Re: Annuities...are they a crap shoot?

One more thing...

Annuities, particularly variable, earn their worth through the
secondary guarantees they offer. It troubles me that I've never heard
them mentioned or discussed here. These guarantees make up such a
significant part of variable annuities that I don't see how a
meaningful conversation could be had without their being mentioned,
yet it's done constantly. Even more troublesome is that I've heard
"pop culture investment gurus" go so far as to dismiss these
guarantees because they are "too complicated for the average investors
to understand". How insulting! The fact is that the complaints that
are constantly made against variable annuities WERE valid. The
insurance companies realized that and changed their products to become
more competitive. An increasing number of VAs no longer do the things
we so regularly criticize them of doing.

Here's an exercise I used to use with clients:
Pretend you could go back in time to 1966 (exactly 40 years ago when I
used to use this example). Now suppose you took $10k with you and you
had the choice of investing in an S&P500 mutual fund or the S&P 500
subaccount of a Variable Annuity with a 6% secondary guarantee. The
S&P fund has 0.18% fees, but the annuity charges 3%!!! Which account
would have had more?

Surprisingly, in this simple back-test the VA account would be 4 times
larger than the mutual fund!

Why? Because even though the VA has higher annual fees, it also
guarantees that your account will go up by no less than 6% every year.
When the S&P earns 12%, the VA is only going to make 9%. But when the
S&P falls 26% (like it would have in 1974) the annuity's secondary
guarantee credits 6%. That's how resoundingly im****tant the secondary
guarantees are.

Of course one could argue that secondary guarantees didn't exist 40
years ago, but the main point was to show that over a statistically
significant period of time things other than AVERAGE annual return
became increasingly im****tant. I encourage all to better famiarize
themselves with MODERN variable annuities before attacking them.


*sorry for the rant, but I have had a few clients recently thank me
for their annuities because they retired shortly before the tech
bubble burst and they would be in dire trouble now if it weren't for
the guarantees. Try to tell them that the annuity was an overpriced
scam.

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