Can you spare some yield? Old Tyme Turtle for

My good friend Ol’ Tyme Turtle had a nest egg that became rotten by taking on too much risk. He then saw the light, worked part-time, saved his nickels and built a respectable nest egg again. But poor Ol’ Tyme; his goal was to live on the interest of his savings but with rates just above zero that goal seems unrealistic. Turtle did the right thing, and now look at him…

As Ol’ Tyme Turtle continues to work at rebuilding his nest egg, the holiday season is upon us and the fixed annuity market has little to be grateful for. Interest rates are at all-time lows and the American saver continues to exist in the yield abyss. So all my friends ask me, “should I buy a fixed annuity now?” and I always say, “it depends.”

One in search of tax-deferral and above market yields should always consider a fixed annuity. Also, if you want to pass your funds on to specific heirs for a specified time and amount at your death, a fixed annuity does the trick. A fixed annuity also offers lifetime interest and income guarantees no other product proposes. So definitely consider a fixed annuity if you’re in search of the benefits I described. But be wary of the annuity salesmen pushing products and features that will crack your nest egg like Ol’ Tyme’s.

Let me break it down a little further – I’m referring to many index annuities and the always questionable upfront bonus. The bonus pretends to be your friend but in the end it will stab you in the back.

Index annuities yields/performance are very closely tied to fixed annuity yields. Yields for both are based on bond yields that are historically low right now. So no matter what your annuity salesman says, the index annuity’s return will be comparable to the simpler fixed annuity.  An index annuity has a little more upside with a stock market kicker, but it also has less attractive guarantees and probably higher fees versus the fixed annuity.

What extra does an index annuity offer you? One word – hope. The hope is that you will earn a higher yield when the stock market turns positive. What’s the negative? Well, your nest egg is probably locked up for at least 10 years of penalties. And most offer upfront bonuses of two, six, eight, or ten percent, and maybe even higher depending on the product you purchase. But wait, there’s more! That upfront bonus is not yours until you comply with all of the rules of the annuity contract. 

I don’t know where to begin when it comes to upfront bonuses. The annuity contract may say the bonus is yours after the first year, but that’s usually the two percent bonuses. When you get to the eight or ten percent bonuses, the product has a minefield of rules. One contract makes you wait at least 10 years, another makes you wait 10 years plus makes you annuitize, in other words, convert your contract to income to earn the bonus. Your money could be locked up for 20 years or longer.  Sorry, I’m not buying a product that locks my funds up for twenty years just so I can receive a bonus check spread out over my lifetime. Upfront bonuses are confusing and you are paying for it through longer lock up periods or with more contractual rules. Do not be fooled.

However, the bonus is simple compared to the very popular income riders. These policy features are being sold by the billions and many Americans have no idea what they have purchased. We’ll dive deeper into income riders next week.

In the meantime, I’m Earl E. Bird, the crusader for the American saver!

Pay-it Forward

In finance, you need a plan. You also need discipline and goals. When buying holiday gifts, have limits and a budget; and stick to it. Think about the pain when opening that January credit card bill. Is that anyway to start the new year?

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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