give him a funny look when he admits he has one, said
Shane Fischer, 37, of Winter Park, Fla. Itís a trap,
they warn him. The fees will eat you alive. And besides,
arenít you too young?
Fischer, an attorney, did his homework before he bought
the product that he concedes has upsides and downsides:
advantage is my money can grow tax-deferred and I can
put more into it," Fischer said of his annuity.
"The disadvantage is I would pay a penalty on my
gains if I took the money out before Iím 591/2, but I
can afford to leave it there."
and without kids, Fischer said his annuity "is a
forced savings plan. Iím not tempted to get a new car
I donít need." He did the math and figured that,
despite fees, he will come out ahead by putting some of
his savings in an annuity.
misunderstood financial product, the annuity is
routinely trashed by the media. Many syndicated
financial analysts, in fact, tell their followers to
avoid annuities, period.
financial planner runs weekly, full-page ads in major
daily newspapers that read, "I hate annuities ...
and so should you!"
of the criticism is legitimate," said John
Robinson, of Financial Planning Hawaii in Honolulu.
"Annuities have a lot of warts and keep changing.
Even professionals have a hard time keeping track."
then, does Morningstar say annuities are a multitrillion-dollar
for some people, in some circumstances, theyíre
beneficial," Robinson said.
put, an annuity is a contract that says you make a
payment or multiple payments (your principal) to an
insurance company. You decide how the principal
accumulates (annuity-speak for growth), when and how you
will make withdrawals (take the money out) and if you
want to annuitize (receive regular payments).
your annuity is immediate, you receive payments right
away. If it is deferred, you choose the timing of your
a single-premium annuity, you pay into the annuity once.
With a flexible premium, you may make ongoing payments.
annuity is not for the commitment-phobic.
you take withdrawals prematurely, the insurer hits you
with a surrender charge. And, Uncle Sam slaps you with a
10 percent income-tax penalty on your gains if you
withdraw money before age 591/2. (Exceptions include
variable annuity is a bundle of mutual funds. You can
move your money from one fund to another within the
annuity, as you do in your 401(k).
fluctuate and you do not pay income taxes on the gains
until you take money out.
a bank CD, a fixed annuity gives you a guaranteed rate
of return for a specified amount of time.
fixed index annuity is a complicated-as-heck hybrid that
is linked to a stock market benchmark like the S&P
baby boomers do not have company pension plans like
their parents did, so buying a fixed index annuity is
like creating their own," said Jim Poolman,
executive director of the Bismarck, N.D.-based Indexed
Annuity Leadership Council. "You get a for-sure
income opportunity and you can participate in the stock
market volatility without suffering its losses."
the annuity can be used as a parking spot for retirement
money, the planners recommend maxing out your
tax-deferred retirement funds ó 401(k), 403(b), IRA
ó first to reduce your taxable income. If you are in a
high-income profession like Fischerís, though, you may
have more retirement savings than the IRS allows you to
sock away in these vehicles, so your other savings are
subject to taxes.
into an annuity, they can be tax-deferred, so you pay
the taxes after you are retired, when your income tax
rate may be lower.
you have college-bound kids, an annuity can help protect
your retirement money from being gobbled up by the
colleges your kids choose, said financial planner
Christina Povenmire, of CMP Financial Planning in
colleges now use FAFSA (Free Application for Federal
Student Aid) to determine how much money the family
contributes toward college," she said.
are among the assets FAFSA does not count when tallying
your estimated family contribution, she explained. (See
fafsa.ed.gov for a sample work sheet.)
client had two daughters in college, then inherited
money from his mother," Povenmire said. "After
he paid off his mortgage, we put the rest in an annuity
so it did not affect the girlsí financial aid. Now he
can use the money for his retirement."
feature of an annuity is its death benefit, or the
amount left behind for your beneficiary.
avoids probate court, where records are public, so it
provides some financial privacy for your heir or heirs.
annuity is progressing at a pace that would make Darwin
blush," said Robinson of new product offerings. Itís
no wonder the consumer can hardly track this changing
product, he said, "because even many experienced
financial planners cannot."
you sign a contract, make sure the insurance company is
highly rated by an outside organization like Standard
you doubt the credibility of your sales representative,
check his or her standing with your state insurance
your insurer goes belly-up, state insurance guarantee
associations may cover part or all of your claims.
you invest a substantial amount in annuities, the
experts suggest you choose several insurers.
"Beware of the salesman who tells you to put all
your eggs in one basket," Poolman said.
fees, commissions and charges, which are how the
insurance company and salesperson make money.
to your accountant about the annuityís effect on your
your time to compare annuity contracts before you choose
one that works for you," Robinson said. "But
if you donít completely understand it, donít buy