Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Avoid the Pitfalls of Variable Annuities

Personal_Finance / Pensions & Retirement Jun 21, 2013 - 11:28 AM GMT

By: Don_Miller

Personal_Finance

Last year consumers purchased $200 billion in annuities. On top of that, there are currently $2-3 trillion in annuities already in force. With all the variations, options, riders and strategies available, it's easy to feel lost. At Money Forever, we aim to simplify complex financial topics. To that end I’m going to share a case that jumped out at me as we researched our special report on annuities. The evaluation process used here translates to any sort of annuity you may encounter; its information you can keep in your back pocket and draw on when annuity salespeople try to overcomplicate products and make predictions sound like guarantees.


In this article I'll tackle what could be the most misunderstood flavor: the variable annuity. Let's start with a story about our friend Erik…

Variable Annuities

Erik's friends bought into the idea of buying their own pension with an annuity. They had taken large payouts from their employer and had put it all into annuities. This was back when putting your entire portfolio into annuities was still allowed.

As Erik explained, the annuities were variable and many of his friends had experienced a 30% cut in their monthly benefits after the stock market crash. At one time, his friends used to brag about how pleased they were with their annuities.  Despite the praises from his friends, Erik thankfully didn't follow their lead, and unfortunately for them, the tide turned. Their income was reduced while their expenses continued to rise. 

The insurance company was totally honest and paid their benefits according to the contract. But the buyers did not understand the contract and had very different expectations. When their benefits dropped, they had to make major changes in their lifestyle.

With this story as our background, one of your first questions is most likely: why did the annuity income drop so radically? The answer is easy to understand. 

Prior to 2008, if you took a lump sum investment and put it into a variable annuity, the company would take a conservative approach to investing your funds. Typically, half the funds would have been invested in quality, safe fixed-income products like CDs and top-rated bonds, which used to pay 6% consistently. The other half would have gone into the stock market. Previously, the fixed-income side of the annuity was the safe side, and the stock market side was the less predictable, variable part. But in good times, like the run-up to the 2008 crash, even the stock market side of it could pretty safely expect a 10% return per year.

The way most people saw it, the fixed-income side guaranteed a 6% return on half the money – even if the market crashed, one would still be set. 

What happened in the fall of 2008 changed that picture quickly as banks called in their CDs and interest rates across the board plummeted. AAA-bonds and FDIC-insured CDs were paying nowhere close to 6%. What was once the safe, cash flow portion of the investment capital suddenly became variable as well.  The investments were technically still safe, but the once decent yield became close to nothing. And of course, we all know what happened to the stock market. So the variable side and "safe" side of the portfolio were hit simultaneously.

While the word annuity in "variable annuities" might make it sound like a safer investment, it's ultimately not. Your money is still in the market. In fact, in some ways, it's at even more risk.

If you simply owned your own mutual fund or fixed-income fund, you could have sold at any time without penalties; the same is not always true of annuities. With variable annuities, your money is in the market with more fees and less control – a toxic combination. Variables annuities are certainly not the same as a guaranteed pension for life.

Not all annuities are bad deals, but before you start asking for quotes on annuity products, you'll want to do some homework. To help you get started we've put together an easy-to-read report called Annuities De-Mystified. You'll find our 8-point checklist to find out if an annuity is right for you, our 9-point plan showing you what to look for when buying an annuity, and an important overview of the risks associated with annuities all within the pages of this timely, must-read report. Click here for your free copy today.

Back when I was a kid we purchased our first television. It was one of those with the small, round glass, black and white screen and poor sound quality; it looked more like furniture than advanced technology. But it was ours and we proudly watched it together as a family. As a Chicago native I naturally watched WGN whenever I could. So imagine my surprise when they called to do an interview about my book, Retirement Reboot. Whether you live in Chicagoland or not you likely get WGN-TV Superstation on your cable or satellite system. So if you have a few minutes between 11 am and 1 pm CDT on Tuesday, June 25th be sure to tune in for my interview.

© 2013 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Casey Research Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in