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Variable Annuities now
offer a Guaranteed Minimum Withdrawal Benefit which allows you to
earn 5% or 6% even if the market drops significantly. Undoubtedly,
you will be pitched a variable annuity or pressured to transfer your
existing one into a new contract with this benefit. Should you? Read
on to uncover the truth behind this feature and see if it’s right
for you.
The Guaranteed Minimum Withdrawal Benefit provides a guaranteed
minimum return on the annuity contract that can be accessed prior to
death. For instance, the GMWB rider might guarantee a minimum return
of 6% per year. So even if the market value of the account drops and
doesn’t recover you will still be guaranteed of earning 6%.
Most people who owned a variable annuity between 2000 and 2002
quickly regretted the purchase. They were stunned to see their
account values drop significantly. Sure, the variable annuity has a
death benefit but that doesn’t help you fund your lifestyle while
you’re alive.
As a result, the sales of variable annuities have declined over the
last few years. In fact, the majority of variable annuity sales the
last few years have simply been from people moving money from one
annuity contract to another. Insurance companies had to find a way
to attract new investors. They think the Guaranteed Minimum
Withdrawal Benefit will do that.
Should you buy one or switch your existing annuity to one with this
new benefit? Not in my opinion. Here’s why.
It’s too long-term. To take advantage of this benefit you have to
keep your money tied up even longer. The GMWB isn’t immediately
active. In most contracts, money must be invested for ten years
before you can take advantage of it. Usually, you then must
annuitize the contract for a minimum of five years in order to
receive those benefits. This means you are looking at a minimum of a
15 year investment. By the way, you lose the GMWB benefit on any
money you withdraw prior to the initial 10-year waiting period.
It increases your costs even more. The additional charges for the
GMWB can be ½ of 1% or more every year. And you pay the additional
annual fee on the full account balance regardless of whether you
ever use the benefit.
That’s in addition to the 1.5% per year charge for administrative
and mortality expense fees. That’s in addition to the management
fees of 1%-1.5% paid to the people running the sub-accounts. All in
all, you could be facing annual fees of 3.5% per year or more!
There is a low probability of needing it. The insurance companies
know history. The lowest 10-year period on the S&P 500 since 1975
was 5.8%. Eighty-two percent of that time, the S&P 500 delivered
average gains over 10% ! There is a very low probability of this
benefit ever being used.
The expense of this benefit will have produced a drag on performance
each and every year. Over a ten-year period, your account value
could be 20-30% less in a variable annuity with this benefit then in
a low-cost exchange-traded fund. If you average 6.1% in the variable
annuity over 10 years then all you were paying for was a false sense
of security.
It distracts you from why you invest in the first place. People use
stock market-based investments to generate a higher return than on
other investments. You invest for performance. The reason variable
annuity sales have declined the last several years is because of
poor performance.
I’ve never heard anyone say they chose to invest in a variable
annuity because it had better performance than the alternatives!
Don’t let pricey gimmicks distract you from the fact that you are
making a stock market-based investment. Would you invest in a mutual
fund that charged 3.5% a year in fees when there were others
available that charged much less? That’s essentially what you are
doing when you buy a variable annuity.
So beware of the advisor that recommends you buy a variable annuity.
A properly managed, well diversified portfolio is a much better
choice. It may not be flashy, but it works--while allowing you to
maintain control and flexibility over your money.
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to www.guardingyourwealth.com and click
on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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