You can do better
Lex calls in from Lubbock, Texas, to get Dave's take on annuities. Dave explains them, then advises Lex he can do much better with his investments.
QUESTION: Lex calls in from Lubbock, Texas, and asks Dave if there’s ever a reason he would suggest doing an annuity. If not, Lex wants to know where he can begin looking for mutual funds for investing.
ANSWER: If you’ve never done investing, we would suggest for mutual funds that you go to someone who has the heart of a teacher. It’s important to be learning before you invest and as you invest. We have people that we endorse in cities around America for several things, and investing is one of them. We call them Endorsed Local Providers (ELPs), and you can go to daveramsey.com and click on ELP for investing. One of them will get in touch with you, and you can sit down and begin to learn.
I don’t recommend an annuity except in very, very rare circumstances. Usually, this would be for older folks, but only for people who have built a level of wealth and are 100 percent debt-free — house and everything.
There are two types of annuities, Lex. There’s an annuity that is a fixed annuity, which I never recommend. The fixed annuity has basically a money market-type interest rate of one, two or three percent right now. If you could get three percent it would be a great day. And it’s basically a savings account with an insurance company. They put a lot of fees on them, and they’re horrible. It’s like putting money into a CD as a long-term investment.
A variable annuity is an annuity wrapped around a mutual fund. It keeps the mutual fund from being taxed as it grows, but you pay an extra fee to the annuity company in addition to the mutual fund fees. You get double-dipped on the fees, so they’re kind of expensive but it allows the money to grow tax-free and has a few other features to it. But you don’t need that, as long as you haven’t maxed out all of your retirement and haven’t paid off your house. Those are things you should do.
If you could put money in a 401(k), it would be a much better deal. If you put money in a Roth IRA directly into mutual funds, it would be a much better deal. Those are going to grow tax-free, or tax-deferred also, and you don’t have to pay the double-dip fees to get it.