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Why I Like Fixed Annuities |

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? Shareholders' letter pt 2/6 Wall Street Unspun 15 july ?

Why I Like Fixed Annuities

Published on June 15, 2010 in Warren Buffett Articles. 0 Comments Tags: Annuities, Fixed, Like.

Financial products, like everything else, evolve over time. Financial institutions are constantly working to develop new products that will give them a competitive edge against other companies. The market nowadays is flooded with too many new, flashy products that are really untested in the long run.

Some very simple economic and physical laws govern how money works. In an attempt to appeal to more clients and crush the competition, insurance companies hire mathematicians to tweak those laws, formulas and equations to create a product that looks like a new gold standard. In order to account for excess risk exposure, the fine print in the contract will usually make up for anything that seems to good to be true.

I am reminded of a great quote from Warren Buffett: "Beware geeks bearing formulas."

Much more can be accomplished if an investor sticks with simple products and a better strategy. When push comes to shove, fixed annuities can perform as well or better for a solid retirement plan that any of those flashy indexed and variable products. With a fixed annuity, you know what to expect and that's exactly what you get. Simple products do that.

Fixed and immediate annuities have been around for longer than any other annuity product out there. And that's because they work. Now, the new products may work but we don't know that yet. No one wants to head into retirement with an untested product. That's kind of like trusting someone else to pack your parachute.

So what is so good about Fixed Annuities? I'll list a few things.

Competitive Interest Rates- Fixed annuities offer rates that exceed bank CD rates and treasury yields. Also, all products come with a guaranteed minimum interest rate so the account will always grow, no matter what.

Income Options- Free withdrawal provisions allow a contract owner to access a portion of the account on an annual basis without penalty. In addition, most products can be converted into guaranteed income for a specified period of years or for life, your choice. New York Life and the Wharton Business School teamed up to do a study and immediate annuities were identified as the way to guarantee the highest level of retirement income.

Safety- 2008 marked a disastrous year for the global financial markets. A lot of insurance companies avoided the turmoil because of extremely conservative management strategies. These institutions are required to hold higher levels of reserves than others in the financial industry. Because of this, many insurance companies are still very stable and profitable. Also, each state has an insurance guaranty fund that insures any losses up to $100,000, just like the FDIC.

Is there a downside to fixed annuities? Sure there is. The debate should not be whether they are good or



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bad, rather that they are appropriate for some people and inappropriate for others. Timing is very important as well. It is likely that almost everyone can benefit from using a fixed or immediate annuity at some point in retirement, but if the timing is screwed up, the investor might regret the purchase.

The problems with the annuity market come mostly from under-qualified salesmen. There are also plenty of products that work really well for the insurance company and not so well for the investor. It takes a little work to be able to discern between a good contract and a not so good one.

If a fixed annuity appeals to you, it is imperative that you find a qualified advisor. Find someone who understands the products they sell and how to use them appropriately. That might take a little extra work, but your nest egg deserves no less.

Bryan J. Anderson Annuity Expert and author of The Annuity Report



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