Everyone always asks me, “Chris, what do you think of variable annuities?” And every time they do, my first thought to myself is, “how much time do you have?” I have over 20 years of experience on this subject, and there are so many things I would like everyone to know and learn. But the reality is: For most people, what I know about variable annuities is too complex for the average investor to want to learn. I believe the insurance companies that offer variable annuities make them intentionally complex.
That being said, let me tackle the value of a variable annuity. For the purposes of this article, when I say value, I mean the value received for FEES being paid. You see, I don’t mind paying a fee (even a high one) if I get value for it. And it goes without saying that if I am not getting value, then I stop paying the fees.
Variable annuities are the no. 1-selling insurance product in our industry. Brokers from all of the popular firms you know sell these like they are going out of style.
You would like to think it is because they are the best, most-suitable option for your personal retirement situation, but this is almost never the case! In fact, the reality is that most of the time they are not only detrimental to your retirement plans, but also come with unwanted/undisclosed risks and extreme fees (also undisclosed) associated with complex, hard-to-understand policy riders.
These riders have all sorts of wonderful names that make them sound great, but I have yet to meet a person who owns one and can explain to me what it is that they own, how it works, why they own it, and how much it costs them. What is even more frightening is that when I meet these folks in my office and get their brokers on the line to ask them a few questions, neither do they. This brings me back to the value of a variable annuity.
How can you evaluate the value of a variable annuity if neither you, nor your broker, can explain it? You can’t! Let’s put aside the commission the broker is making by putting you in this variable annuity and focus on the cost of the annuity to you on an annual basis.
On average, I see fees totaling about 4% per year. They are not readily transparent, and usually they are not completely disclosed by the broker, buried deep into the prospectus that you never read. But believe me, they are there nonetheless!
If you invested $500,000 into such a variable annuity with a 4% fee, held it for 20 years during retirement, and had an average return of 7%, you would have paid about $556,000 in fees, which is more than you invested in the first place. Your account balance would have grown to $861,000, but had you not had to pay those fees, it would have been over $1.8 million, which is more for you and more for your family.
Are variable annuities worth it? Do they offer value? You be the judge.
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