What is missing in his column is the how and why a product, like an annuity, is built and why might there be a need for what he states are higher “fees or commissions.” Plus, he has great reservations in having a variable or fixed deferred annuity inside an IRA or any qualified retirement plan.
Using his logic of never buying an annuity because of higher fees and expenses ignores what is included in those costs.
Let’s look at a non-related example: a bridge built at low costs.
Imagine driving on a one-mile-long bridge suspended 370 feet over a rocky gorge that has no guard rails and was built with inferior steel and concrete. Looking in the rearview mirror, a storm is coming up on the rear end of the vehicle and the high winds begin to blow the car to the edge of the bridge. Remember, there are no guard rails. You feel the bridge shake, rumble and roll. The bridge was built with less cost because the contractors, engineers and architects thought it best to not include them to keep the price low. How safe is that bridge? Might a different route to avoid that bridge be safer and more reliable?
The fees paid for any annuity rider act like the guard rails on the bridge. They add to the cost but are the benefits worth adding? The answer is it depends on the individual situation.
Here are some examples of guarantees/guardrails of a variable annuity: contribution death benefit guarantees and a variety of income annuity options to choose from at a future date, i.e. retirement. Some riders that can be added at additional costs are: long-term care, guaranteed minimum accumulation benefit, guaranteed minimum withdrawal benefit, guaranteed lifetime withdrawal benefit or disability, unemployment and terminal illness. One should consider some general guidelines when contemplating annuity costs. The fees paid for an annuity structure can decrease your total return, so look to get more benefits rather than chase a rate of return.
If investing in an annuity, through a tax-advantaged retirement plan, such as a 401(k) plan or IRA, it’s true there are no additional tax advantages from the variable annuity. One should consider buying a variable only if it makes sense because of the annuity’s other features, such as lifetime income payments and death benefit protection.
Both mutual funds and variable annuities respond to changes in the market, the extent of which is determined by the portfolios, or fund choices. As Zacks Investment Research explains, “sub-accounts and their mutual fund doppelgangers typically report almost the same earnings or losses, and any discrepancy is minuscule.”
However, that’s where the similarities between mutual funds and annuities end.
Mutual funds may be purchased from the fund company directly or through a third-party broker. Variable annuities, on the other hand, are purchased from life insurance companies.
Any annuity is legally an insurance product that offers a range of features not available with mutual funds. Through the use of contractual specialized riders and account enhancements, insurance companies are able to shield investors from losses that would otherwise threaten the stability of retirement income.
Some annuities can be intricate products to understand. It’s important to understand how the annuity works, what its benefits are, and, perhaps most notably, the role it can help play in an overall retirement income strategy. Be sure to prudently read the promotion materials and prospectus. Make sure to ask questions and receive full disclosure before making a decision.
It’s vital to appraise any annuity’s costs versus the guarantees it includes. Not all guarantees are created equal. Some guarantees involve awkward limitations that may weaken their appeal, regardless of the price. On the other hand, keep in mind that when someone buys an annuity, part of what one is paying for is the soundness of the insurance company standing behind those guarantees.
No one financial product is appropriate for every saver. Many people prefer the all-inclusive nature of annuities and are willing to pay somewhat higher fees to ensure both their financial future and peace of mind. Other people, however, are content and skilled in fortifying their own retirement income streams and death benefit guarantees.
Financial peace isn’t achieved by the size of the nest egg or the extinction of debt, but rather by the net difference between the monthly checks coming in versus the monthly checks going out.
Gary B. Woolman, CLTC, CFBS and LUTCF, is president of Woolman Financial Group.