While the “Just Say No” campaign may have worked for Nancy Reagan during the 80s, it can be difficult to say no to high-pressure sales tactics, particularly where annuities are concerned. Yet getting into the wrong investment could quite possibly steal your retirement right from under your nose. The independent regulatory authority FINRA has issued several investor alerts against variable annuities, in particular, after finding that scare tactics are sometimes used with seniors to make the hard sell. Here are 7 good reasons why you might want to “just say no” to this type of annuity, along with 7 options you may want to say yes to instead.
Reason #1: You don’t want to lose money to the stock market.
A variable annuity gives you a way to turn your market investments into a stream of income, but the guarantees that can be purchased typically only apply to the income account. Your actual account value may fall or rise with the market. This detail confuses many investors in spite of the warning on every variable annuity prospectus that says, “This investment can lose money.”
What to say yes to instead: Consider inflation-adjusted annuities that give you market-linked performance without market loss. These annuities can help you grow money for your retirement income while also keeping your principal more secure.
Reason #2: You might need to spend the money.
Most annuities are long-term contracts, and while you may be able to access up to 10 percent without penalty, variable annuities, in particular, may have complex withdrawal restrictions. Failing to comply with them could change the terms of your contract, even if you are paying extra for certain guarantees.
What to say yes to instead: Be sure to establish an emergency fund as part of your retirement plan. Experts typically recommend having three to six months of expenses on hand in the event you need the cash.
Reason #3: You don’t need the income.
Variable annuities are one of the most expensive types of annuities that you can own. If you are lucky enough to have a pension or other sources of guaranteed income, then investing in a variable annuity might simply be an expensive way for you to fund your advisor’s retirement and not your own. The commissions on variable annuities can be as high as 10 percent, so be sure to understand the terms and conditions before you sign.
What to say yes to instead: If you have money that you don’t need for income, an indexed annuity with a death benefit rider can grow money for your spouse or loved ones without exposure to stock market risk.
Reason #4: You don’t want to pay high fees.
Most annuities charge a fee for the income rider. This feature—sometimes called a guaranteed benefit rider or a living benefit rider—is how you structure a deferred annuity so that it can pay your income. The fee for this feature usually average around 1 percent, but with variable annuities, there are several more fees that come into play. Because variable annuities invest directly in the stock market, consumers can also expect to pay an M&E risk charge, administration fees, front-load fees, sales charges, or premium based charges, along with underlying fund expenses, in addition to the charges for benefits and features.
What to say yes to instead: The cheapest way to secure an income is with an immediate annuity. You might also take a do-it-yourself approach by calculating how much you need to fill your income gap.
Reason #5: You want investment choices.
A variable annuity is the only type of annuity that offers investors direct access to market investments. These are usually marketed as “proprietary funds” and may include a mix of mutual funds that invest in stocks, bonds, money market instruments, or all three. However, instead of having access to hundreds of mutual funds, your investment choices will be restricted to the list provided by the company that sells the annuity, and if you purchase an income rider or any type of guarantees, you may see even more restrictions.
What to say yes to instead: If you are still saving for retirement, consider low-cost mutual funds inside of your 401(k) and be sure to take advantage of any employer match.
Reason #6: You already have your money in a tax-deferred vehicle.
It often happens that high-pressured annuity salespeople will tout the benefits of tax-deferred growth as a reason to purchase their variable annuity. Tax-deferred growth can give your money the boost of triple compounding because you don’t have to pay taxes on the profits until you take the money out. However, if you’re currently investing in a 401(k) or IRA, then you’re already receiving tax-deferred growth.
What to say yes to instead: You might consider a fixed or indexed annuity as a CD alternative if you don’t want to pay taxes on the interests earned by your investments.
Reason #7: You are five or fewer years away from retirement.
A variable annuity is a deferred annuity, which means it has two phases: the growth phase and the income phase. During the growth phase, a variable annuity can still lose money to the stock market even if you are paying extra for guarantees. A market loss may reduce the amount of monthly income you receive during retirement.
What to say yes to instead: A fixed or indexed annuity with an income rider can give you the same or better income guarantees as a variable annuity but without the direct exposure to market loss.
Our advisors are here to answer your retirement income questions without high-pressure sales tactics or unrealistic promises. We’ll take you through the advantages and disadvantages of any annuity you’re considering, and we can even have it tested against other types of annuities you might not know about. Reach out to one of our experts today.
