Equity Indexed Annuities (EIA))

Here is an excellent,

short piece on Equity Indexed Annuities 

 written by Robert Huebscher and presented  on Advisor Perspectives.

Equity Indexed Annuities seem to offer the best of all worlds: equity returns with no down side risk.

In the article Huebscher shows how these vehicles are misrepresented by insurance salesman. Alas, once again there is no such thing as a free lunch!

Understand Your Investments

One of the first steps in understanding your path to retirement is to get a handle on what investments you own.  Do you have high priced funds?  Are you stuck because you signed an insurance company contract that specifies egregious fees if you change your mind?

Recently I consulted with 2 school teachers.  They don't make high salaries, and their respective "nest eggs" are a bit meager.  One has approximately $30,000 in IRAs rolled over from previous teaching positions, invested in Franklin Templeton shares  like FKINX, an income fund with a 4.25% load, and an expense ratio of 0.62%.  FKINX is a class A fund.  If you don't know the various classes of mutual funds, read

 The ABCs of  Mutual Fund Classes.

The particular advisor at Franklin Templeton Investments had this teacher, who is in her mid-30s, 70% invested in bonds.  According to the client, the advisor chose the funds and told her he had her invested in the same way he invests his wife's investments!

I don't know the advisor, but I would be willing to bet that he is making a good six-figure income off of the commissions he is getting from putting school teachers and other lower income people in these expensive funds.  I just wonder how he looks in the mirror each day.

To make the story short, I recommended she roll over the funds to Vanguard and invest in their 2045 Life Strategy Fund.  Bottom line:  low expenses, appropriate asset allocation, minimal effort.  The good news is she saw she was headed in a bad direction early on and now has 30 years on a better path!

TO UNDERSTAND YOUR FUNDS, FIND OUT THE TICKER SYMBOLS AND THEN LOOK THEM UP AT WWW.MORNINGSTAR.COM.  If you don't know how to do this, email me and I'll talk you through it!

The second teacher works for a school system that has several insurance companies as providers to their 403(b).  This teacher is 10 years from retirement and has several Equity-Indexed Annuities.  The annuities had returns of between 3% and 6% last year.  Over the same period, a conservative portfolio of 60% stocks/40% bonds achieved a return of approximately 15%.  Just as a reminder, if she wanted to change her mind, liquidate her funds, and try a different approach, she would pay a hefty charge.

Her best alternative, at this point, is to hold the annuities until the charge runs down and then to make a switch.  Her school district also offers TIAA/CREF and Fidelity as providers - both of which offer lower cost, well-diversified funds.  She will use these providers going forward over the next 10 years.

What are you and your family members invested in?  Are you building your nest egg or some broker's/insurance sales guy's nest egg?