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WARNING: Your Variable Annuity Might Not Be What You Thought

Mike Riedmiller

Annuities can offer a number of attractive features for people who are currently working, approaching retirement, or already retired. Each year, Americans purchase billions of dollars of new annuities; they can be a big part of a solid retirement plan.

People choose to add an annuity to their investment portfolio for several reasons, including:

1. Potential upside growth of their money.
2. Lifetime income, either immediately or in the future.
3. Tax-deferred growth.

 

There are many additional benefits that annuities can offer when structured correctly. Those benefits depend on the type of annuity you decide to purchase.

Three Main Types of Annuities:

1. Variable Annuities – Variable annuities usually have higher fees than other types. Your money still has risk of market loss, so it can lose value when the stock market declines in value.

2. Fixed Annuities – Fixed annuities will usually pay a fixed rate of return that is higher than what the banks are offering. Typically, there are no fees.

3. Fixed Index Annuities (FIAs) – Fixed index annuities offer principal protection since your money is not subject to stock market losses. The fee can vary, and the money in this annuity can increase in value when the market index it follows increases, but will not lose value when the market is down.
I’ve spoken to many people with variable annuities who aren’t aware of the fees they are paying. I’ll usually call the phone number on the front of their account statement to discover their list of charges.

It’s a long list.

Here are just a few of the fees a variable annuity can have:

1. Sub-Account Fee – This fee is the cost for the stock market investments within a variable annuity. Think of it as a management fee you might pay for a mutual fund or stock investment.

2. Mortality and Expense Charge (M&E Fee) – This fee is an insurance-related charge for death benefits associated with the annuity.

3. Riders – Riders are options that can be added to a variable annuity, such as lifetime income, withdrawals, or death benefits.

There can also be administration fees and annual maintenance costs that could add more charges to the variable annuity.

If a person has a $300,000 variable annuity and pays 3% annually, the fees would be $9,000, which could add up to $90,000, or more, in fees over 10 years. If their account value rises, they would have a larger account balance and more in fees each year.

There are solutions.

For people with a variable annuity older than five years, it can be easy to transfer the money out of the variable annuity and into a potentially better investment.

Their money can increase in value when the market index is up and won’t lose value when it decreases. Some of these investors have saved over $25,000 each year in fees, which can add up to $250,000 in the next 10 years. This could mean $500,000 in fees saved over the next 20 years.

Equally important, their money won’t be subject to market downturns, like it could be with a variable annuity.

So, instead of a variable annuity, where they were paying fees and their money was at risk in the market, they now have a fixed indexed annuity with no fees. Their money can increase in value every year the market indexes are up, and lifetime income payments are possible when structured correctly.

It’s important to note that it can be beneficial to work with an independent financial professional who works with several companies that offer annuities. They can show you options based on your goals and situation so you can choose the best one for you. If a financial professional only works with one company, they likely are not independent, giving you fewer options.

When you find a better annuity option, it’s as simple as a transfer or rollover. Just fill out the needed paperwork, and your money will be transferred. A qualified financial professional can help you with this process by making it run smoother and be more beneficial for you.

About the Author:

Mike Riedmiller is the president of Riedmiller Wealth Management, an independent financial firm free from the product-focused, sales-driven environment that can be prevalent at large financial institutions. He is a fiduciary financial advisor, author of “The Road to Success,” creator of the “Smart Money Planning” educational course, and a Forbes BrandVoice Contributor.

Your financial success is Mike’s No. 1 goal. He focuses on retirement planning and wealth management. Mike believes it is more important than ever for people to be educated about money and their financial options so that they can secure their financial futures.

Mike works with a large team of seasoned financial professionals to build long-term relationships with his clients and help them achieve their important life goals and financial objectives. As a financial professional, he has a fiduciary responsibility to always act in the best interest of each client.

Mike and his wife, Carisa, have three children. They enjoy spending time with family and friends, biking, snorkeling, hiking, reading, and meeting new people. They have traveled throughout the United States and to foreign countries to take in new experiences and make lifetime memories with their family. With the goal of helping others to have better lives, Mike and Carisa actively support a number of charities.

You can discover more about Mike’s annuity strategies by contacting him at mike@riedmillerwealth.com.

 

Annuity123 does not offer insurance, investment, or tax advice.  You should always seek the guidance of qualified and licensed professionals concerning your personal insurance, investment, or tax matters.  Annuity123 is simply a platform allowing retirement planning professionals to help educate the community on various retirement planning topics.  Annuity123 does not directly support or take responsibility for ensuring the accuracy of the content displayed in the articles themselves or any feedback that may get added in the Comments section from the community.

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