It’s hard to find a financial planner whose advice you can trust – even among so-called experts. I’m looking at an article written by the Insured Retirement Institute called “Debunking Variable Annuity Myths”. This group wants to dispel some ‘myths’ about my least favorite investment in the world, the variable annuity. Let’s get it on!
It’s easy to find a financial planner who believes these IRI studies, but be careful what you allow to affect your portfolio. Here’s Myth 1: VA’s Don’t Belong in Qualified Accounts. The article cites Suze Orman, a financial commentator. She says VA’s protect assets much differently from mutual funds, due to the guaranteed withdrawals, and the living benefits. So the benefits of the VA outweigh the tax benefits inside of a qualified account.
Have you been able to find a financial planner who can tell you if they successfully debunked this ‘myth’? The answer here is no, they didn’t. Actually, I don’t think VA’s belong in any accounts, qualified or otherwise. Suze Orman says VA’s have an advantage because they grow tax-deferred. The problem is that growth is at regular income rates, not capital-gains rates. Even if capital-gains rates go up, they’re still almost certainly going to be under regular income rates. There’s no compelling benefit to being in a VA here. And the living benefits they talk about here are far cheaper to get in an insurance product, instead of a variable annuity.
Buy equities for what equities are for (and find a financial planner who will tell you that!) Buy insurance for what insurance is for. Take my advice – don’t mix them. They are better off separate than mixed. Myth 1 is NOT debunked. VAs still don’t belong in qualified accounts.
I’d be hard pressed to find a financial planner that believes in this next myth. Myth 2: VA’s Are Too Expensive. Really – that’s a myth? I want to see how they justify the way VA’s rip people off. They say the average VA is only 3% to buy in. Well sure, that’s true, but it’s 3 ½ to 4 percent to own. The S&P only climbs at an average of 9%! How are you going to make any money when they are siphoning 4 percent of your investment off every year for fees! It’s still too expensive. Myth 2 is not debunked. The fees are still WAY too high for what you’re getting.
I dare you to find a financial planner who will disagree with Myth 3: VA’s Are Not Tax-Efficient. Here’s their argument. “Evaluating a VA strictly on its tax-efficiency could make it appear a less desirable option than a mutual fund, an investment that does enjoy a step-up in cost basis for capital gains. By comparison, VA’s are taxed as ordinary income. However, many believe long-term capital gains rates are likely to go up to balance the Federal debt.”
But so is regular income tax, and if you find a financial planner who is also a tax strategist and who is responsible, he’ll tell you so! That’s not a great argument for VA’s. Even if capital-gains goes up, and the rumor mill says maybe it will go to 20%, up from the current 15%, that’s still less than the 25% tax rate you’ll be paying on that money if it’s taxed as regular income! That’s a savings of 5%, on top of the fact that we’re wasting 3 or 4 percent on fees in a VA!
You can’t find a financial planner who would admit to the truth of Myth Four: VA’s Are Too Confusing. If you aren’t confused yet just from my explanation of VA’s, I’d be surprised. VA’s ARE confusing. Quoting from the article again: “Clients rely on their financial advisors to bring clarity to their retirement plans…” Right. Want some clarity? I’ve got some clarity for you: Don’t Buy Variable Annuities! “Target-date funds are a perfect example, a seemingly simple to understand option for both consumers and their advisors.” Target-date funds are awful. They’re double-fee’d, and they are confusing as well because what people think they have and what they have are not the same . “But the meltdown of target-date funds has put VA’s back into favorable light.” Not really – VA’s lost real money too.
All the benefits they are talking about in these VA’s are tied to the insurance benefits – find a financial planner or preferably a Tax & Financial Strategist & Coach and ask her – she won’t be able to deny it. Can you get insurance benefits outside of a variable annuity, and get those benefits more effectively (like better guarantees and lower costs)? Absolutely yes!
These people didn’t successfully debunk a single VA myth. Trust me here – don’t get into these things. I can only think of one reason to be in a variable annuity. That would be a case where you already have a highly appreciated VA, and getting out of it would entail a big tax hit. In that case you might stay in a DIFFERENT variable annuity with substantially lower costs. Otherwise, avoid these money sucking ‘investments’. The only myth that needs to be debunked here is that VA’s are a good financial move.
Most “financial planners” are product sales people,
Dallas Financial Planner on Variable Annuities
I’m not a financial advisor who puts a lot of emphasis on talking about particular financial products, but on the complete financial planning picture. To me, product selection is the last thing that should be considered in financial planning. Moreover, product selection, when properly done, is very specific to the needs of the individual investor. Trying to sell one product and make it fit everybody’s financial needs isn’t being a financial advisor, it’s being a salesman. So you will rarely find me making broad recommendations either for or against particular products.
I’m going to make an exception today, and I’ll probably get my humble little financial planning practice in trouble with somebody for it. I want to publicly challenge the value of the single most sold product in the financial services industry today. I think it is a terrible investment, and I see no place for it in a well-managed portfolio. You’ve probably heard of it – it’s called a variable annuity.
What’s my problem with variable annuities, and why are they no part of the financial planning service I offer to my clients? First, it’s one of the highest cost products in the market. You buy mutual funds (which have fees) inside of another product that also charges fees. Most of the variable annuities I’ve analyzed (and I can’t even count how many that is) have fees that average 4 or 5 percent. Compare that against the 10% growth in the S&P over the last 38 years. So you’re paying 4% – 5% to make 10% so your net return is 5% – 6%? That’s terrible, even in a best-case market. How much do you pay in fees when the market is going down? The same 4 or 5 %. You’re trying to win a horse race with a 500 pound jockey riding your horse!
Has the financial planning service you work with filled you in on this? What’s worse, the mutual funds inside a lot of variable annuities are less than optimal. Lots of mutual funds that don’t make it in the open market find a second life inside of a variable annuity. Why? Most people who buy variable annuities aren’t focused on the mutual funds, they are focused on other aspects of the annuity, like lifetime income. Now, I’m a huge proponent of lifetime income. And there are lots of ways to get lifetime income from a portfolio. But when you try to get lifetime income from a variable annuity, usually by way of a lifetime income rider, you get charged a half to three-quarters of a percent more in fees to get you the guaranteed 5 or 6% income. But then you’re required to hold the product for a certain period of time, and then you’re subject to other restrictions (annuitizing, taking the income using the rules of the rider etc.).
Most investors don’t know how to ask their financial planning service if a financial product is right for them. They know they have particular financial goals, and their so-called advisor tries to convince his customers that variable annuities meet those goals. The customer says, “Can I get 5% income for life from this?” “Yes,” says the advisor. But the advisor doesn’t mention that if inflation goes to 10%, your 5% guaranteed income isn’t remotely going to keep up with the rise in your living expenses.
I know I’m making a troublemaker out of myself by saying this, but it has to be said: variable annuities benefit nobody except the financial planning service that sells them. Let me show you how to get out of variable annuities and into something with better inflation protection, better diversification, lower taxes, a better income, and all for much lower cost.
The moral of this story? Don’t buy variable annuities and if you think you are trapped in one you aren’t let me help you with our Annuity Rescue Plans.