A big ad offering “Returns as high as 11.5% and possibly more when you factor in tax advantages” from a well-known charity is likely to get your attention — especially when you can’t get 3.0% investing your money in bank CDs. I came across such an attention-getting ad in yesterday’s (April 22) New York Times business section. Unfortunately, this ad stinks!
The ad offers charitable gift annuities. I won’t single out this charity, because many others follow a similar approach.
Don’t get me wrong. Charitable gift annuities can be a terrific way to donate to a charity you care about, while getting back income during your lifetime.
What’s my problem? It’s the way this and similar ads sell charitable gift annuities by trumpeting a big “return” or “rate of return.”
- In common language, a return is money you gain (or lose) in relation to the money you invest; a rate of return is the percentage of gain (or loss).
- If you put $1,000 in a simple-interest 2.5% CD, at the end of the year the bank would pay you $25 (interest) plus your $1,000 (your principal). Your return would be $25 and your rate of return would be 2.5%.
- With a charitable gift annuity, however, you’ve given away your principal. If you’re 90 or older, the charity that published the ad would pay you $115 at the end of the year (maybe a little interest, but mostly paying back your principal). Calling that an 11.5% return is either confusing or misleading, or both.
Come on, charities. This “return” disclosure approach, which many of you use, stinks. You’re supposed to be the good guys. Surely you can do better.