Equity Indexed Annuities (EIAs) have become the hot product in the afternoon. I think you can easily find other alternatives offered a better return, without locking up your money or surrender penalties perception stronger. I will discuss these alternatives in the next two articles. But first, you must understand two things: its purpose to invest and how the work of the EIA.
Know why you are investing. For simplicity we consider two objectives – the stability and growth. If you is mainly concerned about protecting their investment and earn a stable rate of return after his main objective is stability. On the other hand, if you are concerned about protect against rising prices, building a reserve for retirement or growing your wealth, then their main objective is growth.
It is unlikely that their goal will be 100% stability or growth of 100%. Usually, will be a combination of both. For example, if you are 55 years of age and preparation for retirement, perhaps you'd like about 40% of their portfolio invested in 'stable' investments such as bonds or CDs, and 60% invested in stocks, such as mutual funds.
Moreover, if you're 75, the stability may be more a problem for you. You still want to plan for inflation, but its aim is very different from a person 55 years of age. You could have 70% in stable investments and only 30% of your money in stocks.
Such EIA been told are the perfect answer. Sold as delivering stability and growth. The vendors say you can participate in the growth of the stock market without risk, although it is always earn a minimum of 3%. It appears that the EIA will help you accomplish both. On closer examination, however, will not do well very well.
EIA is said to provide stability because they provide a minimum return of 3%. Say that in perspective. In return for the 3% minimum required to keep their money in the investment for many years, or fined in some cases could be the equivalent of more than 3 years the return value!
Moreover, that 3% minimum does not change with the length of the investment. If interest rates increase during the 7 to 12 years, you can not to take advantage of them. Imagine how you would feel if he knew he could be earning 5% or 7% on a CD or government guaranteed bonds, but you were stuck in an EIA pay 3%! The stability of an EIA states that simply is not up to it.
So let's take a closer look at the growth offered by the EIA. By Generally, your investment choices are limited to the S & P 500, NASDAQ, or an index-linked bonds. But EIA put a limit on the amount earned. If These indexes up 25% or 50% as they did in 2003, can earn only 10% to 12%.
EIA only allow only participate in part of the return of index, or have internal charges of 1-2%. Even if the underlying index goes up 10%, performance will be lower. This makes sense when you realize the need to make sure again the huge commission paid to the agent. The insurance company can not afford a minimum of 3% in bad times and let him get 100% of the lap in good times.
Thus, in an EIA, to assume the risk of investing in the stock market, but do not get all the way around. Do not stack the deck against yourself. By investing on actions that should have access to thousands of options, and get all the way around.
The bottom line: why trap yourself in an investment greatly limits its growth potential and shackles with outrageous surrender penalties, all for a measly 3% promised return, while his agent walks away with a 10 or 12% commission? No matter what you need to divide your portfolio between stability and growth, believe me, there are much better ways to manage their money. I will talk about them next week.
Get Safety, Control, & Growth for Your Retirement
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