We want to warn people about certain annuities. The variable annuity, for example, is something we hope nobody ever buys. The variable annuity is where the broker makes about 8% commission up front, he gets paid every year you own it, the insurance company gets paid every year you own it, and the mutual fund companies get paid every year you own it. Three layers of fees that usually add up to 5% to 7% before you make a dime. Variable annuities under-perform in up markets, due to high fees, and typically lose more money than market indexes in a down market due to high fees. The way these are sold is the agent tells you that variable annuities offer an opportunity to invest in the markets with a guarantee. What they fail to tell you is that you have to die to get that guarantee. The guarantee doesn’t help you while you live. There is a saying that, “variable annuities aren’t bought; they are sold” meaning that if anyone actually knew about all these fees they would never buy one.

Income annuities, life annuities, and income riders are also something that we warn people about. Let’s say that I am 65 years old and retiring from company X. I have a choice of taking $250K in lifetime pension income or I can take $200K lump sum. Sadly, many will think that because $250K is the larger number, that it is the better option. So I tell company X I want $250K for life. Company X actuaries figure I will be around 20 years so $250K divided by 20 years is $12,500 per year for life.

What have I just done?

Now I am paying an insurance company to give me my own money back at the rate of $12,500 per year and the insurance company is hoping I die soon so that they keep what they don’t pay me.

We don’t like these annuities and we don’t use them in our planning.