Annuity IQ

Did you know that variable annuities have 1.8 trillion dollars in assets? This is more than the entire 401 k market place. That is just an astounding number, 1.3 trillion dollars.

With all of these assets we are still puzzled as to why variable annuities are the redheaded step-child (no pun intended I have red hair) of the investment world. The fees are coming down and living benefits are adding more value to the consumer. These living benefits can no longer be ignored and they should not be.

Here is why:

A $100,000 investment in the S&P 500 made in 01/01/200 turned into about $60,000 by 12/31/2002, a 40% drop. If you where taking income from this investment you would have had to make some tough decisions. Let’s say you started taking, from day 1, 5% withdrawals or $5,000. As you continued to take these withdrawals in this declining market you account value would have gotten crushed and would be worth about $45,000 to $50,000.

Since you started taking out 5% a year as your account value decreased your withdrawal percentage increased. By 2002 you would be taking out 10%, or more, of your account value to maintain the $5,000 a year income. This puts a huge strain on your investments and diminishes any chance of your portfolio to recover.

You would have to choose, continue with this excessive withdrawal amount or drastically alter your life style and take much less income out of the investment. Both options are difficult decisions to make.

On the other hand, if you had a variable annuity with a living benefit then the decision would be easier to make. Even with higher fees and all the other negative claims variable annuity pundits make about these products it was still a better option. Why? Because if you had a 5% for-life benefit then your income would not have to change at all.

As a matter of fact this income will continue for as long as you live, even if your account goes to zero. This important fact is over looked by many variable annuity pundits. When you consider the fact that if the market suffers significant losses over the first year or 2 after you retire and you are taking income chances are, even with positive returns over the next few years, your money can still run out prematurely.

This is important to know because people who retired in 1999 through 2002 are in this situation. Why not insure a portion of your retirement? Why risk it all because, historically speaking, the market has always done ok? The fact is you should not risk it all and the market goes up and down.

The impact of taking withdrawals from your investments during a negative market is now being closely looked at. Genworth has a great example of this, but of course it is not client approved. If you risk it all and it does not work out, do you really want to go back to work at 70 or 80 years old? I doubt it and these new living benefits need to be looked at in a very new light and they deserve the benefit of the doubt. variable annuities are not right for everyone, but thee benefits will transform the investing world over time.