Berko: No guarantees with equity-indexed annuities
Friday, May 10, 2013 7:00 AM
Dear Mr. Berko:
I would like to invest $100,000 of my individual retirement account (which is worth $330,000) in safe dividend-paying stocks and bonds. I am 65 and probably will start using some of this money for living and travel expenses. I met with a “retirement specialist” who is the CEO of his firm in Center Valley, Pa. His strategy is to invest in an assortment of guaranteed annuities that index the Standard & Poor’s 500 index and are guaranteed not to lose money; over time, they will always beat the market. Are you familiar with this strategy or with this man and his firm? I think I would prefer some good dividend-paying stocks. Do you think you could recommend a dozen or so stocks I should own?
B.T., Bethlehem, Pa.
If you need to talk to a “retirement specialist,” there are at least 20,000 people you can talk to in Bethlehem who receive Social Security checks every month. These folks can tell you more about retirement than 10 dozen of those apple-cheeked annuity outlaws – who won’t give a fig or ficus about what they sell, as long as the commissions they earn are generous. Stay far away from Central Valley, because that CEO is going to skin you alive, and when he’s finished with your hide, he’ll toss you to the fish. Of course I’m familiar with his ridiculous strategy. I’ve been writing this column for nearly 40 years, so believe me when I say that unless Wall Street has found a way to change the laws of nature, there are no equity-indexed annuities or variable annuities that can perform better than the market. God just doesn’t care enough about annuities to invest them with those powers. And there is no such animal as an equity-indexed annuity or variable annuity that is guaranteed not to lose money. Therefore, every equity-indexed annuity and every variable annuity sold on this planet has a risk factor and can be worth a lot less than you invested.
This “retirement specialist” is what I call an articulate incompetent. His advice is lethal to your wealth, and the 12 percent commission he earns on “an assortment of guaranteed annuities” should be your first clue. Kiplinger, Standard & Poor’s, Morningstar and others have published articles discussing the abuse and misuse of these products. The volume of complaints about equity-indexed and variable annuities currently exceeds the Securities and Exchange Commission’s ability to respond. I suggest that you Google “equity-indexed annuity fraud” and then sit back and start reading.
There are quite a few good dividend/growth stocks that make a lot of sense to own; however, I can’t make specific recommendations without knowing your financial background, your risk tolerances, your income needs and other important personal information. So I recommend that you employ a knowledgeable, experienced, wise and caring money manager whom you can trust. He can help you define and manage your goals and eliminate most of the guesswork from your investment choices. And a professional with those qualifications would probably recommend a portfolio of dividend growth investments in the following sectors: business development companies yielding 5 to 9 percent, pipeline master limited partnership issues yielding 5.5 to 8.5 percent, telephone and electric utilities yielding between 4.5 and 5.5 percent, conservative gas and oil drilling issues with 5 to 8 percent yields, some big drug companies yielding between 4 and 6 percent and selected real estate investment trusts with 4 to 6 percent yields. Depending on the amount of money to be managed, these professionals charge annual fees of between 0.75 and 1.5 percent, including transaction costs.
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