There are much better ways to build wealth than via a relic of the Roman Empire. Sponsored by Leverage Planners.
SEATTLE — Annuities have a bad reputation in the financial world, and for good reason according to David Donhoff with Leverage Planners Wealth Management.
“The annuities that are the most profitable for investment advisors and stockbrokers to sell are also the least beneficial for most people that buy them,” he said. “With the evolution of financial instruments, there’s far better choices today than there ever was in the past.”
Indeed, the origin of annuities has a distant past. The Roman Empire offered families something called a warrior’s annual if they allowed their males to go to battle. It was the first known form of social security in the event a soldier died, and is the basis for today’s annuities. Not a lot has changed in the millennia since.
“All an annuity is is a deposit account at an insurance company, and the insurance company then guarantees an income stream either immediately or at some point in the future,” Donhoff said. “When we look at our three financial families, annuities are available from insurance companies at any three of these formats.
“As you might imagine, right off the bat the one that most people talk negatively about are the red-line annuities, these are also known as variable annuities. Yes, they can make money and they can also lose money. But, more importantly, they’re usually very expensive, anywhere from 2% to 5% every year in charges and expenses.”
There are annuity options available in the two safer financial families, but they aren’t that much better of a deal. Indexed annuities will increase with the stock market and not shrink if the market goes down. Still, there are better options available.
“At some point in the future you can ask the insurance company that holds the annuity for you to convert it from a depository account into a guaranteed income stream, what we typically call a pension,” Donhoff said.
Those guaranteed income streams are accounts like 401ks, IRAs and Roth IRAs. Donhoff explained the differences.
“So 401ks and IRAs are tax-deferred, they kick the taxation down the road. Roth IRAs you pay the taxes right up front, but then the money grows tax-free and spends tax-free down into the future,” he said.
Right now you can convert money from annuities or other accounts into a Roth IRA and get a 25% signing bonus. Bottom line: you should probably stay away from annuities.
“The vast majority of annuities really should be avoided,” Donhoff said. “I think that’s the high level that we should understand.”
For more information, visit the Leverage website.
Sponsored by Leverage Planners. Segment Producer Suzie Wiley. Watch New Day Northwest 11 AM weekdays on KING 5 and streaming live on KING5.com. Contact New Day.