I know financial subjects can be boring but I am determined to keep hitting on things that will affect you in your everyday lives.
Annuities are products usually sold by “bottom dwelling, scum sucking” insurance piranha (just using Margaret’s words). The insurance companies make huge profits out of the “annuity game”.
The only way I can put annuities in laymans terms is to give two examples.
Lets say you have $100,000 laying around (I know that is a stretch for most of you) and you need $5,000 per year of income to live on. The solution is easy. Buy a guaranteed certificate of deposit insured by the FDIC. Today it is easy to get 5% as an effective interest rate without taking a any of risk. Problem solved. You got your $5,000 per year.
Now example number two. You again have $100,000 laying around but you need more than $5,000 per year to live on. Your friendly insurance agent says he will guarantee you $8,000 for the rest of your life if you turn the $100,000 over to him. Good deal, right? How can he do this? Well he calculates how long someone like you will live and he gambles that in addition to the $5,000 per year that he can earn also, he will pay you some of the $100,000 that you gave him. He will pay you $5,000 based on his earnings and $3,000 from principal. After one year, he has $97,000 left to invest. The insurance company gambles that you will die before it pays out all the money you gave them including interest. Here is the “kicker”. If you give the insurance company $100,000 in exchange for a monthly guarnteed income, it is gone. If you die one day after giving the $100,000 to the insurance company, they keep it. Your wife doesn’t get it nor do your KIDS.
Here my get rich tip (in this case, stay rich tip). Manage your own money just like an insurance company would when they present you with an annuity. Earn the best interest you can and use some of your principal when necessary.
Now to complicate the world you should know there are lifetime annuities, tax-deferred annuities, single premium annuities, and variable annuities just to name a few. They all have sophiscated financial calculations to do different things but in the end, the insurance company makes big dollars with your money.
My tip of the day, AVOID ANNUITIES. There is an occasional situation where annuities might make sense, but it is the exception to the rule.
Love,
Dad(Just Chas.)