Annuity IQ

I believe we need a more balanced approach to variable annuities. It is easy to say that Variable annuities are not right for anyone. It is also easy to say that annuities are right for everyone. In today’s world people are polarized in their positions and being polarized is getting nothing accomplished.

variable annuities offer an opportunity to invest their money tax deferred and provide guarantees that no other investment can offer. They do have drawbacks, but all investments have some kind of drawback. annuities are long term investments and if you draw money out before 59 ½ then there is an IRS early withdrawal penalty. You do have, usually, up-to 10 to 15% annual liquidity on these contracts and you have income guarantees, called living benefits.

People concentrate too hard on the negatives of these investment products and not enough on the good qualities that they offer. We can all make a case against any type of investments based on some negative qualities. There is no such thing as a perfect investment vehicle for all people. By simply pointing out one or two negatives about an investment does not constitute a sound argument. You must look at the bigger picture.

The bigger picture is that variable annuities get people who need equity exposure to invest their money. They do this because a variable annuity offers living benefits and guarantee people their money back in some way shape or form. What people fail to realize is that many investors who are risk adverse and need equity exposure will not invest in mutual funds. They will often times invest in a variable annuity.

This is important because risk adverse investors will stick with safe investments which can guarantee them a low rate of return. I know for a fact that you cannot talk these people into investing in regular mutual funds and if you do then they are not going to be happy at all when it goes down in value. If, on the other hand, they had a variable annuity with a GMAB then they may be comforted to know they can get their money back after a set number of years.

Is paying an extra 1% that big of a deal? Think of it this way; if the average annuity costs the investor 2% a year they have 98% participation in the market. If they did nothing at all then they would have, as of right now, 3-4% total return in safe investment vehicles, including fixed and equity index annuities. Not to mention that several studies show that mutual funds loose between 2.5 and 5% of their total performance because they are taxable investments.

With variable annuities you are investing in sub-accounts and these sub-accounts hold less cash than your typical mutual fund. You have far less turnover rate than in traditional mutual funds and this means that you have lower internal expenses for trading the stocks and more money invested in stocks or bonds. This combined with the tax deferral and living benefits can make a variable annuity superior to mutual funds, especially for investors who are risk adverse.

I could not recommend anyone putting 100% of their assets into these products though. That makes no sense at all and can create significant issues down the road. I believe they are appropriate investments for those people who are looking to insure their riskier investments. We insure or homes, cars and our valuable possessions, but for some reason when we talk about insuring our investments the experts go nuts.

That is what we are talking about insuring your investment portfolio. The odds of you ever using your homeowners insurance are slim, but we always renew the policy. When we consider just over the last 10 years we have had several market hiccups and one really nasty, long bear market to think that it cannot happen again is crazy.

As a matter of fact the odds are high that we will suffer another bear market in the future. As we all know the market never goes straight up or down and that is what living benefits can help stabilize. If you are taking income from your portfolio a dramatic market downturn can create havoc with your income and negate your opportunity for a recovery. For some reason many experts who do not like variable annuities miss this important fact.

When they quote 10% a year from the S&P 500 they are never talking about the rate of return for people who are taking income from their portfolios. The fact is when you are taking withdrawals from your account and the market goes down it takes a long time for your account to recover, if it ever does. This important fact needs to be brought up again and again.

I have been reading several advice columns who criticize brokers for recommending variable annuities to investor whoa re about to retire. When we consider that these investment vehicles, Variable annuities, have guaranteed living benefits it makes sense to recommend a portion of the investment to go into a variable annuity. As we stated above, insuring a portion of your investments is not a bad idea. I am not advocating using 100% of your money to go into these products, but a portion of your money sure does make sense.