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Aug. 18, 2018, 7:57 a.m. EDT

Why annuities are a bad idea for almost everyone

You’re betting the insurance company that you’re going to live longer than they think you will

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By Marc Lichtenfeld

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If these were such wonderful products, as defenders of annuities will maintain, why did so many people stop selling them — even before the law went into effect?

So why do people like them?

Fixed annuities prevent losses. You are typically guaranteed that the value of your principal will not go down regardless of what the stock or bond markets do.

Fixed index annuities allow the investor to take part in some upside, though it is usually very limited — about 4% per year in this low interest rate environment. So the investor is trading upside potential for downside protection.

If the market soars 20%, the investor will only make 4%. But if the market falls 20%, the investor won’t lose any money.

Another way they screw you

Let’s say you take out an annuity and your circumstances change. You need the money urgently. If you’re still within the surrender period, it’s going to cost you. Big.

A typical surrender period is seven years and the surrender charge starts at 7% and falls by 1% per year.

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So if after two years, you need your money back, it’s going to cost you $10,000 ($200,000 x 5% = $10,000) to get your own money back.

Instead, take the money and invest it in Perpetual Dividend Raisers — companies that raise their dividend every year.

But I don’t want to risk any money, you say. After all, that’s one of the most attractive features of annuities.

Annuities are typically long-term contracts. People buy them in their 60s, 70s and even 80s, expecting to collect income for years in the future.

Consider that over 10-year periods, the stock market has only been down seven times in the past 80 years. And those seven times all were tied to the Great Depression or Great Recession.

In other words, you had to sell in the depths of historic financial collapses to not make money in the stock market over 10 years.

If you invested in 2000, near the top of the dot-com bubble and sold in 2009, near the bottom of the Great Recession, you were down 9%. Not good, but not horrendous considering you endured two epic stock market meltdowns.

Or consider this scenario… If you have the worst timing of any investor and put your nest egg into the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.79%   at the absolute top in 2007 — right before the financial collapse — you’d be up 91% (including dividends) 10 years later.

Just stop and think about that the next time market naysayers talk about the “Wall Street casino.”

As an industry saying goes, “Annuities are sold, not bought.”

Don’t be one of the people who gets sold.

This article is condensed from a chapter in ‘You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners’ .

Marc Lichtenfeld is the chief income strategist at The Oxford Club and the author of ‘You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle Without Getting a Job or Cutting Corners’ and ‘Get Rich with Dividends: A Proven System for Earning Double Digit Returns’ .

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Dec. 5, 2022 5:05p

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