Choose Fixed Annuities Over Equity Indexed Annuities?

Q. Jeff, I have been investigating different ways to invest my monies. Fortunatley I have stayed away from EIA's because if something is too good to be true it usually is. I have been looking at different fixed annuities with anywhere from 3 to 4 percent guaranteed with usually a 3 or 4 percent bonus the first year. The average fixed annuity is then going to 3 to 3.5 percent for the next 4 years and then what ever the market is after that. Do you feel fixed annuuities are a wise investment choice?

A. Thanks for your questions. I'm glad you've been smart enough to stay away from Equity Indexed Annuities.

I am not nearly as opposed to traditional fixed annuities. I'm not as big of a fan of those that lock you in for several years but only tell you what you'll earn the first year or so. I prefer the ones where the rate is locked in for the entire period for which there are surrender charges.

So if there are 5 years worth of surrender charges, I would want to know what the rate was for the entire 5 years. Otherwise, you have given the insurance company too much control. For instance, you know there isn't such a thing as free money. If they pay a bonus the first year they are going to pay you less than the market rate the subsequent years.

Also, beyond the minimum, the insurance company can set the rate wherever they want and your only recourse is to accept it or pay the surrender penalty. Either way you lose.

The other question is whether now is a good time to tie up money in a fixed annuity for 4-5 years. The rates that you mentioned aren't high enough to justify locking it in. You can earn similar rates on money markets (ING or Emmigrant Bank) or CDs that have a shorter time commitment.

Short-term rates will continue to go up. Rates today are close to 2% higher than this time last year.

If you are to get a fixed annuity, I would suggest waiting until rates get closer to their norm.

Your posted comments on this and other questions are welcome.
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