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Posted by kastnna on July 10, 2008, 10:35 am
> I have two variable annuities with the highest possible ratings. They
> are down a bit in this market, but they have guarantees where you can
> lock in 5-7% guaranteed income for life, even if you lose all your
> money in the annuity. A new one coming out will have a cost of living
> adjustment built in.
>
> Is there a down side to this I don't know about? It seems if they let
> you take out income no matter what, that will you get all your money
> back eventually, even if your initial investment in that annuity is
> worth hardly anything. Thanks!
That depends on what you do and don't know! <g>
Here's how it works (briefly): You actually have two accounts. Think
of one as a regular investment account and the other as a defined
benefit pension.
1. The investment account invests in the market similar to a mutual
fund or ETF would. There are fees associated with both the annuity and
the investments. 2.5%-3.0% is not uncommon. However, the average
mutual fund is about 1.5% and there are some very good ETFs and index
mutuals that charge less than 1/10th of the amount charged by the
annuity. That is probably one of the biggest drawbacks. The investment
account is liquid in that you can call the insurance company at any
time and request that they send you some or all of your investment.
Any surrender fees are deducted from this amount, but usually after
4-7 years there are no fees and furthermore they decline to zero over
that 4-7 year period. Also a potential drawback, but usually an over-
inflated one. Most importantly, this account fluctuates with the
market and can possibly drop to zero.
2. The pension account is where the annuity really shines (IMO). This
account also rises and falls with the investements in the first
account. However, in a down year your investment account (and any
similar outside investement) will fall, while this account appreciates
by 5%-7%. You can also lock-in the higher of the two values on any
given policy anniversary and use that as your pension base going
forward. This account is often compared to a pension due to the fact
that it does guarantee an income stream for life, but you cannot call
the insurance company and request a lump sum. You essentially have no
account balance, only a guaranteed stream of payments.
Long story short, your annuity exchanges liquidity for guaranteed
income. Over the long run, your investment account balance is likely
to be lower than had you invested in a similar mutual fund (due to the
fees). However, many people nearing retirement cannot afford to wait
on the "long run". Whether or not the annuities were a good purchase
will depend upon your needs and the specifics of each annuity.
One last thing, why multiple annuities?
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