Today's Top Ten Fixed Annuity Rates (MYGA)
What Variable Annuity Alternatives Exist?
This material is similar to that discussed regarding other annuity alternatives, which is also relevant to variable annuities#. Life has many choices and nowhere are there more voices competing for your attention than in the world of investing. There are many solid investments available. Conversely, there are also very bad investments in every financial category that exists. Investments and strategies are similar to ingredients in the kitchen. For the most part, it is not the ingredients that can be blamed for the terrible meal. It is the cook! Similarly when financial planning or retirement planning take place, it is normally not the investment’s fault but the incompetent or self-serving planner that used their influence to their client’s chagrin.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Each investment ingredient, when used properly, will complement the whole of the financial plan, thus creating if you will, a superb gourmet retirement, rather than a shortsighted distasteful one. Do not try to use alternative investments where variable annuities# are best. Likewise, do not use variable annuities# where they do not fit or give you a reasonable advantage. There are obviously financial vehicles that differ and yet they may each in there own way, at certain times, help accomplish the financial objective. If you have a larger portfolio, it is probably not wise to place most of it in annuities; however, if you have modest or moderate funds that you must rely on for present or future income, then having the majority of it in an annuity may be the best strategy. An alternative for the sake of an alternative with no solid rationale behind it will likely lead to a disappointment at best. Using a skilled financial planner/educator who knows how to really put the ingredients together can enhance your success. It is important, though, to know that the planner is competent and trustworthy. Do a serious background check and also check references before handing over any of your life savings. As you should know, there are a lot of fixed index alternatives to choose from. Here are a few to consider:
Variable Annuity Alternatives
- Certificates of Deposit
- Money Markets
- T Bills
- Savings Account
- Treasury Inflation Protected Securities
- U.S. Government Bonds
- Municipal Bonds
- Investment-Grade Bonds
- Junk Bonds
- Bond Funds
- Bond ETFs
- Preferred Stock
- Common Stock
- Managed Money Accounts
- Stock Options
- Real Estate Investment Trusts
- Mutual Funds
- Exchange Traded Funds
- Unit Investment Trusts
- Closed-End Funds
- Modified Endowment Contracts
- Investment-Grade Life Insurance
- Lump-sum or periodic contributions
- Invested in mostly high quality A-AAA bonds
- No risk to client. Insurance company assumes all risk
- Guaranteed interest
- Modest growth
- 3-6% interest crediting possible
- 1- to 15-year term
- Predictable, simple
- Guaranteed retirement income
- No annual fees
Fixed Annuity with Indexing Options
[FIA, Fixed Index Annuity]
- Lump-sum or periodic contributions
- Invested in mostly high quality A-AAA bonds
- Annual interest crediting risk to client. Insurance company **guarantees principal
- Higher rate potential based on index performance (such as S&P 500, Dow Jones, NASDAQ, etc.)
- Moderate growth
- 4-8% interest crediting potential; varies with index performance
- 3- to 14-year term
- Sophisticated, greater potential
- Guaranteed retirement income options
- Annual fees, minimal to none
- Lump-sum or periodic contributions
- Invested in sub-accounts chosen by client
- Principal and return risk. Client assumes investment responsibility
- Higher rate potential based corresponding investment risk
- Moderate to aggressive growth
- -5% to +10% return potential; varies with economic factors
- 3- to 10-year term
- Complex, greater potential risk
- Guaranteed retirement income; may fluctuate based on returns
- 2-5% annual fees
Immediate Annuity
- Lump-sum only contributions
- Invested in mostly high quality A-AAA bonds
- No risk to client. Insurance company assumes all risk
- Guaranteed income
- Minimal growth
- 1 – 3% internal rate of return
- 5- 10- 15- 20- 25- 30-year and lifetime terms
- Predictable, simple
- Guaranteed retirement income
- No annual fees
Common Annuity Benefits
- Safety: Backed by highly rated state regulated insurers
- Tax Deferral: Tax-deferred growth
- Higher Return: Better interest rates typically than CDs
- Life Insurance: Death payout **guarantee options
- Liquidity: Flexible withdrawal privileges
- Unlimited Contributions, unlike IRAs and 401(k)s
- Inheritance: Pass money directly to heirs by passing probate
- Lifetime Option: Income you can’t outlive (Annuitization or a Living Benefit Rider)
Each of the investment categories and the four listed annuities serve a particular purpose. It is important to look at your age, size of assets, future income needs, and inflation and then do a cash flow analysis over your life expectancy during retirement. This will help you choose which investment or annuity is right for you. Financial planner/educators can be valuable when you are close to making a decision on an annuity or an investment. Avoid insurance salesman that are just pushing their higher commission products.
Question: How high are normal surrender penalties on a 7-year variable annuity#?
Answer: 7% to 9% initially, then declining excluding any bonus that may not be vested.
Question: Why would anyone accept such a large penalty charge?
Answer: With proper planning, the surrender charge should never be exercised. To leave the money liquid in an account earning 2% less over the same 10 years will **guarantee a 31% penalty charge by default in a lost opportunity cost. Fixed index annuities normally allow 10% annual penalty-free withdrawals