Having a “Defined Income Variable Annuity” may sound super appealing to a soon-to-be-retiree, or it could just sound complicated. The truth is…it’s both.
And most investors should re-evaluate if they own this product or take serious caution if considering any type of annuity.
Here are 3 reasons that you no longer need (should consider an alternative to) a Defined Income Variable Annuity:
1. The Annuity Stated Income/Interest Rate sounds appealing…
…yet you don’t plan on using the income immediately, and/or the amount is not sufficient to cover most of your income needs.
Most investors get drawn into a “guaranteed” annuity purchase with appealing interest rate teasers like “5.5% guaranteed for life”. And these days, even lower than this…
Stated Interest/Guarantee Rate. Let’s examine what this really means to your bottom line: You WILL NOT realize a 5.5% return.
Instead, you should count on 0-5%. 5% being generous. VERY generous.
Because after fees of 2-3% per year, and being parked in a fixed income/bond allocation that promises little growth, you can count on earning LOW single digits. That is, if you’re lucky.
2. Your Retirement Plan requires more than a 5% return on your investments.
Most investors, right?
If you have saved enough to only need a 0-5% return on your investment for the span of your retirement, a Defined Income annuity may be appropriate for you.
And if that’s the case, however, I would question why you would be reading this article as you would be in the top 5% of American retirees. Those that don’t need to earn more than 5% on their investments in order to not outspend their nest egg are rare occurances in the retirement planning world.
Again, you’re most likely going to be invested in a 100% fixed income or bond fund-type investment that’s guaranteed to earn you far less than the typical 60/40 balanced approach that most retirees’ financial plans require for a successful retirement.
3. Your Retirement Plan requires your retirement income to go up with inflation.
ALL investors, right?
A gallon of milk today will not cost the same in 10 years, and herein lies the problem with a guaranteed rate.
A fixed, guaranteed rate is guaranteed to NOT increase with inflation and is assured to contribute to you losing what the planning world calls purchasing power.
So, for those of you who feel that just a portion of your investments should be guaranteed and that the remainder of your portfolio will make up the returns and the purchasing power, just realize that you may be requiring too much from the other portion of your investments and then may be disappointed on both sides of the investing landscape.
At this point you can sense my tone is somewhat (if not 99% against) not only defined income variable, but variable annuities in general.
In short, the annuity/insurance industry abuses most investors in the sale of annuities. Go to any big city and look up. The tallest building is most times AN INSURANCE COMPANY. Why? The excessive fees charged to investors – investors that were sold a product on the premise of fear. The fear of losing money in the stock market.
The irony is that most times you will only lose with an annuity. It may give you some sleep at night – but unfortunately, for most annuity owners, this is a false sense of security because each day you could be paying less and earning more.
Fair is fair, so I’ll share who the 1% of investors that should consider annuities are: Investors in the TOP tax bracket, who have maxed-out their tax deferred investment options. Those are the only investors, PERIOD.
What’s more, these few investors shouldn’t engage in a defined income product because they have enough wealth and assets to warrant taking slightly more risk in the market – even if with a 60/40 balanced approach, as mentioned earlier.
Annuities are NOT the way of the Liberated Investor. Don’t let Wall Street and the insurance industry add you to the growing list of investors who are misguided into products they don’t need. Download our free Liberated Investor Tool Kit today and learn more about the games Wall Street plays and how to beat them at those games.
In the meantime, JUST SAY NO to annuities and consult a professional before you sign on the dotted line!