Annuities Have Become 'The New Black'

by L.A.S.

In 2008, to no one's surprise, investors, suddenly shifted funds into plain old boring fixed annuities. How many investors did this? Just to quote some startling stats that came out earlier this year, sales of fixed annuities in 2008 jumped to $107 billion, up nearly 60 percent over 2007.

We are talking about the most snore-inducing sector of the financial investment field, the fixed or fixed index annuity here. Perhaps the only item that qualifies as duller is the savings bond. Now normally, we are told to have a portion of our investments in safe instruments such as bonds or insurance, vehicles like that. And some of us actually do that.

But traditional diversification did not work for most of us in 2008. So that explains the rush to the safety of the fixed annuity. It is very simple to understand: you just toss a lump sum into the kitty and draw upon it to suit your needs. There are variations in how long a waiting period before you begin drawing on the annuity, and there are also some that allow you to deposit small sums during your working life in order to draw upon it in your retirement, just like an IRA or 401K.

But the deferred accounts are nice because the interest they accrue is tax free. The longer the deferred period, the better, of course, so that they can swell into very nice nest eggs indeed. The downside has always been that you had to accept a rather low rate of return in exchange for this level of boring safety. The other downside is a rather steep penalty for dipping into your fund in case of emergency.

Deferred annuities generally produce a 5 percent rate of return, while immediate annuities may give only about 3.5 percent. And because you are locking into just one company, you want to know for sure that the company is very strong. Everyone thought that AIG was too big to fail, to coin a phrase, but we found out differently.

There are several reputable insurance companies that have avoided the flash and the sizzle, and as a result are in very good financial shape today, even after the stock market bloodbath. Northwestern Mutual Life, headquartered in Milwaukee, is one. (I am not an agent of NML nor am I reimbursed in any way for mentioning them; but I am rather proud that they are based in my birthplace.)