally. /p div class=inStoryHeadinga rel=nofollowspan style=color:#003399;Harvest a rich 401(k)/span/a /div pAnother type of living benefit, geared more toward people in or closer to retirement, is the guaranteed withdrawal benefit for life, which assures that you’ll be able to withdraw a given amount of money as long as you live. But as tantalizing as all these features may seem, I don’t think an annuity makes sense for someone like yourself who is still accumulating money for a retirement nest egg. /p pOne reason is that most annuities come with onerous fees. In the case of variable annuities, there are several layers: an annual insurance charge that can run 1.25 percent or more; the annual investment management fees, which range anywhere from 0.5 percent to more than 2 percent; and, the fees for the various riders, which can add another 0.6 percent or more. Add them up, and you can be paying between 2 percent and 3 percent a year, if not more. /p pThe fee extravaganza doesn’t stop there. Most annuities also have surrender fees that can dock you 6 percent to 10 percent (and in some cases much more) if you decide to withdraw your money soon after investing it. /p pUnfortunately, many people who end up in annuities – or at the receiving end of a sales spiel about them – don’t realize just how expensive they can be, which is why in a recent a rel=nofollowspan style=color:#003399;Long View column/span/a I recommended a simple form for disclosing the various charges. These fees alone are enough to make most annuities a lousy bet. /p pAnd, as I’ve written before, I don’t think the highly marketed living benefits (which, by the way, are also used as a rationale to induce people to invest in a tax-deferred variable annuity within an already tax-deferred IRA) are worthwhile when you understand what you’re actually getting and what you’re paying for them. (For more on that issue, a rel=nofollowspan style=color:#003399;click here/span/a and a rel=nofollowspan style=color:#003399;here/span/a.) /p pBut even if you manage to get around the fee hurdle – and, in fairness, I should note that there are some annuity providers who charge much less than the industry averages – I still don’t think annuities are a good choice for someone like you. /p pWhy? Well, one reason is the way your gains are taxed when you withdraw them. You pay ordinary income tax on investment earnings regardless of whether those earnings are interest income, dividends, short- or long-term capital gains. If you’re investing for growth – as someone your age should be – you’ll likely have the bulk of your money in investment options within the annuity that generate long-term capital gains. /p div class=inStoryHeadinga rel=nofollowspan style=color:#003399;Money for life: The hidden costs/span/a /div pBut instead of paying tax on those gains at the long-term capital gains rate, which maxes out at 15 percent – as you would in a mutual fund held in a taxable account – with an annuity you pay tax at ordinary income rates that can go as high as 35 percent. /p pAnd if you withdraw your money before age 59 1/2, you’ll not only have to pay ordinary income taxes on your gains, but you may also face a 10 percent IRS early withdrawal penalty. (This is separate from any surrender fee the annuity provider might charge.) /p pSo given the fees and the way your gains are taxed, I don’t find annuities a very appealing investment for someone looking to build a retirement nest egg. Throw in the possibility of a 10 percent early-withdrawal hit, and I think the case for them is even more underwhelming if you think you’ll retire early. /p pSo where should you put your extra savings? My suggestion would be a tax-efficient investment like a tax-managed mutual fund or a broadly diversified index fund that generates most of its gains in the form of share-price appreciation. /p pUntil you sell, you’ll pay no tax on the rising share value. And as long as you hold this investment longer than a year, any gain you realize from the appreciation in the value of your shares will be taxed at the long-term capital gains rate, as opposed to ordinary income rates with the annuity. (For more on how tax-managed and index funds help keep your tax bill down, a rel=nofollowspan style=color:#003399;click here/span/a.) /p pTo sum up, I think you can do a lot better than an annuity with your $400 a month. At some point after you’re actually retired, you may want to consider investing some of your money in an immediate annuity to assure yourself an income you won’t outlive. /p pBut in the meantime, if someone wants to sell you an annuity, just say no.nbsp; a rel=nofollow href=#TOPimg height=7 alt=Top of page src=http://i.cnn.net/money/images/bug.gif width=7 border=0//a/p div class=cnnEndOfStorydiv class=cnnEndOfStoryContenta rel=nofollowspan style=color:#003399;About to retire? It’s all about the ‘safe money’/span/a /div/div div style=CLEAR:both;/div div id=quigo628div id=ad-754911 align=center style=BORDER-RIGHT:0px;PADDING-RIGHT:0px;BORDER-TOP:0px;PADDING-LEFT:0px;PADDING-BOTTOM:0px;MARGIN:0px;BORDER-LEFT:0px;PADDING-TOP:0px;BORDER-BOTTOM:0px; /div/div/div/div

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