Who’s Afraid of Variable Annuities?

One of the greatest fears I hear from retirees or folks approaching retirement is that they are afraid their money and assets will run out before they run out of breath.

Even those on a corporate/state/federal pension are scared. Corporate failures threaten those promises. The government and its burgeoning debt and states facing bankruptcy make a person question the sanity of relying upon an outside party to keeps its promises.

But what if you could make yourself and your spouse your own pension?

More and more as a culture we are asked to shoulder the burden of our lives. Even though we are given some miraculous tools to do so, they can hurt us as much as help us.

A few examples:

• Paying for our health benefits at work
• My daughter’s NY city high school selection process (no guidance to choose between the 5,000 schools available, and that is just the public schools, not private!)
• The switch by companies from life time pensions to employee funded 401K plans
• And yes, we have the internet to help us make better choices with tons of information, but it also cause fear and dread. Who wants to spend the 20 to 60 hours researching everything?

A variable annuity is a simple thing.

During accumulation before retirement: It is a mutual fund portfolio that comes with an insurance wrapper for a fee that allows us to be in the market, but put a guarantee on the risk we take when the market takes a dive. Typically, you can never earn less than five percent. It also allows you to be in the market when it goes up, too.

During distribution after age 59.5: It allows the accumulated assets to be distributed as monthly payments for the rest of our lives and our spouse if we so choose, or for a set number of years, or a set number until the funds run out.

Imagine that for a minute—for a fee, you can never lose money in the market again and your money is guaranteed to last as long as you live, or until you and your spouse die.

Why are they so many articles against this “miraculous” product? Here comes a run-on sentence: If I was a broker who sold just mutual funds and I had no way to guarantee against losses in the market, which is my clients’ biggest complaint, and I make more money selling mutual funds over time because I get paid on those forever as a trail, whereas a variable annuity just pays once up front to the broker, what nice things would I say about annuities?  Not many.

A few objections:

• What if the insurance company fails? There has never been a failure of an annuity ever in the United States of America. Let me repeat: There has never been a failure of an annuity ever in the United States of America.
• Fees. The fee is, at worst, 3.5 percent. This means if I earn 20 percent in my portfolio one year I only get 16.5 percent, but if the market crashes the next year I get my five percent compounding on my assets, regardless of what happens in the market. Yes, that means in 2007 and 2008 you would have not lost 30 to 50 percent of your account—you would have gained at least five percent.
• The lock in. Variable annuities require that you stay in the contract for a set number of years before you access the money or move it to another investment. This is a retirement vehicle, not a piggy bank. What is the big deal?

As usual, think several times before you follow popular advice.

P.S. On November 16th, 2011 I will also be starting a free 12-part teleseminar about financial planning. To register, visit www.askjeannebrutman.com to register. The only thing worse than paying for financial advice is not paying for advice because you may be “sold” something that may or may not be in your best interest.

*All investment advice given by Jeanne Brutman is just opinion. Please consult with your financial professional for a more thorough discussion of what is appropriate for you.