Better Alternatives Than Equity Indexed Annuities, a "Guarding Your Wealth" exclusive.

Part 2 of an ongoing series exposing Equity Indexed Annuities. Can you have growth and stability in one product? Read on, Mr. Voudrie will explain this fallacy and more. Guarding Your Wealth is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the president of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.

January 23 2004--Better Alternatives Than Equity Indexed Annuities

Equity Indexed Annuities (EIAs) have become the hot product of late. I believe you can easily find other alternatives that will bring a better return, without locking up your money or levying hefty surrender penalties. Ill discuss these alternatives in the next two articles. But first, you should understand two things: your purpose for investing and how EIAs work.

Know why youre investing. For simplicity lets consider two objectivesstability and growth. If you are primarily concerned about protecting your investment and earning a stable rate of return then your main objective is stability. On the other hand, if you are concerned about protecting yourself from rising prices, building a retirement nest egg or growing your wealth then your primary objective is growth.

(Mr. Voudrie responds to questions from readers on an almost daily basis. If you would like clear straightforward unbiased answers to your financial questions, contact e-mail protected from spam bots)

Its unlikely that your objective will be 100% stability or 100% growth. Usually it will be a combination of the two. For instance, if youre 55 years of age and preparing for retirement, perhaps youd want about 40% of your portfolio invested in stable investments such as bonds or CDs, and 60% invested in equities such as stock mutual funds.

On the other hand if youre 75, stability may be more of an issue for you. You still want to plan for inflation, but your objective is very different from a 55 year-old. You might have 70% in stable investments and only 30% of your money in equities.

Maybe youve been told EIAs are the perfect answer. Theyre sold as delivering both stability and growth. Salespeople say you can participate in the growth of the stock market without the risk, while always earning a minimum of 3%. It seems that an EIA will help you meet both objectives. Upon closer examination, though, you will see that it doesnt do either very well.

EIAs are said to provide stability because they provide a minimum return of 3%. Lets put that in perspective. In return for that 3% minimum you are required to keep YOUR money in the investment for many years, or else pay a penalty that in some cases could be the equivalent of over 3 years worth of return!

Moreover, that 3% minimum doesnt change over the long length of the investment. If interest rates increase during those 7 to 12 years, you will be unable to take advantage of them. Imagine how you would feel if you knew you could be earning 5% or 7% in a CD or government-guaranteed bond, but you were stuck in an EIA paying 3%! The stability an EIA provides just doesnt measure up.

So lets take a closer look at the growth offered by an EIA. Typically, your investment choices are limited to the S&P 500, NASDAQ, or a bond-related index. But EIAs place a limit on how much you earn. If these indexes go up 25% or 50% like they did in 2003, you may only earn 10% to 12 %.

EIAs only allow you to only participate in a portion of the indexs return, or they have internal charges of 1-2%. Even if the underlying index goes up 10%, your return will be lower. This makes sense when you realize the insurance has to earn back the enormous commission it paid the agent. The insurance company cant pay a 3% minimum in the bad times AND allow you to get 100% of the return in the good times.

So, in an EIA, you bear the risk of investing in the stock market but dont get all the return. Dont stack the deck against yourself. When you invest in equities you should have access to thousands of choices, and get all the return.

The bottom line: why trap yourself in an investment that greatly limits your upside potential and shackles you with outrageous surrender penalties, all for a measly 3% promised return, while your agent walks away with a 10 or 12% commission? No matter how you need to split your portfolio between stability and growth, believe me, there are much better ways to manage your money. Ill talk about them next week.

If you have a specific question or would like more information, give me a call toll-free at 1-877-827-1463 or go to www.guardingyourwealth.com. You can also reach me by email at e-mail protected from spam bots. I will be happy to help you in any way I can.

Mr. Voudrie is a Certified Financial Planner and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN.
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