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The Facts About Variable Annuities and Refinancing
Jeff discusses pros and cons of variable annuities, and how to determine whether refinancing your home in this market is really the best step to take.
Dear Jeff:
I belong to a credit union that has a financial services department. I am 66 years old, and the only asset I have is the money from the sale of my home. I have invested 100 percent in adjustable annuities. I seemed to be doing OK until last month, just leaving it there and drawing from it to pay my rent.
Now I am wondering if it is the right thing to do. The money is invested in what I guess is blue chip stocks. Until last month the balance was rising slowly after my withdrawal. I have read many things that lead me to believe that annuities are not the way to go. What do you think about them?
Jeff Says:
Let's start with a review of variable annuities. This is a product that offers within its umbrella separate investment accounts that operate very similarly to mutual funds. Each investment account has its own objective and invests its funds accordingly.
One of the primary differences between annuities and mutual funds is the death benefit offered by many variable annuities. The issuer of the annuity guarantees that it will pay your beneficiaries a certain minimum amount at your death. This could be a great benefit if the market value of your account has dipped below the guaranteed death benefit, but there is a cost associated with this that is added to the normal asset management fees.
Hopefully, your financial advisor explained the fees to you and provided you with a prospectus so you could make an informed decision. By the way, there is usually a declining sales charge for the first few years in the event that you want to withdraw your money. So don't rush out and request your money.
The problem in market value that you have experienced recently is probably more closely associated with the downturn in the stock market rather than the annuity itself. The key for you is to develop a portfolio that suits your risk tolerance level and personal financial objectives. Diversify between asset classes including government securities and bonds, small and large company stocks, and even some international stocks.
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