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Mutual Funds vs. Annuities


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You would be paying more internal expenses for a variable annuity, but your money would be invested in Mutual Funds.

The primary purpose of an annuity to is create income, death benefit or long-term care benefits or to protect assets from loss through a guaranteed accumulation benefit. If you do not need the income, go with regular mutual funds. Do not buy and hold forever. If you want to be nimble, then stick with ETFs. Most discount firms will allow you to trade ETFs for free.

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It all depends on you, not the market. If you're 65 years old and need guaranteed income to pay for food and utilities, then you annuitize. If you are less than 40 and need long term growth, buy a mutual fund. Nothing has changed in this market with a ong term view. If anything, annuities are less attractive because rates are at historic lows and you'd be locking it in forever, even when rates rise again. There are good blue chip stocks with dividends over 5%...REITs and Limited Partnerships paying 5-8%.

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ETF's, REIT's, Limited partnerships, I feel stupid. I read a little about these in a book about mutual funds but the focus of the book was focusing on just that.

So I need a dummy definition and your opinion of each. And lets say you had about 20k, married with two young kids, 40yrs old, good credit, about 2k monthly disability income.

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As investments go, mutual funds are pretty inefficient - there are a lot of fees that you won't even notice...

* Purchase fee/front load (if buying direct and not thru broker) often as high as 4.5% of your investment.

* Redemption fees - if you need to sell or redeem a funds shares.

* Management fees - charged annually.

All these fees affect the performance of the fund. If you go to a site like WSJ or Fool. com, you can look at a funds' performance and compare it to the fee adjusted performance.

ETFs often have the same investments as mutual funds, but with a lower cost since they are traded like stocks. That means you pay 1 commission to buy and 1 to sell - no management fee.

Another positive to ETFs is they are highly liquid and if you want to make some money off of them, you can buy/sell options too.

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It all depends on you, not the market. If you're 65 years old and need guaranteed income to pay for food and utilities, then you annuitize. If you are less than 40 and need long term growth, buy a mutual fund. Nothing has changed in this market with a ong term view. If anything, annuities are less attractive because rates are at historic lows and you'd be locking it in forever, even when rates rise again. There are good blue chip stocks with dividends over 5%...REITs and Limited Partnerships paying 5-8%.

Given the Fed's most recent statements, I don't see rates rising for a very long time... that being the case, a fixed annuity paying 4.50 to 5.00% is very attractive in this market, especially given that the average 30 yr T-bond is paying in the neighborhood of 3.75%.

Right now, a 20 yr German bond is paying 4.25% (offshore investing is not for everyone, consult a lot of experts (mainly tax and legal) before doing so) with a better credit rating that the US. The US based ETF for German bonds is BUNT.

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Consider that when you annuitize, to an extent you are paying yourself back with your own principal (there is no return of principal at some date certain). When you buy equitites paying dividends, they're paid out of earnings. So your initial investment remains intact (to the extent that the stock doesn't lose value), and can even grow larger over long periods of time and taxed at 15% cap gain rate when sold (or 0% if part of your estate when you die). Big consideration.

In any case, there are advantages and disadvantages to both. So again depends on you. And regarding the Fed, if you annuitize, you need to think about interest rates 5, 10, 20, 30 years from now. That's an unknown. Typically long periods of low rates create inflation that will destroy purchasing power (look at gold prices), so even if the fed doesn't raise rates, the amount of goods and services that your annuity payment will purchase will be eroded.

Edited by jq26
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True -when you annuitize, you are taking on some interest rate risk... eventually, rates will go up - the only questions are 1) how much, and 2) when.

The Fed is not expecting to take action in the next 2 years and given the 5 central banks flooding the market with US Dollars the other day, the rate increases are going to have to be dramatic -probably in the neighborhood of a 2-4% instant rise to fight the inflation that has been brewing in the economy since the recession/depression began.

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Okay, but the fed doesn't control purchasing power erosion anyway. They try to, but inflation is the real threat not necessarily interest rate increases. Look at gold. Its tripled in 10 years. Even oil, despite supply increases, has not dropped in price. Food is up something like 10% this year (expected to continue to seriously outpace CPI). So if you are a retiree who bought an annuity that budgeted you for 2-3% expense increases, you'd already be taking a haircut as your purchasing power gets destroyed much faster then anticipated, despite the fed holding the short end of the yield curve at 0.00-0.25% and engaging in QE bond purchases.

Moreover, the "low" CPI #s are because of owner's equivalent rent component has collapsed in the past 5 years, and it represents 23% of the calculation. So as others costs have risen, the OER has been masking those increases. Now you are a retiree with NO mortgage and no rental costs and you buy an annuity to subsidize living costs. You are fully exposed to the ballooning costs of energy and food, and have 0 exposure to the declining OER. Regardless of the fed and interest rate risk, your purchasing power declines substantially year over year. The fed is meaningless. In fact, low interest rates actually work against you because they cost commodity inflation (your food and energy!).

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Very true... so if I had to annuitize, then I'd probably ladder it by buying multiple fixed annuities across different issuers.

I agree that the inflation numbers are misstated...I read somewhere that the actual inflation rate in the economy is in the neighborhood of 15-20%. This is mainly due to the excessive pumping of money into the economy...

Really, the economy is realistically in stagflation - stagnant growth and rising inflation.

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"And lets say you had about 20k, married with two young kids, 40yrs old, good credit, about 2k monthly disability income."

Stay liquid..........this market is for fools right now. You might see some great opportunity's in the near future. I think the markets are going to get hammered very soon.

In the position you mentioned I would hold that cash.......kids are costly, things happen and annuity's suck right now.

I bought one in 2000 when I took a early retirement......half of my 401 went into it, the other half into PM's................my PM's have crushed the annuity, but then again I must sell to realize profit, which I am not willing to do, but it is nice knowing I have it if needed and it will never go to zero.

The CPI is a joke on us if you have faith in the numbers as we all know better, the markets are propped by the Fed pumping and fiat debt around the globe is FUBAR, as everybody is in the devaluation game......look how the Swiss just joined the game.

These are crazy times we are living in, nothing is predictable with the exception of inflation, how far and how much can be absorbed is the question.

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Yes - stay as liquid as possible...maybe the best investment to make is a good safe and store cash, gold and silver... personally, I have been buying a lot of Swiss francs from the local bank, along with 1oz silver coins.

If you feel that you must be in the market, stay in liquid investments - 90 day or shorter t-bills. The yields suck, but the trade off is the high level of liquidity.

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Waiting with baited breath to see the Fed's next move today...

supposedly they want to shift their portfolio to long-term assets...selling their short term assets could push the yields to zero - or worse - negative yields. In other words, the Fed is trying to discourage everyone from being liquid.

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Selling their short term assets would make rates rise because someone has to buy them- at some rate. That's okay, because right now the private sector doesn't care about short term rates, not even a hair. Short term treasuries are being purchased to preserve capital, not for any sort of yield. So maybe rates go from 0.00 to 0.01. No big deal.

Alternatively, having the fed buy the assets on the long end of the curve should drop rates a bit on 15yr and 30yr mortgages. But its an experiment. It apparently didn't work so well in the early 60s. But let's hope....nothing like a 3.xx% rate on a 30yr fixed!!

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Operation Twiest in effect to the tune of $400b. The fed will roll over all short term maturing securities and purchase longer term securities (6-30 years). Their balance sheet will remain steady at approximately $1,600,000,000,000 ($1.6T).

The 10yr bond price spiked on the news, pushing 10yr yields down significantly. ^TNX Basic Chart | CBOE Interest Rate 10-Year T-No Stock - Yahoo! Finance

With a little luck, the current downtrend in rates will remain intact....the refi boom continues! Our retirees are being starved (they live on yields and they've collapsed), but if you are a borrower live it up.

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I wish they'd let the natural business cycle play itself out without constant tinkering. Interest rates should have never been as low as they were in the early 2000s for as long as they were. That helped fuel the home purchasing craze which in turn helped raise prices to levels that were unsustainable by every measure, the best two measures being rental rates and personal incomes. And then POP, down it went bringing the economy to its knees. And here we are, five years later looking to the fed for low rates for an extended period to solve the problem they helped create ten years ago. Ironic.

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Which is funny because I recently read a book about the Great Depression... apparently, according to the author, the New Deal made it last about 4 years longer...

So far, the US has been in the current bout of economic malaise for about 3 or 3 1/2 years. Four "stimulus" plans failed to bring the economy out of the slumps. Operation Twist is basically stimulus #5 (TARP, ARRA, QE1, QE2).

Japan has been in a depression for the last 10 years. They've had rates at 0.00001% to stimulate their economy... an acquaintance of mine borrowed $2 million from a Japanese bank and bought Brazilian National Treasury notes... paid something like $20 in interest, made a cool $600k once he sold the bonds and paid off the bank.

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They've had rates at 0.00001% to stimulate their economy... an acquaintance of mine borrowed $2 million from a Japanese bank and bought Brazilian National Treasury notes... paid something like $20 in interest, made a cool $600k once he sold the bonds and paid off the bank.
Taking advantage of the currency carry trade: Currency Carry Trade Definition
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ETF's, REIT's, Limited partnerships, I feel stupid. I read a little about these in a book about mutual funds but the focus of the book was focusing on just that.

So I need a dummy definition and your opinion of each. And lets say you had about 20k, married with two young kids, 40yrs old, good credit, about 2k monthly disability income.

I have always used the following guidelines when saving:

1) Invest in 401k to the limits of the company match.

2) Contribute to Roth IRA to the $5,000 limit with after tax income.

3) Begin fillling in with traditional IRA's until the limits are met or I run of money to save (usually I run out of money to save, kids and college now).

4) After all 401k's and IRA's have been maxed, then you would want to start parking your money into annuities.

Basically, what I am saying here is there are several advantages within the tax code that will benefit you more than deferring income through an annuity. I think others have already hit on the advantages and disadvantages of annuities so I will not go into more detail.

Based on the scenario you posted above, I would start with opening a Roth IRA with $5,000. As long as you do not have joint income over $55,500, then you would qualify for an additional tax credit of $1,000 (Form 8880). Only obstacle I can see would be the child care credit, and if applicable, would deduct from your $1,000 dollar for dollar. The child care credit used to max at $480.00 per child, so be aware of this. This crdit is also taken after child tax credits, if you are able to qualify for that credit, meaning you would still receive the credit on your Roth.

Later on you may want to, or need to, use the money, and with a Roth you would only need to pay taxes and penalties on actual earnings, not the $5,000. You can also avoid the penalties by using it for certain educational expenses or first time homebuyer.

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  • 2 months later...
Mutual Funds vs. Annuities....................Lets go!

Hammer vs screwdriver....................Lets go!

You are comparing FINANCIAL TOOLS when each has a different purpose and may be appropriate for different kinds of people with various risk tolerances, goals and objectives.

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What is boatloads? Are you subject to the same limitations? Are you subject to the "highly compensated" tests and limits?

I am going to be leaving my corporate job in April 2012. They have agreed to continue to pay me full salary and provide me with medical/dental benefits for a period of time beyond that date (a confidential severance package). But I'm not sure where my income will come from in 2013. If I end up working for myself, maybe a self-funded, self-directed 401k is a viable option.

Edited by jq26
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