For four decades, Jane Bryant Quinn has guided millions of
investors, consumers, savers and borrowers with useful financial
advice by way of magazine and newspaper columns, best-selling books
and Emmy Award-winning television appearances.
Over that period, she has been struck as much by what people tend
to do wrong as by what they do right -- and by how costly those
mistakes can be.
Bottom Line/Personal asked Quinn for advice to help
readers maneuver the perils of today’s shaky economy and turbulent
markets. Be wary of the following common blunders, she advises...
TAX-DEFERRED VARIABLE ANNUITIES
Many investors are drawn to anything that promises guaranteed
income and lower tax bills -- an attraction that is likely to
increase as talk of future tax hikes intensifies. Unfortunately,
the tax savings offered by variable annuities are not as
substantial as brokers often make them out to be.
Money in an annuity compounds tax-deferred, but there is no tax
deduction for the money you put in. Investment profits (including
capital gains) are taxed as ordinary income when withdrawn -- and
annuities impose high fees. Investors often pay commissions of 5%
to 8% and annual fees of 2% or more. If the annuity comes with
guaranteed income or withdrawal benefits, fees can run to 3.5% or
more.
You might have to hold an annuity for at least 18 years just to
make up for taxes and other costs. Big commissions, not tax
savings, are the main reason brokers push clients into
annuities.
Possible exceptions: An annuity
might be a reasonable option for people who don’t expect to need
this money for at least 30 years and who have already fully funded
their 401(k)s and IRAs. After all, annuities did protect many
investors during market crashes over the past decade.
If you are retired, you might instead consider immediate-payout
annuities -- which offer fixed-rate payments over a specified
period of time. To see how much income you can buy for every dollar
invested, go to
www.ImmediateAnnuities.com. Because
interest rates are very low now, you may want to "ladder"
(spread out) your purchases of immediate-payout annuities over
several years so that you can take advantage of higher rates to
come.
REVERSE MORTGAGES
Reverse mortgages are tempting to people whose retirement savings
and home values have had recent losses -- but don’t take out a
reverse mortgage if you’re in your 60s.
A reverse mortgage loan is a way to borrow against the value of
one’s home without selling the home in this slow market. These
loans now are being aggressively marketed to home owners as young
as 62 -- but they are a very bad idea for anyone younger than 70,
and even then, they should be used only as a last resort.
Lenders offer extremely unappealing reverse mortgage loan terms to
those still in their 60s. These loans are not to be repaid until
the home owner dies or moves out. That might take decades if the
borrower is in his 60s, so lenders adjust their offers to make up
for the delayed payback. Reverse mortgage contracts are so complex
that it often is difficult to spot the steep fees and interest
rates.
BONDS
Don’t be dazzled by the supposed "safety" of bonds. The extreme
volatility of the stock and real estate markets in recent years no
doubt has some investors thinking about shifting a sizable portion
of their savings to bonds and bond funds. But that would be a
mistake now. Bond yields are low these days, and bonds carry a
crucial risk that today’s investors tend to overlook -- inflation
risk.
We haven’t had to worry much about inflation lately, but given this
nation’s massive deficits, high inflation is possible.
That would be terrible news for bond portfolios for two reasons --
the low yields on the bonds that you own don’t allow you to keep up
with inflation... and inflation drives up interest rates paid on
bonds, so if you want to sell an old bond or liquidate bond-fund
shares, you could lose money because buyers can obtain new bonds
with higher yields.
RENTAL PROPERTIES
Don’t buy a second home as a rental property. Even though
residential real estate looks cheap when compared with real estate
values of a few years back and prices finally seem to be
stabilizing in many regions, those who purchase a second home as a
rental property this year still are most likely to lose
money.
Rental rates have fallen sharply in most regions, and high-quality
tenants have become harder to find -- apartment vacancies reached a
30-year high in late 2009. Even in a best-case scenario in this
market, your rents are unlikely to cover all of the costs of owning
and maintaining the property.
At worst, you might not find a tenant at all, or your tenant might
lose his/her job and stop paying rent. If so, your investment will
stop producing income entirely.
Buying rental property still could pay off if real estate values
rebound quickly and strongly -- but don’t count on that. The real
estate boom of recent decades was an aberration driven by unusually
low interest rates and loose lending standards. Historically,
long-term property appreciation of 3% to 6% is more likely. You
could do a lot better than that in stocks without the aggravation
and expenses of being a landlord.
Possible exception: One-bedroom
single-family homes can be profitable rental properties. Few home
buyers will consider one bedrooms, so the properties can be cheap
to buy, yet one-bedrooms are appealing to many renters. If you
eventually can convert the one-bedroom’s garage, basement or
screened porch into a second bedroom, you might be able to sell at
a nice profit, too.