Author Topic: Thoughts on Variable Annuities?  (Read 3596 times)

BuildingFrugalHabits

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Thoughts on Variable Annuities?
« on: March 29, 2012, 05:46:18 PM »
Hey guys. I'm looking for words of wisdom here on an investment strategy.  My brother in-law put me in touch with a financial planner recently after telling me about this investment that guarantees you a minimum 8% return each year.  I thought that sounded pretty good considering that the S&P just experienced a "lost decade" of zero returns (assuming no dollar cost averaging I believe).  Anyways, I found that they are selling variable annuities here which I now understand are products sold by insurance companies.  Instinctively, I know that insurance companies are in business for one reason and that is to make money so this can't be the deal that it appears to be.  Aside from that I just read that like 401K's, there is a penalty for early withdrawal which would require another account for mid-term savings since I'd be looking to begin withdrawing by 2020 (Age 40).  Still though, I can't stop thinking that a consistent 8% return would be extremely difficult to match with another investment vehicle.  Thoughts?

gangr

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Re: Thoughts on Variable Annuities?
« Reply #1 on: March 29, 2012, 08:06:38 PM »
The fees, early surrender charge, large commission for the FA, investment options within the annuity, and normal retirement age access (without penalty) make the variable annuity a specialty investment vehicle for specialty clientele. I would highly advise that you do your due diligence and arm yourself with as much information about the aforementioned VA before you invest. I would start here: http://www.sec.gov/investor/pubs/varannty.htm

arebelspy

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Re: Thoughts on Variable Annuities?
« Reply #2 on: March 29, 2012, 08:43:44 PM »
It will make your adviser a lot of money. 

Very, very likely that return isn't guaranteed, just based on past performance.

Go ask about it on Bogleheads or early-retirement.org or any place with sophisticated investors.  They'll tear it apart.

Bottom line: Stay. Away.
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HeidiO

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Re: Thoughts on Variable Annuities?
« Reply #3 on: March 30, 2012, 12:50:51 AM »
2 separate issues- 1 - how are they guaranteeing 8% return? That makes me seriously suspicious.  Unless it is some weird "invest x at 35 years old, and when you turn 65 we'll give you 8% of x every year for the rest of your life."  Which is VERY different than 8% return.
 2 - I have a variable annuity w/ Vanguard that I will be cashing out soon so I can use that $ for downpayments on rental property, so I know a little about them.  Mine was after-tax money, so I don't pay tax or fee when I get the original money out, but earnings are taxed at your income tax rate plus 10% penalty.  At least on my account, there is no redemption fee to Vanguard.  For me, the only good thing about this annuity is that it kept the money where I didn't spend it.  But now I don't want all my savings sitting in mutual funds.  I want to play with it!
Heidi

gangr

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Re: Thoughts on Variable Annuities?
« Reply #4 on: March 30, 2012, 08:25:24 PM »
HeidiO, I think the OP needs to read the contract, as the insurance co may be able the cancel the minimum return provision or replace it with a different amount given the VA docs.  A guaranteed 8% sounds great until they revise it down, coupled with 8% sounds great until the market for the SP500 does 15% and the contract holder only gets 8%. For the OP, if you understand the VA and it fits your situation, okay, but if you don't understand it - watch out!

Mr Mark

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Re: Thoughts on Variable Annuities?
« Reply #5 on: March 30, 2012, 09:55:39 PM »
Something's paying all those fees for everybody: the FA, insurance co., and the fund managers.

It's you.

I smell a rat.

BuildingFrugalHabits

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Re: Thoughts on Variable Annuities?
« Reply #6 on: April 01, 2012, 08:36:18 AM »
Thanks for the feedback fellow Mustachians.  Obviously I was a bit skeptical which was my reason for the post.  At this point, I don't have all of the fine print.  I have another meeting with the financial planning set up and I will report back with any new information that comes from it.  You guys hit on the major points that I'm concerned with i.e. the fees and commission structure and not being able to withdraw until 59 1/2.  I was more or less curious if anybody has been able to successfully use these products to their advantage as a complement other investments but it doesn't sound like that is the case.  I will exercise extreme caution here...

arebelspy

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Re: Thoughts on Variable Annuities?
« Reply #7 on: April 01, 2012, 09:51:16 AM »
If he's like the vast, vast majority of annuity salesmen, he will brush past your questions and try to confuse you.  Keep it simple and direct.

Do not purchase anything you do not 100% understand.  Stay strong.

Good luck!
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Dave

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Re: Thoughts on Variable Annuities?
« Reply #8 on: April 01, 2012, 10:11:26 AM »
Still though, I can't stop thinking that a consistent 8% return would be extremely difficult to match with another investment vehicle.  Thoughts?

This is what sets alarm bells ringing for me. Active stock pickers and fund managers can't beat the market consistently, so how is a product funded which can pay out 8% over a decade when the market is flat? Magic chest of coins that's never empty?

Put it this way - the S&P is roughly where it was a decade ago, but at 8% a year compound, a 1K investment ten years ago would now be worth $2160. Sound suspicious? It is!