Tony, Could you explain to the members here the difference between Annuities and bonds, and what the advantages are of putting your money in annuites rather than mutual funds or stocks. Thanks,
Well Seth, I could probably write an entire book on that question...no joke! But I will do my best to give a simple and straight forward answer.
The difference between annuities and bonds:
Bonds are debt instruments issued by companies and the government to raise money. AS a result, the issuer offers the investor the opportunity to earn a stated rate of interest for their time (bonds are generally issued for 1 year or longer). The bond can be tax free (such as a municipal) or not. Furthermore, depending on many factors, during the life of the bond, the value of the bond may increase or decrease. For example, if a bond is issued paying 4% and and rates go up during that time, the value of the bond may decrease. That doesn't mean an investor won't get his money back at the end of the term, but it means that if he wanted to sell prior to maturity, he would have to take less money than what he paid for it. Also, bonds are affected by many other factors including the strength of the issuer, the economic state of the issuer, as well as many other variables.
Annuities, on the other hand are issued by insurance companies. They are tax deferred vehicles (by nature) that are similar to IRA's in the respect that once the money is in, the gains coming out are treated as income AND you can be penalized when pulling out gains prior to 59 1/2. Annuities can be purchased in IRA's also. The obvious thing to mention here is that their 'tax deferred' feature is not a benefit when purchased in IRA's. With that said, the way they work depends on whether it is a fixed or variable annuity. Fixed annuities pay stated rates of interest (depending on what kind of fixed annuity they are). Variable annuities allow you to invest in a group of mutual funds (and money markets) offered by that particular annuity. Both types of annuities offer a 'death benefit' meaning what you put in is what your beneficiary gets minus penalties and withdrawals.
Annuities are not designed to be short term vehicles. They are generally thought of as 5 years or more (although they may possibly be shorter) where as bonds can be purchased in durations of 1 year (and sometimes shorter on the secondary market). Annuities are NOT investments and therefore can not be sold on the secondary market like bonds can. Therefore, if you have an annuity paying a stated rate of interest and rates go up, the value of the annuity stays the same (it really has no secondary market value), however, you just have a vehicle paying less than the market (and other annuities at the time) is paying.
Why someone would want an annuity as opposed to a stock or mutual fund is also a question that could take some time to answer but let me give a short explanation.
A variable annuity may be purchased by someone who wants to actively trade mutual funds without getting taxed on the sale and purchase of mutual funds. The reason is because in a variable annuity, one may actually switch between funds without getting taxed (one huge benefit of variable annuities, although they have their detriments as well). Furthermore, as I say in 'The Shocking Truths', a variable annuity may also be right for a 'dying gambler'. Variable annuities have a death benefit equal to the amount invested (less any withdrawals and penalties). THerefore, if an investor put in 100K and invested poorly taking their account value down to 40K, the death benefit would remain at 100K. This is a HUGE potential advantage of variable annuities. HOWEVER, REMEMBER THAT AN ANNUITY IS ONLY AS GOOD AS THE INSURANCE COMPANY BACKING IT UP. Also, variable annuities can come WITH HEAVY FEES. I am only a fan of variable annuities in very limited circumstances---even the living benefit is something to be leary of...
Now fixed annuities can be used in a portfolio for 'safety'. When I think of fixed annuities, I generally think of a portion of an investors portfolio that is 'long term' safe money. It is money that one can count on being there in the future and be relatively certain that there will be some sort of return. ALL FIXED ANNUITIES HAVE A MINIMUM GUARANTEE. Therefore, no matter what, one can be assured (if held to term) that their will be more money than what he started with in a fixed annuity.
So let me give a couple of specific pieces of information to sum this up.
Annuities can be used if someone is completely maxed out on their tax deferred vehicles (401K's, IRA's, etc) and is looking for more tax deferral.
Annuities can be purchased by investors looking for particular guarantees.
Annuities can be used in IRA's if used for the right reason.
Annuities can be purchased if someone is more comfortable with the fact that their money is with an insurance company as opposed to being backed up by our Federal Goverment (yeah, scrutinze this comment if you want but Insurance Companies are running the show in this country if you haven't noticed)
Annuities can be purchased by people prior to age 59 1/2 but they must understand that the money must be thought of like IRA's...BETTER BE MONEY THEY DON'T NEED BEFORE 59 1/2.
Although annuities are tax deferred, TAX DEFERRAL should be approached with caution as it can cause future problems.
Annuities should be purchased with caution and from a professional who knows what the heck he's doing because they have great advantages but huge limitations if used improperly.
So again, this is just a small explanation of your question so I hope that helps. There are so many more facets but again, maybe this is a good start to answering that question.
IF there is a more specific part of that question you want answered, please let me know.
Hi Tony we (my wife & I ) just signed up for a 1035 transfer to take our fixed annuity,paying 3.65%,with Prudential, to Fidelity & Guarantee Life Ins Company .This is a Index Annuity with one year monthly point to point based on the S&P 500 index.We also get 1% bonus on ourv money per year .The annuity is for 6 year duration ,as I am 67 & my wife is 66.They also have 8 ,10 & 12 year plans with the same yearly 1% bonus given each year of the contract.
Please give us your thoughs on this Fidelity Index Annuity .Is it good ,bad or ?
Cooldad>>>In general, F&G has come out with annuities that meet our criteria. HOwever, I would like to follow that up with something. Since everyone has a different situation, I can not attest to whether this annuity is right for YOU. That would depend on many different circumstances and what your goals for that money were. So, again, we have seen good products come out of F&G however, whether they would be good for you would be dependent upon what you are trying to accomplish and whether that annuity can do that for you.
Vince----I think it would only be fair to say that it's hard to compare money markets or savings accounts to annuities. Annuities tend to have longer durations and less liquidity and are used for money that is not needed at the present time. With that said, I will give you an idea of a couple of annuities available today. The best I saw today was a 5 year annuity that paid a first year of 5.25% and 4.50% for years 2 through 5. Remember, this is also tax deferred. And you must remember if you are less than age 59 1/2 it is unlikely that an annuity for short term investing would be a good idea (although not impossible depending on your situation). So bottom line is, to compare it to your money market may not be a fair comparison but hopefully this gives you an idea of what annuities can do relative to savings accounts.
There are also annuities that pay a one year rate and renew each year for the duration of the contract with a minimum guarantee for subsequent years. These are often beneficial in a rising interest rate environment....Hope this helps!!!
Thanks Tony. Reason for the index annuity is to take advantage of the potential increase in the S&P 500 ,for 6 years. You mention a one year annuity interest at 5.5% with subsequent years at 4.5% .Who puts out that annuity & what is the contract term.I am interested for new money. TIA
No I am not personally invested in annuities. I am a 33 years old with ALL of my capital invested in offline and online businesses. I am extremely aggressive in nature and therefore, annuities do not fit my profile whatsoever. I am too young for annuities, too aggressive for fixed annuities (what I believe in for the conservative people I deal with), and am not fully maxed out on my tax deferred accounts such as IRA's or 401K's in order to take advantage of them.
With that in mind, your question leads me to a thought.
Many times, prospective investors I meet with share their portfolios with me. And I always ask them why they are invested in what they are invested in. And many times, the asnwer is, 'my broker is invested in this.' And my answer is, what does that have to do with your situation.
I answer this way because in my book, I tell everyone that that is the WORST reason to invest in something. It doesn't matter what ANYONE else is invested in. What matters is a person's situation and what is right for them.
So pure and simple, investments are personal. They should be tailored to one's situation, annuities inclulded. And what's right for one is not necessarily right for another. And an annuity that is perfect for one person may be a tragedy to another person.
So with that in mind, always remember that what you invest in should FIT your needs. If the broker tells you he has money in this, or his mother in this, just look at him and ask him---'What does that have to do with me?'
Tony, I'm wondering that because the interest rates in Annuities are not fixed, and can fluxuate over time, wouldn't bonds be a better investment, or are the majority of Annuity rates generally higher than that of bonds? For example, if I wanted to maximize my return with a significant amount of security for a 5 year investment, should I go Annuities or Bonds. What about a 10 year investment? Thanks,
Great question....the answer is, it depends. Again, annuities are ALWAYS tax deferred. Furthermore, they act as IRA's as far as withdrawal penalties prior to age 59 1/2. With that aside, it depends on the type of bonds and the credit rating. You can move down in credit rating and buy higher paying bonds but you may be faced with some risk of losing your money. You can go with gov. tax free bonds (municipals) and maybe get a rate equivalent or higher than annuities depending on your tax bracket.
Annuities on the other hand can be completley fixed for the duration or fixed for one year and then fluctuate. At any given time you can find annuity rates higher than bonds and vice versa. On the other hand, if rates move against you in bonds, and you need your money, you may definitely take a hit to your principal. Again, investment objectives are paramount here. It really takes a GOOD professional to help you discern what is right for you and your situation. Unforunately there are no hard fast rules as to what is better or worse...IT depends on your situation!
I have a full time job. A friend of mine want me to attend a seminar on Variable annutiy and want me to become an agent. He said to me that I can deduct my rent expense, gas and lunch, trip as part of business expense. He also told me that I can build a tree so that I can earn huge commission. I need to take series 6 and insurance test. It sounds to be too good to be true. Could you advise me on this, thanks
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Hi Tony we (my wife & I ) just signed up for a 1035 transfer to take our fixed annuity,paying 3.65%,with Prudential, to Fidelity & Guarantee Life Ins Company .This is a Index Annuity with one year monthly point to point based on the S&P 500 index.We also get 1% bonus on ourv money per year .The annuity is for 6 year duration ,as I am 67 & my wife is 66.They also have 8 ,10 & 12 year plans with the same yearly 1% bonus given each year of the contract.
