In Focus

Analyzing Annuities

April kicked off the Chicks Laying Nest Eggs book tour. In case you haven't heard (perhaps you were put under a spell by a wicked witch, or held captive by Captain Hook), our Head Hen, Karin Housley, put together a terrific book about starting an investment club based on the experiences of our own group. What an incredible month it has been! Karin has been flying about the US & Canada doing endless promotions; Chick Cheryl & Chick Jeanette taped a "Men are From Mars, Women Are From Venus" show in California; Chicks Jana and Kristin are signing Chick books in Atlanta... and the list goes on! I've had my share of signings and TV & radio shows, too. It's fun sharing ideas with other interested Chicks (and Roosters). I've also enjoyed fielding all the interesting questions asked. Some of my favorites have included:

What has been the most important thing you have learned since the club started?

What happens if everyone can't agree on something?

Can men become Chicks?

And Where can I get those jammies?

Those are some of the easier questions. Then there are always those questions you wish you could go back and answer again. Correctly. Or without stuttering, snafu-ing, spitting or drooling. At least I always preface my talks with "I'm no expert! I'm just like you... still learning!" And that's the truth. So when Rene, from Books & Co. in Dayton, Ohio, asked me what I thought of Annuities, I gave her an honest answer. The gist: "I don't really know too much about Annuities. Personally, I need to keep things simple, within the parameters of ChickSpeak -- as Cheryl would say." But as I tossed and turned in bed that night, I dreamt of chocolate-covered annuities, annuities with tuna on an Asiago bagel, and myself, dressed in annuities, which in my dream was something not bought at a maternity store. So, Chick Rene, in order to put an end to these bizarre dreams I present to you... in basic ChickSpeak... Annuities.

Basically, Annuities are sold as an interest-bearing, tax-deferred product offered by an insurance company. In other words, you give some cashola to some Joe, and you can either receive your Annuities from the get-go (called an Immediate Annuity) or you can contribute to your annuity until you are ready to receive it (Deferred Annuity). When this Joe-guy sells you this product, he will hype the heck out of the fact that you won't pay taxes on your money until you cash it in. But it ain't as purty as all that! If you decide to have your Annuity paid to you all at once on a particular date in the future, you will be taxed on whatever you have gained; but because it is considered "ordinary income," you will not be able to benefit from your capital gains tax breaks. If you have requested to have your Annuity paid out to you in payments, each payment is considered partial investment and partial income. You WILL pay taxes on the number the IRS considers to be your income. Doesn't sound very tax-deferred to me, how 'bout you?

The hottest Annuity out there today is one that boasts about resembling market-type returns. They are treated like a mutual fund and reflect what is happening in the market. These are called "Variable Annuities." I know, I know, I'm a Chick, I love the market, so shouldn't these particular Annuities excite me? No, they don't. Because A) if you're going to put your money in something "like" the stock market, I believe you may as well invest in the actual market, and B) there is really no tax-deferment in Variables either. Nope. The IRS, being what it is (I'm trying to show restraint here), has found a way to take a portion of those payments as well, and taxes you on what the IRS considers income -- despite what you may think. No surprise there.

Another gloomy side of Annuities is their expensive fees. You automatically get charged an M&E charge (Mortality & Expense Charge) which incorporates everything from your basic administrative fees to commissions. These fees can vary. Surrender Charges are incurred if you cash out earlier than you'd planned -- not real great if you should encounter an emergency. Although some are fairly gentle on you if you take out less than 10% within a year's time, dipping beyond that can mean HUGE penalties. Then, of course, you have your Management Fees. Again, these vary from Annuity to Annuity, but let's face it, these three deductions compounded over time can really hurt your bottom line. And after being taxed on their lovely "tax-deferred" plan, you're looking at a pretty sizeable loss.

Before I go on, I want to be clear that there is a lot more involved in Annuities than I can spell out here in the minuscule space my boss provides. But looking at the F-A-C-T-S -- the False Advertising, Confoundedly Taxed Sketchiness -- of these programs, I can honestly say that to my mind there are definitely better options out there. No question. Even dropping a wad of cash into a resemblance of the S&P 500 like the Vanguard Fund Index Trust 500 Portfolio would get you better returns; a LOT better returns. So who exactly would benefit from a program like this?

In this Chick's opinion, there is only a small select group of people this option might benefit. That is, if you are someone who is ready to retire, and hasn't made the best choices along the way investment-wise; if you're someone who is concerned with making sure you receive a monthly income and simply don't trust any other method, then Annuities may be something to consider. Just knowing that legally the insurance company with which you have invested absolutely MUST distribute your payments to you on a timely basis and that many states even have extra provisions to insure that policyholders are taken care of, could be of the utmost importance to you.

But if you don't fall into that category, there is a really great book I'd like to suggest. If you're someone eager to learn about what your money CAN and IS (or isn't) doing for you, Chicks Laying Nest Eggs is just for you. Rene, I hope I've helped you out a bit with your question (but I know you read the book and something tells me you're on the right track now anyway). Keep those great questions coming!