Rising interest rates are another reason to avoid Equity-indexed annuities. If you are retired or near retirement, do not be spoken in the purchase of an Equity-Indexed Annuity. Doing so could easily be a decision you regret for years to come.
I've been called 'a voice alone in the desert talking about the dangers of equity indexed annuities. It seems that everywhere you turn there is an advisor or insurance agent telling an equity-indexed annuity is the greatest thing since sliced bread. Do not believe them.
I have spoken extensively in other articles about the hidden dangers in Equity-Indexed Annuitiea, but the 3 main reasons are (1) that unnecessarily require to lock up your money for a very long time, (2) most of his statements are based on the market yet values and (3) commissions selling annuity Equity Indexed are so high that it creates a tremendous conflict of interest for those who recommend them. Increased rates interest is another reason. Let me explain.
Equity Indexed Annuities eliminate your flexibility and control over their money. In the post-9/11 world today where terrorism is a very real threat, it is important that you have the ability to make changes and access all your money when you need it – without incurring surrender penalties that can be as 20%! Block money in an equity indexed annuity 10-15 years makes you lose control of all but a small part of it. Equity Indexed Annuities not offer enough reward in exchange for such long-term commitment.
The main selling point of an Equity Indexed Annuity is the ability to participate in the return of the stock market but have a 'guarantee' that your money will earn at least 3%. The performance of these investments are intended to come into the stock market, no warranty. If you are willing to invest in the stock market, I find better ways to do so to provide protection to the downside, while what can maintain total control and flexibility. (Contact me for more information.)
The increase in interest rates is another reason that should not invest in an equity indexed annuity. In the past 3 years, the idea of getting a fixed return of 3% of your money does not sound so bad. Certificates of Deposit at the local bank have been paying only 1% or 2%. That made it difficult for those dependent on such revenues to cover their monthly needs. Equity-Indexed sellers Annuity have used this as a major selling point.
But things have changed. The Federal Reserve recently raised the interest rate for Federal Funds one quarter of one percent. This may not seem like much, but it is the first time they have raised rates in four years. He noted that the economy is going in the direction correct and that will continue to increase interest rates in coming years as necessary to keep inflation under control.
Interest rates available in federally insured certificates of deposit (CDs) have increased considerably. You can earn almost 2.5% on a 1-year CD and over 3% in a 2-CD year. The proposed futures markets that the federal funds interest rates could be as high as 3% in late 2005. That means it's likely that you can to get a 1-year CD for a more than 4% and 2 or 3-CD for a year by 5%.
Think about it – if you can earn 5% in the short term, federally-insurance certificate of deposit, why would you want to lock your money up for 10 to 15 years with a guaranteed win only 3%? Especially if you have to pay a fine that could be as high as 20% to reach a part of something more than a small part of it! It simply makes no sense.
For those who need the income, now is the time to be patient. Use the short-term investments such as certificates of deposit that mature in 1-year or less. When due, is likely that rates will be significantly higher and patience will be rewarded.
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