In a recent CBS MarketWatch program entitled - 'Safe' Investments - How Risky Are They? - editor-at large Jill Schlesinger promulgated at least four ideas about fixed indexed annuities that are either misinformed or entirely disengenuous. Let's consider at least four points that were made in this program and learn whether they are FACT or FICTION.
#1 - According to Ms. Schlesinger, "if it (the market) goes down, well, you won't get hurt as badly (with a fixed indexed annuity)."
This is a FICTION. In reality, if the market goes down, you won't get hurt at all with a fixed indexed annuity.
Fixed annuities pay a stated amount of interest, much like a bank CD, and are entirely unaffected by the market. Fixed indexed annuities do participate in market gains through indexed returns, still the worst case scenario is that one earns nothing at all - zero. So when markets dip or freefall as they have in 2008 and 2009, not one penny of investment principal is lost in a fixed indexed annuity. In fact, this is perhaps the most important features of fixed indexed annuities - SAFETY OF PRINCIPAL.
#2 - Ms. Schlesinger also said that annuities have "a big cost, huge cost - two to three times more expensive than mutual funds."
This, too, is a FICTION. In reality, fixed indexed annuities are much cheaper than their mutual fund counterparts.
This statement truly comes out of left field, or maybe even further. To begin with there, there are no sales fees incurred by an investor when purchasing a fixed or indexed annuity. Sales commissions are paid separately by the insurer and 100% of the premium deposited into an annuity goes to work on Day 1 the policy is in force. There are no up-front or back-end loads, no 12-b-1 marketing fees, account fees, investment management or wrap fees as are typical of securities products. Given the churning, reallocation, capital gains and myriads of fees associated with securities products, their managers, and their advisors, fixed indexed annuities provide a much less expensive alternative to mutual funds.
#3 - Ms Schlesingler stated that with an annuity "your money has to stay in this investment until your 59 1/2" and "if you need your money before then, there is a massive penalty".
There is some truth to this statement, but when considering an annuity as a stand-alone solution, this statement is also a FICTION.
Look, if an annuity is held within a qualified account like an IRA or a 401k then, yes, one may not access either the account principal or growth until age 59 1/2 without substantial penalties and income tax - but this is true for any qualified money whether it's held in cash, stocks, bonds or any other investment.
On the other hand, if an annuity is not held within a qualified account, there is complete access to all of the principal and growth at the end of the contract term. And this is true whether you are 30, 40, or 50 years old. Of course, since the earnings within an annuity are tax deferred, taxes on the gains must be paid when they are withdrawn. Still you will have access to your money regardless of your age.
#4 - Lastly, Ms. Schlesinger states correctly that "most people are investing for the long term," but then adds, "but you want access to it (your money) if you need it. This (an annuity) will not give you any access to your money."
To be sure, annuities are not liquid like a savings or money market account. Never the less, almost all annuities provide for an annual free surrender - an amount the policy holder may withdraw without penalty. This surrender often equals 10% or more of the initial premium invested or more.
Furthermore, many insurers now offer a Return of Premium feature. In exchange for a slightly lower rate of return, this provides the policy holder with access to all of the investment prinicipal at any time and without any penalty.
Let's be clear - fixed indexed annuities are not a silver bullet solution for all investment needs, never the less they should be considered a part of a comprehensive retirement strategy. And remember, annuities offer several key features that qualify them as truly "safe money" investments:
- Guarantee of principal
- Tax deferral
- Guaranteed income that one may never outlive
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