Once you learn the facts about variable annuities, youâll see why they might not be as great a choice as they sound for retirees.
One of the most misunderstood investment strategies Iâve come across over the past 25 years is the variable annuity.
When I audit existing variable annuities, I get the facts about them by calling the insurance company directly rather than the broker who sold them. Why? Because I believe you should trust but verify, and I like to get my information directly from the horseâs mouth.
When I call the insurance company, among other questions, I ask: What are all the fees? What is the risk? What are the features? After going through that drill numerous times, Iâve pretty much seen it all. Based on my experiences over the past 25 years, the following are the seven most common myths Iâve learned about variable annuities and the facts dispelling those myths:
Myth #1: A variable annuity is a suitable investment for a retiree. If youâre like most of the retired highnet worth clients I encounter, your investing goals and strategies evolved as you got older.
Early in life, you were probably happy to ride with the ebb and flow of the market, waiting and hoping to hit that investment âhome run.â And why not? Suffering a loss now and then didnât bother you because you were certain of a rebound, and you knew you had plenty of time to recover, long before retirement.
But years pass and investing approaches change. Entering retirement, most people start thinking about protecting and preserving what they have, not making a big splash in the market.
You may have heard it said that these days the return OF your principal is more important than the return ON your principal, and that is definitely true for most of our clients. Thatâs why the variable annuities some retirees count on for a regular income may not be the best route to take. Which brings us directly to Myth #2.
Myth #2: Your money is safe. People are often led to believe by their brokers that with variable annuities their money is safe, which couldnât be further from the truth. Your money is invested in mutual funds with no real protection of your principal.
The name of the annuity pretty much sums it up: âVariable,â as in the principal varies, unlike a fixed annuity, where the principal is guaranteed by the insurance company. In a variable annuity, your cash value is determined by how well the mutual funds perform, meaning it depends on the whims of the market.
Albert Einstein is credited with saying, âThe definition of insanity is doing the same thing over and over again and expecting a different result.â If your goals and needs have changed now that you are in retirement and are more concerned with preserving and protecting your wealth and keeping your fees low, then it might be a good time to change your retirement strategy to match your goals and needs.
Myth #3: Your fees are low. Variable annuities typically have high, hidden fees â ranging from 2 percent to 4 percent per year â that can eat away at your money, potentially leaving nothing for your beneficiaries and really dragging on your overall investment performance.
Variable annuities typically have up to five different fees! I have seen 4 percent annual fees on a regular basis in variable annuities that I audit for clients in my financial planning practice.
Myth #4: Your income rider value is your cash value. I have heard many clients say the broker told them money in a variable annuity is safe and canât be lost. As I proved above, thatâs just not the case, because your cash value goes up and down based on the mutual funds youâre invested in, minus the high annual fees in the variable annuity.
What your broker is generally referring to is the addition of an income rider, which might grow at 6 percent a year. Some people believe they are earning 6 percent on their money, and that they can walk away with this lump sum 6 percent growth in the future. This couldnât be further from the truth!
What this really means is that only your income rider is growing at 6 percent per year, and if you want to walk away in the future with a lump sum of money, you arenât getting the 6 percent per year growth income rider value. Instead, you will walk away with whatever your cash accumulation value is based on the mutual fund results, less the annual fees you paid each and every year.
The 6 percent rider simply says that at some point in the future, you can turn on a guaranteed pension for life and that if you outlive your money, the insurance company will continue to pay you that income for as long as you live. Sound good? Sure. But wait until you read the rest of the story…
Craig Kirsner is a retirement planner and an Investment Adviser Representative. Craigâs book, Retire With Confidence: Preserve and Protect Your Wealth and Leave A Legacy will be available on Amazon shortly. He has been a licensed life insurance and fixed annuity agent for 25 years.
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Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and StuartÂ Estate Planning Wealth Advisors are not affiliated companies. Stuart Estate Planning Wealth Advisors is an independent financial servicesÂ firm that creates retirement strategies using a variety of investment and insurance products. Neither the firm nor its representatives may giveÂ tax or legal advice. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protectÂ against loss in periods of declining values. Any references to protection benefits or lifetime income generally refer to fixed insurance products,Â never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-payingÂ ability of the issuing insurance company. 547467