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Where To Put A Spare $100,000

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This story appears in the Septemper 28, 2014 issue of Forbes. Subscribe

Let's suppose that you are 50 and looking to put away a little extra for your retirement. You've filled up your 401(k). You are somewhat worried about market crashes. Where's a good place to stash $100,000?

This essay will examine two very different investments, one simple and the other not. To give away the ending, uncomplicated investments have a lot going for them.

The simple way to save has you putting a third of your money in stocks, a third in medium-term bonds and a third in inflation-protected bonds. Such a portfolio is not crashproof, but it's crash-resistant.

When the next market crisis arrives—a collapse in stocks, a spike in inflation or a rise in interest rates--this timid portfolio should give you the strength to hang in there. From a low-risk blend, of course, you can expect only a modest gain. Over the next 15 years you might get an annual return of 4% before inflation and 2% after.

Implementation of this strategy is simple indeed. Put equal amounts in three exchange-traded funds: Vanguard Total Stock Market (VTI), Schwab U.S. Aggregate Bond (SCHZ) and Schwab U.S. Tips (SCHP).

The other way to save is with a deferred annuity. It's a simple fund wrapped up in a very complicated life insurance policy.

If you know anything about the deferred annuity industry, you know that it is frequented by charlatans making high-pressure sales pitches for murky, overpriced products. There are also a few honest operators. Let's look at one of the good players, in order to give annuities a fair shot against the three-fund mix.

Our hero is Thrivent Financial, and its annuity is the Flexible Premium Deferred Variable Annuity. Thrivent is an unusual beast. It is neither a profit-hungry corporation like American Equity Investment Life Holding (NYSE: AEL) nor a mutual like Vanguard Group. It is a "fraternal organization," with roots in a mutual aid society of the Lutheran Church. Thrivent uses its profits to help poor people, and it encourages its customers to do volunteer work.

You won't find a more benevolent vendor than this one. And yet the annuity imposes fearsome burdens on its buyers, beginning with the fact that it is mentally taxing. You're supposed to study the 255-page prospectus, then decide which of 33 different investment portfolios you want, then pick any of 8 combinations of insurance.

There's a "basic death benefit" and optional "maximum anniversary," "premium accumulation" and "earnings addition" death benefits. What are these things? They are all aimed at reassuring the hesitant stock market investor--someone who wants some of the ups but none of the downs. If you die prematurely, your heirs get back at least the $100,000 you put in. With the enhanced, optional coverage, their guaranteed recovery ratchets up with the investment account's value.

But does this really shelter you from life's vicissitudes? For your family to get any benefit from the insurance you'd have to perish during a stock market downturn. It's hard to get that timing just right.

More likely: Your challenge is not an early demise but a long retirement. Can you cover your heating bill? The complicated savings product is your enemy in this endeavor.

Complications cost money. Expenses on the deferred annuity depend on your choice of insurance options and your choice of investment style but could easily top 2% a year. That wipes out the likely real return from a conservative mix of stocks and bonds. (Unless, of course, you luck out by walking under a falling anvil in a bear market.)

The Thrivent annuity is emblematic of what's wrong with Wall Street. The invention of online trading and the index fund should have put most stockbrokers out of business. Instead, they devise ever more convoluted products to sell—variable annuities, hedge funds, tax shelters. If you don't want to be bagging groceries at age 70, give the complicated stuff a pass.

Postscript: Variable annuities are often thought to make up for their sinful costs with tax virtues. They are supposed to enrich you by deferring taxes. Surprise: They often boost your tax bills. The airthmetic is explained in Variable Annuities: What's the Tax Deferral Worth?

I count two reasons to buy annuities and five reasons not to buy them in Deferred Variable Annuities: Pros and Cons.