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Q: In the last year or so, your column has regularly said that there is no good-return safe investment at this time.

What is your opinion of the following: A financial adviser has recommended putting $100,000 in a fixed-index annuity guaranteeing 6.5 percent.

This would double to $200,000 in 10 years, at which time it would guarantee $9,000 per year for life or cash out.

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What is the catch, when all other investments are much less?

There is a penalty for early withdrawal, but 10 percent can be removed annually.

A: No catch, just a serious misunderstanding on your part, or misrepresentation from the salesperson.

A typical offer for a fixed-index annuity involves a 10-year deferral before any cash is removed.

During that time, what is called the withdrawal benefit value of your account will grow at a rate that varies with different contracts.

The withdrawal-benefit value is not the actual cash value of your account. It is only a number used to determine what your guaranteed lifetime income will be when you start making withdrawals.

Since the real value of your account probably won’t double in 10 years, the actual percentage withdrawal rate from your account will be higher than you are led to believe.

The likely result is that the actual cash value of your investment will decline once you start to take your guaranteed lifetime income. You will be spending down your principal.

The problem is that the actual yield on your money is not 6.5 percent a year. Instead, it is likely to be closer to the yield on intermediate-term bonds, probably under 5 percent. That isn’t terrible, but make sure you don’t mistake the sizzle for the steak.

Q: I’ve been gradually migrating my portfolio to exchange-traded funds (ETFs). Most of the money has gone into Schwab ETFs — where they have the applicable products — for the expense savings.

In the past I’ve used mutual funds and I’ve held REITs in my Roth accounts. I’ve held bond, small-cap and value funds in my IRAs. Everything else goes in my taxable Schwab account.

As I migrate to ETFs, should I reconsider any of this strategy, given the more favorable tax treatment of the ETFs — which I plan to buy and hold? The rebalancing of my portfolio is generally done with additional cash investments.

A: The quick answer is no, there is no need to reconsider your asset location strategy because there is no change in the basic arguments.

The usual tax consideration is to put equities in taxable accounts and fixed income in tax-deferred accounts.


Because a low-turnover, but taxable account invested in equities can be very tax efficient.

This is particularly true with the broad index ETFs such as the S&P 500 or Total Market ETFs.


Copyright 2014,

Universal Press Syndicate

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