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Last week I shared with you the real
reason advisors push IRA accounts into variable annuities: the
commission. If you’re getting ready to retire with a large IRA
rollover, or your current IRA account is nearing the end of any
surrender penalties, chances are you’ll be pitched this product. So
this week I’m going to reveal more secrets about the truth behind
the variable annuity sales pitch.
One of the biggest draws advisors use to get you to take the plunge
is the promise of the big bonus. They’ll pay you 6%, 8% or even 10%
extra, right up front, just for putting your money into their
variable annuity. Sounds great, doesn’t it? Who wouldn’t want such a
big boost to their nest egg, especially with the stock market
returns of late? But remember, there’s no such thing as a free
lunch.
In return for this lovely bonus, you end up paying higher recurring
annual fees, usually .15% higher (or more) than regular variable
annuities. These fees are charged on all of the money in the annuity
and are a continued drag on performance. Surrender penalties are
higher and longer, too. The truth is that when you take into account
the increased fees and the extra years you have to stay in the
annuity, you really aren’t getting a ‘bonus’ at all!
These bonuses aren’t just used to entice you to invest your original
IRA rollover when you retire. They’re also used to encourage you to
transfer out of an annuity you already own that’s still in the
penalty period. Advisors will tell you that the bonus on this
‘new-and-improved’ annuity will ‘pay you back’ for the penalty
you’ll pay to get out of your old commission-based investment. The
truth is, by getting you to switch to the ‘bonus’ annuity, they earn
a fat fee up-front. You end up with pretty much the same thing you
had but now are locked into it for much longer. What kind of a
‘deal’ is that?
The promise of multiple investment choices is another feature of the
variable annuity sales pitch that doesn’t live up to its claim. It’s
true that many variable annuities offer a multitude of mutual fund
choices in various sub-accounts, including funds investing in bonds,
small companies, large companies, international stocks and more.
Surely out of all of these choices, anyone could create a balanced
well-performing portfolio, right?
Not necessarily. It’s sort of like fishing. Who wants to fish in a
pond full of minnows? Wouldn’t you rather drop your line where you
have a greater chance of catching the big one? The mutual fund
universe is full of thousands of choices. But only a small group of
them are consistent top performers. Unfortunately, few variable
annuities offer these big fish.
Some variable annuities feature a well-known fund already offered to
the general public. But beware. This same fund will have much higher
management fees within the annuity than it does outside of it,
hampering its performance. I believe insurance companies make
special deals with mutual fund companies to gain access to their
management and then charge higher fees.
When you invest your money into a variable annuity, you’ll no longer
have control over the choices at your disposal. The insurance
company can change the investment choices whenever they want to and
you have no recourse. Since your money is locked in for years, it
will be very costly to change course a few years down the road
should you be dissatisfied. What kind of choice is that?
So here’s the bottom line: variable annuities make big promises but
don’t really deliver. Every feature they offer -- be it a big bonus,
a multitude of investment choices, death benefit, or a guaranteed
income stream -- comes at a very high price. High management fees
and long, costly surrender penalties hinder your performance and rob
you of your flexibility and control. The ones making the most money
off of variable annuities are the advisors and the insurance
companies. It turns out that variable annuities are a great
investment—for them.
If you’d like free, clear, unbiased advice submit your questions to www.guardingyourwealth.com/askjeff.htm. Also, see answers to questions other
readers have asked onthe Q&A page at www.guardingyourwealth.com.
Mr. Voudrie is a Certified Financial Planner, nationally syndicated
newspaper columnist and President of Legacy Planning Group, Inc., a
Private Wealth Management Firm in Johnson City, TN. He can be
reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com
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