Thursday, September 30, 2010

The Hidden Benefits of a Roth IRA

One of the most basic retirement planning decisions is whether to put your money into a Roth IRA or a Traditional IRA.  Is it better to take the tax deduction now or later?  Before we get into the meat of this article, I want to review quickly the differences between a Roth IRA and a Traditional IRA.  Note that, generally speaking, the same differences apply to a Traditional 401(k) and a Roth 401(k).

With a Traditional IRA, you don't pay any taxes on the amount you deposit (subject to certain rules).  However, when you withdraw the money in retirement, you pay taxes on whatever you withdraw.  This is the "pay later" choice.

With a Roth IRA, you have to pay taxes on the money you deposit.  However, when you withdraw the money in retirement, you get to take your money out tax free.  This is the "pay now" choice.

When choosing between these two retirement vehicles, your choice often comes down to whether or not you want to pay taxes now or pay taxes later.  The general rule of thumb is that if you are going to be in a lower tax bracket in retirement, you want to pay taxes later (i.e. Traditional IRA).  Otherwise you should pay now (i.e. Roth IRA).

Here are three examples that illustrate this common rule of thumb.  In each example, I compare the results of investing $5000, which is the maximum contribution amount for 2010, in each type of IRA for 20 years assuming a 5% annual return.

Example 1:  25% Tax Bracket Now, 25% Tax Bracket in Retirement

Type of IRAInitial InvestmentInvestment After TaxesAccumulated Value, 20 years, 5%Withdrawn Amount After Taxes

Example 2:  25% Tax Bracket Now, 33% Tax Bracket in Retirement

Type of IRAInitial InvestmentInvestment After TaxesAccumulated Value, 20 years, 5%Withdrawn Amount After Taxes

Example 3:  33% Tax Bracket Now, 25% Tax Bracket in Retirement

Type of IRAInitial InvestmentInvestment After TaxesAccumulated Value, 20 years, 5%Withdrawn Amount After Taxes

As you can see, these examples confirm the standard rule of thumb when it comes to IRA.

However, astute readers will notice that there is a twist to this rule which nobody every points out.  The twist is that the $5000 limit is a before tax limit for Traditional IRA's, but it is an after tax limit for Roth IRA's.  What that means is that you effectively can invest more into a Roth IRA in a given year than you can in a Traditional IRA.

When you invest in a Roth IRA, the money that you are paying towards taxes on your investment amount does not count towards the $5,000 limit.  If you are in the 25% tax bracket, you can set aside $6666.67 for retirement.  25% of that, or $1667.67 goes towards paying taxes, while the remaining amount, $5000, can be invested.  This means that with a Roth IRA, you can allow more money to grow tax free than you could with a Traditional IRA.

Let's redo the examples showing the actual maximum investment that we can make in each type of IRA:

Example 4:  25% Tax Bracket Now, 25% Tax Bracket in Retirement

Type of IRAInitial InvestmentInvestment After TaxesAccumulated Value, 20 years, 5%Withdrawn Amount After Taxes

Example 5:  25% Tax Bracket Now, 33% Tax Bracket in Retirement

Type of IRAInitial InvestmentInvestment After TaxesAccumulated Value, 20 years, 5%Withdrawn Amount After Taxes

Example 6:  33% Tax Bracket Now, 25% Tax Bracket in Retirement

Type of IRAInitial InvestmentInvestment After TaxesAccumulated Value, 20 years, 5%Withdrawn Amount After Taxes

Note how you can accumlate more in a Roth IRA under all three circumstances.  Of course, this is due to the fact that you are putting more money into your Roth IRA up front, so in a sense it isn't a fair fight.  However, what it does show is that you can put more tax-advantaged money towards your retirement using a Roth IRA.  This is just another thing to consider when you are trying to decide which investment vehicle to choose.

Friday, September 24, 2010

The Hidden Cost of Refinancing - Part Two

In a previous article, I talked about how refinancing can end up being a bad deal because you are extending the life of your mortgage and, as a consequence, adding to the amount of interest you are paying on your loan.  However, one assumption that I made was that the borrower was going to not sell his or her house for the duration of the mortgage.  As we know, that assumption doesn't always hold.  A large number of homeowners end up selling before their mortgages are paid off.  People trade up for a bigger home when they have kids, trade down for a smaller home when the kids leave home, relocate for a new job, or experience some other life event which forces them to sell.  How does this affect the decision to refinance?

Let's assume, as we did in my previous analysis, that you are looking to refinance an existing 30 year mortgage with another 30 year mortgage, and you are not going to take out any cash at closing.  In this situation, the main benefit of refinancing is that you are going to lower your monthly payments.  However, there are two costs that offset this benefit:
  1. The closing cost associated with refinancing.  This is usually paid up front when refinancing.
  2. The fact that equity is going to build up more slowly than it would have under the original mortgage.
Most online mortgage refinance calculators base their recommendations on whether or not to refinance solely on comparing the drop in monthly payments versus the closing costs.  They don't take into account the fact that you will be building up less equity in your house by refinancing.  The more equity you build up in your house, the more money you get the keep when you sell it.  Therefore, this becomes very important should you decide to sell your house before your mortgage has expired.

The question is how much of effect does this have?

To examine this, let's assume again that your original mortgage is a 30 year loan for $300,000 at 6%.  Now let's assume that you can refinance it with another 30 year loan at 4.5%.  Finally, we will assume that the closing costs to refinance are $5000.  Will we come out ahead by refinancing?

I ran the numbers two ways.  First, I looked at the scenario where you are refinancing your original mortgage after making payments on it for 5 years.  Then, I looked at the scenario where you are refinancing after 10 years.  If you remember from the previous article.  If you refinanced after 5 years and held onto your house for the life of the mortgage, you would come out ahead by refinancing.  However, if you refinanced after 10 years and held onto your house, you would come out way behind.  The question becomes how far ahead or behind would you be if you sold your house before the mortgage was paid off.

The graph below shows how far ahead/behind you would be under both scenarios if you sold after N years:

Refinance Analysis.  Source:

The blue line shows your profit if you refinance your original mortgage after 5 years.  As you can see, if you sold your house within 2 years of refinancing, you'd end up behind.  This is because the decrease in monthly payments doesn't make up for the fact that you paid $5000 in closing costs to refinance.  However, after year 3, you would end up ahead no matter when you sold.

The interesting thing, though, is that the benefit from refinancing actually peaks at around year 19.  If you sold 19 years after you refinanced, you would be over $44,000 ahead than if you held your original mortgage.  However, your profit starts to drop if you sell after that.  Why is that?
The way a mortgage works is that in the early years of your mortgage, the amount of principal that you pay is quite small.  If you look at your mortgage statement in the first year, you will see that most of your money goes towards paying interest.  However, the situation reverses itself in the later years of your mortgages.  In these years, most of your payment goes towards paying down principal.  If in the case of refinancing after 5 years, you had stayed in your original mortgage you would be in year 25.  At this point, you would be paying a significant portion of your monthly payment to towards principal.  However, with the refinanced mortgage, you are only in year 19.  Therefore you are paying less towards principal.  It turns out that the additional principal that you would have paid under your original mortgage is enough to offset the fact that your payments are less under the refinanced mortgage.  This starts to eat away at your profits.  Fortunately, it is not enough to drop your profits below zero at any point.

The red line shows your profit if you refinance your original mortgage after 10 years.  Again, you are in the red if you sell your house within 2 years of refinancing.  However, you start coming out ahead if you sell after year 3.  In this scenario, your profit peaks in year 12, and then it starts to drop.  Eventually, after 20 years, you are again in the red.  As with the first scenario, the lower payments on the refinanced mortgage are offset by the slower accumulation of principal.  However, there comes a time when you end up behind.  If you plan to stay in your house at least another 20 years, you are better off keeping your current mortgage.

The bottom line is that if you are planning to sell your house before your mortgage is paid off, you need to consider two things when you are deciding to refinance:
  1. You need to plan on staying in your home long enough to recoup your closing costs.
  2. You need to plan on selling before the slower accumulation of principal offsets the savings in lower payments.
The problem, of course, is figuring out if you are always going to come out ahead, like in the first scenario, or if there is a point when you will come out behind, like in the second scenario.  Unfortunately, most online refinancing calculators do not help in this regard.  Many are hosted by mortgage lenders and brokers.  Obviously, they have a vested interest in convincing homeowners to refinance, so they won't show you anything that might dissuade you from refinancing. 

Maybe a "smarter" refinance calculator should be my next project.  Hmmmm...

Monday, September 20, 2010

Fibbing with Numbers

This past Sunday's New York Times Book Review had a review and excerpt of an interesting new book entitled Proofiness.  It is sort of a goofy title, I admit; however, the premise is intriguing.  The author describes how people. politicians, and corporations use false numbers and statistics to confuse, obfuscate, and flat out lie.  He asserts that when you attached a number to a false or misleading statement, that statement gains a certain amount of credibility.  This is all the more reason to educate yourself so you can rely upon your own numbers rather than somebody elses. 

Saturday, September 18, 2010

The Morality of Money

Today was the Jewish holiday of Yom Kippur.  For those who aren't familiar with Jewish tradition, Yom Kippur is the last day of what are known as the 10 Days of Atonement.  From the beginning of the Jewish New Year (Rosh Hashanah) until Yom Kippur, Jews are called upon the reflect upon their actions and deeds from the previous year and ask for forgiveness for any wrongdoings they may have committed.  This introspection is intended to improve oneself and so that one can become a better person.

As a Jew, I have spent some time thinking about what I have done over the past year, and the subject of money came into my mind.  The purpose of this website is to educate and empower people to look at their personal finance using reason and logic, rather than emotion.  The goal, of course, being to increase ones wealth.  The question is whether this goal is a constructive one.  Is the pursuit of money something good and desirable, or is money truly the root of all evil?

On the one hand, money and its unbridled pursuit has lead to much destruction in our society.  One only has to look to the recent economy troubles to see that.  The leaders of our financial institutions pursued profits at all costs.  They risked other people's money on investments that were dubious at best.  When this house of cards came tumbling down, not only did it take these institutions down, but it had a ripple effect of taking down the entire economy.  Millions of lives were affected because these greedy people were willing to risk everything for another buck. 

On a smaller scale, there are young people in the inner city who become drug dealers.  These people are seduced by the allure of quick and easy money.  They sell these drugs to the people in their communities who become addicts and this creates downward spiral of despair in these neighborhoods.  Their greedy is terribly destructive, and it has a very high human cost.

I could go on, but suffice to say that there are countless examples of the how greed has caused misery.  I'm sure we all know of examples of how money has caused strife in our own lives with our loved ones.  The question becomes whether or not the goal of this web site, to increase ones wealth, is a noble one.

In the course of researching this article, I wanted to find out who said "money is the root of all evil" and find out its context.  It turns out that this famous quotation does not exist.  It is a misquote of a passage from the New Testament of the Bible (1 Timothy 6:10):

For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows

I am by no means a Biblical scholar, and I particularly am not a scholar of the New Testament.  However, my interpretation is that money itself does not lead to evil.  It is loving money.  If the pursuit of money becomes your focus to the exclusion of all else, then that is where evil comes into play.  However, if you view money is a tool - as a means to an end - then it can be a power for good, too.

In the movie Wall Street, the main character said that greed is good.  In a limited sense, there is truth to that.  Monetary rewards provides the motivation to work hard, improve oneself, and achieve great things.  It is the means by which we can quantify our skills, our drive, our determination.  It's a way of keeping score, for lack of a better word.  Now the idealist might say that achievement itself should be its own reward.  Unfortunately, human nature does not work that way.  Humans are motivated by the promise of wealth and this force has been harness in a positive way. 

Consider the trust fund kid who has more money than he knows what to do with, so he wastes his life on inane pursuits, not contributing anything to society.  He never had the need to put in an honest days work because he never had to.  Now consider the kid from a poor family who had nothing handed to him.  Because of this, he could either work hard or starve.  This kid got through school studying while working two jobs to help support himself and his family.  The work ethic he was forced to learn developed into a drive to outwork and outhustle everybody else.  He was motivated by the promise that, through his hard work, he would have the means to better himself and his family.

Money can also provide the means to provide for one's family and one's community.  Like it or not, idealism doesn't put a roof over your head or food on the table.  Money does.  We all want to provide our families with a certain amount of comfort and safety in this crazy world, and money does just that.  Money can also be used as a force to change lives, through charity and good deeds.  Consider that Bill Gates, one of the richest men on the planet, is now one of the biggest philanthropists.  His foundation is doing amazing work around the world in so many different areas of need.  What allowed him to do this?  Money. 

Even though Bill's commitment is great, there are literally millions of people around the world who are also practicing philanthropy on a smaller scale through contributions to those in need.  When there is a disaster, like 9/11 or Hurricane Katrina, it takes money to provide comfort to those who are affected.  Money gives us the power to help those who need our help to to improve the world.  Money gives us the power to make those choices.

So is money good or evil?  Like all things, it is both.  Pursuit of money at all costs reveals the darker side of human nature.  However, a restrained pursuit of money can be a positive force, as it gives us an incentive to improve ourselves, and it gives us the power to shape both the lives of our loved ones and our communities at large.

Thursday, September 16, 2010

You've Got to Buy 'em and Hold 'em

"You've got to know when to hold 'em, know when to fold 'em,
Know when to walk away, know when to run.
You never count your money when you're sittin' at the table.
They'll be time enough for countin' when the dealin's done."
- Kenny Rogers, The Gambler

"Tonight, I am going to share with you the secret to making money.  By knowing and applying one simple rule, you too can be rich like me."

I'm sure you have heard boasts like this before.  Usually it comes out of the mouth of some under-decaffeinated pitchman trying to sell you the latest get rich quick scheme.  In the 90's, it was how to make money from the Internet.  In the 2000's, it was how to make money buying and selling real estate (funny how you don't see too many of those commercials anymore, huh?).  Nowadays, it is how to make money in gold and silver.  However, tonight I really am going to share with you the secret to making money.  My technique is so simple that even a baby can learn it.  If you can remember three simple words, then you can make money, too.  All you have to do is repeat after me:


Yes, it is not as fancy as crazy option strategies or insane charting techniques, but it is proven to work.  This article on the Fidelity website describes research that compares the investment returns over the past two years of for groups of people:

Flight to Safety:  Sold all of their stock investments between October 2008 and March 2009

Fled and Stayed on the Sidelines:  Sold all of their stock investments between October 2009 and March 2009 and stayed away from stocks.

Market Timers:  Sold all of their stock investments between October 2008 and March 2009 but bought stocks again

Stayed the Course:  Remained invested in stocks throughout the past two years

If you remember your stock market history, October 2008 through March 2009 was the height of the financial meltdown.  Every day was doom and gloom:  bailouts, stocks prices dropping, layoffs, dogs and cats living together, mass hysteria.  However, a funny thing happened in March 2009.  Just as things couldn't get any worse, the sun rose again on the stock market and stocks took off like a rocket.  Anybody who sold their stocks prior to this ended up missing out on this powerful bull market.  Here is what Fidelity found when they compared the returns of people in the aforementioned four groups:

 As you can see, people who held onto their stocks throughout the worst of the financial crisis actually ended making the most money.  Even people who had the courage to dip their toes back in the stock market waters ("market timers") ended up making less.  However, at least they ended up with positive gains.  The people who sold their stocks during the market crash ended up with less money than what they started with because they missed out on the rapid gains.

In a previous article, I talked about how over the long haul, the stock market has grown at an average rate of about 7% per year.  However, that assumes that you stay in stocks for the entire time:  through the good times and the bad times.  If you bail out when the going gets tough, you are going to miss out on when things get good.  Sounds a little bit like marriage, doesn't it? 

Even if you say that you will sit on the sidelines for awhile until things are looking up, you are going to miss out on some of the gains.  The funny thing about the stock market is that, historically, it jumps around in fits and starts.  Sometimes, when it goes up, it goes up quickly.  By the time you realize what is happening, it is too late.  You've already missed the elevator up.

The bottom line is that nobody knows when the stock market is going to go up or down.  Therefore it is better not to even try to predict it.  Staying the course and sticking to your plan usually is a wise option.

Tuesday, September 14, 2010

Low Interest Rates = A Hidden Bailout

A recent article in the New York Times talks about something which I have been thinking about for awhile now, which is that the current low interest rate environment is just another bailout for the banks who caused the financial crisis.

To understand this, you have to understand a little bit about how interest rates are set and what the impact of this is.  Every two months, a group of economists known as the Federal Open Market Committee (FOMC or more commonly known as "the Fed") meet to set the federal funds rate.  For all practical purposes, this is the rate at which banks can borrow money from each other.  A lower rate encourages banks to borrow more money, because they have to pay less interest on this money.  In theory, this encourages banks to invest more freely because borrowing money is cheaper.  When the economy needs a kickstart, the FOMC committee will lower rates as a way to stimulate the economy by making it less costly for banks to raise money to loans to business and consumers. 
As a result of the economic slowdown, the FOMC has cut the federal funds rate to practically zero  (officially the rate is "between 0.0% and 0.25%").  A rate this low is unprecendented.  What it means is that banks can borrow money practically interest free.  Can you imagine if you could get a mortgage or a car loan at such low rates?  You would probably refinance in a nanosecond at that rate if you could!

What impact does this have on the average person?  Borrowing money from other banks is not the only way that banks can raise money.  They also raise money by allowing savers like you and me deposit money in the bank, either through a CD or a savings account.  When you deposit your money in a bank, you are basically loaning the money to the bank.  In return the bank pays you an interest rate.  Now if you are a bank and you are able to get money from other banks at practically no interest, what is your incentive to pay your depositors a high interest rate?  Not much.  That is why bank interest rates are so low.

Because bank rates are so low, people looking to invest money might look instead to other relatively safe investments, like government bonds.  Because of the higher demand for government bonds, the U.S. governement can lower the interest rate paid on them.

This chain of events ripples through the economy so that the interest rates on everything are lower.

Lower interest rates are great if you are borrowing money, like a bank or a person looking to get a mortgage.  Think of all the money borrowers are saving because they don't have to pay as much interest.  Where does all that money come from?  It comes from the savers.

People who are looking to save money end up earning less and less on the money that they've deposited in banks, CD's, bond mutual funds, etc.  If you are retired and saved up a nest egg of $500,000 with the intention of living off of the interest, you have to live off of less.  A drop in interest rates of 2% means that you have lost $10,000 per year.  Multiply this across the millions of savers across the country, and you are talking about some serious money.

While I understand the logic in lower interest rates to stimulate the economy, the situation stinks.  First, you are rewarding the very institutions which caused the economy crisis (reckless banks and the reckless borrowers that they enabled).  Meanwhile you are punishing the people who did the right thing by being frugal and saving for a rainy day.  In a just world, it would be the other way around.

Second, this bank bailout doesn't show up in the Federal budget, so it does not get the same exposure as a bailout.  When the U.S. Government bailed out the banks, it was visible because it showed up in the budget and it is accounted for in the deficit numberts.  When the FOMC lowers interest rates, no tax dollars are being spent.  Instead it shows up in your bank statement every month.

The good thing, I suppose, is that the federal funds rate cannot go any lower, so there isn't any more gas in that tank.  Who knows, though, maybe they will make the rate go below zero and pay banks to borrow money.  What a topsy-turvy world that would be!

Saturday, September 11, 2010

The Biggest Threat to Google Android (And What They Should Do About It)

I have been a loyal Verizon customer since 2002.  I have stuck by Verizon all this time for two reasons.  First, everybody in my family also has Verizon which means that I get unlimited mobile-to-mobile minutes when I call them.  Second, their network has the best coverage in my area.  However, my one big complaint about Verizon had been that their selection of phones was terrible.  This was especially true when all of my AT&T acquaintances were flaunting their iPhones in my face.  Verizon did have a couple of smart phones, but most were dumbed down so that you could only get premium services through Verizon at extreme prices.

However, the situation changed with the release of the Motorola Droid.  Verizon finally got wise and realized that the key to smartphones is actually having phones that people want to use without any of the restrictions.  The Droid has turn-by-turn navigation that you didn't have to pay $10/month for.  The Droid has a wide selection of apps and many of the useful ones are free.  The Droid has a slick interface that isn't encumbered by all sorts of Verizon crapware.  It really seemed like Verizon was starting to wise up.

This was a great move for Google, too.  Android went from a fringe phone operating system to a serious competitor to Apple.  Most of the credit goes to Verizon and their network.  For people like me who want to stay with Verizon but want a 21st century phone, Android was the perfect match.  The rapid growth of Android's market share has been well documented.  Some experts predict that it will continue to grow and gain market share over the next few years.  However, there is one thing that should scare the pants off of Google.

A Verizon iPhone

For awhile now there have been rumors that a Verizon version of the iPhone was in the works.  Rumors about a Verizon iPhone remind me of the persistent rumors about a new Star Wars movie that persisted through the late 80's and into the 90's.  Every year there would be a new rumor and most of them never panned out.  However, eventually George Lucas finally got his act together and released his prequel to much fanfare and ridicule.  I'm talking to you, Jar-Jar.

Anyway, my point is that even if the latest rumors don't come true exactly, it seems inevitable that Apple would want to bring their product to the largest wireless network.  That would spell bad news to Android.  One of the reasons why Android has become so popular is that it is the best game in town for Verizon customers.  You could argue that Android is technically superior to the iPhone, but most people buy smartphones based upon styling rather than substance.  In any case, a Verizon iPhone would put a serious dent in Android's market share.

Given the fact that Apple is looking to branch out to Verizon, what should Google do?  My suggestion is simple.  They should offer to give Verizon a boatload of money to lock Apple out of the Verizon network.  Now I am not an anti-trust lawyer (or any type of lawyer for that manner), so I don't know what the implications are from a legal standpoint.  However, if it is legal for AT&T to maintain the exclusive rights to sell the iPhone, I would think that it would be legal for Google to become the exclusive smartphone provider for Verizon. 

If Google doesn't do this, I predict that Apple is going to eat their lunch in the smartphone market if and when they sell the iPhone for Verizon.

Tuesday, September 7, 2010

The Hidden Cost of Refinancing

With mortgage rates at record lows, mortgage refinancing is starting to get a second look from recession weary homeowners.  For those whose credit rating didn't take a hit over the past few years, the prospects of lowering ones interest rate and monthly payments is a very tempting proposition.  However, there is one huge factor that most people don't take into account when doing the refinancing math.  Not taking it into account can literally cost you tens of thousands of dollars if you are not careful.

Refinancing a mortgage restarts the clock on your mortgage.

Saturday, September 4, 2010

Some Changes to the Website

You may have notice that I have started to add some new features to the web site.  First, I added a list of some useful and interesting personal finance blogs that I follow.  One of my favorites is a blog called Free Money Finance.  The author has a great, no-nonsense philosophy when it comes to personal finance.  One point he makes is that one of the keys to being successful financially is to manage one's career.  This is an area which most personal finance experts ignore for some reason.

Second, I added a list of books which I have found to be either useful, informative, or entertaining.  I will continue to add more as I go.  Included is a direct link to Amazon where you can learn more about them and possibly add one to your own personal library. 

Feel free to email me if you have any other suggestions of complaints on the layout.  I will continue to experiment with it, but my goal is to not let all of the fluff interfere with providing quality information.

[In the interest of full disclosure, I should let you know that I belong to the Amazon Associates program where I get a (small) percentage of any book purchases that are referred through my website.  However, most of these books are also available at other bookstores, both online and offline, as well as at your local public library.]

One Money Expert's Strategy for Savings

I came across an interesting article on the New York Times website about using laddered CD's (Certificate of Deposit) instead of a typical savings account.  Normally, the downside of putting your money into a CD is that you cannot access it until the CD matures without incurring a penalty.  However, with the laddered CD strategy, you open up multiple CD's of varying durations so that every few months at least one of the CD's matures.  That way, you always have access to part of your savings.

Of course, there are a couple of caveats to this strategy:

1. If you have a specific savings goal for which you need your money, you will need to synchronize the maturity dates of the CD's with the time frame of your need.

2. If you have an unexpected need to have access to a significant chunk of your money, you will need to be prepared to withdraw your money prior to maturity and incur a penalty.

That being said, this certainly is a viable strategy for emergency savings or some other savings where you are concerned with preserving principal.  For longer term savings goals, like college or retirement, you might be better off in stocks, bonds, or another investment which does well over the long term.

Thursday, September 2, 2010

Misleading Financial Post of the Week

Today, I came across the following article on the Forbes website that made me want to scream.  Forbes is supposed to be one of the paragons of intelligent investing, which is why the existence of this article under their banner is all the more shocking to me.  It shows a total lack of understanding about how annuities work.

Why am I so worked up over this posting, you ask?  I don't have a problem with its general message of protecting against inflation.  In fact, educating people about inflation is something of a pet project of mine.  No, what has gotten my attention is the following statement that the author makes near the beginning of the article:

If you are a 70-year-old male, for example, you can get $630 a month for life from insurer New York Life by plunking down $100,000. That’s a 7.6% annual payout, a lot more than you could get from other relatively safe investments, like bank CDs and U.S. Treasury bonds.

A casual person would read this and conclude that an annuity is better than a CD because an annuity returns 7.6% while a CD only returns about 1% these days.  Of course, this is very misleading.