I am starting a new thing this week and I am calling it “Dean Vagnozzi’s Scam Alert”. In this blog, I will be highlighting investment opportunities that I feel are not worth your while, especially in the economic environment that we are in now. If you have taken the time to read some of my blogs or posts in the past, 1) I thank you. And 2) You know how strongly I am against the 401(k) and IRA. Let me rephrase that … I feel there are MUCH MORE lucrative and safer ways to invest your money than those two well-known investment vehicles.
But that is not what I am writing about today.
Today, what I am going to talk to you about is annuities. Now do not get me wrong, annuities ARE SAFE. There are no securities violations when it comes to annuities that A Better Financial Plan can cry foul on. Dean Vagnozzi cannot claim that annuities are a fraud. You will NOT lose money investing in an annuity … (at least not the first year)… but more on that later.
However, what I CAN CLAIM about annuities with absolute certainty is that NOW is the absolute WORST TIME to invest in an annuity. That, my friend, is a fact. I feel so strongly about it that I’ve outlined all of the reasons why in this video.
But let me start by explaining what an annuity is (and then I will go into what it is not).
The definition of an Indexed Annuity according to Investopedia is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.
What is further, the income you receive from an annuity is taxed at regular income tax rates, not capital gains rates, which are usually lower. The goal of annuity is to provide a steady stream of income, typically during retirement. Funds accrue on a tax-deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59½.
Sounds harmless enough, right? In fact, for most people, I would venture to guess will say that it sounds great.
Well, here is the reason why it is not.
Let me begin by saying that there are many different types of annuities. All have various risks, although for the sake of argument, let us start with the ever-popular Indexed Annuity.
Indexed annuities fall somewhere in the middle when it comes to risk and potential reward. You receive a guaranteed minimum payout and a portion of your return is tied to the performance of a market index, such as the S&P 500.
According to this article, indexed annuities must guarantee a minimum of 1% to 3% interest each year on 87.5% of the premiums you invest, depending on prevailing interest rates at the time. So, if you invested $100,000, you might be guaranteed from 1% to 3% a year on $87,500.
Let me state that again. Annuity interest rates are based on the prevailing interest rate at the time.
Where are interest rates right now???
If you are thinking what I am thinking, you know what I am about to type. Right now, in this current economic environment, interest rates are virtually non-existent.
At worst you will be making 1% from your annuity investment, at best, perhaps 3%.
Now I do not know about you, but I want my money to work for me, not against me. And I certainly do not want it locked up for 10 years before I can even touch it… let alone make 2% when I finally can.
What is more, when you finally realize just how poor of an investment your annuity is and decide you want to pull out of the investment? You will be charge huge penalties.
While indexed annuities do not typically charge any up-front feeds, if you decide you want out of it, you will pay a fee, and a hefty fee at that. In fact, according to Fidelity.com, the average surrender fee for the 10 top-selling indexed annuities averaged 9%. That is well above the 1-3% you may be making while your money is sitting in this investment.
However, indexed annuities are also often criticized for their complexity and high fees compared with other kinds of investments.
If you’d like to learn more about annuities and why this is the absolute worst time to invest in them, I invite you to watch this video.
And it you would like to hear more about some opportunities that offer low risk, yet much higher rates of return, don’t hesitate to contact us. You can find all of the different ways to get in touch with us at abetterfinancialplan.com. Once we hear from you, we will educate you thoroughly on all the investment classes that we offer.