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Author: TinyTone Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75636  
Subject: What's an annuity? Date: 3/26/1998 8:01 PM
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This may seem like a foolish (small 'f') question but I have to ask it:

My company's 403(b) plan has the option of either mutual funds or annuities. I have a decent understanding of what a mutual fund is, but am struggling with the concept of an annuity.

I found a simple on-line definition which stated that an annuity is a fixed payment by an insurance company to an investor over a period of time. Wouldn't this be analogous to a stock or mutual fund dividend?

Also, the annuity has several "funds" which invest in stock, bonds, real estate, etc. similar to a mutual fund.

Is there some difference between an annuity and a mutual fund that I'm missing here?

Thanks.
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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2411 of 75636
Subject: Re: What's an annuity? Date: 3/26/1998 9:59 PM
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<I found a simple on-line definition which stated that an annuity is a fixed payment by an insurance company to an investor over a period of time. Wouldn't this be analogous to a stock or mutual fund dividend?

Also, the annuity has several "funds" which invest in stock, bonds, real estate, etc. similar to a mutual fund.

Is there some difference between an annuity and a mutual fund that I'm missing here?>

An annuity is a lot like a conventional full-life insurance policy. (There are single payment annuities where you pay the entire "premium" up front.) However you can collect without dieing, which may be more fun. In return for all your money, whether paid in installments or all up front, the insurance company promises to pay you a certain amount each month until you die. They get the rest (if you die earlier than usual), and they lose out if you live too long. In order that they not lose money, insurance companies pay what amounts to a very low rate of return on your money.

There are many variations on this. Some do not guarantee the amount you get each month, but base it on the amount that is earned on the investment that you get to choose. This is another scheme to shift the risk from them to you.

It is not the same as a mutual fund dividend, since dividends from a mutual fund are not guaranteed, and if the dividends drop, the only way to maintain a fixed level of income is to sell some of the mutual fund shares. If you do that, you might run out of capital before you die if you live long enough. This will not happen with a normal annuity unless the insurance company becomes insolvent (rare, but not impossible). I imagine insurance companies will not become insolvent except in times of great financial stress. This is bad for you, though, since just when your stocks are going into the tank will be the time the insurance companies will become insolvent. There is no sure thing.

I have a single-payment annuity that I bought a couple of years ago. I am not kidding myself into think it is an investment, though. It is from a Swiss insurance company, the amount is denominated is Swiss Francs, and I consider it insurance against a large drop in the U.S. Dollar vis-a-vis the Swiss Franc. The interest is gravy. Of course, if every other investment of mine goes bad, the annual payment from the annuity will be nice and it will not end until I die. Then I won't need it. They guarantee a return of about 2.5% but suggest that 4% may be more typical. These are approximate, the certificates are at my bank, so I am going by memory.

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Author: Shealy One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2414 of 75636
Subject: Re: What's an annuity? Date: 3/27/1998 7:25 AM
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<<I have a single-payment annuity that I bought a couple of years ago. It is from a Swiss insurance company, the amount is denominated is
Swiss Francs, and I consider it insurance against a large drop in the U.S. Dollar vis-a-vis the Swiss
Franc. >>

I don't think I've ever heard of anyone hedging against the inability to take ski vacations in Switzerland.

;^)

Shealy

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2416 of 75636
Subject: Re: What's an annuity? Date: 3/27/1998 8:40 AM
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TinyTone,

<<My company's 403(b) plan has the option of either mutual funds or annuities. I have a decent understanding of what a mutual fund is, but am struggling with the concept of an annuity.

I found a simple on-line definition which stated that an annuity is a fixed payment by an insurance company to an investor over a period of time. Wouldn't this be analogous to a stock or mutual fund dividend?

Also, the annuity has several "funds" which invest in stock, bonds, real estate, etc. similar to a mutual fund.

Is there some difference between an annuity and a mutual fund that I'm missing here?>>

JeanDavid gave you an excellent response. If you haven't read it, you definitely should.

Thanks, JeanDavid, for the input.

Regards…….Pixy



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Author: tedferg Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2424 of 75636
Subject: Re: What's an annuity? Date: 3/27/1998 1:05 PM
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Re: Annuities, got to Forbes www.forbes.com and do a search on annuities - lot of information Forbes Feb article was strongly against annuities. Much follow on comment that I have nothad time to read.

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Author: gdc45 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2434 of 75636
Subject: Re: What's an annuity? Date: 3/28/1998 2:06 AM
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When investing in a qualified plan, you're probably looking more at accumulation than payout options. JeanDavid explained the payout options very well.

A major difference between annuities and mutual funds when accumulating funds is fee structure. A "variable" annuity has a dual fee structure, money management as well as insurance company fees; while mutual funds generally have only money management fees.

Using an annuity to accumulate funds in a retirement plan provides a return of principal (or return of current value, which ever is higher) for an additional annual insurance fee (generally about 1-1.4%). Of course you can't collect this benefit, as it only
kicks in when you kick off.

For my money, I'd rather skip the death benefit and let my money earn that extra 1-1.5% by using straight mutual funds.

GDC

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Author: gilvid One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3894 of 75636
Subject: Re: What's an annuity? Date: 6/19/1998 9:02 AM
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While on the subject of annuities just thought I'd throw this out there maybe someone can benefit from it.
I have a friend who says he and his wife set up an anuity with the college they graduated from (Cornell U),in return they are guaranteed a certain amount each month untill they die. Think I'd rather see my money go to an educational institution than some insurance co.

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Author: Helter Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3895 of 75636
Subject: Re: What's an annuity? Date: 6/19/1998 10:33 AM
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Not to rain on you parade, but I'd guess that some insurance company is running the annuity for Cornell. IF we all agree that annuities are poor investments, you could probably help Cornell more by donating some money to them, and investing the rest elsewhere to get your income.

Just a thought.

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