Annuity FYI has compiled what we believe to be the most compelling reasons for investors to utilize annuities for their retirement. But remember, we are not just recommending any annuity — only the most competitive in the marketplace are worthy of your investment consideration.
- Predictable Income. Imagine having a fixed sum in a mutual fund or stock portfolio and living off the returns. When the market goes down, you have less income. But your expenses don’t decrease. It’s what keeps most retirees awake at night, or keeps them invested in low-yielding money market or bond funds that won’t keep them ahead of inflation. Only variable annuities coupled with living benefits allow you to withdraw a specific percentage of your initial premium annually (the most competitive allow up to 6% annually without touching or harming your benefit base) and receive it monthly, regardless of market performance. Even in a down market, regardless of your account value. With a competitive variable annuity, you are guaranteed a minimum fixed monthly payment, regardless of down market performance, while still participating in market gains.
- Income you can never outlive. Only annuities give you a guaranteed income stream, for as long as you or your spouse (if applicable) will live. You will never outlive your income when invested in competitive variable annuity products that are coupled with living benefits, even in a down market, regardless of market performance and regardless of your account value.
- Full market upside without the downside risk. We like to ask investors the following: “What if we could show you a way to participate in the upside of the markets while investing in many of the top mutual funds available, with turn-key asset allocation hands-free portfolio modeling and a 6% worst case guarantee if the market does poorly? And if the actual performance of your portfolio exceeds the 6% worst case you get to lock it in (‘reset”) and then earn 6% off of your new, highest anniversary account value?” This is what the most competitive variable annuities offer.
- Multiple investment options: The most competitive variable annuities allow you to choose from 15 to 25+ top fund families and 50+ hand-picked mutual fund sub-accounts for complete asset allocation diversification and a better hedge against inflation over the long term. Many allow you to choose proven asset allocation models. Over time, well-managed and diversified asset allocation programs have proven to lower risk while outperforming many market indices (after fees) by diversification in as many as 25 different style boxes: e.g. large-cap growth, small-cap value, mid-cap blend, specialty holdings, international holdings, and emerging markets, to name a few. The most competitive annuities also allow you to select passive investment strategies, such as the S&P 500 or NASDAQ 100.
- Lower Cost. That’s right, lower cost. Compared to mutual funds, the most competitive variable annuities are less expensive. PriceWaterhouseCoopers found this in a 2002 study for the National Association for Variable Annuities, and we’d be happy to send it to you. Let’s take a specific example: based on the average cost of the 10,585 open-end mutual stock funds tracked by Lipper Inc., your total average fee would be 2.573% for $500,000 invested in Ibbotson Asset Allocation Models. This does not include any guarantee of principal let alone a 6% minimum guarantee. Compare that with some of Annuity FYI’s featured variable annuities, with average total fees of 2.26%! This is an excellent example of a variable annuity giving you more, for less money. Another recent study released in January 2007 from long-time variable annuity skeptic Moshe Milevsky: “In the last few years that I have been observing this industry, I am seeing an enormous shift in the way VA policies are being designed, priced and marketed to the public. After some careful analysis, the same mathematical models that told us a decade ago that basic death benefit guarantees were overpriced are now telling us that many living benefits are underpriced.” (For a copy of the complete article, contact Annuity FYI).
- The most competitive annuity equity sub-accounts outperform the mutual funds after which they were modeled. In most cases variable annuities are more expensive as a total package than the mutual funds after which they are modeled (although that is not the case of all annuities, including many of Annuity FYI’s featured variable annuities). However, on a net return basis variable annuity sub-accounts tend to outperform the mutual funds after which they were modeled when investing a majority of the fund in equities. (Source: Lipper Analytical, PriceWaterhouseCoopers, and Fidelity Investments — contact Annuity FYI for the complete reports). This is due to the fact that the variable annuity sub-accounts are on average smaller funds and therefore more easily managed than the larger mutual funds. In addition, variable annuity sub-accounts are generally more fully invested and have greater predictability of cash flow than mutual funds.
- Avoid Social Security offset. When the government calculates your Social Security payment amount, they will decrease your Social Security benefits based on any other reportable income. This is known as Social Security Offset. For example, any reportable income from mutual funds, corporate bonds, treasuries, CDs, and individual stocks will decrease your Social Security payments. Even the interest on “tax-free” municipal bonds, while tax-exempt, is factored into the calculation of taxing Social Security benefits. Income derived from these investments will reduce your Social Security payments, even if you are reinvesting the gains rather then spending them! With an annuity, you can reduce or eliminate taxes on your Social Security income. This means that you don’t have to pay taxes on your annuity until you need to use it as income, and gains within the annuity will not offset your Social Security benefits. You can learn more about Social Security Offset here.
- Annuity investors are less likely to sell low and buy high. Dalbar, Inc. did an interesting study of stock mutual funds over the past 20 years. During this time, the S&P grew by 12.98%; the average investor earned only 3.51%; and market timers lost 3.29% per year! (Contact Annuity FYI for the report). Because the top variable annuities guarantee your principal and a minimum return, annuity investors tend not to panic during down markets the way that mutual fund and equity investors do. As such annuity investors are less likely to sell low and buy high.
- Probate and Creditor Protection: All annuities are exempt from the probate process. Other investments that avoid probate include life insurance, and qualified retirement plans such as IRAs, 401k’s, and 403b’s. Most states offer annuity owners and their beneficiaries some sort of protection from creditors. Annuity FYI can send you a free report to see what kind of protection your state offers.
- Peace of Mind: This is probably the single most compelling reason to invest in a top variable annuity with exceptional living and/or death benefits, and we’ve saved the most compelling reason for last. When most people near retirement they thing of several things, including but not limited to:
- I can’t afford to lose my nest egg. I’m not working so I can’t make back money that I lose due to a bad market or poor investment choices.
- I can’t afford a reduction in my income, and I need a hedge against inflation.
- I don’t want to have to watch my money on a regular basis but instead I prefer to hire professionals that know more than I do about investing so that I can actually enjoy my retirement and focus on what I want to do.
- I need to protect my spouse/family in the event that something happens to me.
- I want to fall asleep easily at night not worrying if the market will tank and I will lose my retirement savings, or that I or my spouse will outlive our money.
All data in this article is as of March 2007.