Index annuity funds

So I got invited to one of these retirement investment dinners. It was at steakhouse that I like (Flemmings) so I figured “what the heck”, listen to an hour of blarney and get a free dinner.
Anyway, what the guy was recommending made a lot of sense.

Index annuity funds, a product sold by insurance companies.

Invest “X” amount of money, for a set period of time ( 5 or 10 years)
The principle investment, and a small return was guaranteed safe (he claims), even if the market crashes.
If the market grows 10% or 25%, your fund grows by that much
The catch ? You must leave the money in for the agreed time, and your profits are “capped” at 25% a year.
Meaning if the market takes off and grows 40 % in one year, you only get 25%.


Am I missing something, is this as good as it sounds ?

my mother just rolled over one of her 401's in the same type of account. It's seems like a good idea.
Jay

chasendeer said:

my mother just rolled over one of her 401's in the same type of account. It's seems like a good idea.
Jay

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That's what I'm thinking. I've got a couple of different retirement funds. I use my 401 from my last job as a "safe" fund, and this looks safer, with better return then leaving it in bonds and targeted retirement stock funds.

As PT Barnum said.....


"There is a fool born every day".....

Jose could you explain yourself on that.
Thanks
Jay

Like I said Jose, am I missing something ?

Index annuities can be very confusing so be sure to know EXACTLY what you are buying. Not saying they're bad, just not for everyone.

Never seen a cap rate of 25%. A typical cap rate will be 5-8% and the insurance company can usually change them on an annual basis, so be sure to know what the minimums are.

Also keep in mind that the insurance company is not actually buying the index. Meaning you don't get the dividends that the index would get. So don't let anyone tell you that "the index has averaged X% so that's what you'll likely average". NOT TRUE.

Know what the surrender schedule is. Remember if you bail early it will cost you (usually big time).

If you're looking for a relatively "safe" investment with CD type returns (2-5%) for a long period of time, they can be a decent vehicle in the RIGHT situation in my opinion.

JoseCuervo said:

As PT Barnum said.....


"There is a fool born every day".....

Click to expand...

..expound. If you have the nads.

ashersdad said:

Index annuities can be very confusing so be sure to know EXACTLY what you are buying. Not saying they're bad, just not for everyone.

Never seen a cap rate of 25%. A typical cap rate will be 5-8% and the insurance company can usually change them on an annual basis, so be sure to know what the minimums are.

Also keep in mind that the insurance company is not actually buying the index. Meaning you don't get the dividends that the index would get. So don't let anyone tell you that "the index has averaged X% so that's what you'll likely average". NOT TRUE.

Know what the surrender schedule is. Remember if you bail early it will cost you (usually big time).

If you're looking for a relatively "safe" investment with CD type returns (2-5%) for a long period of time, they can be a decent vehicle in the RIGHT situation in my opinion.

Click to expand...

This.

The cap is most likely under 10%. The insurance company is going to make more money than you.

Not saying he didn't say that but I would read the fine print before handing over any money. Usually you get 10% up front, then 10% if it goes up, if it crashes you don't lose anything but you don't make anything. These are usually long term, 5 years +. YMMV

Here's my opinion on annuities: You will never see someone wake up in the morning and say, "I'm going to go buy an annuity." Instead your financial guy wakes up and says, "Who am I going to sell an annuity to today?"

Take that for what you will.

Annuities are like any other investment choice. In the right situation and for the right person they work.

Something to review: What are the surrender charges? Life is never certain so make sure you understand what happens if you want to surrender it.

Remember that is most cases money in an annuity is not given a stepped up basis for capital gains at the time of death. That can have huge implications on an estate if not taken into consideration.

Also look at the expenses inside the annuity. They usually are HUGE and there is a reason that the guy giving the presentation can afford to buy you a decent meal. It is not because he is just a great guy.

If the market crashes who says the insurance company won't crash with it?

Nemont

The whole goal of this salesman is to capture assets or your money so they can use it as they wish.

NeMont and ashersdad are on track. There is also some misinformation from others here. I am a Senior Financial Advisor with a major firm. I manage close to $150MM and a lot of annuities. The term "annuity" is very broad and often misused. It can mean a lot of things. You cannot compare one type of annuity to another without knowing a lot of detail. A fixed annuity cannot be compared to a variable annuity, which cannot be compared to an immediate annuity, which should be compared to an index annuity. Only the uninformed would say that an annuity (meaning all annuities) is always a bad idea. For the right client, a proper choice in an annuity can solve a lot of issues for retirement income and remove market risk from the equation. Some kinds of annuities can be wonderful retirement planning tools. Other kinds can also be sold by unscrupulous salesmen to unknowing and unsuitable clients. Unfortunatley, this happens too often, and gives the general term "annuities" a negative connotation. It really shouldn't. Most of the abuse is isolated and revolves specifically around index annuities. That is the one type that you can pretty much make a blanket statement against. They are very expensive, very complex, and offer reduced returns that are hard to calculate. I will not sell them and will always recommend against buying them.

Not all annuities are bad, far from it, yet not all annuities are good too. Do your homework, and be very wary buying one from a sheister who just fed you a nice lunch. Instead, get a referral from a trusted friend or advisor.