Are you thinking of purchasing a Variable Annuity or do you already own one? I would encourage you to do some homework before purchasing one, and if you already own one please have it reviewed and make sure you understand all the moving parts.
Why? Annuities have high, on-going fees compared to traditional investments. With a variable annuity you have more than one flat fee. You can incur Mortality and Expense, Administrative Fees, Optional Guaranteed Minimum Death Benefit Rider, Optional Lifetime Withdrawal Benefit Rider, and the Fund expense for the Sub-accounts you choose to invest. These fees can add up to as much as 4% or more if all the benefits are chosen.
Let’s take for example someone who invests $500,000 in a variable annuity and compare that to the investor who invested with an Investment Advisor who charges 1% annually and assume the investment earned a gross return of 10% over a 7-year period compounded annually. The money invested with the Investment Advisor would be worth $914,019.56. If you invested in the variable annuity with a 4 % annual fee your money would have grown to $751,815.13.
In a seven-year period the insurance company you bought your annuity from collected $162,204.43 from your potential return in this scenario. Let’s break that down by the year, that’s $23,172.06 annually. Most people would love to have that extra money to spend in retirement. Oh, by the way, there’s another potential fee I forgot to mention.
Variable Annuities typically carry surrender fees if the investment is redeemed prior to the surrender charge schedule. Surrender periods are usually 7 years and could last even longer. Most surrender charges decrease over the life of the contract. For example, the first year could start at 7% and then decrease incrementally over the surrender charge period of the contract until eventually going to zero. Most investors buy annuities because the benefits associated with the product sound good. There are many other factors to consider before investing in an annuity such as taxes, liquidity, and suitability.
Annuity sales people often overlook the potential drag on investment return due to fees when presenting the product to a client. I also believe that once the product is sold they move on to the next potential sale and do not properly manage the assets inside the annuity. This happens all too often. They get paid upfront and then they fail to reach out to you regularly to review your investment. We review investments with our clients on a regular basis. It is crucial to an overall financial plan because situations change and the investments may need to change too. If you have an annuity or other investments that may be neglected do not hesitate to call for a complimentary financial review.