Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 25, 1994 TAG: 9404260032
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: By MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
CDs are federally insured. The full amount of money will be returned at the end of the period chosen by the depositor, which is usually a year or less.
Annuities are issued by private companies and are only as sound as the insurance company backing them. Fees are high, and most annuities carry heavy penalties for withdrawal in the early years.
But for the right people in the right circumstances, annuities can form part of a well-rounded retirement portfolio.
David Cissel, a fee-only financial planner with Financial Solutions in Roanoke, said potential investors must be aware that they are dealing with an insurance product when they purchase an annuity. And, he said, investors should shop around, because returns vary widely.
Cissel said he would not put money into an annuity before the maximum amount is placed in an employee (or self-employed) retirement plan such as a 401(k) or Keogh.
Cissel said buyers can choose between fixed annuities, which pay a specific monthly income during retirement, and variable annuities, whose return depends on performance during the investment years.
Some companies use bait-and-switch tactics for fixed annuities, he said. They offer a high return up front, but the rate drops drastically in renewal periods.
Anyone considering a fixed annuity, he said, should ask for the company's renewal rate history, not just the opening interest.
Variable annuities invest in stocks, bonds or money-market funds, Cissel said. The danger here is the high fees that companies charge. In addition to commissions and set fees, he explained, they also levy a "mortality and expense" charge that kicks up the other costs by another 1.27 percent to 1.7 percent every year.
Both types, he said, charge surrender fees in the first years. Because of this, he said, annuities must be long-term investments.
Then, too, he pointed out, those under the age of 591/2 must pay a 10 percent penalty (in addition to taxes) if they withdraw the money.
Cissel said many people buy annuities because taxes are deferred on the earnings until the time of withdrawal. But then, he said, the earnings are taxed as regular income, not as capital gains as is the case with mutual funds. That means people who buy annuities must be confident they will be in a low tax bracket when they take out the money.
He said annuities can be a good retirement product, provided that people shop around and compare policies, ascertain that the company is financially sound, know that they can keep the policy in place for many years and understand what they will be charged.
Andrew Hudick, of Fee-Only Financial Planning in Roanoke, said many people buy annuities as a forced savings plan.
Annuities can be valuable as part of a retirement portfolio that includes other types of savings, Hudick said. People can annuitize their retirement by providing a basic monthly payment for life, with money in other types of investments for growth and ready access.
They are most valuable, he said, for people whose estates exceed $600,000 (or couples with $1.2 million) because an annuity removes the money from the estate while still providing lifetime income.
Many people put a lump sum into a so-called single-premium annuity. But Hudick said the costs of accounting, commissions and marketing often exceed 2 percent per year. Investors should question whether such a fee makes economic sense, he said.
Hudick said annuities are "not a CD substitute." Once people buy annuities, he said, they must stay in and pay high charges because of the heavy withdrawal fees. The exit charges, he said, keep the buyer from changing his mind about the investment.
Anyone who buys an annuity, he said, should check the return after payment of all the fees, not just the advertised interest rates.
He advises his clients who are retiring with money rolled over from a pension plan to use part of those assets for an annuity that will pay fixed income for life. The rest of the money, he said, should go into other types of investments.
J. Gregory Tinaglia of Investment Management Corp. in Roanoke said annuities are appropriate for people who want to save on a tax-deferred basis. That means the buyers should be in the higher income-tax brackets.
Fixed-rate annuities are conservative, because the monthly income will remain level for the rest of the retiree's life, he said. He, too, warned about initial "teaser" rates.
Variable plans are more aggressive with potential for a higher return over a long period of time. They are, he said, a lot like tax-deferred mutual funds and should be considered after investing in company retirement plans.
People who are not approaching retirement who are considering buying variable annuities should consider the stock option for faster growth, he said. This requires a horizon of 10 or more years.
Expenses, he said, average 2.3 percent per year compared with 1.3 percent for a stock mutual fund. He suggested that people buying variable annuities be certain that the performance of the investment options more than offsets the high costs.
Because it's hard to get out of a plan, he said, buyers can get locked into a poorly performing fund. And, he said, a variable annuity is only as good as its investment options.
Tinaglia also said that annuities should not be placed in a tax shelter, because annuities themselves are tax deferred. That makes them inappropriate for retirement plans and Individual Retirement Accounts.
by CNB