Naked Truth Investing: Deferred annuities: Your best interests are deferred–for
Posted by: admin in Money and Finance NewsFiled under: Columns, Money and Finance Today, Personal finance
This is the part of a new series of columns called “The Naked Truth,” by retirement expert Dan Solin. Please
bring him your questions, in the comments box, and he’ll answer as many as he can.
Question: What are your thoughts on deferred annuities?
Answer: I think they are great…for insurance salesman (big commission items) and insurance companies (little risk; massive reward).
For most investors they’re an costly and ill-suited product.
Let’s disassemble the sales pitch and see what lies underneath these products:
The much-hyped “death benefit” really isn’t much of a benefit. The guaranteed benefit is calculated as the value of your contributions, minus any withdrawals. You are funding your own “death benefit.” There is tiny possibility of the guarantee coming into play. How likely is it that the value of your account at the time of death will be less than what you originally invested?
The cost of this “benefit” is typically 1.25% for the life insurance portion. According to one leading study, this fee should be closer to 0.15%, making this expense 800% higher than it should be!
Tax deferral is the large selling point. Is this really a benefit?
If you’re buying the annuity within a 401(k) or a 403(b) plan, the appreciation on all investments is already tax deferred.
When you withdraw the money from the annuity, you’ll be taxed at ordinary income rates in effect at that time (and who knows what they will be?), instead of the historically more favorable rates applicable to long-term capital gains and qualified dividend income.
The bottom line is that the vast majority of investors would be far superior off investing in a properly allocated, globally diversified, portfolio of low cost index funds.
Dan Solin is the author of The Smartest Investment Book You’ll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You’ll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com
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