BACK IN TEXAS

Back After A Long Trip. After flying to Denver to check on business, I got in my pick-up truck and headed Southwest to Arizona. I had a number of things to take care of such as scattering the cremated remains of my uncle on a mountain in Tucson and visiting my 88 year old father in Mesa. After that, I rode across the desert and back to the woods here in Southeast Texas. I'm glad to be back.

Is An Annuity In Your Future? If you read the financial press, you'll see many negative articles about annuities. Granted, the management/mortality fees are somewhat high and the surrender charges can be excessive if you cash in before the required 5-10 year holding period, Much of these disadvantages are the result of over-zealous sales tactics by some commission-driven sales people. Just like most other financial products, they are useful a number of circumstances and mis-applied in others. For example, I recently ran across a couple with 100% (almost $1 million) of their IRA money in a variable annuity. My opinion is that there are at least two things wrong with this scenario. 1. IRA's are tax advantaged instruments which allow the build up of earnings inside the annuity with no current taxation. Annuities offer the same tax deferred build up. Buying these instruments inside an IRA offers no additional tax advantages and the investor ends up paying excessive fees for services charges inside the annuity. While there might be some reasons for including an annuity in an IRA (I'm being charitable here), you never want to devote 100% of your IRA to an annuity. 2. The other flaw in this scenario is that your investments are limited to those offered within the annuity. While these can be quite broad, they are still a long way from being comprehensive.

What's The Real Benefit Of An Annuity? When I took my financial planning courses, the official definition of an annuity was "systematic liquidation of capital." Sound like a trip to Las Vegas? Translated into English this means that an annuity allows you to draw principal and interest from your investment at a previously agreed upon schedule. Viewed as an insurance, rather than an investment product, the real benefit of an annuity is that it offers a guarantee that you will be able to receive an income stream as long as you live. It insures that you will never outlive your income. For example, consider a 66 year old male with $300,000 in capital. This individual doesn't want to be bothered with managing his investment portfolio and doesn't want to worry about outliving his money. One alternative is to buy an annuity that would pay $2067 a month for life. If he lives until age 90, his total payments would be $570,492. Upon his death, payments cease and there is no money left for heirs. If a spouse is involved, there are other options, one of which is that, in return for a smaller income stream, there is also a guaranteed income for the lifetime of a spouse. In the case of a 63 year old spouse, the income would be $1,773 and the spouse would also be covered for her life. This is an oversimplified approach. I received these numbers from a web site, www.immediateannuity.com. While the site provides a quick estimate of the available benefits, there are other details to consider which are too cumbersome for discussion here.

There Are Obvious Disadvantages To This Approach. If the investor and spouse die in a flu epidemic during the first year, the insurance company gets all the money and the heirs get nothing. In addition, inflation would reduce the purchasing power of this income stream over the years. Theoretically, it is possible to receive this same income from an investment portfolio without forfeiting the principal at death. The main benefit of this approach is stability. You give your money to the insurance company and the game is over. You don't have to worry any more since your income is guaranteed for life. There are also a number of compromises. You could invest part of your money in this instrument and the remainder in other investments. This would enhance the stability of your return while the other investments would allow the possibility of capital appreciation and higher returns. The task is to choose the mixture of higher returns and stability that fits your income needs and risk tolerance.

The Holiday Season Is Upon Us. It is my objective to get one more post in before the holidays. If I don't, I would like to thank you all for your friendship and support over these years. While money is a major part of my life, it means nothing compared to the relationships that have sustained me for almost 70 years.