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b'Annuity 101
A lot of my clients ask me if they should put some of their money into annuities or if they are better off with simple bond investments\\u2026 so I thought I\\u2019d make this a topic on my show today. The gist of my commentary is from an article on of FinancialPlanning.com titled Annuities vs. Bonds: Do the Math, by Elliot Kass.

As Americans are living longer due to better healthcare, diet and nutrition\\u2026 many are worried that they will outlive their retirement savings\\u2026 and see annuities as an attractive option for guaranteed lifetime income\\u2026 and as insurance if they outlive their retirement assets.



And annuity underwriters are well aware of this fear and structure annuities so they pay relatively unattractive interest but provide the peace of mind of a guaranteed annual payout. Returns on annuities, after annual fees, are often less than 3%\\u2026 so, in essence, your annuity payment does not even keep pace with inflation.

Here\\u2019s how an annuity works\\u2026 when you buy an annuity, the underwriter subtracts certain fees and expenses and does some math to come up with a fixed amount he can pay you each year\\u2026 say that works out to $5,000\\u2026 now $5,000 is what you will receive each year for the rest of your life, without any adjustments for inflation.
\\xa0Annuity Drawbacks
But over the course of 20 years, with inflation at about 3%, the purchasing power of $5,000 drops significantly\\u2026 to the equivalent of about $2,000 \\u2013 so that\\u2019s one catch with annuities \\u2013 your income stream does not keep pace with inflation and loses purchasing power significantly over time \\u2013 so factor that into your annuity purchase decision.

Here\\u2019s something else to be aware of: With annuities, investors generally get their principal back in about 15 years\\u2026 so if you opened an annuity at age 65\\u2026 you\\u2019ll earn back your principal and recoup your invested capital by the time you\\u2019re 80\\u2026 then\\u2026 if you\\u2019re still alive past 80, you\\u2019ll start seeing a paltry return on your investment \\u2013 doesn\\u2019t sound too appealing!

Most annuities also charge fairly high fees \\u2013 from 3.5% to 5% each year\\u2026 so if your annuity earns about 5% to 7% a year\\u2026 after fees, you only end up with a net yield of 1.5% to 3.5% each year. A lot of these fees pay for generous broker commissions\\u2026 which is why annuity salespersons sell you pretty hard, often locking-you into unrealistic expectations.

Should you choose to break an annuity, you\\u2019ll end up paying hefty penalties.

So, if you\\u2019re considering annuities, research your options well \\u2013 look into fees, commissions, payouts, inflation adjustments\\u2026 and compare them to yields on simple or inflation-protected U.S. Treasurys or high-quality corporate bonds that yield a bit more, don\\u2019t charge exorbitant fees and do not lock-in your money or have you pay hefty penalties on early termination.'