Quote:
Originally Posted by amandasfinances
My banking advisor recently told me about annuities as an alternative to my 401k plan. She said annuities are good because they are more secure in the event of big losses (like we had recently) since they are insured unlike 401ks. Can anyone verify this information and generally give your opinion on annuities as a place to put your retirement money?
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You received some half truths
401ks are subject to market risk. The reward for losing 40% in one year is the possibility of a 100% increase in another year. This is volatility, it is normal, and its the risk you take when investing in equities.
I did lose 40% in 2008 and I expect to gain around 50-100% this year. Really.
An annuity works like this ("probably"). When you put in a contribution, you lose X% to fees (so a $100 deposit might put $99 or $98 into account). For that fee, you are allowing company to say "you will never lose money" and give you the higher of market returns, capped at y% (such as 9%) or z% (fixed at 2% maybe).
So if market goes up 7%, you get 7%
if market goes up 11%, you get 9% (because that was cap the annuity set for maximum gains)
if market goes up 3% you get 3%
if market goes down 1%, you get 2% (because this was the minimum return the annuity was set at).
Every annuity is different, you need someone to explain the fine print to you.
You need to know:
capped increase
minimum guaranteed return
fees