Not every investment is a smart investment and in most cases, investing in annuities can suck the money right out of your pockets. In fact, annuities benefit the broker selling the annuity more than it does anyone else. Variable annuities, to be specific, often cause the most trouble. Variable annuities are usually marketed as the ideal retirement vehicle with plenty of tax benefits. While in reality, they can instantly evaporate capital, carry more risk than the stock market, and limit your returns.
Before explaining why variable annuities are not a smart investment, we will first describe how they work. You start by investing money in exchange for getting taxed later. This money is locked into the annuity for a time period. With variable annuities, you have two phases: the accumulation phase and the payout phase. During the accumulation phase, this is the period of time where the annuity grows by choosing a selection of investments to invest your money. For example, you can choose the S&P 500 as the underlying investment on your variable annuity. If the stock market returns 2% in that time period, your annuity grows in value by 2% for the time period minus any fees. Then comes the payout phase where you begin to receive income from the annuity. As the owner of the annuity, you can choose to receive your payout either as a lump sum or over time, but keep in mind that once you choose, you cannot change your mind.
The fundamental issue with variable annuities is that the underlying investment, such as the S&P 500, can go up 20% in a year, but oftentimes your payout will be capped at a certain percentage. I just ran across an annuity that was capped at 6% per year that followed the S&P 500. That means if the S&P 500 returned 12% this year, the annuity would accumulate only 6% in value. If you are taking on the risk of the market, you should reap the rewards. Not only that, but the funds within the annuity can have high backend loads, which are fees on the sale of the underlying fund, sometimes up to 5%. If the annuity company sells the investments in the annuity, that means that $100,000 could turn into $95,000 just because you are selling the investments.
At Fogel Capital Management, our approach to retirement planning is one where we can accumulate capital for you, while at the same time being mindful of choosing the right investments for your stage of life. We can set you up with a portfolio that generates income while saving you the burdensome fees that come with bad products such as annuities. For a free portfolio consultation or to discuss your existing annuities, please call us at 772-223-9686.