Dear Mr. Berko: I have a large certificate of deposit coming due next month, which I could renew at less than 1 percent. When I told the banker that I’d like a higher rate of return, I was introduced to a specialist who aggressively tried to sell an equity-indexed annuity. He said that it guarantees 5 percent income and that I could never lose a penny. I am 73 and have Social Security and a fair pension, but an extra 4 percent a year would be very welcome on that $250,000 CD. Please look at this annuity enclosure and tell me what you think. The banker spent a good hour explaining the annuity’s advantages. And I don’t want to be in the stock market, because I am afraid it will fall. I just have a mutual fund in my retirement account and 476 shares of Johnson & Johnson. I own Johnson & Johnson stock because I worked for the company for 28 years before retiring in 2002.
— BT, Syracuse, N.Y.
Dear BT: Don’t be a sucker. Before you purchase an annuity that’s overripe with fees, please review the following six points, which I doubt the salesman discussed with you. Then consider the suggested investment alternatives, which I’m certain the salesman did not discuss with you. If you still prefer the annuity, then do it and “be happy,” as Bobby McFerrin would sing.
1) Do you know that the sales commission on this equity-indexed annuity would be 7.5 percent? This slithering bankster would usurp an $18,750 gross commission. Good Lord, Charlie Ford, last month, a family I know purchased a lovely lakefront home; the commission was 3 percent, and the real estate agent had over six weeks of work involved.
2) Were you told that the yearly costs to maintain the annuity would be 4.1 percent of your principal? That would include mortality charges, insurance costs, selling and administrative expenses, commissions, management fees, fees for investment advisers, plus a plethora of other expenses (mailing, accounting, records). These costs would be necessary to keep your annuity ticking and the confusing quarterly reports and unreadable 580-page prospectuses flowing.