Variable annuities are often confusing and hard to understand. In addition to the fees charged for managing the sub accounts (read mutual funds) within the policy consumers also pay for the insurance portion of the policy (mortality expense) and various riders and options offered with the policy. If you want to compare the expenses of owning or buying a variable annuity here is a simple grid that you can take to your insurance agent ( yes your broker is an insurance agent if she is offering you an annuity) for help comparing.
EZ annuity fee disclosure checklist Before you buy any annuity, ask your advisor to fill in the blanks. What you pay each year Annual fee (as % of account value) for: Number Typical The insurance (a.k.a. mortality and expenses) _____% 1.35% The investments within the annuity _____% 0.95% Riders and options _____% 0.65% Total annual fee: _____% 2.95% What you pay to get out Max. surrender charge (as % of withdrawal) _____% 7.00% Number of years before surrender charge expires _____ 8 Source:Morningstar, National Association of Variable Annuities, Money research Note: Max. surrender charge may not apply to all withdrawals.
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With the recent turmoil in the stock, bond, and real estate markets it is a good time to review one of the most important tenets of successful investing; minimizing your losses.
The math of losses works in a funny way. If you lose 10% on your investment, a 10% gain does not make you even. It takes a little over 11% to be even. If you lose 20% it takes a 25% gain just to be even, and if you lose 50% it takes a 100% gain just to get back to even. That's why you should have a strategy to protect yourself when things inevitably go wrong. 10%15% gains in the stock market come along fairly frequently, but 25% plus gains are very rare. If you can implement a disciplined strategy to protect yourself from large losses you can be ahead while everyone else is still working to make it back to even. If you are like me math class was not the highlight of your day when you were in school. There are many formulas that melted from my brain like snow from a roof just as soon as I completed the test.
But there are some math formulas that were worth relearning. I use them every week. You might not need them but once a year. I don't expect that you will remember them five minutes after reading them, but knowing how they are used can help you reach your financial goals, so remember that. The first formula is Future Value for Compound Interest. Just like the name implies it is a way to calculate the future value of something that is compounding. Here it is; FV = PV * ( 1 + i )N PV = present value FV = future value i = interest rate in percent per period N = number of periods Use it if you have a sum of money today and you need to know how much it will grow to at some future date. You don't even need a fancy calculator to use it. Just take the part ( 1 + i ) put it in a basic calculator as whatever the sum is times itself, then hit the enter key N number of times. The next formula is the Annuity formula. It will tell you how much you can expect to have in the future is you invest some amount on a regular basis (monthly, annually, etc.) and earn some rate of compounded interest. FV = PMT * [ ( ( 1 + i )N  1 ) / i ] FV = future value (maturity value) PMT = payment per period i = interest rate in percent per period N = number of periods If you contribute to an IRA every year you can use this formula to calculate what it could be worth when you retire. Don't let all the brackets scarer you, just do it a step at a time, working from the inside out. The last formula is the Payment formula. You use it to calculate how large a payment you would need to make to pay off a loan or to accumulate a pile of money. With the internet it is easier to go to a site with loan payment calculators, but I'm a bit of a traditionalist. PMT = P*i( 1 + i )N /( 1 + i )N 1 PMT = P*i/1(1+i)N In future posts I'll explain how you can use these formulas to craft your kithen table financial plan. In 2013 the Census Bureau reported that the median household income in the United States was $51,939. Assuming you start working at age 25 and retire at 65, that means your lifetime household earnings would be $2,077,560.
So the big question is what will you do with your $2,000,000? With the recent turmoil in the stock, bond, and real estate markets it is a good time to review one of the most important tenets of successful investing; minimizing your losses.
The math of losses works in a funny way. If you lose 10% on your investment, a 10% gain does not make you even. It takes a little over 11% to be even. If you lose 20% it takes a 25% gain just to be even, and if you lose 50% it takes a 100% gain just to get back to even. That's why you should have a strategy to protect yourself when things inevitably go wrong. 10%15% gains in the stock market come along fairly frequently, but 25% plus gains are very rare. If you can implement a disciplined strategy to protect yourself from large losses you can be ahead while everyone else is still working to make it back to even. 
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