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There’s an investment people previously purchased, in which every single one of them regrets their decision.

It’s not metals, or a stock pick.  Some may mention that they purchased their home at the wrong time, but at least it’s provided a roof over their head.

No, the investment they all regret is the purchase of an annuity.

If you have any amount of money accumulated, you’ve likely been pitched an annuity at some point in your life.  Ultimately, annuities provide a series of payments after a certain accumulation phase and normally have a life insurance spin in case of death.

On the surface, the sale appeals to the human’s innate fear of losing what it has earned.  However, the incentives to get one into an annuity are less valuable for the customer and extremely profitable for the provider.

Fees & Surrender periods

There’s not just one type of fee.  Annually you’ll be paying all of these fees:

• Mortality and Expense Charge
• Sub Account Management Fees
• Unreporting trading costs
• Annual Administrative Expenses

And it’s not cheap.  After the provider is finished spreading your cash around in commissions, you’ll likely be paying 2.5%-4% of your assets annually.

Once you purchase an annuity, you’ve given away your money.  There are lock up periods that span from 7-15 years.

If you want access to your money before then, you may have to pay between 5-10% for the right to have it back.  Some annuity companies are “nicer”, giving you the option to withdraw 10% from the account annually without penalty.

Having your money locked up for that period of time can place a huge burden if you need it for an emergency or find a better opportunity along the way.

Inflation

Needless to say, the reason I’m not buying 30-year bonds from the US government is that if they find a way to avoid default and keep paying the interest, likely the 4% payment won’t buy me a loaf of bread in 28 years.

Annuities have the same problem.  There are annuities which claim to track inflation.  You’ll pay higher annual fees for this option.

The main issue is that they will use government inflation figures.  We’re all aware that reported figures aren’t even close to real inflation.

The government has changed their calculation in the past, and another one was proposed in the recent bailout plan.  Government Shadow Statistics puts current inflation over 10%, while the government has magically put it in their comfort zone of 2-3%.

This results in a real purchasing power loss of 7-8% PER YEAR.

The inflation rider will have you paying more in fees and still losing out.

Inside a retirement plan

Annuities at least defer taxes for those who purchase them with after-tax dollars.

Doing so inside a retirement plan removes about the only benefit an annuity can offer.  Aside from the reasons mentioned above, these are the people I talk to most who end up regretting their decision.

Your retirement plan is already tax deferred or tax-free if it is a Roth.  This is exactly where you should be putting your most profitable investments or more frequent trades.  No short-term capital gains and you can reinvest the gains immediately with no tax burden to compound the money further.

Bottom line, annuities are an archaic product for those who don’t know how to save themselves.  Ironically and unfortunately, their purchase ends up being one of the most costly in their lives.

If the volatility in the market has you leaning toward an annuity, I encourage you to re-read your copy of Unleash Your IRA on how to get real assets, which you know, about into your retirement plan.  There’s something for everybody.  A rancher who knows nothing about equity markets purchases cows annually for a 30% gain.

Good Investing,

Passport IRA