Ball and Chain Investing with Variable Annuities

Ball and Chain Investing with Variable Annuities

I was lucky enough to be invited to a nice steak lunch the other day. It wasn’t with a friend; it was a lunch sponsored by an insurance company seeking more variable annuity business. What’s funny is, the company doesn’t need to sponsor these lunches because it seems these products sell themselves. It goes back to last week’s post: it’s mostly about income payout and little about accumulation and investment accounts.  It’s easy to see, though, why insurance companies focus on VAs. The fees are so damn exorbitant that accumulation is almost out of the question!

The lunch, er, sales pitch, starts out stating that many Americans are looking for income. Pension plans are a thing of the past, and they will need an investment vehicle that can distribute income from their lump sum 401(k) distributions. No complaints with the presentation so far. Yes, we Americans will need income for the cell phone, student loan, credit card and mortgage bills we signed up for. Our rollovers will pay for the bare essentials, not the dream life we assumed we’d have.

This smooth annuity wholesaler goes on to tell the crowd how hard-working Americans can receive 4% to 6% of their own money back in payments. And no matter how long you live and no matter how the stock market performs, you’ll receive that amount until the day you die. Period. But wait, there’s more. The speaker insists that–since your funds are invested in mutual-fund type sub-accounts–your account’s value is likely to go up. The increase in account value can improve your income payout as well. It’s confusing, I know, but let’s say you buy an annuity and lock in an income amount. Your account value can go up, which can throw off more income than you were guaranteed. Plus, your account value will appreciate for your beneficiaries. Got it? Good. By the way, the income feature is called the guaranteed minimum withdrawal benefit (GMWB). Yes, I’ve discussed it several times before.

Although the VA is the hottest investment product in the financial adviser and life insurance agent marketplace, I still have major gripes with it. The GMWB looks good and sounds good, but it isn’t good. Do you know what you’ll pay for this feature in a VA? The total fees, including management and insurance, will total about 4% a year. In this day and age, with interest rates at about 0%, how can you ever think the investment you’re buying is worth 4% per year? Your money will never grow with this ball and chain tied to it. Yes, the income will be paid, but don’t think for a second that your funds will grow. They will not. So, in essence, you will be paid 4% to 6% of your original investment until your death.

Fees have never been so important, due to low stock market returns and 0% interest rates. Annuity advisers are painting a rosy picture to Americans that will be very difficult to attain. Yes, if we have a 1980s or ’90s type of bull market, it could happen, but you’d be better off investing in an equity mutual fund. I failed to mention that the VA forces you to invest very conservatively when a GMWB is purchased. So limited upside will take place with your investment portfolio, and 4% will be taken from that limited portfolio.

Don’t let the VA adviser paint you this fake picture. Everyone is making money with VAs, except the hard-working American client. I could go on and on about how disappointed I’ve been with these products. Do yourself a favor; if an adviser pitches you a VA, throw him out the door! Enough of high fees, America!

Pay-it Forward:

The No. 1 characteristic to teach your post-grad is to be humble. Tell them no job is too small and no task is beneath them. Many great jobs start out in the mail room. We don’t start off as partner. We start off working hard in all tasks and asking questions. I just don’t get it. Stop telling your sons and daughters they deserve better. Let them learn the hard way. That’s how you build character.

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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About the author

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

More posts by | Visit the site of Earl E Bird

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