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November 07, 2008


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Your suspicions about annuities being wildly expensive are true. If you're not especially careful, you'll offset any potential benefits by going with a high fee annuity.

If you've maxed out your retirement plans, IRAs, and any other tax-deferred options, then an annuity might be a good choice for more tax-deferred growth. Like you said, look for low-load or no-load annuities (I'd go no-load myself). Vanguard has some annuity options but I haven't looked closely at them. Another possibility is Ameritas Direct. You'll just have to look around.

I'd reiterate and strongly emphasize the point in the article about annuities being useful ONLY AFTER you've maxed out all other tax-deferred options. I have a feeling that many people with an annuity haven't actually done this and only own the annuity because a very smooth salesman talked them into it. That's the very reason why annuities have such a bad rep.

As far as I can see, the only real reason to buy an annuity (fixed) is at retirement, to convert some of your portfolio into a vehicle that offers a guaranteed rate of return.


You can choose to take the income stream (annuitize) or not. If you choose not to, then an annuity could be used to grow your money tax-deferred. It works like a Traditional IRA only without the initial tax deduction (plus higher fees).

A single premium fixed annuity can be appropriate for a retiree with low tolerance for risk, a small SS benefit, and no pension. The key is to keep some money in reserve for non-recurring costs. Even though annuities are costly compared to other investments, the peace of mind it can buy the nervous retiree also has value.

I'd agree that annuities are only an option to consider after fully funding all other retirement vehicles, and then only in certain circumstances. However, certain annuities can be a wonderful option for people with very large estates who want to leave money to a large number of people. It can allow you to leave money to people without it being considered part of your estate since you can name a direct beneficiary. Might be a great idea for anyone who has explored every retirement option already and is in more of an estate planning mode.


From an estate planning perspective, there are much better options for leaving part of your estate to many different people. For people with large estates you could look at a family limited partnership or LLC to get an additional discount so you don't pay as much in gift taxes. You could also use irrevocable trusts or just outright gifts.

You'd also have to be very careful using an annuity for this as any incidents of ownership would still cause it to be included in your estate. If it has a named beneficiary then it won't be subject to probate, but if you have any control over it whatsoever when you die then it will probably be included in your taxable estate (which is the bigger issue).

I can't speak for variable annuities, but I actually sell fixed annuities. Some companies have annuities that are very costly and do a good job at locking up your money (not a good idea). These are the annuities that give them a bad name.

The ones I sell have no fees, have a 5-10 year penalty period during which time you can access 10% per year penalty free. After the penalty period, you can access anything, no loads or fees. The fixed accounts are either a percentage that locks in (like a CD except 2-3 times as much interest), or Equity Indexed (when the S&P 500 goes up, so does your account. When the S&P 500 goes down, your account doesn't.).

Every company has different ones, these are the ones I know because I sell them. I think they are a personal choice, it depends on your situation as to whether they're a good idea for you. As with anything tax-sheltered, there are tax penalties if you take out any money before 59 1/2. Most people don't annuitize their annuities, they just treat them like any other investment. It usually isn't a good idea to annuitize them unless a person has to go onto wellfare because an annuity is still somewhat liquid.

I have been maxing out 401k and IRA and would rather invest extra in my taxable account instead of an annuity.

There is one very important point about annuities (fixed annuities not variable) that the post and comments failed to highlight. The return of principal in fixed annuities is guaranteed. Fixed annuities may offer a low rate of return, but that return is guaranteed. In light of today's environment, I wonder how many individuals who "maxed out their investments," would be happy if they could go back and put their funds in "boring" annuities? When an individual is facing retirement and has a lump sum of capital I would argue the annuity is the first investment, not the last. Annuities can be effective in providing a "safety-net" or reserve and income. Once that base of income is established then the investor is free to go hog-wild on risk investments.

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