Just save $3 million bucks and live off the 4% interest income of $120,000/yr while living in a no income tax state! Perfect

Life is simple guys. Don’t make it complicated!

I still stand by the position that the so-called safety (I’m talking VAs here, not fixed) you get with many of the riders is money thrown out the window unless the stars align in your favor. If you want to invest in 100% stocks and pay 3-4% each year so that you can sleep at night knowing the worst case scenario is you’ll get your principal back, well, you can create a diversified portfolio that can squeeze out fairly consistent moderate gains, which is what you’ll end up with investing aggressively while having a large chunk taken out for expenses.

If the stock market averages 10% a year and you’re paying 4% in total expenses you’re left with a 6% average return for that piece of mind. I’d just argue that you could skip the variable annuity during the accumulation phase construct a conservative portfolio that gives you fairly consistent returns in the 6% ballpark over that same time frame without taking on too much risk and without forking over 4% to an insurance company. Sure, investing in a way that’s targeting a consistent rate of return in the 5-6% range is limiting your upside, but it’s also providing you with a safety net in that you’re not relying entirely on the stock market.

But, different strokes for different folks I guess. Some will like the ease in just dumping their money into a single vehicle and buying the protection for a set fee, and others can accomplish the same thing on their own or with a quality financial planner.

I wrote a post called “At What Cost?” http://evolutionofwealth.com/2009/09/30/at-what-cost/
The purpose was to ask about the expense of a safety net. It’s not about gambling for it to pay off it’s about peace of mind and knowing what the worst case scenario is. You limit the upside a bit to give you that safety net under just in case the market let’s you down. Isn’t it possible it could do it again.

I am happy to have this discussion with you because I think your comments provide a clearer indication how you feel about the product than does your post.

“I’m just saying that most riders on variable annuities are a gamble, just like betting the farm on a few individual stocks is.”

But the difference is the purpose of purchasing the rider vs betting on individual stocks. The product is made for someone that is looking for safety.

As far as Fixed Annuity Rates – I just looked some up and you are correct they are much lower than the 5% number I gave, but I found a few there were about double of ING’s Account (apparently, it has been a while since I looked at the annuity Market lol). That being said, I think you’d be hardpressed to create a bond fund where you were getting Net 5% with the low risk of a aa1 or thereabouts insurance company. Go CIT bonds lol jk

“Annuities should be used to lock in guaranteed income for life. That’s what they were designed for, and if that’s what you want, they are a great tool. But if you’re looking for a way to beat the market or find some sort of safety during your accumulation years, you’re basically rolling the dice in hopes that somehow what you purchased will pay for all of the added fees you’re assuming for that safety”

I couldn’t agree more with the sediment that they should be used to create a steady income stream. That is what they are there for, and I don’t think you are going to get a homerun out of them in an up market – but for safety purposes in a down market there is no roll of the dice, if you were to use a guaranteed Income/Minimum benefits rider in a down market. Since no one knows what we will have for the next 30 or so years, I just don’t think it is entirely bad to have a little safety.

“When those fees are associated, like you said in your comment, but not in the article, with creating further safety of principal (and possible growth) for a price, i.e. the cost of the rider – why would you then tell someone to invest in a few individual stocks?”

I’m just saying that most riders on variable annuities are a gamble, just like betting the farm on a few individual stocks is. If you buy the rider and your portfolio doesn’t go up enough to cover the cost of the rider over that time, you wasted money. If the market goes up (which most people hope it does) your rider is likely useless again and wasted money. So you’re basically taking a gamble in that the market goes down enough that you can utilize your rider and come out ahead. With long-term market trends, that’s a losing bet and it all comes down to your luck of timing.

“Partially correct, if you have an annuity with guaranteed growth of NET 5% (think fixed annuities) and CSDCs (surrender charges) for 7 years and you don’t have any intention of invading for 7 years, would you rather see that money in an ING account with 1.3% Gross?”

Come on now, let’s not get carried away. Let’s not compare a 5% fixed annuity with an ING savings account. First of all, I’d love to see a fixed annuity right now paying 5% net for a full 7 years. I haven’t paid much attention to the annuity market in recent years but even back when you could get CDs for 5% APY it was nearly impossible to find a fixed annuity that would pay out that high for more than a year or two.

Second, if you’re going to compare something like that there are all sorts of alternatives that can net you close to 5% and still be virtually guaranteed. By the time you look at the bond universe and put together a portfolio that would do quite well.

“It should also be noted that while those fees absolutely hurt, the growth is tax deferred – so those fees are somewhat mitigated when comparing net returns in a mutual fund.”

I’m ignoring tax-deferral because what happens is most people end up rolling their retirement nest egg which happens to be n a 401k or IRA into an annuity thanks to the salesman pushing the product. I saw it happen every day at my old job. Most people weren’t sitting on a pile of taxable investments and then decide to roll it into an annuity. Of course the tax deferral is an important consideration IF you’re comparing after-tax growth vs. tax deferred.

And finally, I’m not saying annuities are bad at all. I specifically mention how they are a great way to lock in money and receive a regular payment for life. That is exactly what annuities are for and have a number of uses for this. My problem is when people try to mix long-term investing with annuities. All of the riders and features and other bells and whistles are just sales gimmicks. Yes, they can and do pay off at times, but for the majority of people they just end up costing money that otherwise could have been avoided.

Annuities should be used to lock in guaranteed income for life. That’s what they were designed for, and if that’s what you want, they are a great tool. But if you’re looking for a way to beat the market or find some sort of safety during your accumulation years, you’re basically rolling the dice in hopes that somehow what you purchased will pay for all of the added fees you’re assuming for that safety. It might work out, but it might not. So for me, I’d rather construct a portfolio on my own that minimizes risk and decide on my terms down the road whether or not to convert that into guaranteed income for life.

I am not a monster fan of Annuities, I just think it is easier for most PF Bloggers to repeat the oft heard, “Say No to Annuities too many fees.”

“Riders are expensive. Period. If you’re going to take the gamble and waste potentially tens of thousands of dollars on added expenses for choosing an annuity and then a rider on top of that you might as well bet your entire retirement on a few individual stocks”

When those fees are associated, like you said in your comment, but not in the article, with creating further safety of principal (and possible growth) for a price, i.e. the cost of the rider – why would you then tell someone to invest in a few individual stocks?

“If you don’t get lucky enough to even use your guaranteed income/principal rider you’ve just thrown money away.”

Partially correct, if you have an annuity with guaranteed growth of NET 5% (think fixed annuities) and CSDCs (surrender charges) for 7 years and you don’t have any intention of invading for 7 years, would you rather see that money in an ING account with 1.3% Gross?

It should also be noted that while those fees absolutely hurt, the growth is tax deferred – so those fees are somewhat mitigated when comparing net returns in a mutual fund.

Again, I am not a huge fan of annuities, but they absolutely have their place in some people’s world. I just think your post is below your usual level…basically providing an argument that Annuities could be good for some people (safety) and then just revert back to the garbage…but they are expensive.

For high watermark and similar riders to work you’re essentially betting on the fact that you buy your annuity at a low point, in a few years it rises, and then just before you are ready to retire the market tanks. If that doesn’t happen you’ve likely just wasted a ton of money over the years on useless expenses when you could have invested on your own and then purchased an immediate annuity once you’re in retirement.

Furthermore, many of those types of riders will additionally dictate how you must withdraw the money in the event you choose to use the benefit of the rider. While you might be able to lock in a higher amount if the market falls right when you’re about to retire you might not have the flexibility of payout.

If you don’t get lucky enough to even use your guaranteed income/principal rider you’ve just thrown money away. For example, if you buy a $200,000 annuity contract and hold it for 10 years and your portfolio doesn’t even realize any gain, after you factor in say a 1.5% M&E, fund expenses, and maybe another 1% in riders you’ve spent nearly $70,000 in fees over that 10 year period. You could have invested this money on your own and realized a 30% loss over that period and still have roughly the same net result.

That’s why these products are offered by insurance companies. They make money by assessing risk and then charging an appropriate premium for the protection. They make money because more often than not they won’t have to pay out because of life expectancy, the market doing good in the long run, or the fact that most people never annuitize to begin with.

Riders can be a benefit, but it’s a big IF. IF the market happens to go down significantly right when you plan on taking the money, yes, the gains you were able to lock in may offset all the costs and you MIGHT come out ahead. But the odds are not in your favor and you’re better off accumulating assets on your own terms and only using an annuity once you decide you want to lock in that income for life.