Annuities seem to be enjoying a resurgence lately, thanks to the bear market. That’s a shame. Many companies sell annuity products that are so costly in terms of fees and penalties that they seem better suited for funding the salesperson’s retirement than the investor’s. Amazingly, some agents even recommend buying annuities inside an IRA, meaning investors are paying extra to defer taxes…on an account that is already tax-deferred.

I can certainly understand the appeal of secure returns these days, but buying an annuity too often means being locked in to high fees and low returns. You can get the same security and pay zero fees by building your own annuity. Here’s how:

Let’s say you have $50,000 to invest for five years. You don’t want to lose any money under any circumstances, but you’d also like to make some money if stocks go up.

First, find a high yielding five year CD that is insured by the FDIC. Currently, you can find some on Bankrate.com that yield 3.50%. (Rates will likely be higher in the coming months.) If you buy the CD in your IRA, then you’ll create the same tax break found in an equity-indexed annuity.

At a yield of 3.50% you’ll need to invest $42,099 today to have $50,000 in 5 years. (Here’s a calculator.) Take what’s left and invest it in a low-cost index fund like the Vanguard 500.

In five years, you’ll get $50,000 back, guaranteed. If the market goes nowhere, you’ll still end up with $57,901. If stocks earn 7% per year, you’ll have $61,082.

You get the idea. Creating recurring payouts means splitting up the initial sum and investing in CDs with staggered terms. Email me for help plugging in real numbers. And please think hard before buying an annuity.

Additional articles:

The Downside of Market-Proof Annuities.
Consider Annuities – But as a Last Resort.
Retirement Plan Ripoffs.
Added Value – and Anxiety – For Variable-Annuity Owners.
Not So Easy Riders.