San Ramon, CA (PRWEB) December 12, 2012
Richard Morey is a Registered Investment Advisor who has been in the investment industry for over 15years .
Millions of investors believe they own variable annuities that guarantee they will make 6% a year or more in profits. Unfortunately, they have no idea that this is not correct.
Variable annuities are some of the most complicated investment vehicles. These days nearly all of them essentially have two accounts, one that isn’t guaranteed but goes up and down with the underlying investments and one that deceives consumers into believing they are making far more than is the case. This second account has many names, but it is basically an income rider that attaches a guaranteed income amount to the contract.
Here is how it works:
An analysis of a typical variable annuity from one of the major insurance companies reveals that the guaranteed income number does indeed increase by 6% each of the first three years. After that time the owner can begin to withdraw a guaranteed percentage of that total each year for life. That percentage varies from 5-7% a year, depending on the age of the person when they begin the withdrawals.
A detailed analysis of this contract is needed to understand the problem. If a 64 year old man invested $100,000, he would be guaranteed to receive $6,490 a year for life beginning at age 67. If this man lived to his life expectancy of 85, he would have received a total of $116,820 (the $118,000 the income account is guaranteed to grow the first three years times an annual guaranteed income withdrawal of 5.5% thereafter). So over a 22 year time period (age 64-85), he is only guaranteed to receive $16,820 more than he invested – a return of well under 1% a year. All the rest of the guaranteed income consists of the insurance company returning his principal to him.
This year approximately $150 billion dollars is being invested in variable annuities. Most believe they are making 6% (or even 7% or 8%) a year – guaranteed. These consumers don’t have the slightest idea that nearly all of the so-called return they could someday receive in income is simply the insurance company handing them their own money back.
This doesn’t mean there is no value in these annuities. Guaranteeing that you will eventually receive your principal back (unless you die early) plus a tiny profit is better than nothing (and the value of the guarantee does go up if you live a lot longer than average. It may, however, not be worth the 1% fee many companies charge for this guaranteed income benefit.
Of course, the actual investments in the annuity might make much more over time so the amount you receive is larger than the guaranteed minimum. But a major problem occurs when those who read the materials on these annuities come away with no concern at all about how much their actual account value could lose. Instead, they look at the sales material, listen to the salesperson, and walk away happy that their money is now guaranteed to make at least 6% a year. Unfortunately, it isn’t.
Richard Morey is President of Secure Retirement, a fee only Registered Investment Advisor located in California's Bay Area. Richard directs the investments for hundreds of families' retirement accounts. Secure Retirement practices the principles of active , disciplined management of clients retirement accounts to safeguard their money regardless of market conditions. To access more economic and investment reports and commentary by Mr. Morey, please visit http://www.secureretire.com.