Fear driving people to fixed annuities
Why are people doing something so dumb? Fixed annuities are offering guaranteed yields of 3.3 percent to 3.5 percent, higher than that offered by 5-year CDs -- 2.13 percent. They want something safer and want out of stocks. They're looking for the best return they can find right now.
The big problem with this move is that investors are locking in an interest rate at the bottom. The Fed's target rate is near zero. When interest rates start to climb, those stuck in a fixed annuity won't be able to get out without paying stiff penalties.
Fixed annuities usually charge surrender fees for withdrawals during the first 7 to 10 years (though with some you can withdraw up to 10 percent per year without a fee). These fees are much higher than the penalties you will pay to withdraw money from a CD. That extra one percent in interest won't look very good in a year or two when interest rates start climbing.
Fixed annuities are usually bought by the elderly. If they need the money quickly the surrender fees can be a big problem. "You can usually do better elsewhere and have greater liquidity," fee-only financial planner Gary Schatsky told USA Today.
But the big problem is that most sales people who encourage you to buy a fixed annuity will earn a big commission from selling you that annuity.
Fixed annuities only make sense for people who have a lot of money, are afraid to manage it on their own and want a guaranteed income. Don't expect that income to increase above the amount your sales person quotes.
If you lock your money up in an annuity, be sure you can live on that fixed amount of money. If you find you can't and want to take it out, you'll lose a lot of your principal to surrender fees. You'll have to pay those fees even if you need the money in an emergency.
Don't make a decision to lock up your money now. If you're fearful of the market, look for something more liquid than an annuity and all its hidden fees.
Lita Epstein has written more than 25 books, including Working After Retirement for Dummies.