|
E-mail this page to a friend!
Guarding Your Wealth for Senior Citizens
Are Low Cost Annuities A Good Choice?
By Jeffrey D. Voudrie, CFP
July 5, 2006 - I’ve disliked variable annuities for many years
because of their high fees and onerous surrender penalties. Now,
low-cost variable annuities are available that slash fees and do away
with the surrender penalties. Does this change my opinion on the use of
variable annuities? Read on to find out.
There is $1.8 trillion dollars invested in
annuities and a lot of that money is in variable annuities. To put this
in perspective, there are $2.1 trillion in 401(k) assets. That’s right.
There’s almost as much money in annuities as there is in 401(k)
retirement programs!
As I’ve mentioned in previous articles on variable
annuities (see index of articles in left column), variable annuities are sold because of
two main features—tax deferral and a death benefit guarantee.
Tax-deferral is emphasized if you are investing
non-retirement money. Instead of having to pay taxes on dividends,
interest and gains each year, those taxes are deferred until you
withdraw the money from the annuity.
This used to be an attractive option, but not since
capital gains and dividend tax rates have been lowered to a maximum of
15%. You see, earnings withdrawn from an annuity are taxed at higher
ordinary income rates. These can be as high as 33%.
In years past there wasn’t much difference between
ordinary income tax rates and those on dividends and capital gains. Now,
there is a substantial penalty when earnings are taxed as ordinary
income. As a result, it can take decades before you really see the
benefit of tax-deferral.
The other main selling point of variable annuities
is the death benefit guarantee. Investors like the peace of mind knowing
that even if the market drops substantially, their heirs will get at
least what they initially invested when they pass away. This is used to
entice investors to choose an annuity for their IRA where the annuity’s
tax-deferral feature is worthless.
Unfortunately, investors had to pay through the
nose for those benefits—typically 1.4% of the value of your account each
year. On a $200,000 account, you would be paying $2800 a year. Over ten
years it is likely those benefits would cost over $30,000. That’s some
of the most expensive insurance you will ever buy.
Now there are new, low-cost variable annuities
available from companies like Fidelity and Vanguard that lower the costs
of these benefits. For instance, Fidelity offers one that charges ¼% in
fees each year. That’s 1.15% less each year then the typical variable
annuity. The Fidelity variable annuity still offers the much touted
benefit of tax-deferral but it does not offer the death benefit
guarantee.
If the death benefit is the main reason you want a
variable annuity, you can achieve that goal with the Fidelity variable
annuity by purchasing a separate term life insurance policy. Doing so
would save a 60-year old non-smoking man almost $15,000 over ten years
versus the typical variable annuity.
As investors age, these savings decrease. But even
then, you have to realize that your ‘guarantee’ is actually much higher
with a private life insurance policy than it is with the broker-sold
variable annuity. In the broker-sold variable annuity, your either get
the market value of the contract OR the death benefit, whichever is
higher.
When you buy a low-cost variable annuity and a
separate life insurance policy your heirs receive the market value of
the annuity PLUS the death benefit of the life insurance policy. Even if
the annuity loses half of its value, your heirs still end up with 50%
more than the broker sold annuity. So even if it costs the same it is
still more benefit. And you can keep the insurance policy even if you
cash out your annuity.
The only situation I would recommend a low-cost, no
surrender penalty variable annuity is if you currently have
non-retirement money in a high-cost variable annuity and you have
amassed a significant gain. Even if you have surrender charges, it may
be worthwhile—see how many years it would take to make up the
difference.
For everyone else, I still do not recommend it. If
you have IRA money in an annuity, I suggest a non-annuity IRA when your
surrender penalties end. You can achieve the same benefits for far less
cost.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or go to
www.guardingyourwealth.com. You can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens. Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
protected from spam bots.
Click to More Senior News on the
Front Page
Copyright: SeniorJournal.com |
