Ask Terry Questions Fixed Indexed annuities?

Fixed Indexed annuities?

By Terry Savage on February 27, 2018 | Investments

Would securing a fixed indexed annuity be a good option for a couple in their early sixties, one option has a 10 year surrender charge, with a 5% penalty- free withdrawal once per year after the first year. The second option has a 16 year surrender charge with a 10% penalty-free withdrawal once per year after the first year The sales pitches seem to good to be true. We would like to be more conservative now that we are closing in on retirement, and would like to know what vehicles would be safe for seniors. We have heard good and bad about fixed annuities.

Terry Says

These sales pitches ARE too good to be true!  They don't explain everything.,  First tip-off is the word "indexed" -- which is typically a selling point promising you stock market gains with no risk.  The devil is in the details here.  You won't get the full stock market index return, typically no dividends (which over time is 40% of stock market total return). And "fixed" guaranteed interest rates on the base amount will look way too low in 10-15 years, as interest rates rise! Plus, when you withdraw there are all kinds of limitations and caveats.  So don't count on taking those stock market (hopefully) gains out in one lump sum.  You'll have to withdraw over time -- and who knows what the market value of your "account" will be in the long run -- especially since .  There may be a "high-water mark" guarantee -- but for sure you're paying for that in some way!  Even worse, these products are being sold to people who have no need for the tax sheltered returns -- because their money is already inside an IRA rollover account! How do I know all this?  I tested it out myself over a decade ago -- a relatively good time to do it because the rate guarantees were high, and the stock market was low.  Even so, the insurance company took advantage of something I hadn't anticipated -- and unilaterally moved my money OUT of the STOCK funds I had chosen and into the minimum low rate guarantee of about 2%!  (The insurer hadn't hedged the risk of a declining market -- and worried about its future obligations. They could do that -- and they did -- right near the bottom of the market decline!) The base investment has grown at a higher rate that was guaranteed, but I missed out on the stock market gains that would have been far better! There are a bunch of hidden caveats the insurers use to pay big commissions to the sales agents -- by restricting the rewards you thought you would get. The lessons that cost the most, teach the most.   That's an old Savage Truth.   And it's a lesson I'm passing on to you!  

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