Why My Fixed Annuity is My Smartest Investment
By Peter L. HeimdahlDes Moines, Iowa

Here's a testimonial on the great value of annuities.

Recently, a few misguided financial pundits have questioned the wisdom of buying annuities. Their concerns don’t hold up in the real world, however. I have diligently saved money for retirement, both in a 401(k) plan and post-tax vehicles, for almost 30 years. With a suspicion that my stock/bond fund returns have been substandard, I recently completed an eye-opening analysis of my investments. What appalled me is just how miserably they performed. Let’s face the harsh truth. The vast majority of Americans do not have the ability or the discipline to manage their stock and bond fund investments. I made the same mistake, over and over, that most individual investors make. I placed my money in the trendy stock/bond funds of the moment. It is nearly impossible for the average investor to resist chasing high returns. The result is that we buy high, then panic and sell low when the formerly hot fund goes bust.
Given how much money I lost in my 401(k) stock funds (they still haven’t recovered from the 2000 crash), had I placed all my savings in a fixed annuity averaging 5%, instead of stocks, I would be almost $200,000 ahead. Yes, a plain old, non-sexy, often scorned by financial experts, fixed annuity. Fortunately, I did purchase a fixed annuity almost 10 years ago, which mitigated my financial fiasco. Through regular deposits, I channeled virtually all my non-401(k) plan savings into it and the balance spiked to $240,000. Granted, the interest rate is not spectacular, but it is respectable — varying from 5% to 6.5%.
Often swayed by media pundits, most Americans are horribly tempted to swing for "home runs" with their investment choices. Instead, we are almost guaranteed to strike out. The beauty of my annuity is that while I am not hitting home runs, I am hitting consistent base hits month after month, year after year, decade after decade — and with the power of compounding, it really adds up to big time money.
The annuity further shines because it is tax deferred. Yes, CDs are finally offering attractive rates. But I will owe enormous taxes immediately on the interest. For a single person, it doesn’t take much income to fall into the onerous top marginal Federal tax rate; which, when combined with state income taxes would decimate my earnings by almost 40%. With my annuity, however, when I retire, the power is in my hands to choose when and how much to withdraw to keep my taxes in a low bracket. And with the withdrawal options available, I could even have a guaranteed lifetime income, if I so choose. Also, I can add to my annuity at any time, a vital convenience not possible with most CDs. Annuities have been disparaged for their surrender fees. But these fees actually are good for many consumers. They thwart impulse buying by lessening the temptation to yank annuity money and send it to risky funds frequently hyped by the media. Surrender fees, of course, work to the advantage of the annuity company, too. The fees reduce the volatility of the companies’ investments, allowing them to plan long term — which enables the interest rates they pay to usually be higher than those paid on CDs. In any event, most surrender fees are structured to allow reasonable yearly withdrawals without penalty.
Another great thing about my fixed annuity is the prudent care my annuity company, American Equity Investment Life Insurance Company (and, I suspect, most insurance companies) takes with investments. Unlike many stock fund companies, it doesn’t invest my money in mysterious — and you can bet, risky — financial vehicles. The company’s financial stability is reassuring; virtually all of its assets are in Treasuries and investment grade bonds.
Because typical buyers are in their 60s, annuities are perceived and marketed as a retiree product. Unfortunately, the working public is unlikely to find a fixed annuity as an option in their 401(k) plans.
People in their 30s, 40s, and 50s, however, shouldn’t overlook annuities as key components of a diversified financial game plan. After maximizing their 401(k) plan contributions, I believe the smartest financial move young people can make is to put most of their post tax savings into a fixed annuity.
This runs contrary to conventional wisdom, which is to place post tax dollars into index stock funds, because the capital gains tax is only 15%. I think the capital gains tax inevitably will be boosted sharply.
If anyone is under the delusion that bond funds are a safe haven, look at how they have tanked in the past couple of years. I love my annuity, and as the earnings pile up over the coming decades, savvy young people who buy annuities will love theirs, too.
For the record, I do not work for an annuity company or sell annuities. I simply think they are fantastic products that have served me very well.

Peter L. Heimdahl is president of a printing company. He does freelance writing as a serious hobby.

What do you think about this article? What is keeping you up at night? What concerns do you have about your retirement?
Have you been given and/or read wrong information or been told by your financial advisors to stay away from Annuities? Planning for retirement is not easy but should be a top priority.