The Fixed Indexed Annuity Comparison

During eight five-year periods starting in 1997 through 2004, data shows that the FIAs (Fixed Indexed Annuities) looked at offered an average annualized return of 4.19% to 9.19%, with no negative years. By contrast, an investor in the S&P500 would have seen four positive five-year periods and four negative ones.

Making The Case for Fixed Indexed Annuities
By Kerry Pechter Tue, Aug 24, 2010
Retirement Income Journal

Read the rest of the article... click on the link below:

http://retirementincomejournal.com/issue/august-25-2010/article/making-the-case-for-fixed-indexed-annuities

Is an Annuity Right for Me?

In the past, annuities were considered investments only for people nearing retirement. But today, annuities can be smart investments for people of all ages. Remember, an annuity can be invested in a variety of different investment instruments, offering everything from modest to fast capital growth alternatives. The following are good uses for annuities:

1. You need a higher interest-rate alternative to Certificates of Deposit(CDs) and money market funds

2. You want to make your long-term savings grow faster without current taxation.

3. You need to save more for retirement, but you have "maxed out" your IRA and 401(k) or 403(b).

4. You need to roll over (reinvest) existing tax-deferred savings, like pension plans.

5. You need to guarantee yourself an income for the rest of your life.

6. You need to guarantee yourself an income for the rest of your life and your spouse’s life.

7. For purchasers of a special type of annuity called an Equity Index Annuity, You want to protect your "principal" with a guaranteed rate of return while investing in the equity markets.

TOP TEN REASONS YOU DON’T NEED A LIFETIME ANNUITY

10. You still live at home and your parents have yet to cut-off your allowance annuity.

9. You grow your own food, make your own clothes, and barter for other needs.

8. You have extremely successful adult children who gave you a platinum American Express card for Christmas with a $100,000 credit limit.

7. You worked in Congress for a year and are now guaranteed that salary for the rest of your life.

6. Your closest friends refer to you as “The Donald.”

5. Your new money manager has promised you that everything is back to “normal” and he will earn you 8% annually, after inflation, for as long as you live.

4 You just received a life sentence without parole and feel confident in the stability of our prison system.

3. Your trust fund could feed a small country.

2. You live in a warm area, wear shorts and flip flops, eat wild nuts and berries and know you can live on Social Security’s after-tax $12,000/year.

AND, THE NUMBER ONE REASON YOU DON’T NEED A LIFETIME ANNUITY

1. You thought money trees were a joke until you found one in your back yard!!

Annuities vs CDs

Once upon a time, CDs were THE WAY TO GO. They offered short-term, liquid accounts. However, while the world of principal preservation options has advanced, the mindset about CDs has not changed for many people in, or going into their retirement years.

Annuities and CDs (bank certificates of deposit) are similar in that they are safe, secure investments with guaranteed rate of returns based on interest rates, both issued by large financial institutions, CDs issued by banks, Annuities offered by insurance companies, but they both possess inherent differences as well. The big differences are that while Annuities offer everything CDs offer, they carry several advantages.

1. Generally Higher returns
2. Tax-Deferral
3. Liquidity
   

CDs do have FDIC protection to guard against Bank or banking industry failure, but Annuities also have safety measures put in place by the state to ensure Insurance companies have reserve pools in place. Insurance companies may also be vetted for financial strength by obtaining their rating from objective rating firms -- Standard & Poor's, Moody's, A.M. Best or Duff & Phelps . The more solid the rating usually equates to a more solid financial backbone of Insurance Company. Higher Returns: Annuities, like CDs, are hinged to interest rates. But when rates are low so are CD returns whereas annuities have a minimum guarantee in place, usually 2% to 4%.

Your investment will never dip below the guaranteed minimum interest rate during times of falling or low interest rates. Again, low interest rates mean CD returns will be low as well. To offset the problem of low or falling interest rates, insurance companies equip annuities with guaranteed minimums. This is an agreed minimum rate of interest so that your investment is assured not to fall below the minimum performance even if CD rates do. Tax-Deferral:You pay annual taxes on CD interest earned without being able to withdraw funds until your investment term is over. With annuities, there is also a set term, but the earnings are tax-deferred.

You only pay taxes on interest earned when money is withdrawn. So with annuities the deferred tax on your interest remains in the investment earning you more and more money, instead of being paid out to state and federal tax agencies on a yearly basis. Liquidity:CDs do not allow you to withdraw any monies during term... period. Annuities have provisions that allow you to withdraw money, generally 10% of your account value annually plus many contracts allow you to remove the earned interest on a monthly basis.

Several other contract provisions allow you access to all of your funds such as in the event you are hospitalized, undergoing a life-threatening illness, subjected to a permanent or extended stay in a nursing home, or other major calamities that affect you economically. In addition, annuities can be structured to pay-out for the life of the owner over a fixed term such as five or ten years, thereby spreading out your tax-burden and providing enhanced income security.

In short, Annuities offer enhanced flexibility.

Portions borrowed from Annuity.com

The Single Premium Immediate Annuity (SPIA)

A single premium immediate annuity offers an income stream that will last as long as the annuitant (or joint annuitant, if that option is selected) lives or for a predetermined period, depending on the option selected at the time of purchase. The fixed immediate annuities include nominal, graded and inflation-adjusted payment options. There is also a variable option in which the payout is determined by the returns on the investments chosen by the investor.

In exchange for these payments, the annuitant surrenders a specific amount of money to the insurance company. These payments can be based on a single or joint life. Normally this purchase is irrevocable, and the money used to make the SPIA purchase is not available to one's heirs, even if the annuitant dies shortly after purchasing the annuity, unless a predetermined payment period was selected. However, selecting one of the available term-certain payment options will result in lower payments.

An SPIA is probably one of the easiest annuity products to understand. You give the insurance company a specific sum of money in exchange for an income stream that you can't outlive. The SPIA can offer peace of mind in bridging income shortages. For example, if a retired couple needs $4,000 per month to cover their living expenses, and Social Security and pensions provide $3,000 per month, they could purchase an SPIA that would pay out the needed $1,000 per month for as long as either one of them lived. However, they would need to keep in mind that most annuity payments aren't indexed for inflation, so over the long term, the spending power of that $1,000 would decrease.

Should the couple choose to purchase one of the few inflation-indexed SPIAs available, they'd have to either pay a higher premium or receive a lower initial payment. And since inflation-indexed annuities are only offered by a few insurance companies, there's not a lot of competition to help make those rates attractive for the annuitant. Finally, it's important to remember that the return of your principal is included in the promised payment stream.

An SPIA can also provide a "bridge" that could allow an investor to delay taking Social Security until later in life. Doing so could mean larger Social Security payments to both the recipient and his/her spouse. Boglehead Ron explained his use of an SPIA this way: "In our case, we used it as ‘SS gap insurance' since I retired at 59 but will not claim SS till age 70 (primarily for the benefit of my wife)."