key because of the variety of available products. Once your goals are outlined, start shopping around, but be careful.
“There’s no truth in lending as with credit cards, or good faith estimate as with mortgages,” says Cheryl Creuzot, president and CEO of Wealth Development Strategies L.P. in Houston.
CONSIDER THE COSTS
When shopping for an annuity, compare the costs involved with other investment options. Keep in mind that annuities are usually the most expensive.
According to Morningstar Inc., an investment research firm, insurance companies charge an average of 2.27% in insurance and money management fees on variable annuities, while the average mutual fund charges only 1.44%. Lipper, a Reuters company that specializes in mutual fund analysis and commentary, further indicates that even the income-producing annuities that are most comparable to fixed annuities charge an average 1.91% in fees.
Moreover, like back-end loaded mutual funds, annuities charge owners for withdrawing money in the first few years. But the annuity penalties, called surrender charges, are staggering, typically ranging between 5% and 7% in the first year. They usually decline by one percentage point each year, according to the National Association for Variable Annuities, a nonprofit trade association that promotes variable annuities.
Audrey Mitchell Carruthers, 46, says the daunting surrender penalties force her to refrain from withdrawing money from her annuity. While she was in her 30s, Carruthers liked to shop and found it hard to leave her savings alone. So when she got a $30,000 lump sum payment, she worried about it trickling away in a flurry of shopping bags. That is until 1994, when a financial adviser mentioned that she might be interested in purchasing a variable annuity. Carruthers, who earns $76,200 a year as an internal budget analyst for Bell South Financial in Atlanta, saw an opportunity to keep herself from dipping into the money.
It worked. And Carruthers became so proud of her growing portfolio that she began investing in other products. Today, she maximizes contributions to her 401(k) and IRA and is investing in a 529 college savings plan for her 8-year-old son, Kyle.
CONSIDER YOUR AGE
While many banks and insurance companies with financial goals of their own pitch annuities to young people, most financial advisers do not support the purchase of annuities by those younger than 40. Since younger investors tend to have growing families with more occasional cash crunches, they may be tempted to withdraw early from the annuity, stacking up unwanted surrender charges.
Marvin Mangham, a registered representative for Investors Capital Corp. and a principal at The Atlanta Planning Group, says annuities make more sense for the person pushing retirement; therefore he does not promote them to very young people.
“They have limited uses in a portfolio—that is, they are useful if you have a large amount of money that you really want to grow tax deferred and have no use for except to supplement retirement,” he says.
Mangham admits that despite his feelings about young annuity holders, he chose to support Carruthers’ decision to keep her annuity when she solicited his services in 2002