Consider the New Annuities' Advantages

September 16, 2008
Roccy DeFrancesco

Physician's Money Digest, May 15 2003, Volume 10, Issue 9

Let's face facts. If you have your money in aCD or bank account, earning 5% in interesta year that is netting you 2.5% in returnsafter you pay taxes, you could be doing much better.Getting 2.5% in returns is hardly worth all thepaperwork that goes along with tracking the moneyand filing the gain on your return.

Wouldn't it be nice to have a productthat allowed your money to grow tax-deferred,that gave you a minimumannual return guarantee, and thatallowed you to benefit in upswings inequity or bond markets?

Physician-investors can find this inthe new guaranteed annuity productsavailable in the marketplace. Most peoplewho invest money have heard ofannuities, and many doctors I run intohave older annuities somewhere in theirportfolios. Many doctors, however, areunaware that there are new annuitiesthat have minimum guarantees, with thepossibility of benefiting from the upswingsin the market.


The new annuity guarantees a minimumreturn on your money of around 3%, but thenthe potential growth is pegged to a bond or equityindex (eg, S&P 500). If the indexes do betterthan 3%, then you get the better returns creditedtoward your account. Some companies capthe growth at around 12%.

A typical scenario:

Say you have $25,000 in a CDor savings account and your take-home pay is inexcess of $250,000 a year. You mentally like to keepmoney in a CD or savings account so that you canhave ready access to the money in case of emergency.You don't end up needing the money for 10years. At the end of the 10th year, you have $33,595(after factoring in annual taxes paid on gains).

If you had your money in an indexedannuity with a minimum guaranteedreturn rate of 3% but possible higherreturns of 9.6%—which the S&P 500has done over the past 10 years—youwould have approximately $62,523 (atthat 9.6% assumed rate of return).Youhave not paid tax on the gains yet, butyou were able to use all your money andhave it grow tax-deferred for the 10-yearperiod. Furthermore, if your circumstanceschange and you don't need themoney available for short-term cash,you can allow the money to continue togrow tax-deferred until retirement, andthen you could annuitize the moneyand set yourself up for a guaranteedretirement benefit (something thatcould never be done with money in asavings account or CD).

The main downside with annuities is that theytypically have surrender charges for 5 to 10 yearsshould you withdraw your money. Consider,however, that if you have $10,000 to $100,000 insavings and you need short-term capital, you canuse your line of credit through work or take out ahome equity loan. The interest will be deductible.For a short-term problem, that is a much betteranswer than leaving your money in a CD or savingsaccount for 10 or more years, waiting for acash flow problem to arise.


The first questionto address:

There are many doctors getting close to retirementwho need to figure out what to do with themoney in their pension plan at work. Do you have the 70% tax problem(ie, up to 70% taxation on your estate if you fall ina certain tax bracket) with that qualified money?

Assuming you don't have the 70% tax problem,when you retire, you will most likely considerrolling that money into an IRA, which a brokerwill manage. More than likely, a broker will wantto put you in stocks or individual mutual funds.The problem is that there are no guarantees whenyou have mutual funds in an IRA. I believe someportion—10% to 50% of your money after retirement—should go into a no-risk investment. ACD or savings account won't get you the returnyou're looking for, but a new annuity with minimumguarantees and the potential to benefitfrom upswings in the market will.

Most advisors shy away from annuities becauseof fees and because they want to actively manageyour money after retirement. Every physician-investorgetting close to retirement should considerputting a portion of their money into a newannuity. Those age 55 and older who have watchedtheir portfolios go down dramatically over the past2 years, should consider putting a portion of theirmoney when nearing retirement or after retirementinto a no-risk product. CDs and savings accountsgive you security but don't give you the upsidepotential in the market that new annuities do.

Roccy DeFrancesco isan attorney and authorof "The Doctor's WealthPreservation Guide."He has run a medicalpractice and lectured formany state and nationalmedical associations.For a free asset protection,income, and estatetax reduction CD, or forquestions or comments,call 269-469-0537 ore-mail