What the Heck are Fixed Index Annuities? (And are they a good idea for retirement?)

One of the ways I fall asleep at night is by reading nonfiction books. I like these books, don’t get me wrong, but they still don’t totally suck me in and keep me awake like fiction books sometimes do. Usually, as I’m in bed reading my nonfiction book of choice for a few minutes, my eyelids get heavy and I drift off. It’s a very effective, as well as instructive, bedtime routine.

For quite awhile, my nightly book of choice has been Tony Robbins’ Money, Master the Game. I’m a big Tony Robbins fan, as I enjoy his motivational talks and writings, and was extremely excited to see that he’d written a book on finance- one of my favorite topics.

I devoured a lot of the beginning of the book (which got me through quite a lot of bedtimes as the book is 638 pages long). I really enjoyed most of the way Tony Robbins was trying to make finance information accessible to everyone, and he even included interviews with finance experts I loved such as Jack Bogle from Vanguard. A bulk section of the book was concerned with savings accounts and starting a retirement account, as well as the magic of compound interest- I love these subjects. These are some basic money topics to me, but I enjoy being reminded, and many people don’t understand concepts such as compound interest, which Robbins makes easy.

However, somewhere in the last third of the book, I got lost. The subject of Fixed Index Annuities came up and stayed prominent for many, many pages. Robbins was touting how great annuities are, and how the right annuity would bring you retirement income for life. I was extremely confused and started thinking “how have I not heard anything about any kind of annuity from any finance blogger or writer or podcaster ever before?” I was baffled. For years, I’ve listened to the podcasts and read a few of the blogs and books of some quite entertaining and well-known finance professionals including Suze Orman, Dave Ramsey, Farnoosh Tohlrabi, J. Money, Shannon McLay, Ramit Sethi, Paula Pant, J.D Roth, and more. I couldn’t remember any of them ever suggesting, or even bringing up, annuities.

I actually reread the entire 638 page book (it’s a break from my other favorite bedtime book, The Elegant Universe), and once again attempted to understand Robbins’ take on fixed annuities, but to no avail.

In the back of my mind, I associate annuities with scams. But Tony Robbins was so convincing in his book, even talking about how variable annuities are the actual scams, and fixed annuities are the good ones. So I thought maybe I had missed something. And, in the interest of this blog, and for my own personal pleasure (I have some weird pleasures), I looked everything up, paying special attention to my favorite finance experts and finance news sites, including Forbes and Suze Orman, to see what they had to say.

Basically, without going into the extremely complex and intense detail, my hunch was right. Unbiased (i.e non-commission-based) finance professionals almost never recommend annuities- unless they’re still somehow trying to sell you something…like an annuity. There are very rare circumstances in which SOME annuities would kind of make sense, but those circumstances generally affect people in one of two categories:

  1. If you have an extremely high income and have maxed out both your 401k and IRA and want to try putting tax deferred money elsewhere.
  2. If you are extremely, incredibly risk averse and would rather have complete peace of mind that you will have some money while alive than a good rate of return. Because the odds are against you that you’ll have more money for yourself and for your beneficiaries (spouse, kids, etc) with an annuity than with any other retirement strategies (401ks, IRAs, Roth IRAs, etc).

Otherwise, low cost index funds in IRAs, Roth IRAs, and 401ks are significantly better retirement options, with much better rates of return and way lower fees.

Again, without going into numbingly complex details, the issues with most annuities include:

  • Most people selling them stand to make a major profit off of you, and may not inform you of the other retirement options you have. So there can be quite a bit of shadiness in the annuities business because of the high commissions paid out.
  • Your money is tied up for a very long time, and you will pay major fees if you try to take it out early! These fees can range from 10% up to 20%! So even if you purchase an annuity for $50,000 and in a month you change your mind, you can’t get that money back without getting hit with a ridiculous fee. About $5000 (10%) will already have been removed from your 50k as a commission fee to whoever sold you the annuity! Plus you’ll get hit with that major fee for early withdrawal, so your $50,000 can possibly become only $38,000 in the span of only one month!
  • If you die early, your beneficiaries can get absolutely nothing! The one major benefit of most annuities is a guaranteed monthly income for life, until you die. So if you live a VERY long time, you may somewhat benefit from an annuity. But an annuity is actually a life insurance product, and the companies are banking on you dying earlier rather than later- because if you die early, in most situations, the rest of your payout is their’s to keep! And even if you find an annuity that leaves your money to your beneficiaries (which will of course be pricier to begin with), the beneficiaries will have to pay taxes on all of the interest your money made! So if your original 50K grew to 150K, your beneficiaries will have to pay taxes on the difference- that means paying taxes on the 100K difference!! That’s a huge tax bill!

So, I’m sticking with my classic retirement strategy- the Roth IRA, filled with low cost index funds from Vanguard. I write about Roth IRAs and how to set one up here.  And although I enjoy Tony Robbins’ advice and greatly respect him, I’m not planning on taking any of his advice on annuities.

If you want more information on annuities, here are some of my sources for this article:

The Motley Fool annuity advice

Suze Orman explains annuities

Time Magazine’s advice about annuities

Forbes talks in detail about annuities

Get Rich Slowly shares annuity knowledge

As always, feel free to ask me any questions. I’m just learning about this topic myself, so I’d love to hear your thoughts! Thanks!



Budgeting in Your 30’s When You Hate Budgeting

For all the writing I do about finance and money goals, I really hate to budget. I just can’t stand it.

Perhaps this is because I’m already a big saver, so when I want something, I usually REALLY want it, and not much is going to stand in my way. I hate not listening to my own written budget, but I wouldn’t listen if I really wanted something badly, so I feel like I’d probably go over budget lot of the time, and then I’d kick myself. Ok, so this is actually a self-control issue. :/

I walked around forever with budget hatred burning a hole in the pit of my stomach until recently, when I read an article and realized I’d been kind of following an unofficial budget strategy all along. I googled the info in that article and came upon even more articles that outlined alternative budgeting strategies. Turns out, I naturally follow a common budget strategy called the 80/20 budget, though my version is actually a 70/30 budget.

The 80/20 budget is basically the simplest and least detailed way to budget ever. And I love it, because the details of budgeting make me nuts. Here’s how it works: when you get a paycheck, 20 percent goes to savings. The rest is fair game to divide between needs and wants. That’s it.

This is kind of amazing if you’re never sure how much you’re going to spend in any given month- no matter what, you’ll still be saving. I do a 70/30 budget, or actually a 70/10/10/10 budget, which is only slightly different than the 80/20. The way it works is:

  1. I get a paycheck
  2. I put 10 percent in my retirement account immediately
  3. I put 10 percent in my savings account immediately
  4. I put 10 percent towards my student loan immediately (this is always in addition to the minimum monthly fee I pay)
  5. Then the other 70 percent is divided as best I can among EVERYTHING else without making a budget.
  6. Within the 70 percent, my NEEDS include: Rent, utilities, and student loan minimums (definite needs), as well as food, metrocards (transit), laundry money, and toiletries.
  7. Also within the 70 percent are WANTS including: eating out and or/drinking with friends, food and coffee and green juice splurges, new shoes or clothes, tickets to theater, subscriptions to Spotify and Hulu.

Don’t get me wrong- it’s probably best to actually budget everything out little by little with a food budget, a clothing budget, and an eating out with friends budget. But I’ve never done this, and I don’t know if I’d stick to it if I did. So I think it’s better to at least have SOME sort of budget! And with the 80/20 (or 70/30, or even 60/40) budget, you’re at least still saving. If you don’t have students loans, I’d recommend putting at least 10-15 percent of your paycheck immediately into your retirement account, and then 10-15 percent immediately into a savings account.

What’s funny about taking a certain percentage out of your paycheck right away and paying down a debt and/or putting it into savings is how little you notice that the money is gone. It’s a strange phenomenon! Try it if you don’t believe me. Take 10 percent out of your paycheck immediately each month and put it into savings…you probably won’t even miss it! And if you do, you can always take it back. I wouldn’t recommend it…but the whole point is that your savings account belongs to you! 🙂


How Much Should I Be Contributing to My Retirement Account in My Thirties?

The Suze Orman Show recently went off the air and I’ve been heartbroken ever since.

I never watched Suze on tv, but I listened to her show religiously, podcast-style. After all, Suze’s money commentary was addictive, and she dispensed the good advice to give up cable, which I haven’t had in years to begin with.

There are so many points Suze repeated over and over that made simple what used to feel so complicated in the world of money. She kind of changed my life. In tribute to her, my next few money posts will be as short and simple as possible- her best ideas were short and powerful and repeated time and time again.

So here’s how much you should be contributing to your retirement account(s) in your thirties:

1. First, if you are an employee (and not an independent contractor) make sure you are actually signed up to contribute to your work 401k. Are you SURE? I have so many friends who thought they were signed up for years but actually weren’t. So they contributed ZERO…by accident. Double check.

2. Second, if your workplace offers a 401k match, contribute money into your 401k up to the match. Then stop and contribute to your IRA or Roth IRA. 

3. If your workplace doesn’t offer a 401k match, or you’re self-employed, start out by contributing the maximum to your IRA or Roth IRA. Don’t know how to open an IRA? Read about simple ways to do so here.

4. You can contribute up to $5,500 a year to your Roth IRA OR your IRA. Total. Try to hit that mark. If not, do what you can.

5. Contribute what you can to that IRA or Roth IRA. This is your main retirement vehicle. I try to contribute 10% of my income to my Roth IRA. Many financial advisors recommend 15%…I’m not ready for that yet, but once I finish paying off my student loan I will be.

6. If you max out both your 401k MATCH and ALSO your Roth IRA or IRA, then go back to your 401k and contribute as much as you can. You can contribute up to $18,000 in 2015.

7. If you don’t have a 401k because you’re self-employed like me, and you’ve maxed out your Roth IRA or IRA (good for you!), then you can start contributing to special retirement accounts for the self-employed. Learn about those here.

Hope this helps you learn how to save for retirement! Please ask any questions you have- I’m happy to answer or find you answers! 🙂


What To Do With A 401K From Your Old Job

Since you’re in your thirties, or almost there, I’m going to take a guess and say that you’ve probably changed jobs at least once.

In fact, it’s likely that  you’ve changed jobs multiple times.

So what did you do with the 401ks from your old jobs? Did you even have one then?

When I was looking into this (because I’ve gotten this 401k question a lot), I noticed that not only did many people not know what to do with their old 401ks, many of them didn’t know how to FIND them..or they didn’t know whether they had a 401k with their former job in the first place. 

So first things first: let’s start with what to do with a 401k at an old job when you know where it is and that it exists. Basically, there are 4 options:

1. Leave the 401k where it is (with the old job.)

2. Roll the money into your current job’s 401k

3. Roll the money into an IRA

4. Take the money and run.

I’m going to start with a warning: please don’t do the last one! DO NOT take the money and run!!! It’s a really bad idea, and will cost you a ton of money to do so! If you pull the money out of an old 401k before age 55 (retirement age for 401ks), two things will happen: 1. You’ll be hit with a 10% penalty!! 2. You’ll have to pay taxes on all the money as if it was regular income (which it is)! Just don’t do it! My research found that 25% of people choose this option…don’t be one of them! Anyway, that’s my two cents on that choice.

So now you have three choices left. All of these choices are pretty good- it really depends on what you want.

Two of the choices may not be an option:

1. You may not even be able to roll your money into your current employer’s 401k plan. You’ll have to check with them and see.

2. If you have less than $5000 in an old 401k, your old employer may not let you keep the money there anyway.

So, if you’re looking to have all your accounts in one place and less hassle with paperwork, I’d recommend either rolling your old 401k account into your new 401k account (if your new job allows you to do that), or consolidating everything into a rollover IRA.

But if you’re looking for the best possible investment options and don’t care about the hassle of paperwork from multiple accounts, you’ll have to do a little research. Here’s what you should be thinking about: 

a)Sometimes the 401k at your old job has some special investment options (like company stock) that you can’t get in an IRA.

b) A 401k offers slightly more protection from creditors in certain states.

c) You can withdraw from a 401k penalty free at age 55, but you can’t withdraw from an IRA until age 59.5 without a fee.

So if you have great old company stock or are really worried about creditors or really want to retire by 55, you may want to leave your money alone in the old 401k or roll into the new one (if possible).

But generally, rolling your old 401k into a Rollover IRA is the simplest and most cost-effective way to go. 

Here’s how to set up and roll your old 401k into a Rollover IRA and get started at Vanguard. 

Here’s how to set up and roll your old 401k into a Rollover IRA and get started at Fidelity.

Now, if your 401k is lost or you aren’t sure whether you even have old 401ks lying around from old jobs, see the awesome 401k helpcenter I found!

Hope this helps! I know that’s a lot of info if you’re unfamiliar with IRAs and 401Ks so, as always, let me know if you have any questions or anything to add! Thanks!

Do not take the money and run. You won't be able to hide...the IRS will find you and tax you on it...and take away 10% of it...

Do not take the money and run. You won’t be able to hide…the IRS will find you. And tax you…

How to Set Goals for Finances- New Years Resolutions Series

The countdown to 2015 continues…though hopefully no one’s standing outside in Times Square yet waiting for the ball to drop. You never know, though. I wouldn’t put it past people.

Anyway, I thought I’d kick off some New Years resolution money talk for thirty-somethings.

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Last year, I made a resolution to put 30 percent of every paycheck I received towards savings, student loan debt and retirement. I actually started doing this slightly before New Years so I cheated a bit.

I split up the 30 percent this way- 10 percent went into my Roth IRA, 10 percent towards my savings, and 10 percent towards my smallest student loan. (My largest student loan already had a crazy amount of money going towards it because its minimum was so high. But I digress.)

And I followed my financial resolutions through thick and thin for the whole year and am continuing with them. There was a moment where I even tried to up my payout percentage to 40%, but that was way too much. Other than that- the 30% resolution was actually quite simple: whenever I received a paycheck I’d log onto Chase.com and make my transfers. There was something extremely satisfying about the whole thing.

If you’re making financial resolutions for the New Year, my advice is much like Jane’s in her last post: break down the goal into easy steps. My financial resolutions last year were simply:

1. Put money into savings

2. Pay down student loan

3. Put money into Roth IRA

A lot less would have gotten done if I’d stopped there instead of making the simple breakdown of 10% from every paycheck towards each category.

So, if you have savings goals, save yourself a headache and break them down into steps that seem so easy as to be almost automatic. In fact, you can even automate the savings process by having your bank automatically put a certain amount of money into your Roth IRA and savings account every month. Just about all banks will do this for you.

Since I’m self-employed and am paid a different amount every month, I kept my process manual. Also, I get a gleeful joy out of manually saving money, but I’m weird like that.

Anyway, this year my financial goals are:

1) Pay extra $$ towards my BIG student loan

-This is broken down into the easy steps of

a) Finish paying down the little student loan the same way I was before. Just about done!

b) Put the 10% (plus the monthly minimum) I was putting into the small loan towards the big loan instead.


2) Find a savings account that pays way more interest than my bank. 

– Done! I guess once more I cheated on this one…I did it last week before New Years. But don’t worry if you hate your savings account, I’ll talk about better ones in another post soon and help you set that up too if you like. For now, if you’re interested in how much you should be saving, I wrote about it here.

3) Switch my Retirement Plan from a Vanguard Target Date fund to a different Vanguard account now that I have more money in my Roth IRA. 

– This involves a couple of breakdown steps including investigating Vanguard’s other options and figuring out more about how to manually choose funds. I’ll explain why I’m doing this in another post as well. And if you’re interested in retirement plans in general (or if you don’t know what the heck I’m talking about), I talk all about why retirement accounts are important here and here and here.

Of course, there’s my fourth financial resolution which I haven’t yet broken down, and that’s:

4) Discover additional sources of income. 

I lied about not having this goal last year. I have this goal every year, and I’m always messing with the breakdown. There’s quite a bit of work ahead. Sometimes breaking down resolutions can be as tough as keeping them 😉

What are some of your financial resolutions for the new year?

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