This site is best viewed using Mozilla Firefox browser.

What's New

2002-09-01 11:12:00

Sleep... got to sleep!

: We are in our 70’s. Six years ago, we put $158,000 in a variable annuity with a "top-rated company". Today, its value is $54,000. It has gotten to where Awe don’t even want to look at our monthly statement. We’re not sleeping. Thank goodness we didn’t have everything we have there. Surely there has to be something out there as safe as a CD with better rates. The 4% return on a CD, and then paying taxes on that 4% is ridiculous, but not as ridiculous as losing 65% of an investment.

Charlie Traffas Question: We are in our 70’s. Six years ago, we put $158,000 in a variable annuity with a "top-rated company". Today, its value is $54,000. It has gotten to where Awe don’t even want to look at our monthly statement. We’re not sleeping. Thank goodness we didn’t have everything we have there. Surely there has to be something out there as safe as a CD with better rates. The 4% return on a CD, and then paying taxes on that 4% is ridiculous, but not as ridiculous as losing 65% of an investment. Answer: Your situation is almost like an epidemic. Everyone is telling the same story and everyone is looking for the same answer. The other night in a meeting, I heard almost exactly the same thing, so I will answer your question as I answered theirs. I asked those in attendance to tell me what they would want in the perfect investment. I wrote their answers on a chalkboard in front of them. You will think they’re crazy to even expect such an investment product, but let’s see what they said.• I want the upside potential of the market with no risk to principal. • I want to be able to get my  money if I need it for something else. • I want to keep all my money working with no fees going in… no maintenance fees… no fees going out. • I don’t want to pay taxes on the earnings. • I want a safe investment. • I want to be able to sleep at night.Who wouldn’t want a deal like this? Do you think there is such an investment?It may surprise you to learn that there is a type of investment that comes very close.  The investment is called an Index Annuity.  Although Index Annuities can be based on a number of different indices, one of the most common is the S & P Index.  The annuity provides you with the upside of the market with a guarantee that you will not lose any of your principal.  Does this sound too good to be true?  Many people can't believe it.  A quality Index Annuity will have the following features to give you even better value:*  An annual reset provision that allows you to lock in any gains on a yearly basis which protects those gains against future loss*  100% participation in the gain (if any) of the index subject to a maximum or cap*  A flexible withdrawal feature that allows you to take a portion of your money without paying surrender penalties, usually up to 10% each year*  Issued by a company rated A+ or better by A.M. BestHere is an example of how an Index Annuity with an annual reset provision and 100% participation might work:Let’s say you invest $100,000 on January 1.  On that date, the S & P Index is 880. At the end of the year, let's say the Index is 960, a 9.1% gain.  Your account would be credited with the full increase in value and locked in against future market fluctuations.  If in the second year the index declined by 10%, you would loose nothing, gain nothing, but your starting point for the third year would be 864 instead of the 960.  If the S & P gain for the year is 40%, your account would be credited with the maximum allowed in the contract, say 12%.  If the gain is 10%, you would get 10%.  If it is a 30% decline, you gain nothing, but you don't lose anything either... and you would start with the lower base for the next year.Recapping:1. You paid no fees of any kind when you bought the annuity.2. There are no charges of any kind throughout the life of the annuity.3. The gains in the annuity grow tax-deferred. You do not pay taxes on anything until you take the money out. This can make a big difference in the overall return as your total return includes the gains on the taxes you would have paid.4. You can pull out up to 10% of the total value of the annuity each year over the term of the annuity, with no penalties of any kind (subject to taxes however). 5. For any other amounts you would want to pull out over and above the 10%, there would be a surrender charge of a fixed amount, depending upon the surrender charges outlined in the annuity contract.6. There are no surrender charges or market value adjustments if the owner of the annuity should die during the life of the annuity.  7. Your investment is at least as safe as a CD.  No owner of an annuity in the United States has ever lost a dime of principal invested in a fixed or guaranteed annuity.  Like the FDIC on certificates of deposits, the state guarantee fund covers certain insurance products (including annuities) up to $100,000 under certain circumstances.  Index Annuities are one of the more popular investment in America today.  When you combine the guarantees with the potential for sharing in gain of the stock market, it is difficult for the average investor to find a better investment.  Even if you were to have had it over the last three tumultuous years, you would have lost nothing and perhaps gained a little, as opposed to losing 40, 50 & even 60% of your portfolio.This investment works for a wide range of people of all ages.  The best test to determine if it is for you is to ask yourself… "What if I would have done this instead of what I did?" If the answer is a bit of a head shake, an eye roll and silence... it might be wise to investigate this investment further. Oh, don't forget what might be the best part... you should finally be able to get some sleep... and that’s worth a lot too!