The Scramble For The $$$$

Several of my clients have contacted me lately to ask my opinion on the “new” options for their 403b’s. These new options are annuity based investment plans, some straight variable annuities, while others have some limited down side protection [10% in the one I saw]. This is an ongoing pattern from companies trying to capitalize on the loss of confidence of Wall Street and it’s mutual funds, which have been heavily pushed for the last 30 years. We are still seeing outputs from mutual funds in general while equity mutual funds are the heaviest hit. Trying to capture those dollars is the name of the game for all financial companies now.

I have never been a big proponent of deferred annuities. Immediate annuities have a place for folks who want to assure themselves of a certain level of income for life. But deferred annuities in my opinion are more problematic. Variable annuities have the same problem as mutual funds with the big market downturns dramatically effecting outputs. But the biggest problem with deferred annuities is that they must be backed by short and immediate term products, which will give folks lower rates of return. The indexed annuities will always have much lower cap rates than the indexed life products for this reason. With an annuity the company must be prepared to give the money back at any time and therefore must use investing strategies that allow that type of liquidity.

Taxation

The other issue is that there is some taxation on annuities. Generally, any accrued interest will be taxable when income is taken.

For me, the deferred annuity is really no better than the current options most people have in their 401K/403Bs. It is being sold as a safer investment that beats the returns on certificate of deposit’s, but that is a pretty low bar to overcome.

For those who are in good health, Equity Indexed Life Insurance should be considered. Tax free income — low overall expenses — no negative years — and insurance that can protect one’s dependents or help heirs/designated beneficiaries.

BawldGuy Here: Please, do yourself a favor and don’t gloss over ‘no down years’. That factor alone is often the difference maker. Every time you have a down year in stocks or bonds you instantly climb onto the ‘investor treadmill’ runnin’ as fast as you can to get where you were before you had the ‘down year’.

For those who’ve never been on one, treadmills get you nowhere, but fast, and you get pretty tired during the process.

Related posts:

1. Equity Index Universal Life Insurance Is Not a Popular Financial Planning Vehicle
2. Why EIUL? Real Estate Investment Strategy
3. Real Estate Investors: How EIUL’s May Fit Your Purposeful Plan For Retirement
4. Who Stole My Retirement?
5. Comparing Apples and Oranges VS Real Analysis – It’s About AFTER TAX INCOME