Financial Friday - Bonus Annuity

SAVING THE MONEY YOU SAVE – THE BONUS ANNUITY (PART 1)

Many of you follow Metroplex Savers because you are working hard to save money on your purchases. You may be very successful saving as much as $100 a month in spending. But where does all the money you save end up? Perhaps you spend the money you save on other necessities of life like rent and utilities. That’s understandable. But I suggest to you that if you could SAVE the money you save and put it to work for your future, that would be even better.

Just like you shop for deals, bargains, and special opportunities in the couponing world, you can do the same in the financial world. Financial institutions will offer various promotions at times to bring in new accounts. Let’s look at an example of one product where you might be able to get your earnings doubled on your savings; the product is called a bonus annuity.

Let me begin with a couple of disclaimers. First, before you put your money into any kind of long term financial vehicle, you need to talk with an agent or financial advisor you trust. He or she can explain the different financial products, give you printed information that discloses exclusions and limitations, and help you determine which product may be most suitable for you. That’s what I do in my financial planning practice.

Second, my example is typical of several products from different companies, but it is not specific to one plan or company. If you want to see an actual illustration, you need to speak to the agent or advisor. There are many products out there and each one is unique in some way.

I suppose there should be a third disclaimer. Annuities have taken kind of a bad rap in the press in recent years. The problem is not with the product itself, but with unscrupulous salespeople who either don’t understand the proper usage for it or just don’t care. As I like to say, if you go to a car dealer to buy a convertible and they sell you a pickup instead, the problem isn’t with the pickup, it’s with the salesman. Annuities are great vehicles – if it’s the right vehicle for you.

Now, allow me to paint a picture for you. Let’s say you want to save $100 a month for the next five years. If you put that money in a savings account at the bank right now, you’d probably be lucky to get 1.0% interest on your money. If you had a lump sum of savings that you could put aside all at once, you could buy a CD for 5 years and earn somewhere between 3.5% and 4%. But, if you’re just starting out your savings, you probably don’t have $6,000 in cash lying around. And, if you’re just getting started and you’re only saving $100 a month, stocks and mutual funds don’t make a lot of sense because of the high fees and investment risk relative to the amount you’re setting aside. What’s a new saver to do?

A bonus annuity could be just the ticket. Next week, we’ll explore how a bonus annuity works, and how and why the financial institution will pay you a bonus to save money. In the meantime, if you have any questions or have comments, please drop me an e-mail at david@davidwbarnett.com.