David has more than 21 years insurance, 15 years retirement planning, and seven years securities experience. He completed Certified Financial Planning courses at PDI Institute, Dallas, Texas.

Since 1994, David has focused on providing a financially conservative, reduced risk approach to his clients. Emphasis is given to investment safety, liquidity, and potential tax reduction. David was born and raised in Wisconsin, and has made his home in Plano, Texas with wife and family since 1981.

Email Address:
davidwiner@aol.com

Big Yield Safari V:
Tax Deferred Annuities

By Scott Burns, 4/6/1999

Guess where you can get a better yield than a bank CD?

(Sorry, "almost anywhere" is not an acceptable answer.)

Old-fashioned fixed income tax deferred annuities.

I learned this while looking through a recent monthly issue of the Fisher Annuity Index, a monthly publication of Dallas-based Fisher Publishing Company. While the average annuity was barely competitive with a 5 year Treasury a few years ago, the average now sports an attractive premium. Better still, with a little research you can expand the premium from attractive to compelling.

Here are the numbers. In February, when the average 5-year bank CD was yielding about 4.4 percent and a 5-year Treasury was yielding just under 5.0 percent; the average tax deferred annuity was yielding 5.64 percent. Either way, it's a nice premium.

Nor is it a fluke. It's the average. About one third of the 964 contracts tracked by Fisher Publishing offered rates between 5.64 and 7.07 percent. Some offered still higher rates.

I found, for instance, that some 528 contracts offered yields greater than the 5.17 percent yield on a 5-year Treasury note. Of those, 108 were CD type annuities with very limited early withdrawal penalties. And, of those, only 28 had five year terms and only 17 had a rating of "A" or better from A.M. Best and Company. The highest yield among those 17 was a Transamerica annuity with a yield of 6.6 percent on a minimum investment of $5,000.

Does 6.6 percent sound puny to you?

It's not. It's rare and worth the search.

To put it in perspective, only 26 of more than 1,400 mutual funds that invest in corporate or government securities offer an SEC yield of 6.6 percent or better. None are tax deferred and most involve substantially greater risk.

"They're getting more aggressive," Mr. Fisher said when I asked what had caused the yield improvement. "This isn't creative genius. This is watching Sam Walton take a smaller spread on more dollars. We're seeing more companies follow a trend toward higher quality, consumer oriented annuities.

"There are some nice selections you can make if you watch what you are doing. There are 5 to 6 year rates out there that are 6 percent or higher, not over 7 percent, and the money is safe. There's also a lot of flexibility about when you take the money, when you pay the taxes, etc."

Could he give me an example of flexibility?

"Sure. Not long ago my mother wanted to do something with $11,000 she had in an IRA. We annuitized it over 4 years so she could make payments on a new car. The monthly check goes into her checking account automatically. And the monthly car payment is withdrawn automatically. That's flexibility. You can't to that with Treasury bonds or CDs."

The caveat here is that you can't just go out and buy the annuity with the highest yield. Indeed, Mr. Fisher says that really high yields are usually fluky contracts with draconian penalties for early withdrawal. Basically, they are designed for salesmen, not consumers.

His advice?

Look for--- or ask for--- a simple contract with a surrender penalty that isn't punitive.

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Questions about personal finance and investments may be sent to: Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas 75265; or faxed to (214)-977-8776; e-mail to scott@scottburns.com Check the website: "www.scottburns.com." Questions of general interest will be answered in future columns.

File Name: 990406TU

Dallas Morning News file date: 04/06/99---TUE

Universal Press Syndicate file date: same

© Dallas Morning News, Universal Press Syndicate, 1999