September 9, 2013

What makes fixed rate and variable annuities such poor investments? Why are they pushed so hard by financial “helpers”?

2 thoughts on “September 9, 2013”

  1. Cody says:

    Low rates of return, lazy investing.

    It might be beneficial to look at the other side of the case when trying to answer the first question. If you win the lottery, do you take the annuity or the upfront cash? Most generally, you would opt for the cash upfront. Why? In most cases you will be able to earn a return on that lump sum than you would have if you opted for the annuity.

    So, I would venture to say that annuities are poor investments for their low returns. Even variable-rate annuities only serve to “hold you back.” These will only give you a certain amount over prime, where an equity investment would tend to offer a higher return. To consider an annuity would be the equivalent of a savings account.

    This leads to my case for the second question. I believe that financial “helpers” would be prone to this type of investment. While the return is much less than to be had elsewhere, the investment requires little work on their part. If the annuity is asset-backed, there is little recourse to be had from financial losses – e.g. They can play it safe, and not be responsible for a loss or low return from an equity investment.

  2. Mike Finley says:

    Nicely said, Cody. Let’s take a look at an example that happens far too often to far too many people. The broker/financial advisor/life insurance agent convinces you to invest your money into a fixed or variable rate annuity because of the “guaranteed” return and tax shelter. What he is not telling you is he will earn very high commissions (6% to 10% is quite normal) by selling that investment and you will pay very high yearly fees (3% or so in fees cover the cost of paying salespeople to pawn off these poor investments). Annuities also lock your money up causing you to pay penalties if you ever want to get it back before retirement. Everyone wins, except YOU.

    Stay away from variable and fixed rate annuities. How? Stay away from the salespeople who sell them. It really is that simple. If you want to grow your money over time stick with those very cheap (.2 or less in yearly fees) no-load index funds (no commissions) at a place like Vanguard. Your company retirement plan? Identify widely diversified index funds and feed them monthly. Stay away from fixed and variable annuities! To learn more, watch this video:

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