Variable Annuities

[Craig]

OK, put the knives away ... let me ask the question.

At one time, years ago, I did some research into variable annuities, qualified plans and after tax savings ... decided that variable annuities might be a helpful addition to my tiny portfolio. Tax advantaged for moving funds, a bit higher cost due to the insurance feature, some downside protection, and different requirements for timing of withdrawals late in life. So, we put a little into Vanguard and Fidelity variable annuities.

Now rethinking the whole thing, and considering moving those funds out, and into some Vanguard index funds with obviously lower fees. There will be a tax bite, but not too severe.

I know, I know ... most folks say variable annuities are worthless, with excessive fees. Are there any folks on this board who have taken a contrary position, and have used them for some portion of your portfolio? If so, why? And if you're dead set against them, are you sure they have no purpose in any portfolio?

Just curious, and do appreciate the fine minds on the board here. Thanks.

 

[John Galt]

I have no advice for others. I don't see a need for
variable annuities in my life, but suppose they have their
proper place. When I was quite young, an insurance guy sold me one. Afterwards, I regretted it. Gave it to my ex-wife in the divorce. Problem solved.

JG

 

[Cut-Throat]

When I was quite young, an insurance guy sold me one.

That in a nutshell is what is wrong with annuities. When they are sold, you can bet that their fees at quite high.

 

[Jarhead*]

That in a nutshell is what is wrong with annuities. When they are sold, you can bet that their fees at quite high.

Back in the dark ages, 60's, and 70's when the tax rates were much higher than they are now, and no tax-advantaged programs, (Ira"s, etc.), they were fairly popular for high income bracket individuals.
I personally preferred real estate, but it was really a scramble, if you were subject to high W2 income to get write-off. (Lots of marginal, and subsequently, totally bogus write off schemes).
Annuities, of course weren't a write-off, but the deferral of taxes on the Div's, Cap Gains, etc. had some appeal to some indivduals.
One of the best things that ever came down the pike was the tax-advantaged products that has been available for the last 20 some years.

 

[charlie]

If you are young, and have already taken max
advantage of tax sheltered accounts, then you
might make a case for putting tax ineficient
investments such as REITS and small cap value
in a VA.

Cheers,

Charlie

 

[brewer12345]

There are VAs and then there are goddamn VAs. The term "variable annuity" (VA) covers a very wide variety of products. The simplest ones (like those offered by Vanguard, Fidelity and TIAA-CREF) are basically just mutual funds stuffed into a tax-deferred wrapper. These are generally sold direct to the retail investor and are usually pretty cheap and are not hung with all kinds of insurance-type guarantees. If your tax situation indicates that this is a good move (and unless you are in a really high bracket, this is unlikely), this is not a terrible way to go.

OTOH, goddamn VAs are expensive mutual funds in a tax deferred wrapper with overpriced insurance guarantees attached. These worthless pieces of (&%^*%$! are usually sold by greedy financial planners who take a big commission out of your hide and typically sport expense ratios of 300BP (!) and up. Stay the hell away from goddamn VAs regardless of your tax status.

 

[Martha]

So I am in the highest tax bracket last year and this year, but likely will substantially drop in brackets next year, Brewer, does a Vanguard type variable annuity make any sense? I always thought they were bad ideas because of the fees.

 

[brewer12345]

So I am in the highest tax bracket last year and this year, but likely will substantially drop in brackets next year, Brewer, does a Vanguard type variable annuity make any sense?  I always thought they were bad ideas because of the fees.

I think that the low cost VAs make the most sense for someone who will be in a high bracket for a number of years, and then will drop substantially, and who invests in tax inefficient asset classes inside the VA. The ideal investor also plans on waiting until after 59 1/2 before tapping the funds. This is a far smaller customer pool than the number of people who have been sold VAs.

Personally, I would choose TIAA-CREF over Vanguard. Nothing against Vanguard, just that TIAA-CREF has a much longer track record.

For you, Martha, I think it depends. How old are you? When will you need the funds? What are you planning on putting the money into (bonds, stocks, etc.)? If we are taking about one year of high bracket stuff, it probably isn't worth it. If you are planning on investing in an S&P 500 index fund, its not worth it. OTOH, if you are thinking about bonds or REITs and will be in, say, the 28% or higher bracket for several years, then it might be worth it.

BTW, the low fee guys typically have expense ratios on VAs in the ~35BP ballpark, depending on the asset class.

 

[Craig]

brewer12345, I think you hit it on the head. We went with Vanguard and Fidelity VA's a long time ago, and while I'm not sure these days it was the best move, at least I feel we didn't have our heads handed to us.

Thanks.