What’s covered in this Review?
In this review we’ll cover the following information on the Retirement Income Plus Variable Annuity offered by Transamerica:
- Product Type
- Current Rates
- Realistic long term investment expectations
- What to expect, and what not to expect
The Retirement Income Plus is a streamlined variable annuity from the Transamerica insurance company designed to give investors a simple way to invest money for retirement and then convert that money into an income stream without the complexity. This might sound like the perfect solution to your income needs, however, getting into a variable annuity with the hope of avoiding complexity is kind of like going into a McDonald’s and hoping to avoid fast food.
We don’t mean to sound cheeky – well, maybe we do – but the point here is that you need to be aware of how variable annuities operate before you decide to commit your cash. To continue our restaurant analogy, just because you’re hungry and on a budget doesn’t mean that you can’t go somewhere else to get a great meal for the same number of dollars. It all depends on what you’re hungry for.
Assuming you are drawn to the idea of the Retirement Income Plus because income is on your mind, let’s take a look at the two time periods inside this investment: the accumulation phase and the income phase.
- The accumulation phase is when you invest and grow the money
- The income phase is when you structure the investments for payouts
Now the question to ask yourself is, what phase are you in? Are you ten or more years away from needing regular income payouts? Is retirement tomorrow? If it’s tomorrow and you need income, then this particular annuity probably can’t help you. To understand why we need to take a closer look at how the benefits and features (such as the income payouts) are configured inside this annuity.
And that is where we come in.
Annuity and Retirement Income Planning Information That You Can Trust
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If you’re worried about income during retirement and trying to learn more about annuities, then you’ve likely seen advertisements that dangle tantalizing benefits right in front of your face such as:
- High Payouts
- Low Fees
- Top Rated Companies
- Guaranteed Income For Life
- Professional money management
- Earn 7-8% Returns With NO Market Risk
Are any of these claims true? Annuity Gator is the place to go if you want to find out the FULL story. How the benefits of annuities are calculated and what they can actually give you in terms of an income for your hard-earned dollar is sometimes misrepresented. Financial salespeople selling variable annuities might make it sound as if these products easily earn you returns upwards of 7% or 8% returns with no risk to your principal.
They can say this because there are many details leave out, and you know what they say about the details. At Annuity Gator, we believe you deserve to know about the whole enchilada.
Our goal is to educate and empower current and aspiring retirees so you can decide for yourself whether or not an annuity like this one is in your best interest. We do the work of combing through the boring prospectus (which everybody says you should read but nobody wants to read) and then we translate our findings for you in easy to understand language.
Keep reading to learn more, and if you have any questions, feel free to reach out to us at any time, and one of our qualified advisors will be happy to get back to you.
Ready to dig in? Let’s roll up our sleeves and begin:
Transamerica Variable Annuity Retirement Income Plus at a Glance:
|Product Name||The Retirement Income Plus Variable Annuity|
|Issuer||Transamerica Life Insurance Company|
|Standard & Poor’s Rating||AA‐ is 4th highest of 21 ratings (as of May 12, 2016)|
Opening Thoughts on the Transamerica Retirement Income Plus Variable Annuity
As an insurance company, Transamerica came from humble beginnings back in 1904 when it operated out of a converted saloon. Today, the Transamerica Center currently encompasses nearly one city block, so clearly they’ve done something right. The now iconic Transamerica pyramid has claimed its place in the San Francisco skyline as a testimony to the strength of this long-standing company.
Because your annuity is only as strong as the claims-paying ability of the insurance company, this is definitely a good thing.
The demand for an investment backed by security has been growing since market uncertainty has become the norm. The fear of running out of money is what has many retirees looking for a safer place to put their savings. Is the Retirement Income Plus that place?
Based on the product’s name, it sounds like it could be. With the promise of income PLUS market gains, what’s not to like? Variable annuities like this one are often sold by brokers as the complete retirement package because they can do two things:
- Grow your money
- Provide guaranteed income
The problem is, in spite of its very reassuring name, the Retirement Income Plus gives you one benefit at the expense of another, and the result may not be more income for you, but rather more fees. To understand the reason for such disparaging results, you have to look inside the variable annuity to see how it arrives at its benefits.
In order to get the “retirement income” promised in the annuity’s name, you have to purchase a Living Benefit Rider feature. This rider creates a secondary account that grows protected or at an enhanced rate from which the income payout is calculated. There is a fee for this rider – which is pretty standard for all annuities – but with a variable annuity, adding the rider is the only way to “guarantee” your withdrawal amount or income.
The Retirement Income Plus advertises as having some of the highest income payout rates in the country, but will you really get the most amount of income from your money if you buy this annuity?
We will take a deeper look into how these income benefits are arrived at, but for now, the short answer to this question is: probably not. This annuity is what we in the industry refer to as a deferred annuity. That means once you purchase it, you basically put off taking the income payments while your account grows and accumulates income credits. It is also a variable annuity, which means the value of your actual policy can go up and down in value.
This variable component is problematic for the insurance company that is trying to guarantee your income for later. In order for Transamerica to stay strong and preserve their reputation, they have to do two things to protect themselves:
- They charge you a fee for this exposure to market risk, known as the Mortality and Expense Risk fee, sometimes called the M&E.
- They limit your investment options. Case in point: the Retirement Income Plus has the most limited investment selection out of all the variable annuities offered by Transamerica.
It often happens that investors are sold a variable annuity because they believe they are benefiting from superior market returns, when really what they are getting is the income credits guaranteed by the income rider. Income guarantees can get very tricky inside a variable annuity, and the benefits are not always explained as thoroughly as they should be explained. We ARE going to dive even deeper into the income benefits offered by this annuity, but first, a brief message from our legal department:
This is an independent product review, not a recommendation to buy or sell an annuity. Transamerica has not endorsed this review in any way nor do we receive any compensation for this review. This review is meant to be an independent review at the request of readers so they could see our perspective when breaking down the positives and negatives of this particular model annuity. Before purchasing any investment product, be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances. All names, marks, and materials used for this review are the property of their respective owners.
How Transamerica Describes the Retirement Income Plus Variable Annuity:
Transamerica advertises the benefits and features of this annuity on their website as follows:
- A streamlined way to save money for retirement income.
- Living benefits that can, for a fee, grow and protect retirement income by locking-in investment gains and allowing income to grow even when markets underperform.
- Access to investments from some of the most recognized money managers in the industry.
- Living benefits that provide you with a higher withdrawal rate, in addition to establishing a reliable income stream that won’t go down.
- Annuitization or the opportunity to receive guaranteed lifetime income payments through a variety of payment schedules and options.
There are also Nursing Care and Terminal Condition waivers, but this covers the main claims presented on the company’s website. If you want to read the product summary from the company website, you can click HERE.
How Financial Advisors Might Present This Annuity to You
If you are making this decision under the guidance of a financial salesperson who stands to earn a commission or fee from the sale of this annuity, then you’ll want to look at these claims with a very clear eye. It’s not just WHAT the investment can do, it’s HOW it does it that will, in the end, matter the most to your retirement.
Here are the three main concepts you’ll hear advisors talk about when they explain this variable annuity:
- This investment performs better than other annuities out there.
- It will give you downside protection by providing a guaranteed lifetime income.
- This income will grow or step-up every year that you wait to access it.
First, let’s take a look at the fund’s performance. The investments offered by the Retirement Income Plus are from a selection of sub accounts described as conservative, moderate, and fixed. These adjectives seem to appeal to someone looking to preserve their nest egg, however, none of these funds are guaranteed. If you really are looking for something fixed, then choosing fixed options inside of a variable annuity is probably one of the more expensive ways to go about it.
If you are choosing this variable annuity because you want the stock options, then you should know that your selection here is one of the most dismal we’ve seen. Unlike other variable annuities which offer access to 100 different funds, or the private market which can give you access to virtually thousands of funds, this annuity allows you to choose from among seven investment options. Furthermore, this selection comes with the following three warnings:
- You bear the risk of any decline in the cash value of your policy resulting from the performance of the underlying fund. (Yes, this is true even with the purchase of the income rider.)
- Transamerica does NOT guarantee that any of the sub accounts will always be available for premium payments, allocations, or transfers.
- When you add a rider, you will be subject to investment RESTRICTIONS.
You can’t really get much more restricted than seven investment options, but I guess inside this variable annuity, things really can get limited. The reason for this, again, goes back to that pesky word, variable. It’s really difficult for the insurance company to give you guarantees inside a variable investment.
Your financial salesperson, however, will likely explain to you that this annuity earns higher returns than other annuities, which means you can get higher income payout rates. They can say this because, in their mind, they are adding the enhancements you get with the purchase of a benefit rider.
For example, if the underlying fund in your variable annuity is up 2 percent for the year – which is a realistic return considering these options – the advisor selling you this annuity might promise you a 7% rate of return because, in their mind, they are talking about the fund return PLUS the enhancement guaranteed by the purchase of the Living Benefit Rider.
While it’s true that the in our above example the fund returns contributed to a higher overall return, this return isn’t on your actual policy value. Your actual policy value could still go down in value if the stock market has a bad year. This return is calculated in the secondary account created by the benefit rider.
Now let’s talk about the income side of this investment: One thing that the Retirement Income Plus does do well is to offer you income options. You can choose a fixed rate of income that will pay out income for a fixed period of years or a fixed amount of money until your account balance is zero, or you can choose a variable rate of income.
The amount of your income or withdrawal is what Transamerica calls the income payout rate. It is calculated using the money in that secondary account. Remember that account growing at that enhanced rate? Here are two important things you need to know about this account:
One, all benefits will terminate upon annuitization. What does that mean? Annuitization is the moment you trigger your income. Basically, once your accumulation period ends and the income payments start, you no longer get the enhanced growth rates. The only benefits that remain include the guarantees provided under the terms of the annuity option.
To go back to our fast-food meal analogy, it’s kind of like paying extra for ketchup, lettuce, tomato, cheese, and even a basket of French fries, only to find out that once you start eating, one by one, those add-ons are going to be taken away.
Sounds kind of like a tease, doesn’t it? In a way, it is. And this leads us to our second main point:
Those guaranteed optional benefits (including death benefits and living benefits), growing inside that secondary account creates what Transamerica calls “the withdrawal base.” Most people look at that account and think, Hey! My money is growing at this accelerated rate and it’s guaranteed and I can access this money!
That’s not the case at all. The money in this account is used to calculate your payment amount and it’s not “real” money. We’re going to quote the prospectus here to make sure this disappointing news sinks in:
“We (Transamerica) determine the withdrawal base solely to calculate the benefit withdrawal AMOUNT. Your withdrawal base is NOT a cash value, a surrender value, or a death benefit. It is NOT available for withdrawal, it is NOT a minimum return for any subaccount, and it is NOT a guarantee of policy value.”
Did you notice how many times the word “NOT” is used in that sentence? What is this account even for again?!?!? It’s just a number used to calculate your withdrawal amount or income.
What About the Fees?
Throughout this review, we’ve touched on a few of the fees you’ll find inside this annuity. Variable annuities are one of the most expensive kinds of annuities that you can own, and the Retirement Income Plus has tried to lower the fees by simplifying the investment side of this product. However, you should understand which account these fees are taken from.
The fees you pay for your annuity are calculated using that bigger, fatter account created by the purchase of an optional benefit rider. And then, the fees are subtracted from your actual policy value. That means your fee could be a much higher percentage of your policy value, particularly in the event that your policy value decreases significantly.
Imagine you put $100,000 in this variable annuity, and after 10 years, your “withdrawal base” has grown to a nice fat $150,000. Looks great, doesn’t it? But your actual policy value dropped to $70,000 due to a recent market loss. Even though your policy value is $70,000, your 3.12% fee (which is the lowest possible fee) will NOT be $2,184. Instead, $4,680 (or 3.12% of $150,000) will be subtracted from your already losing account. Your actual policy value is now $65,320.
This can be a bad deal for married people who are trying to guarantee income benefits for their spouse. Depending on the living benefits you select, if one of you were to pass away, the surviving spouse could be left trying to make a living for the next 20 years using that $65,320.
Here is a breakdown of all the fees inside this variable annuity:
- Mortality and Expense Risk fee: 1.15% to 1.25%
- Administrative Charge: .15%
- Annual Service Charge: $0 to $50
- Living Benefit Rider Charge: 1.25% to 2.00%
- Portfolio Operating Expenses: .57% to 1.03%
Fee Total: 3.12% to 4.43%
There is also a 3% to 8% surrender charge on this annuity if you want to get out of it before the first 8 years of the contract.
Want to compare this annuity in terms of fees and benefits against your other options? CLICK HERE.
The Annuity Gators End-Take on the Retirement Income Plus Transamerica Variable Annuity.
Where it works best:
- For investors who are afraid to invest on their own and wants a simplified approach to retirement.
- For the investor who has already maxed-out their 401(k) or IRA contributions and is looking for a tax-deferred place to put the money they need for income.
- For the investor who doesn’t care about fees and cost.
- For the investor who wants to stay in the stock market during retirement.
Where it works WORST:
- For an investor who already has a guaranteed source of retirement income coming from a pension.
- For the investor who needs their income benefits to start right away.
- For an investor who can’t afford to lose money.
- For investors who need access to their money.
When you sign up for this particular annuity, you will be charged more fees to access fewer investment options than you might see in other kinds of annuities, and the higher returns from the benefit options are terminated once you start receiving income.
In terms of growth, the Retirement Income Plus provides its guaranteed benefits through the purchase of benefit riders that restrict your investment options and for which you pay an additional fee.
As an income producing investment, the projected growth rate promised by financial salespersons who sell this annuity is NOT your actual policy value but rather reflects the withdrawal base from which your income payout percentage is calculated.
What does all this mean to you? If you are looking for an investment that can turn your savings into retirement income, you can get these same or better income payout percentages using other annuities that are not exposed to market risk. (Got questions about how to do that? No problem – we’re here to help).
Thanks for bearing with us on this rather long post. If you found it helpful, please spread the word and share it with others. If you’d like to read more about variable annuities, you can access our 2016 Consumer Report free as our gift to you.
Lastly, like all humans – we do make mistakes. If you see one on this review, please reach out and let us know. We are always more than happy to make corrections and give credit where it is due. If you’re an investor and this review causes confusion and creates questions, feel free to reach out as well. We can’t always get back right away, but we can usually clear up any questions within a day or two.
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