Annuities cap your Income potential!!

Annuities are mostly sold to people on the notion of safety, and they guarantee your income. If the market goes down, you can't lose money. Now that sounds nice, however, does anyone realize first of all how expensive they are.  Currently, the average annual fee is around 2.28%. Not only is that high, but it's cause has to do with the fact that annuity salespeople receive high commissions.

On top of that, your money is locked up and your gains are capped. (This is a feature that many people don't understand.)  For an example, even though the stock market is up 18% this year, with an annuity, your gains could be capped at 5%.

If you had taken out a variable annuity with 5% caps in 2009, you'd have missed out on over 129% gains during the past four years. Not to mention, if you haven't noticed, Wall Street's good years have always made up for its down years, and then some, to date.

I have a friend whose Husband passed and a friend of hers talked her into an annuity and I was floored at what she said he had told her, but I couldn't get her to listen to me.  There is one form of an Annuity called an ALDA let me share with you the basics of an ALDA. Like a regular annuity, it will pay a defined amount of money over a specified period of time. However, the ALDA will pay out later in life. So for example, you can be 65 years old, pay a lump sum today and start collecting the income stream starting at 80.  The ALDA will be cheaper than a regular annuity because the income collected will likely be less than if you started immediately at 65. But if you die before 80, the insurance company keeps the lump sum payment. You don’t collect anything!

In other words, you’re placing a bet with the insurance company that you’re going to live long enough to recapture all of your lump sum payments in the form of monthly income. As you can see there’s a reason these executives make millions and fly private jets – because they bet the right way more often than not.  Now that doesn’t mean you can’t live to a ripe old age. It just means that financially, an annuity of any kind isn’t designed to work out for your benefit. It was created to generate profits for the insurance company.

I've never been a fan of annuities or any investment where I'm not somewhat in control, or at least have knowledge of what is going on.  That is one of the reason's I share information that I've gained on the Suburban Trader web site and blog.  From the information and knowledge that I've gained over the years that is why the portfolio at Suburban Trader is around 90% invested in stocks that pay handsome dividends.

One interesting book to read is Get Rich With Dividends by Marc Lichtenfeld; it's just one of many but may be a good start for some of our readers.  But let’s get on with the information. If you don’t need the income stream for 10 years or more, buy quality Perpetual Dividend Raisers – companies that raise their dividend every year – and reinvest the dividends.

Here’s the way it would work:

Let’s say you buy a portfolio of quality Perpetual Dividend Raisers with an average yield of 4% and average annual dividend growth of 10%.

If the companies continue to raise the dividend by an average of 10% every year, as we've stated that they have over the past 10 years, and the market generates its historical average return, a $200,000 initial investment will be worth $635,549 in 10 years.

If at that point you need the income stream, you simply stop reinvesting and instead collect the $28,808 per year in dividend income. That is likely 50% more than you’d receive if you invested the same $200,000 in a deferred annuity.

In 15 years, the $200,000 portfolio is worth $1,179,868 and spins off $59,968 per year in income. That’s way better than giving an insurance company $200,000 at 65, hope you make it to 80, and then collect less per month than you would investing in quality dividend stocks.

Even better is that as long as the companies continue to raise the dividend, you’ll get an increase every year, something that won’t happen with an annuity.

So if you’re collecting $59,968 at age 80 and the companies you’ve invested in are raising the dividend by 10% per year, at age 81, you’ll collect $65,964. The next year you’ll receive $72,560, etc. And when you pass away, that million-dollar nest egg will go to your heirs instead of an insurance company’s bottom line.

As you can see, that investing in Perpetual Dividend Raisers is the least expensive method of investing. You get to hang on to and compound your savings rather than pay for an insurance executive’s salary. Furthermore, you’ll make more money than you would with an annuity, and, importantly, your assets will stay with your family.  Marc also writes an article for Seeking Alpha.

 There are hundreds of companies that have been raising their dividend for years. Some, like Procter & Gamble (NYSE: PG), have done so since Eisenhower was president. Others, like Texas Instruments (Nasdaq: TXN), have a 10-year track record.

Also, it would afford you the opportunity to participate in the considerable upside that stocks offer. Is there some risk? Of course, but over 10-year periods, stocks have gone up 91% of the time.  In fact, the only time stocks did not rise over 10 years was if an investor sold during the heart of the Great Depression or Great Recession. The average increase over those 10 years (including the losing years) was 128%. Does an annuity do that?  In actuality, stocks that raise the dividend every year have never been down over 10-year periods, not even including the Great Depression, for which the data was not available. But that does include the Great Recession. In fact, if you sold at the end of 2008, right near the bottom of the market, you still made 40%.

Stocks, particularly Perpetual Dividend Raisers, are not as risky as people think when you're talking about the long term. If you have a 10-year or longer horizon, it's riskier not to be in stocks as your money won't grow and keep up with rising prices.

 

Disclaimer:  Suburban Trader is a publisher of financial news and opinions and NOT a securities broker/dealer or an investment adviser.  You are responsible for your own investment decisions.  All information contained in our newsletters or on our web site(s) should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence.

Suburban Trader