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Annuities: Rising Interest Rates: Another Reason To Avoid Equity-Indexed Annuities

Aug 17, 2007
Rising interest rates are another reason to avoid Equity-Indexed Annuities. If you are retired or near retirement, don't let yourself be talked into purchasing an Equity-Indexed Annuity. If you do, it could easily be a decision you regret for many years to come.

I've been called 'a lone voice in the wilderness speaking out' about the dangers of equity-indexed annuities. It seems that everywhere you turn there is an advisor or insurance agent telling you an equity-indexed annuity is the greatest thing since sliced bread. Don't believe them.

I've talked at length in other articles about the hidden dangers in Equity-Indexed Annuitiea, but the 3 main reasons are (1) they needlessly require you to lock up your money for a very long time, (2) the majority of your returns are still based on the stock market and (3) the commissions for selling an Equity-Indexed Annuity are so high it creates a tremendous conflict of interest for those recommending them. Rising interest rates are just one more reason. Let me explain.

Equity-Indexed Annuities eliminate your flexibility and control over YOUR money. In today's post-9/11 world where terrorism is a very real threat, it's important that you have the ability to make changes to and access all of your money when you need to--without incurring surrender penalties that can be as high as 20%! Locking your money into an Equity-Indexed Annuity for 10-15 years causes you to lose control of all but a small portion of it. Equity-Indexed Annuities don't offer enough reward in exchange for such a long-term commitment.

The main selling point of an Equity-Indexed Annuity is the ability to participate in the return of the stock market but have a 'guarantee' that your money will earn at least 3%. The performance of these investments is designed to come from the stock market, not the guarantee. If you are willing to invest in the stock market, I feel there are better ways to do so which provide downside protection while allowing you to retain complete control and flexibility. (Contact me for more information.)

Rising interest rates is another reason you shouldn't invest in an Equity-Indexed Annuity. Over the past 3 years, the thought of earning a 3% fixed return on your money didn't sound too bad. Certificates of Deposit at the local bank have only been paying 1% or 2%. That's made it difficult for those relying on that income to meet their monthly needs. Equity-Indexed Annuity salespeople have used this as a main selling point.

But things have changed. The Federal Reserve recently increased the Federal Funds interest rate by one quarter of one percent. That may not sound like much, but it's the first time they've raised rates in four years. They also signaled that the economy is heading in the right direction and that they'll continue to raise interest rates over the next few years as necessary to keep inflation in check.

The interest rates available on Federally Insured Certificates of Deposit (CDs) have already risen significantly. You can earn almost 2.5% on a 1-year CD and over 3% on a 2-year CD. The futures markets project that Federal Funds interest rates could be as high as 3% by the end of 2005. That's means it is likely that you'll be able to get a 1-year CD for over 4% and a 2 or 3-year CD for 5%.

Think about it--if you can earn 5% on a short-term, Federally-insured Certificate of Deposit, why would you want to lock your money up for 10 to 15 years with a guarantee of only earning 3%? Especially if you'd have to pay a penalty that could be as high as 20% to get at more than just a small portion of it! It just doesn't make sense.

For those needing income, now is the time to be patient. Use short-term investments like Certificates of Deposit that mature in 1-year or less. When they come due, chances are rates will be significantly higher and your patience will be rewarded.
About the Author
Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He will answer your financial question FREE at http://www.guardingyourwealth.net/
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