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Equity Indexed Annuities:
There Are Better Alternatives (stability)
Every
investor would like to increase their income without
compromising their stability. Maybe that’s why Equity
Indexed Annuities (EIAs) have become so popular, because of
their promise of providing a stable income stream. But there
are a number of ways that you can easily outperform what an
EIA can deliver. In this article, I’ll show you how to meet
your need for stability and income in your portfolio.
One of the main sales-points of EIAs is their promise of a
stable income stream. Many nervous investors are comforted
by the thought of a guaranteed minimum return on their
investment of 3%, especially in today’s low interest rate
environment. They’re willing to accept this small return,
because they think they are able to participate in the
growth of the stock market without all the risk.
But what these investors have done is confuse objectives
with risks. Because of their fear of losing money in the
stock market, they settle for a paltry return. They’re
trying to meet 2 objectives: growth and stability, with the
same investment. How much better it would be for them if
they used separate investments for their different
objectives.
Growth and stability investments each have their own set of
risks and rewards. By combining the use of both, the risks
balance each other and you get the rewards of both.
Unfortunately in an EIA, its growth potential is severely
limited by caps and high fees. Next week I’ll discuss how to
boost your returns in your growth investments. Right now,
let’s take a look at how easy it is for you to outperform
the guaranteed rates of EIAs.
There are many better alternatives for the stable portion of
your money. These include government guaranteed Certificates
of Deposit (CDs), U.S. Treasury Inflation Indexed Securities
(TIPS), government and corporate bonds, guaranteed
investment contracts (GICs), and Real Estate Investment
Trusts (REITs).
These alternatives can provide the stability you are looking
for without forcing you to commit to them for 10 years. More
importantly, if anything happens and you decide you want
YOUR money back, you have much greater flexibility in these
alternatives than you would in an EIA. On a CD for instance,
the penalty for taking your money out early is typically a
maximum of 6 months worth of interest. That’s considerably
less than the 3+ years worth of interest penalty on some
EIAs.
The rates of return on these stable alternatives are also
better then the 3% offered by an EIA. Three year CDs
are being advertised in my local paper pay just over 3%.
TIPs are paying close to that and can increase what they pay
as inflation returns. Government and Corporate bonds
historically have averaged 5-6%. Even though they pay less
than that today, interest rates are expected to rise over
the next few years. Why would you want to tie your money up
long-term at 3% in an EIA when interest rates are at 40 year
lows?
REITs can provide a stable income and are a good
alternative. For instance, many of my clients have invested
a portion of their money in a REIT that is yielding 8.3% and
pays the interest monthly. Another is yielding 7%. There are
closed end mutual funds that invest in REITs that regular
pay between 5% and 8%.
Guaranteed Investment Contracts are like Certificates of
Deposit but are offered by insurance companies. They are not
FDIC insured but are backed by the ability of the insurance
company to repay the money when due—just like all the
money you would invest in an EIA. GICs from
well-established insurance companies currently pay 3%.
You aren’t required to only choose one of these stable
alternatives, either. Depending on the size of the stable
portion of your investment, it could be divided between
several of the alternatives to increase your safety and
flexibility.
The key to having a stable income stream from your
investments is to retain flexibility and control, while also
keeping a healthy diversification between categories,
maturities and issuers. As you can see, it isn’t that
difficult to outperform an Equity Indexed Annuity. And you
won’t have to lock up your money in the process.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or go
to
www.guardingyourwealth.com.
You can also reach me by email at
jeff@guardingyourwealth.com.
I will be happy to help you in any way I can.
Mr. Voudrie is a Certified Financial Planner and the
President of Legacy Planning Group, Inc., a Private Wealth
Management firm in Johnson City, TN. |
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