50% Tax Penalty?

Sep 16, 2019 David Kennon

BREAKING NEWS:  STOCK MARKET ALERT

Year to date returns:

Stocks:  +18%

Bonds:  +9%

How is the media not talking about this?!

Moving on…..

I am often asked by my clients who are over 70 about RMDs or Required Minimum Distributions. I can understand why RMDs could cause concern. Let’s take a quick overview of the subject, so we are all on the same page.

What is RMD, or Required Minimum Distribution?

Once you turn 70-½, the IRS requires you to begin taking money from your retirement accounts. (I don’t know why it’s 70-½; it’s just one of those strange bureaucratic choices we all have to live with.) Basically, the government doesn’t want to let you defer taxation on these accounts forever.

The amount you are required to take out depends upon your age. The portion increases each year.  Here is a table giving you an idea of how much you need to take out:

Age	Required Withdrawal (%)
70	3.6%
75	4.3%
80	5.3%
85	6.7%
90	8.7%

So if you are 75 years old and you have $100,000 in your IRA, you are required to take out $4300 during that year. If you don’t, the IRS imposes a 50% penalty.

That’s not a typo.

There is a 50% tax penalty on the monies you should have taken out but didn’t.

So the combination of severe tax penalties and the seemingly unfair practice of being forced to pay taxes on your retirement savings gets a lot of attention.

But I’m here to tell you that RMD planning for most people is a distraction from the real issue: When should you begin to spend your retirement savings?

When should you spend your retirement savings?

I ask the same question to everyone who comes into my office. When do you plan to spend the money you saved specifically for retirement?

The most common answer I hear?  “When the government says I have to.”

Does that make sense to you? Does it really make sense to let the government dictate when and how much money you spend from your savings?

As I discussed at length in the past, America is a country full of oversavers. Retirees, falling back on a scarcity mentality that comes from their parents (which comes from living through the Great Depression) are waiting too long to spend their savings.

Instead of looking at generic government tables, doesn’t it make more sense to do a little planning and determine how much you can safely spend from your retirement accounts as soon as you retire?

Personally, I strongly subscribe to the 5% rule. If you have your money invested in a diversified portfolio of stocks and bonds (with at least half of the money in stocks), the reality is that between now and the end of your life, the portfolio should return an average of at least 5%.

Minus the Great Depression Part 2, you are going to be fine.

So if you are 65 years old and you have $100,000 invested in your IRA and you begin to withdraw $5,000 a year, great! You should be! Enjoy that money. Spoil those grandkids! Take that dream vacation!

And guess what, when you turn 70-½ and you start hearing warnings about RMDs, you don’t need to worry! You are already, naturally, satisfying the requirement by simply withdrawing a sustainable and reasonable amount of money each year.

Remember, the government doesn’t say that you need to spend 3.6% of your principal at age 70.5.  If your investments make 3.6% and you withdraw that money- it satisfies the RMD!

YOU need to be determining how to get the most LIFE out of YOUR money. You certainly don’t want to hand that job over to Uncle Sam.

Stop asking the question: “When and how much money does the government force me to take from my retirement accounts?”

Start asking, “When and how much money can I safely spend on an annual basis from my retirement accounts?”

Instead of saying, “I don’t want to take out 3.6% of my account value when I turn 70.5 and pay taxes.”  Say, “I am going to find the perfect balance between spending too much and spending too little from my savings.  It’s not up to the government to determine when I can enjoy my money.”

Instead of being frustrated that you can’t continue to defer all of your retirement savings indefinitely, empower yourself to discover how to live your best life NOW.

Be Blessed,

Dave

Cheating on Tests

Sep 9, 2019 David Kennon

It’s quiz time. For those of you who faithfully read my weekly articles, you should do great. Those new to the Retirement Revolution are going to learn some pretty mind-blowing facts.

Note: The answers follow each question. No cheating!  I was trying to figure out how to make sure you don’t peak at the answer by mistake.  So I tried to be creative.  You will see what I mean below.

1. What did the stock market return the 12 months after the bottom of the 2008 real estate and stock market crash?

A. -30%
B. +5%
C. -10%
D. +49%

Answer: One letter after c (otherwise known as d)

2. What did the stock market return, per year, in the 1990’s?

A. 5%
B. 18%
C. 1%
D. 10%

Answer: Two letters before d

3. What is the average return for stocks from 1800-1900 (accounting for inflation)?

A. 5%
B. 3%
C. 10%
D. 0%

Answer: One letter before d

4. What is the average return for stocks from 1900-2000?

A. 4%
B. 10%
C. 0%
D. 12%

Answer: Two letters before d

5. At what age should most people stop investing money in stocks and bonds?

A. 60
B. 70
C. 80
D. 90
E. Never

Answer: One letter after d

6. How often do “most economists” predict a recession?

A. Every ten years
B. Every five years
C. Every three years
D. Basically every year

Answer: One letter after c

7. Why do many money managers hesitate to encourage clients to spend?

A. They don’t want them to run out of money.
B. Portfolios perform better when you don’t take out any money.
C. They are jealous of all the fun you are having with the money.
D. They get paid based on how much money is in the account.

Answer: Two letters after b

8. How much do I need to watch financial news channels to be informed enough to make good investment decisions?

A. One hour a day.
B. One hour a week.
C. A few minutes here and there.
D. Never.

Answer: One letter after c

9. How much more money do you receive for every year you wait to collect social security?

A. 5%
B. 0%
C. 6%
D. 8%

Answer: Two letters after b

10. When will social security go bankrupt?

A. In the next ten years.
B. In 10-20 years
C. In 20-30 years
D. Not in your lifetime

Answer: One letter after c

11. From your late forties to your late seventies, how much less money do people spend on average?

A. The same
B. 10% less
C. 40% less
D. 18% less

Answer: Two letters after a

12. When does it make sense to use some of your 401k to pay off your mortgage?

A. If you are about to retire.
B. If you plan on living there for the rest of your life.
C. If it would make you feel better and more secure.
D. Basically never. The taxes are terrible.

Answer: Two letters after b

13. You are getting $2000 a month in Social Security. Your spouse is getting $2500. If you spouse were to die, how much money would you continue to receive?

A. $2000
B. $4500
C. $2500
D. $2250

Answer: One letter before d

14. How many retirees are dying with more money than they’ve ever had before?

A. 5%
B. 33%
C. 0%
D. 50%

Answer: Two letters before d

15. How many Americans are able to maintain their standard of living once retired?

A. 48%
B. 0%
C. 74%
D. 15%

Answer: One letter before b

16. Which of the following steps is NOT a part of the Retirement Revolution?

A. Create a budget
B. Invest your savings in a diversified portfolio of stocks and bonds with at least half the money in stocks.
C. Spend 5% of the account value each year.
D. Use the money! The 5% withdrawal, historically speaking, has never led to someone running out of money.
E.  Invest all of your money in Bitcoin.

Answer: One letter after d

17. Why is the Retirement Revolution awesome?

A. It helps you spend the perfect balance of too much and too little.
B. It reduces worry and increases fun!
C. It gives you the financial rules and parameters by which you can live your retired life.
D. It harnesses the incredible power of diversified portfolios of stocks and bonds.
E. It might help you to spend more, and worry less.

Answer: All of the above

How did you do? Share this with friends to see if they can do any better.

Be Blessed,

Dave

The Tragic Cost of Fake Recessions

Sep 3, 2019 David Kennon

What is up with all this recession talk?!

You cannot listen to any news source lately without hearing warnings of a pending recession.  I’ve had several people in my office in recent days scared to death.

There have always been talks of recessions, but what makes this worse is how financial news has blended with political news. The stock market’s performance has become a political talking point. If the market goes down, one political party worries. If the markets go up, different people worry.

It is completely out of control.

Remember that the news will report on anything that will get and hold your attention. Stock market pullback? Big news! President talking about the market pullback? Network executives are even more thrilled. It’s great for ratings, but it is terrible for you.

Why? It gives you the faulty perception that anyone, and I mean anyone, can predict a recession. Last year, I sat through a lecture by a highly respected group of economists. What was their message in 2018? High probability of a recession half-way through 2019.

Oops.

But they will decry, like all prognosticators, “It is happening more slowly than we realized.  The recession is still coming but now we see it coming in 2020.” And maybe it will. But maybe it won’t.  And if there is no recession you could be just as financially damaged as if there were. How? Let me explain through an illustrative anecdote.

Meet Betty Bonnett.

Betty worked hard her entire life as an office manager at a small, family-owned business. The owners of the company offered a 401k and a very generous match to any contributions their employees made. Like most small businesses, the owners genuinely cared about their employees and did everything possible to help.

After 35 years, Betty finally decided to retire at age 65. Up until this point, she had contributed money to her 401k and never gave it much thought. The financial guy at work had suggested some mutual funds, and Betty hadn’t changed her portfolio much through the years.  She had other, more pressing issues to deal with. Keeping an eye of the stock markets was not really on her radar.

Once Betty retired, she was suddenly faced with a terrifying decision: What do I do with the money now? The gravity of her financial choices had suddenly multiplied ten-fold.  She realized that stocks and bonds are powerful wealth building tools. Heck, she’d seen her 401k grow almost every year since 2008.

So Betty met with a planner and got her money working in a diversified portfolio. Everything was going great … until Betty started to see stories about an imminent recession on the way.

On TV, the radio, the newspapers —  the impending recession was everywhere.

Betty couldn’t escape it.

The fear-mongers made perfect sense. The national debt was too high, the Federal Reserve didn’t agree with the president, and the economy hadn’t crashed in over ten years. (On a side note, unemployment is historically low, the country’s economy (GDP) is growing, and corporate profits are breaking records.)

Betty grew sick with worry. She watched her portfolio every day. On one particular day, the market fell 3%. All in one day! It was the last straw for Betty. She called her advisor and demanded all the money be put into cash.

The market went up 4% in the next two weeks.  “Now the economy is at an all time high,” Betty thought to herself, “it is sure to crash now.”

It didn’t.  Over the next six months the stock market grew by over 16%. (By the way, the stock market, this year to date, has returned over 16%).

Betty had made a terrible mistake. She forgot that the way to invest successfully involved keeping her money working for a long time — not trying to time the markets. The 24/7 news establishment had completely derailed Betty’s financial well-being.

By missing the “ups” in the market, her long term returns will be dismally low.

What goes down always comes up.

When you join the Retirement Revolution you absolutely must understand and believe the concept that markets go up and down, but overall they have always gone up.

Put another way, if you never looked at your statement again, took out 5% of your account value each year, and then looked again at your account on your deathbed, guess what? In almost every case, you will have more than what you started with.

While I can’t guarantee this result, it has been the case since 1930.

The average retirement lasts around 20 years. The worst 20-year period in the stock market since the Great Depression returned an average of 5.6%. The best 20-year period returned an average of nearly 18%.

Nobody knows if and when a recession is coming. Trying to time the markets is a losing bet.  Close your eyes to the day-to-day hysteria and Trust. The. Process.

If you sense my frustration, it comes from the incredibly irresponsible reporting I see all around me. The news cycle is always looking for something to talk about, and recently they decided talking about recessions will get the most eyeballs on their show.

When you see a hysterical news reporter or read a hyperbolic editorial, you can confidently turn away. You know better. Their manic doomsday prophesying can’t affect you if you don’t let it.

You have a plan. You are harnessing the power of stocks and bonds. You are utilizing financial planning concepts that have worked for 200 years. You are not in danger. It might feel that way, but feelings are not facts.

Be encouraged! Be confident! And if you know someone who is freaking out over the “impending” recession, be generous! Share this newsletter with them.

Be Blessed,

Dave

Three Strange Stages of Retirement Spending

Aug 26, 2019 David Kennon

Now that hundreds of locals have already joined the Retirement Revolution, I’ve noticed some interesting consequences.

Remember that the Revolution encourages you to spend the money that your money is making — beginning the very first year of retirement.

So what happens in the real world for those of you who have embraced this concept? I see a similar pattern with most of you, and I couldn’t be more thrilled.

1. You step out into the world.

I find that many retirees plan to travel during their retired years. Once it’s discovered that it is okay to spend some of you savings, the immediate first step is almost always a trip somewhere.

Let’s say you start with a road trip across the country, and then a cruise to Alaska. Next up in a river cruise through the middle of Europe. How about an African safari? Or driving around Ireland searching out family members and history?

Some people go on multiple trips, or become cruise junkies. But I’ve found you can only take so many vacations before Home Sweet Home appears more and more appealing.

2. Home is where your heart is.

Once the traveling bug has been satisfied (or maybe at the same time) many of you start work around the house.

Remodeling your kitchen and bathroom. Resurfacing your pool. Getting a new driveway. Putting in some professional landscaping. New carpets, new flooring. New air conditioner. New roof. New appliances.

After a little while you seem to run out of home improvement ideas. Remember, I’m not asking you to become materialistic, nor just spend for spending’s sake. Once the basics are done it is time to move on.

3. You pay it forward.

This is where it gets tricky, and it’s the part I’m so excited to share with you. Members of the Retirement Revolution know they should spend the money that their money is making. So, once you’ve done the traveling and the home repairs, what’s next? Do you go out and buy fancy cars and jewelry? Not usually. Do retirees start new businesses with their extra cash flow? That can be a little too much hassle.

Generally step number three involves a wonderful new use for the money: generosity.

1. A mom buys her 30-year-old daughter a new car, so that her child and her grandchild could travel in a safer vehicle.
2. Retired parents organize a family vacation — all expenses paid.
3. An aunt gives some money to her niece, who is going through a nasty divorce.
4. A man extravagantly tips his breakfast waitress.
5. A retired woman buys a neighborhood kid a bike.
6. A mother supports a local battered women’s shelter.

You see, once you no longer fear that you’ll run out of money, your outlook on life will slowly change. Instead of feeling a wave of worry whenever you spend some of your savings, you can be confident and empowered knowing that you have done the proper planning. You’ll know that the investment plan you have in place has stood the test of time, and you’ll know exactly how much money you can safely spend — or give! —  each month.

Be creative! Giving feels great. For both the giver and receiver.

I have one of the most rewarding jobs in the world, because I get to see these transformations. I get to witness, first hand, retirees who once viewed their financial future with dread, now get excited not about how much they have, but by how much they can give.

Be Blessed,

Dave

Presidential Elections’ Effects on the Markets

Aug 19, 2019 David Kennon

Quick Market Note:  The markets have been volatile this week.  These are short term, temporary fluctuations that have been happening on and off for a hundred years.  And it always works out in the end. 

Moving on....

I get a ton of questions from readers. Luckily, I have lots of good answers! Today, I am going to share a few of the most common questions and my answers. 

Question #1: Do presidential elections affect the stock market? 

While the election is still a little over a year away, I still sit down with skittish and concerned investors at least once a week. So what is it? Do presidential elections make the markets go up? Down? Is it better if a Republican is elected, as opposed to a Democratic administration? Do markets generally go up or down before an election? What about after the election?

There are actually several academic studies on the subject. Going all the way back to George Washington, the trend is remarkably clear. In fact, presidential elections have had the same effect on the markets for hundreds of years.

So, in the end, what is the answer? What kind of effect does an election year have on your investments?

None. Literally. 

There is no correlation between presidential elections and the stock market. There might be some elevated volatility, but from a long-term perspective, no one can find any positive or negative connection between presidential elections and the stock market. Strong capitalist economic systems have shown incredible resilience under all presidential administrations, be it Martin Van Buren or Millard Fillmore. 

By the way, during the presidency of Chester A. Arthur in 1886, the Dow Jones Industrial Average was at 30 points. Yesterday the Dow Jones closed at over 25,000.

Question #2: How do you know that the stock market will continue to average around 10% per year?

Some people accuse me of being an optimist, but I prefer to look upon myself as a realist. For 240 years people have been betting against America and for 240 years they have been wrong.

But the American economy has reached its limit. The last century may have been great, but most of the innovation has already occurred.... 

It's like when your dad told you that music was doomed after Elvis Presley, or how you said the same thing to your kids except your reference was The Beatles. We have been doomsdaying the economy for centuries. And we've been wrong every time.  

Here’s some perspective. There have been more improvement to the human condition in the past century than all the previous centuries combined since man first appeared on the Earth.

• A gallon of milk costs 90% less today than it did in 1900 (accounting for inflation). 
• In fact, 50% of American incomes went toward food in 1900, compared with 10% now.
• In 1900, the life expectancy in the U.S. was 47. Now it is 79.
• Penicillin, by itself, has saved more lives in the past 50 years than all of medical treatment and medicines during the rest of human history.
• In 1900, ten Ph.D.'s in physics were awarded each year. Now that number is 6,000 per year.

I could go on.

What is my point? We are living in the most affluent and free society in all of human history. Of course we need to be vigilant to keep this country strong, but can you imagine what the next 100 years could bring?

Probably not. I know I can’t. Because it is going to bring advancements we can’t even imagine now. 

Maybe curing cancer will be as simple as taking an over-the-counter pill. Maybe solar energy technology will advance to the point where we have unlimited, free, clean, renewable energy. Personally, I’m excited to see where human innovation takes us next!

What does that mean for the stock market? Innovation fuels a healthy economy and a healthy stock market. It's been that way for over a hundred years, and there's no indication it's going to change anytime soon. 

Question #3: Once I retire, am I too old to invest?

The life expectancy of a healthy 65 year-old is around 90 years. Without utilizing growth investments, such as stocks, you are missing out on a powerful tool. I’m not promoting that you put all of your money in the stock market, but a diversified portfolio of stocks and bonds is usually appropriate throughout your entire lifetime. Whether you are 19 or 91. 

Question #4: Do I need to have my house paid off before I retire?

While it might feel nice to be debt-free, it is not a prerequisite for retiring. Thirty-six percent of Boomers still have a mortgage once retired. As long as your retirement budget can handle the payment, many people retire with a mortgage. 

I often hear, “Dave, I’m going to do everything I can I pay off my house by the time I retire.” While I love the enthusiasm, this attitude usually means that 401k contributions stop and emergency cash funds might be reduced to a couple thousand dollars. Make sure your cash reserves and retirement accounts are being funded, and then you can put some extra money toward the house. 

Question #5: Can I lose all my money in the stock market?

I guess. Anything is possible. World War III? Planet is hit by a meteor? I'm only half-joking. While it’s true you could lose all of your money by investing it all in a single stock or a single bond, a diversified portfolio of stocks and bonds has never gone to zero. In fact, in the past fifty years, the WORST year for an investor with a 50/50 stock/bond portfolio was 1974. You would have lost about 12% overall for the year. By the way, the same portfolio would have been up 20% the following year.

Gotta question for me? Email me at david@kennonfinancial.com. 

Be Blessed,

Dave

A Crash Course on Market Crashes

Aug 12, 2019 David Kennon

Quick Market Update: The markets have been very volatile recently. It is no way will affect your long term financial health. Pay no attention. It is completely normal (and irrelevant).

A Crash Course on Market Crashes

Did you know that real people in real situations actually lost much less money during market “crashes” than the media reports?

I’ve been doing some historical digging and I’ve discovered some shocking truths. I hear a lot of horror stories about how much money people have lost during past crashes. You never know! You might be next! Get ready to live in a cardboard box!

The markets have had five significant crashes in the past 100 years.

The Great Depression (1929)
World War II (1939)
Oil Embargo/Nixon Resignation (1973)
The Dot Com/Technology Bubble (2000)
The Great Recession/Real Estate Bubble (2008)
It may come as a surprise to many of you that there were decades-long periods without any major ‘’corrections” in the markets. But I want to point out another interesting statistical curiosity.

Crashes typically cause short-term damage.
Allow me to explain through an analogy.

If you invested all of your money at the beginning of 1929 or 1940 or 1973 or 2000 or 2008, you would have had a bad time. But in the real world, you generally don’t suddenly invest all of your money at once. It is usually a gradual process as you save money and contribute to retirement accounts over the years. We need to look at the years preceding the crashes to get a true sense of how damaging they were to real people’s financial lives.

Let’s start with the years preceding the Great Depression.

1926: +11.6%

1927: +37.5%

1928: +43.6%

This means that if you had $100,000 invested in 1925, you saw it grow to $220,000 by the time the markets faltered. Over the next four years, your value dropped to $80,000. The markets then skyrocketed upwards again. By the end of 1936 your account was worth $241,000.

This means that over ten years (1925-1935) your investment in the S&P 500 would have increased from $100,000 to $241,000. That’s an increase of 141%.

This was during the worst downturn in the history of the stock market.

The World War II crash saw a similar phenomenon. From 1935-1945 (with the markets dropping significantly in 1937, 1940, and 1941) your $100,000 investment would have turned into $242,000. How?

1936 had a 34% return.

1938: 31%

1942: 20%

1943: 26%

1944: 20%

1945: 36%

Who cares if you had a few bad years in between?

The years preceding and following the crash in 1973-74? Same thing. If you invested money from 1970 to 1980 (with the markets dropping 40% during the downturn), your $100,000 turned into $170,000.

The years leading up the dot com bubble in the early 2000s is the best example of this concept. The 1990s was the best decade the markets have ever seen. Your $100,000 investment turned into a whopping $530,000 during the 90s. Did you lose 40% from 2000-2002? Yes. But you would have still been WAY ahead.

Lastly, the crash nearest and dearest to our hearts; the real estate bubble was possibly the worst economic event since the Great Depression. But the 37% lost in 2008 was mitigated by solid returns before and after. If you invested $100,000 in 2005, today it would be worth $327,000.

I think you get my point by now. Stock market crashes do not occur in a vacuum. We need to look at returns before and after to get a better understanding of the true cost of downturns.

What does all of this mean for you?

Keep calm and carry on.
What this means to you is that you can stop worrying. Turn off the financial news notifications on your phone. Change the channel from financial reporting. What is happening today in the stock market is not what will be happening a year from now.

Which means, if you are retired and have over $200,000 invested in a diversified portfolio of stocks and bonds right now — you can start spending the money the money is making.

Hmmm … let me say that again. Louder for those in the back this time.

You can start spending the money that your money is making!
Let your retirement savings turn into a machine that sends you a check each month. Back in the good ol’ days many workers received a pension when they retired in additional to social security. Since most of those plans are now gone, you need to turn your investment accounts into a sort of pension.

How do we do this? We spend 5% of the account value each year. Historically speaking, this kind of withdraw is a conservative assumption.

Even if there is a market “crash,” folks who plan for the long game are most likely going to be fine. So stop worrying and start living!

If you’re thinking to yourself right now, “Hmmm … that’s interesting. I’ll have to think about that.” Stop! The time for action is NOW. It starts with a retirement plan you can understand and believe in. Know how much money your money is making so you can decide how much you can spend.

Imagine: helping grandkids pay for college, financing that dream family vacation, helping to renovate your church, or investing in an exciting business opportunity. Retirement is supposed to be about living. This new mindset — the switch from saving to spending — makes it possible.

Here’s one more statistical fact for you: the older people get in this country, the more their net worth grows. Every study out there agrees on this fact. That means retirees die with more money in the bank than when they started retirement. Why? You can’t take it with you, so why not enjoy it while you can?

Kennon Financial is dedicated to helping you get the most life out of your money. If you want to go through the process yourself, give us a call.

Be Blessed,

Dave

Annuities and Free Steak Dinner Seminars

Aug 5, 2019 David Kennon

I’m sure you’ve heard the term thrown around before. Maybe you’ve looked into purchasing one yourself. Retirees are often pitched annuities at “free” steak dinners from financial advisors. But, if you don’t have a clear idea of what annuities are, or if purchasing one would fit into your financial plan, how do you know if you’re making the right decision?

Annuities come in all kinds of flavors, sizes, and colors. I would argue that annuities are the single most complicated product I see on the consumer financial market. My mom was a 2nd grade teacher, so I am going to try to channel her teaching ability and make this as simple as possible.

The definition of a pure annuity is actually pretty straightforward. An annuity is a contract that guarantees you a set amount of money each month for the rest of your life. Social Security is a great example of an annuity. The federal government is guaranteeing you a check for the rest of your life. Once you die, the check stops. That is the very definition of an annuity. A teacher’s pension is another example of an annuity.

But the financial industry likes to take very simple concepts and make them incredibly complex. Here are some products insurance companies have created:

Immediate annuity

Fixed annuity

Variable annuity

Equity Indexed Annuity

An immediate annuity is just like Social Security. Say you give an insurance company $100,000. They will then look at your age and gender and make a determination of how much money they are willing to give you each month for the rest of your life. If you are 65 you might get $400/mo. If you are 75 it might be $500 a month. The older you are, the larger the payment, due to the fact that you will probably not be collecting the benefit as long.

A fixed annuity is very similar to a CD. It will pay you a fixed amount of interest for a specified amount of time. For example: A fixed annuity from XYZ insurance company will pay you 3% per year for 5 years. After the five years are up you have access to your money again.

Variable annuities are complex products that allow you to invest in variable accounts —  similar to mutual funds. A variable annuity allows you to have certain monthly income guarantees while still investing your money in the markets. The prospectuses for these things are hundreds of pages long.

Equity indexed annuities are a hot topic, as I see them being sold at nearly every “free” steak dinner seminar in town. The sales pitch is: you can’t lose any money if the stock market goes down, and if the stock market goes up, you get some of the gains. I’ve found that these products can have some issues. While you won’t lose any money if the markets go down, you are very limited in the amount of money you make if the market goes up.

Before you buy an annuity, read this.

So now you know what annuities are. The bigger question is: Is one right for you? Here are a few things you should know about annuities before deciding.

Taxes. 

Annuities are taxed in a rather inefficient manner. All growth in an annuity is taxed as regular income. Generally speaking, income taxes are higher than capital gains rates. Growth in stock prices are taxed as a capital gain.

Surrender Penalties. 

Want some money out of your annuity? Not so fast. Many annuities charge you a significant penalty if you take more than 10% of your money per year. Most penalty periods can last anywhere from 5 to 12 years. Penalties for withdrawals in excess of 8% are common.

Fees.

Variable annuities have significantly higher fees than index funds and exchange-traded funds.

Age Restrictions.

You must be at least 59-½ to withdraw money from an annuity or the IRS assesses a 10% penalty.

So what do you do if you are pitched an annuity at a free steak dinner? Be wary, chew your food, and take your time. Of all the annuity owners I’ve met, about 5% of them actually understand what they own. Try not to listen to the hype.

Dave’s final take on annuities: meh.

Should you buy an annuity? My opinion, after 18 years of research is: probably not. It goes without saying that everyone is in a different situation, and for some it might be a good fit, but I’ve found there are much better alternatives to achieve similar goals. It drives me nuts that annuities are generally sold using fear-based sales tactics. (Markets are going to crash horribly, you might run out of money, Wall St is rigged).

You want to make your financial decisions based on facts and data — not on fear.

My Type-A personality loves to understand investment options backward and forward. I can’t help but go back to the fact that a diversified portfolio of stocks and bonds has unparalleled historical success. Why reinvent the wheel? Why make something more complicated than it needs to be? Is it just so advisors can pitch those free steak dinners?

In the Retirement Revolution, we serve up facts, not fear. No steak knife required.

Be Blessed,

Dave