Are Variable Annuities A Good Investment For Retirement? – NOT!

While commonly used and ostensibly for retirement, consumers should be very careful when considering variable annuities, which are a form of life insurance with securities investment aspects.

While some very cheap, quality product has emerged, the policies consumers are apt to be presented tend to pay high commissions, and be saddled with high costs. These costs range from mortality and administrative (the life insurance part) to the sub-accounts (basically mutual funds) to available riders (more insurance features).

In practice, I have seen these as high as 6% when loaded up with riders, all of which are commissionable to the sales agent, who of course has a non-fiduciary incentive to push all the bells and whistles.

Often, these costs are invisible to consumers, who may be inundated with pages of disclosure but gain little real appreciation of total costs. If they ask if they pay a commission, agents typically answer that that do not, which is technically true since the consumer gives the money to the insurance company, and the company pays the commission.  Of course, the money comes from the investor’s principle – it can come from nowhere else – who is saddled with high surrender charges if they try to move the money; these surrender charges the first year are often roughly equivalent to the sales agent’s commission.

While annuities can do something nothing else can do – guarantee (so long as the life insurance company makes good on it’s promise) lifetime income – obtaining this feature from expensive variable annuities may be a mistake.

Finally, for non-qualified accounts (non-401k/IRA) accounts, taxes on annuities can be far, far higher than other alternatives.

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