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Annuities:  All They're Cracked Up to Be?  
Dear Friend,Catherine Head Shot

The start of 2014 has been a great reminder that the financial markets are unpredictable.   For example, the correction we had been preparing for in 2013 never occurred.   We had said many times that the stock market was moving upward as the result of quantitative easing (QE).   But while the economy is growing and it's not all bad, it certainly wasn't good enough to justify the outsized returns we experienced in the market last year.

 

Going forward, we expect market returns to be more subdued. The economy will continue to have pockets of strength and weaknesses, allowing us to move along, albeit at a slow pace. Until we see real fiscal reform that is business friendly, however, it will be difficult to meaningfully grow the economy. All of which is to say, when it comes to the financial markets this year, we can expect a bumpier ride.   

 

Times like these make us want to pull the covers over our head and run for safety.  It makes many ask about, or turn to, annuities.    But do your research first.    Annuities look great on the surface.  Who wouldn't want "guaranteed" income for life?  A deeper look, however, reveals much to be desired, especially in a low interest rate environment.

 

The companies we own continue to have excellent financial strength, strong cash flow, and are still increasing their dividends.  They have the fortitude to weather periods of uncertainty.  Please call if you have any questions.

 

Happy Valentine's Day!

 

 Signature

Catherine Maniscalco Avery

 

The backbone of CAIM is to employ a classic long term investment strategy including dividend paying stocks. CAIM is an independent, women owned investment management firm specializing in managing investment portfolios for women and baby boomers.

203.966.2712  p
203.966.5697  f 



February 11, 2014|  Issue No. 49
In This Issue
Annuities: All They're Cracked Up to Be?
Top 5 Financial Priorities 2014
Holiday Giving 2013
Quick Links
Find Out More
Call me at 203.966.2712
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Annuities:  All They're Cracked Up to Be? 

                                                                                                                       

As the life expectancy of Americans continues to soar, more people are searching for ways to also extend the lifetime of their investments.  One popular investment vehicle, used as a source of guaranteed lifetime income and a hedge against outliving assets, is the annuity.   An annuity is a contract between you and an insurance company in which, in return for a lump sum payment or series of payments, you receive regular disbursements, beginning either immediately or at some point in the future.www.investopedia.com

 

Before you rush out and starting buying annuities, however, it might be prudent to take a little time, do some research in order to understand the pitfalls of this particular investment vehicle.  In his recent article:  "Annuities vs. Bonds: Do the Math," Elliot Kass at www.financial-planning.com questions whether annuities are indeed the best investment.  He's backed up in this regard by Brian Rezny, a fee-only financial planner at Rezny Wealth Management in Naperville, IL, who argues that annuities are not only inferior but expensive.   


Why?   First, Rezny points to a 3% or less return on a 25-year investment with no inflation protection.   Then, he argues, while an annuity may offer an investor income for life, that income never increases.  And given today's levels of inflation, this means a return of less than 3%. 


Another point by Rezny:  the money a client does receive is generated from the money they used to initially purchase the annuity.  Since it takes around 15 years for an investor to get their money back, this does not bode well for older clients.    "If a client purchases the annuity at age 65, then he would be 80 years old before he actually begins seeing a return on his investment," says Rezny.  "Clients who live only to 81 or 82 would see almost no return at all."

 

Then there are the fairly hefty costs of holding annuities, ranging between 3.5% and 5% a year and further diminishing the returns.   A retiree whose annuity is earning between 5% and 7% (a fairly typical range, according to Rezny) is only receiving between 1.5% and 3% a year after expenses. Although they're structured and sold a bit differently, both the expenses and the returns are similar for variable and hybrids.    Most of his clients, says Rezny, would be better off simply buying U.S. Treasuries, which are far more secure and for which they would get a similar return without locking up their money for 20 years or having to pay surrender penalties.

 

At CAIM we agree that annuities pose a number of problems.  Not the least of these are lack of transparency, lack of liquidity, high costs and a lack of protection against inflation.  

 

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Your Top 5 Financial Priorities for 2014


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