Are variable annuities as bad as people say?

[kgtest]

I worked for Securian, Allianz, and Thrivent. All sell annuities contracts. I was always surprised at how low the guarantee's were and how high the fee's were.

I would never own one.

The contracts are ridiculous.

 

[DrRoy]

How can I say this?

YES

 

[prudent_one]

A few years back an advisor suggested a variable annuity and gave us a flashy 3-page brochure that made it sound fantastic. The anal-retentive side of me asked for the full prospectus to review.

It was 67 pages of dense small text that was incomprehensible. And in the spirit of not buying things I don't understand, I told him I wasn't interested because it was too complicated for me to understand. He struggled to find a way to overcome my objection but since he couldn't understand it for me, that ended the discussion.

 

[pb4uski]

He calls them "Fixed index annuities", but they are what my understanding of variable annuities (maybe i'm wrong)

No, fixed index annuities pay benefits based on the performance of an index, commonly an equity index of some sort. Variable annuities have subaccounts which are underlying funds like an ETF or mutual funds. Both are overly complicated and high cost and should be avoided.

 

[ncbill]

No benefit to the purchaser except the few benefits I mentioned. I'm not sure what all the benefits are in being able to reclassify an unlimited amount of assets as "retirement assets", but there are the few I mentioned. Not that those make a difference to many people, but might make a difference in some situations. That being said, the typical high pressure sale, high commission VA's are certainly to be avoided, and usually that's what people are talking about when the topic of VA's come up.

Umbrella coverage is far cheaper for protecting exposed assets from creditors.

 

[Palmtree]

Here is a link to video where they break down the fine print and show you all the tricks that are played by sellers of variable annuities. I was suprised how good they sound on the surface but how bad they actually were.

https://moneyguy.com/episode/can-this-annuity-destroy-your-retirement/

 

[TheWizard]

TIAA VAs are good for retirement income.
You don't need to put $$$ in them until you're ready to start receiving lifetime monthly income.
But I won't try to buck the tide and defend them due to the prevailing sentiment...

 

[Stormy Kromer]

TIAA VAs are good for retirement income.
You don't need to put $$$ in them until you're ready to start receiving lifetime monthly income.
But I won't try to buck the tide and defend them due to the prevailing sentiment...

You are absolutely right. From my experience there is no need to even consider any annuity during the accumulating scene. Once you have accumulated assets and need a secure income stream they may have a place. I have taken an absolute beating with my VUL since 1997. I'm embarrassed and would like to help others avoid the same.

 

[leeg]

(formerly) Vanguard Variable Annuity

I didn't see any mention of Vanguard variable annuities here. Here is my story.

For reasons not worth going into I invested (bought?) a Vanguard VA in 1994, at age 42. I'm not sure I realized it at the time, but this was an arrangement between Transamerica and Vanguard - the annuity contract was with Transamerica. It used Vanguard funds for investment ("sub-accounts") and Vanguard managed the investments - meaning, that if you called with a question Vanguard answered the phone. The Vanguard "front-office" component of this changed a few years ago when Vanguard gave up the "front-end" job and Transamerica took it over. Today the only connection with Vanguard is that the investments are still all Vanguard funds. (Boy did this piss off a lot of people, including me).

As I said I invested $50,000 in this VA in 1994 - almost exactly 30 years ago. I have kept the investments roughly 60/40, and I've rebalanced.

Today I'm 72 and the VA is worth $500,000, or 10X growth. My rule of thumb is to expect 7% nominal from a 60/40 portfolio, so in 30 years I would have expected the $50K to double three times - 100K, 200K, $400K. In fact, I've done better than that - a hair under 8% according to GPT4.

Today that $500K represents a little under 10% of my investments, and about 7.5% of net worth.

Was this a good investment? I'm still not sure.

As it turns out, I don't think my wife and I will ever need it, in part because it is tax-inefficient. Any money that comes out of it comes out as ordinary income, and the $50,000 "basis" comes out tax free, but last. So, we are just letting it ride.

Our present intention is to leave it to our daughter. In this light was this a good investment? It might be - she can "annuitize" it for lifetime income at a pretty good rate (depending on her age when she inherits). Or, she can let the investment continue and take money based on her RMD schedule (plus additional monies above that, at her discretion, if she chooses). Of course, she'll end up paying the ordinary income taxes.

So, while no one will really know for many years (I hope), and I will never know, this may turn out to be a good investment - for her.

I'd appreciate comments and observations on this. Am I missing anything?

(edit: Follow-up: Ive tried to find someone with a similar contract and situation on Bogleheads, with no luck, just to discuss whether my planning makes sense. I've also looked for a financial advisor to help me (and in the future my daughter) think through the choices we are making and that she will have to make when she inherits this VA (it's complicated), again with no luck. If readers here see a problem with my plans for this VA, I'd value your thoughts. And yes, I know if I'd put this in the S&P 500 for the last 30 years it would be worth a lot more, and our daughter would get a step up in basis if she inherited it. But that ship has sailed ....).

 

[2retireearly]

I made my living, understanding these, and programming them. they are terribly complicated and take a degree in math to understand (which I have)...but, they are good for some, but mostly they do insure a decent Death Benefit. And, yes, they have huge fees. and for some who don't want to play the market, those high fees are ok to pay for certain guarantees of values. But wow...were they fun to break into components, to program insanely complicated algorithms.

 

[kgtest]

I made my living, understanding these, and programming them. they are terribly complicated and take a degree in math to understand (which I have)...but, they are good for some, but mostly they do insure a decent Death Benefit. And, yes, they have huge fees. and for some who don't want to play the market, those high fees are ok to pay for certain guarantees of values. But wow...were they fun to break into components, to program insanely complicated algorithms.

I tested the products and software as an automated test engineer. So I also enjoyed the complex packages and functions of the products. Usually as a software engineer and test engineer you want simplicity but you are right, these contracts with all their death benefits and riders and variable vs fixed...all the bonuses and forfeits etc.

I worked for some big ones and got deep into the products as we did massive system overhauls.

Securian, Allianz, Thrivent, Accenture. You probably heard of the ALIP system. That was one of the core systems I had to test. Or rather wrote code and software to test using web services.

The one thing I remember was I had access to the guarantee tables and databases and I started comparing those to my own performance and that of the market and some funds I was familiar with and realized I could do better on my own. But like you there are people who would be served well with an annuit6 but I would personally steer people clear due to the complexity of the contracts.

Love that work though.

 

[pb4uski]

I didn't see any mention of Vanguard variable annuities here. Here is my story.

For reasons not worth going into I invested (bought?) a Vanguard VA in 1994, at age 42. I'm not sure I realized it at the time, but this was an arrangement between Transamerica and Vanguard - the annuity contract was with Transamerica. It used Vanguard funds for investment ("sub-accounts") and Vanguard managed the investments - meaning, that if you called with a question Vanguard answered the phone. The Vanguard "front-office" component of this changed a few years ago when Vanguard gave up the "front-end" job and Transamerica took it over. Today the only connection with Vanguard is that the investments are still all Vanguard funds. (Boy did this piss off a lot of people, including me).

As I said I invested $50,000 in this VA in 1994 - almost exactly 30 years ago. I have kept the investments roughly 60/40, and I've rebalanced.

Today I'm 72 and the VA is worth $500,000, or 10X growth. My rule of thumb is to expect 7% nominal from a 60/40 portfolio, so in 30 years I would have expected the $50K to double three times - 100K, 200K, $400K. In fact, I've done better than that - a hair under 8% according to GPT4.

Today that $500K represents a little under 10% of my investments, and about 7.5% of net worth.

Was this a good investment? I'm still not sure.

As it turns out, I don't think my wife and I will ever need it, in part because it is tax-inefficient. Any money that comes out of it comes out as ordinary income, and the $50,000 "basis" comes out tax free, but last. So, we are just letting it ride.

Our present intention is to leave it to our daughter. In this light was this a good investment? It might be - she can "annuitize" it for lifetime income at a pretty good rate (depending on her age when she inherits). Or, she can let the investment continue and take money based on her RMD schedule (plus additional monies above that, at her discretion, if she chooses). Of course, she'll end up paying the ordinary income taxes.

So, while no one will really know for many years (I hope), and I will never know, this may turn out to be a good investment - for her.

I'd appreciate comments and observations on this. Am I missing anything?

(edit: Follow-up: Ive tried to find someone with a similar contract and situation on Bogleheads, with no luck, just to discuss whether my planning makes sense. I've also looked for a financial advisor to help me (and in the future my daughter) think through the choices we are making and that she will have to make when she inherits this VA (it's complicated), again with no luck. If readers here see a problem with my plans for this VA, I'd value your thoughts. And yes, I know if I'd put this in the S&P 500 for the last 30 years it would be worth a lot more, and our daughter would get a step up in basis if she inherited it. But that ship has sailed ....).

That sounds about right... $50k put into a 60% VTSMX/40% VBMFX blendin 1994 would be worth $510k today according to Portfolio Visualizer... so you have done well.

The bad part of an annuity vs a brokerage account is that the withdrawals would be ordinary income and income first and then principal unless you annuitize so for the 60% in equities the VA structure has converted qualified dividends and LTCG at preferential rates into ordinary income... but a plain old IRA does that too.

Also, when you pass the annuity doesn't get a stepped up basis like funds in a brokerage account do.

But OTOH, you have deferred taxes on that growth for 30 years.

Shoulda, coulda, woulda.

 

[Stormy Kromer]

I was sold a VUL with Lincoln. It has not performed near as well as the example above, about 2% annually over the last 10 years. The sub account choice is limited and expensive. It hasn't performed like I was told it would. I was told it would track the SP index with a small fee which provides a 5% step up guarantee each year. It didn't work that way.

From what I've seen VUL's are a good way to turn Long term capital gains into ordinary income on your tax return. They are also a tax bomb in your estate, no step up in basis.

Never again would I consider one.

 

[DuluthGA]

I was sold a VUL with Lincoln. It has not performed near as well as the example above, about 2% annually over the last 10 years. The sub account choice is limited and expensive. It hasn't performed like I was told it would. I was told it would track the SP index with a small fee which provides a 5% step up guarantee each year. It didn't work that way.

I have a Lincoln VUL too. In theory its done what its supposed too. WHile the 2% performance feels crappy given the market had we had another Great Recession the timing on annuitizing the step up v/s the account balance would have done what they said it was supposed to do. As it is I’ll probably transfer elsewhere and buy a SPIA as Lincolns rates are not as good/

 

[Koolau]

I also tell them this:

Rule of Thumb: The more complicated an investment product is, the more likely it is that it was designed to make money for the seller, not to make money for you.​

For your other Thumb, Ko'olau's rule is:

If they sell something at a "free meal," enjoy the meal, but don't buy anything, including especially variable annuities. The fees are staggering as has been suggested. How would an agent afford to put on a "free meal" if there weren't tons of profit built in for him/her. YMMV

 

[Stormy Kromer]

Earlier this week I had a question for the FA that sold me the VUL. I called his office and was told by his receptionist " He is at his vacation home in Florida for the winter, is there anything I can help you with?"

 

[leeg]

That sounds about right... $50k put into a 60% VTSMX/40% VBMFX blendin 1994 would be worth $510k today according to Portfolio Visualizer... so you have done well.

The bad part of an annuity vs a brokerage account is that the withdrawals would be ordinary income and income first and then principal unless you annuitize so for the 60% in equities the VA structure has converted qualified dividends and LTCG at preferential rates into ordinary income... but a plain old IRA does that too.

Also, when you pass the annuity doesn't get a stepped up basis like funds in a brokerage account do.

But OTOH, you have deferred taxes on that growth for 30 years.

Shoulda, coulda, woulda.

Nope, it's my understanding that this does not get a stepped up basis. And yes, it is comparable to a traditional IRA, but with more flexibility in that our daughter can "stretch" it for her lifetime if she choses to (other choices are to annuitize it or to simply withdraw over five years). I have spoken to advisors who thought that the elimination of the "stretch" for tIRAs eliminated the stretch for VAs as well, but according to Transamerica that is not the case.

"Non-qualified stretch: This is for an inherited non-qualified annuity outside an IRA. It allows non-spouse beneficiaries to receive RMDs based on their life expectancy, allowing them to name a beneficiary for their own annuity inheritance."
​

https://www.transamerica.com/knowledge-place/inheritance-annuities-know-your-annuity-contract

 

[sengsational]

I didn't see any mention of Vanguard variable annuities here. Here is my story.

Since you probably had few transactions and few positions, you could probably put the whole history into a back tester using the actual Vanguard underlying funds, and compare those modeled totals with your actuals. I would expect that it would differ only by the admin fee percentage added to cover wrapping the mutual fund as an insurance product. This difference shouldn't be too much in the specific product you bought. That can't be said for most variable annuities, but I think the Vanguard VA had zero up-front commissions and very low ongoing fees.

Sad news that the original basis is "buried", but take solace in the fact that during your likely high earnings years, you were making lots of money and not paying taxes back then.

 

[Dabbler]

"Annuities are not bought, they're sold"

https://www.google.com/search?q=Annuities+are+not+bought,+they're+sold

– Dubious sales practices and high fees have led to a saying in the industry that annuities are not bought, they're sold
– Annuities are highly complex investments that are marketed aggressively, often to individuals for whom they may not be appropriate
– Brokers and selling agents stand to collect a sizable commission in return for each annuity sale
– The sale of annuities is justified entirely too often because of the massive commissions that go to the broker or agent selling the product
– People who sell annuities aren't necessarily bad people, but they are salespeople

 

[pb4uski]

...Also, when you pass the annuity doesn't get a stepped up basis like funds in a brokerage account do. ...

Nope, it's my understanding that this does not get a stepped up basis. ...

I wrote that the VA does not get a stepped up basis. Did you misread my post?

 

[Koolau]

Earlier this week I had a question for the FA that sold me the VUL. I called his office and was told by his receptionist " He is at his vacation home in Florida for the winter, is there anything I can help you with?"

Heh, heh, she just did.

 

[jazz4cash]

"Annuities are not bought, they're sold"

https://www.google.com/search?q=Annuities+are+not+bought,+they're+sold

– Dubious sales practices and high fees have led to a saying in the industry that annuities are not bought, they're sold
– Annuities are highly complex investments that are marketed aggressively, often to individuals for whom they may not be appropriate
– Brokers and selling agents stand to collect a sizable commission in return for each annuity sale
– The sale of annuities is justified entirely too often because of the massive commissions that go to the broker or agent selling the product
– People who sell annuities aren't necessarily bad people, but they are salespeople

Painting with a broad brush. Not all annuities have these characteristics. The OP specified variable annuities which I think generally but not always have these negatives. I think VAs and EIAs can be OK for specific situations but as OP relates you may never know even decades later. I’ll never say never but I’m pretty sure I won’t ever buy one.

 

[aja8888]

Only if the Mafia knew about VA's back in the day, most of those guys would not have been put in prison and would be on easy street living in the islands in a nice big condo.

 

[Koolau]

Only if the Mafia knew about VA's back in the day, most of those guys would not have been put in prison and would be on easy street living in the islands in a nice big condo.

What a great idea for rehabilitation training in prison. When these folks finally get out, let them sell VAs at free steak dinners.