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!

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Some Awesome New Finance Experts I’ve Been Following

After Suze Orman ended her amazing finance show (which I always listened to as a podcast) about a year and a half ago, I realized that almost everything I knew about finance I’d learned from Suze Orman. And I didn’t know what to do without her.

I still had Dave Ramsey’s podcast, which always amused and humbled me (he sometimes speaks to really down and out (aka completely broke) people who call in…and he always has pretty sound advice, even when I don’t consistently completely agree with him (he can get very religious). However, one of his best quotes is “you can’t fix stupid,” which I absolutely agree with). Another podcast I listened to was (and is) NPR’s Planet Money– which is a great podcast about money topics- but is more an exploration of economics in our lives than a ‘money advice’ show the way Suze Orman’s was.

In the past few months I’ve discovered some cool new finance advice podcasts (as well as bloggers…many of the podcasts are from bloggers that have decided to start podcasts). Nothing replaces Suze Orman, who had a distinct voice, but a lot of these are very good. If anyone wants some good and relatable finance podcasts and blogs for complete novices, here are some awesome recommendations:

http://www.budgetsaresexy.com –  J.Money’s refreshingly honest and totally down to earth financial blog. I’ve never read a finance blog that’s as open and genuine- J. Money tracks every dollars he has and he will give you exact numbers including his net worth, his retirement savings, his mortgage paid, and much more. He writes articles with titles like ‘What I’d Like to Teach My Dumb-Ass Tenants About Money.’ This blog is fantastic for anyone who doesn’t come from a finance background and just wants to understand all the basics a more, from someone who’s ‘just like you.’

http://affordanything.com/  – The Afford Anything podcast (which used to be called the Money Podcast) got me turned on to budgetsaresexy.com because J.Money (of budgetsaresexy) used to be the co-podcaster. However, he has since left the podcast, and his co-podcaster Paula Pant has renamed the show after her website: affordanything.com. Both the podcast and the website are really inspiring and useful – Paula Pant is in her early thirties and is completely financially independent and never really has to work again. She still works, though, and explains why in both her podcast and on the blog. Listen to the podcast from the beginning to listen to her and J.Money co-host together. They’re a great pair. Paula talks a lot about real estate and has made her fortune from it, so if that interests you, this is an extra good one (but it’s a good podcast even if you’re not into real estate- I’m not.)

Optimal Finance Daily – This is a cool podcast because each episode is a part of a different well known finance blogger’s blog- read aloud by the podcaster Dan Warren. It’s a great way to get familiar with lots of different finance bloggers – plus each episode is only around 8 minutes- so super easy to listen to!

So Money with Farnoosh Torabi – Farnoosh’s podcast is superbly edited and makes the listener feel taken care of (the way Suze Orman’s show always was). Farnoosh’s podcast is great to listen to because she’s a money expert interviewing other money experts! Super clear financial advice, and a very inspiring show as well.

Hope you enjoy some of these. As always, let me know what you think!

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Help! I Have No Money In My Thirties And Am Not Able To Follow Any of Your Money Advice

Somewhere around the second month or so of this blog, I’d written a few posts on finances-saving money and putting money into retirement accounts and wasn’t sure what people wanted to hear about next financially. I asked Jane, my co-blogger, what financial advice she might want to hear next.

Jane said to me, “I’m wondering what advice we can give to people who feel like they can’t follow any of the retirement account advice or the savings account advice. What about the people who are barely making ends meet? What about people who are just like ‘I’m broke and can’t do any of this?”

She told me about this teacher of hers who didn’t really want to save money and didn’t want to start a retirement account. He basically wanted to “live in the now” and said he didn’t have enough money to put away for any retirement account or savings account anyway. “All this money advice is BS for people who don’t have enough money,” he said.

At the time I was completely stumped. The topic filled me with fear. I was pretty new at following this financial growth advice myself and I told myself I’d simply get back to the ‘not enough money’ topic.

Then a few days ago I was talking to a coworker about how I put 10 percent of my money into savings, 10 percent into retirement, and 10 percent into additional student loan payoff.

In turn, he told me how he divided his money. He  had a pretty sophisticated system. He put aside 20 percent right off the bat for taxes (he’s self employed like me.) He had a separate account to hold that tax money. He also had multiple accounts reserved for different things- one for investments, one for savings, a special account just for spending money, another for classes (investment in learning.) It was a quite complicated and well laid out system and I felt mildly overwhelmed for a bit. He asked me what I might be investing in, and I was stumped. I wasn’t investing in anything in particular- not in a separate account anyway. I was ‘only’ investing in my Roth IRA…I hadn’t ‘gotten to the investment step yet.’ I’m still killing off my student loan that was originally over $100,000 but is now finally less than half of that.

I started to feel like I might not be as well-prepared financially as I thought I was, and I felt intimidated by how far ahead of me some people seemed to be. There was still so much  investment research I wanted to do- so much more money I still wanted to make and save. But then I started to feel proud of myself once again for all that I financially accomplished so far in just the last two of my thirty years. I was perhaps not as financially ahead of the game as I’d like to be at thirty, but I had made a major dent.

And I flashed back to a time when I felt absolutely overwhelmed by the killer student loan in my life. A time where I cried at the thought of  just getting by monetarily from month to month. Where I would have laughed at the thought of retirement or savings accounts, and could barely pay for a dinner out. Where just paying rent every month put true fear in my heart.

They say that money doesn’t buy happiness, but I’ll say very honestly that it can take away a huge amount of fear.

So if you’re feeling afraid and maybe even embarrassed that you don’t have enough money in your thirties to follow the retirement plan or savings account steps laid out for you by certain financial sites or advisors, let’s start with a simple first step:

1. You’re not alone. And it’s okay.

It’s really okay. The fear is real, but so is the truth. And the truth is that everyone moves at their own pace. Not everyone starts at the same point. Perhaps you have multiple student loans or have gotten yourself into some bad credit card debt. Or you’re making no money or are in school or have just declared bankruptcy. The most important thing is that you will change and want to change and grow your wealth.

2. You recognize that you want to change your finances and are ready to take small steps.

Dave Ramsey says this best with his talk of Baby Steps. Take things little by little. If you’re not making enough money to follow any financial advice, then your focus should be on hustling to make more money. It’s that simple. Dave Ramsey will sometimes tell people to ‘deliver pizzas for extra money’ when they call into his show and tell him they’re broke. That may seem below your sense of dignity, but sometimes you may truly have to hustle.

I’ve worked outside in the snow in the dead of winter, taught SAT prep in my spare time, sold insurance, traveled two hours to Staten Island to work gigs and much more in the past in order to meet the quota for money I needed to make that month. Hustling for money can be hard and grueling, but it can be done.

3. Do what you can. It does get better. Really.

I recently paid off a student loan that I wasn’t supposed to pay off until 2022. It was quite a feat, and I’m very proud of myself. Did I get it paid off early because I’m rich? Not at all- I got it paid off 7 years early because I got angry at the loan and I set my mind to getting it out of my life. My other big loan is still ahead, but you better believe I plan to attack it with all I’ve got. I don’t make a ton of money, but I try my best to take baby steps to get rid of my student loan debt and save as much money as I can. Right now I have a mini retirement account started and a small savings account. It can be done. It’s just little by little.

Times can be hard and finances can be scary. Please know that I understand and I’ve been there. Im still there sometimes. But I believe that I things can get better and they’ve been slowly getting there. And I know you can do it too. I believe in you.

 

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