Mythbusting Variable Annuities- Featured on Fortune.com

By: Brian Bowen

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Some financial advisors present variable annuities as a terrific wealth accumulation product. They are sold to many retirees as a vehicle to reduce stock market risk and are said to have incredible guarantees. Unfortunately, many advisors fail to mention the negatives.

Over the years, numerous clients have walked into my office with variable annuities that were inside IRAs (which provide no additional tax deferral benefit), and they didn’t even realize they owned one.

Many investors found out the hard truth in 2008, when their variable annuities went down 40%, and some investors sold their positions at the bottom of the recession.

Some variable annuities may have death benefit riders that guarantee an increase every year, but some of these riders are very expensive. Most of the clients who have income and death benefit riders don’t even need them in the first place. Let’s debunk a few misconceptions about variable annuities.

Myth No. 1: Variable Annuities are great for growing your portfolio.
The total fees for some variable annuities can be very high compared to other popular investment products—as much as 3-5%. Usually, when I ask a prospective client how much in fees they think they are paying, most of them say “none,” or that their advisor told them 1%.
That’s when I ask, “Do you have five minutes to find out?” Together, we call the insurance company directly and they authorize us to speak with the insurance company’s representative. These are the details that were gleaned from a recent call:

 Mortality and Expense 1.4%
Sub Accounts Expense Ratio 1%
Income Rider 1%
Death Benefit Rider 1%
TOTAL ANNUAL FEES 4.4%

For an annuity portfolio of $1.2 million, this translated into fees that averaged more than $52,000 per year, more than their Social Security and pension income combined.

If the variable annuity is taking over 4% in fees annually from your account, the fees will erode more than half of your surrender value. If the money isn’t there, it simply can’t grow.
Most of my clients aren’t too happy about the lack of disclosure from their prior financial advisors, to put it mildly. This is why the U.S. Securities and Exchange Commission has an investor warning with five cautions to warn consumers about the dangers of variable annuities. Find the advisory at: http://www.sec.gov/investor/pubs/varannty.htm

Myth No. 2: Variable annuities protect an investor from a stock-market collapse.
Do they shield an investor from market downside? Variable annuities are often pitched this way. But this is usually the case only if you die and your beneficiary receives the last year’s highest benefit amount. If you surrender your contract when the stock market drops, you could potentially lose thousands of dollars.

Myth No. 3: Investors often claim they are getting a guaranteed 6% or 8% return.
This is what we call the funny money. Income riders on variable annuities are often sold with guarantees that they’ll return 6% to 8% on your income. Many retirees have come into our office and have proudly said they are getting 8% guaranteed for life.

But are those returns really guaranteed, and by whom? Most likely, what they are really getting is an increase of 8% of the income account base only if they decided to turn the income rider on for life.

If you live to 95 or 100 years old, then this may be a great thing, but who knows if you’re going to live that long? And do you really want to pay 4% annually in fees to accomplish this?

Before you get locked into an annuity, you need to determine if you even need one. Please carefully discuss your options with a financial planner to see if annuities should be part of your portfolio.

Read the article on Fortune here: http://fortune.com/contentfrom/2015/10/28/mythbusting-variable-annuities/ntv_a/3uUBAG0gEAfxgFA/