Rising interest rates are another
reason to avoid Equity-Indexed Annuities. If you are retired
or near retirement, don’t let yourself be talked into
purchasing an Equity-Indexed Annuity. If you do, it could
easily be a decision you regret for many years to come.
I’ve been called ‘a lone voice in the wilderness speaking
out’ about the dangers of equity-indexed annuities. It seems
that everywhere you turn there is an advisor or insurance
agent telling you an equity-indexed annuity is the greatest
thing since sliced bread. Don’t believe them.
I’ve talked at length in other articles about the hidden
dangers in Equity-Indexed Annuities. You can find those
articles at
www.guardingyourwealth.com,
but the 3 main reasons are (1) they needlessly require you
to lock up your money for a very long time, (2) the majority
of your returns are still based on the stock market and (3)
the commissions for selling an Equity-Indexed Annuity are so
high it creates a tremendous conflict of interest for those
recommending them. Rising interest rates are just one more
reason. Let me explain.
Equity-Indexed Annuities eliminate your flexibility and
control over YOUR money. In today’s post-9/11 world where
terrorism is a very real threat, it’s important that you
have the ability to make changes to and access all of your
money when you need to—without incurring surrender penalties
that can be as high as 20%! Locking your money into an
Equity-Indexed Annuity for 10-15 years causes you to lose
control of all but a small portion of it. Equity-Indexed
Annuities don’t offer enough reward in exchange for such a
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 is designed to come
from the stock market, not the guarantee. If you are willing
to invest in the stock market, I feel there are better ways
to do so which provide downside protection while allowing
you to retain complete control and flexibility. (Contact me
for more information.)
Rising interest rates is another reason you shouldn’t invest
in an Equity-Indexed Annuity. Over the past 3 years, the
thought of earning a 3% fixed return on your money didn’t
sound too bad. Certificates of Deposit at the local bank
have only been paying 1% or 2%. That’s made it difficult for
those relying on that income to meet their monthly needs.
Equity-Indexed Annuity salespeople have used this as a main
selling point.
But things have changed. The Federal Reserve recently
increased the Federal Funds interest rate by one quarter of
one percent. That may not sound like much, but it’s the
first time they’ve raised rates in four years. They also
signaled that the economy is heading in the right direction
and that they’ll continue to raise interest rates over the
next few years as necessary to keep inflation in check.
The interest rates available on Federally Insured
Certificates of Deposit (CDs) have already risen
significantly. You can earn almost 2.5% on a 1-year CD and
over 3% on a 2-year CD. The futures markets project that
Federal Funds interest rates could be as high as 3% by the
end of 2005. That’s means it is likely that you’ll be able
to get a 1-year CD for over 4% and a 2 or 3-year CD for 5%.
Think about it—if you can earn 5% on a short-term,
Federally-insured Certificate of Deposit, why would you want
to lock your money up for 10 to 15 years with a guarantee of
only earning 3%? Especially if you’d have to pay a penalty
that could be as high as 20% to get at more than just a
small portion of it! It just doesn’t make sense.
For those needing income, now is the time to be patient. Use
short-term investments like Certificates of Deposit that
mature in 1-year or less. When they come due, chances are
rates will be significantly higher and your patience will be
rewarded.
If you’d like me to answer specific questions about your
financial situation, feel free to email me at
jeff@guardingyourwealth.com
or call 1-877-827-1463. I regularly respond to readers’
questions and would be happy to answer yours.
Mr. Voudrie is a Certified Financial Planner, nationally
syndicated newspaper columnist and President of Legacy
Planning Group, Inc., a Private Wealth Management Firm in
Johnson City, TN.
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