Annuity IQ

There are certainly a lot of anti-annuity financial writers around, but there is one who is totally anti-Annuity. That would be Mr. Burns who writes for a newspaper in Texas. Now, I do not disagree with everything Mr. Burns writes about, but I do disagree with a fair amount of his advice.

Yesterday, Mr. Burns compared management fees to paying taxes in qualified plans. The problem is he is comparing apples to oranges and management fees should never be compared with taxes. A management fee is paying for the fund management and in the case of annuities the guarantees that the annuity provides. While taxes go to the government and funds the nation’s Federal Budget.

In a nut shell Mr. Burns says that paying taxes is not as bad as high expenses, but he used qualified retirement plans as his example. I do not understand why he used qualified plans for his example, but I am not a rocket scientist and he is. In my opinion he should have used taxable accounts to make his comparison, but that would not have made his story or numbers work.

He uses figures that show total amounts paid to the money manager over years and compares them to the current tax rates. He basically extrapolates out money managers and annuity fees over a period of years to make his case, I guess he does not realize that taxes have to be paid annually not every few years, clearly this is not a level headed example.

Mr. Burns then uses 403 (b) and 401 (k) with broker sold mutual fund management fees as an example of higher fees. These qualified investments are not taxed until money comes out so I am still lost as to why he is comparing management fees of these investments to paying taxes. I am also aware that cheaper 401 (k) plans are a must in today’s society and that is fine, but that is no reason to not do a fair comparison.

So, let us reexamine his comparison using realistic accounts, taxable accounts. According to Mr. Burns mutual funds are far superior to variable annuities because of the long term capital gains tax is at 15%. If all we paid was capital gains tax on mutual funds I would have to agree, but we pay much more than 15%. You will receive 4 distributions from mutual funds every year.

1. Short term capital gains – the bulk of your distribution will be short term distributions and they are taxed at your ordinary income tax rate.

2. Long term capital gains distributions – these are taxed at 15% and generally make up a smaller portion of your annual distributions.

3. Dividends – these are paid out quarterly, usually but sometimes monthly or annually, and are taxable, but they make up the smallest portion of your distributions.

4. Capital gains tax, part two- when you sell your mutual fund you will have to pay taxes on the appreciation of the shares of the mutual fund. This would be added on to of the distributions that you have already paid taxes on. If you bought your mutual fund shares at $10 per share and sold them 20 years later at $20 per share you would owe taxes on the difference.

Now, according to two studies, mentioned here before, the average investor looses between 2.5% and 5% of their total return due to paying taxes on these distributions. When we add in another 1% for management fees you may be loosing between 3.5% and 6% of your total return due to taxes and fees.

Compare that to a variable annuity where you will pay 2.5%, including fund expenses, and you tell me which is more. I am not a rocket scientist unlike Mr. Burns who is one, but 2.5% is less than 3.5% and is definitely less than 6%. You should also know that the 2.5% variable annuity charge also guarantees you a stream of lifetime income that can go up over time.

For Mr. Burns to use qualified accounts as an example is bogus and absurd to say the least. He also uses compounded numbers over time and reduces the management fee to a percentage of your total return making it sound like they are robbing you blind. Look behind his numbers and you will see them for what they are, a sham.

Especially considering he shows the management fees compounded over a 40 year period of time and then says; ‘This is far more than the 35% federal tax rate’ what a joke. Mr. Burns TAXES ARE PAID ANNUALLY, not every 40 years! How can you compare a number compounded over 40 years to annual taxes is beyond me, but I digress.

Every time Mr. Burns does his rant and rave about annuities he forgets to mention the living benefits they offer or, on the rare occasion he does mention them, he misrepresents the living benefits offered. Every time he does this he shows his ignorance on how these products work. Instead he is reduced to showing this type of example, a qualified account and comparing management fees to paying taxes? Come on give me a break.

On the brighter side of things he did blow a hole in the anti-annuity crowds argument that variable annuities can cause increase your tax rate to 35% when you take withdrawals. In his first couple of paragraphs he tells you that the marginal tax rate of 35% means you needed income of $349,700 in a given year. Most Annuity owners will not retire with $349,700 in income so it is unlikely they will ever pay 35% on their annuity withdrawals. Sorry for sounding so angry, but a person can only take so much.