Investing comes with risks – we all know that. But what about those advisory firms that tell you, you can invest “risk free” – how does that work? Long story short: It doesn’t. Retirement horror stories come in all forms. When you shine a light on these promises of “risk free,” they turn out to be hollow. Don’t fall for an empty promise.
Insurance companies are a big culprit. So are big banks and often times “fee-based” firms – watch out for that word. (Remember, when a firm sells you something for commission, there is a big conflict of interest – the salesperson will put his or her need for a hefty commission before your best interests to find the best product for you. When hiring a financial advisor, make sure he or she is a fee-only fiduciary.)
Insurance firms are known for selling their clients variable annuities that “promise” they can take a set percentage (5 or 6 percent) as income for the rest of their life. Many investors find this appealing because they don’t want to lose money. But what these salespeople generally won’t tell you is that it comes at a high cost. When you buy a variable annuity, you pay in multiple ways – ways that you may never see.
There are four key ongoing annual expenses in variable annuities, most of which are avoidable for savvy investors. These are:
- The Mortality and Expense
- Subaccount Revenue Share
- Death Benefit
- Living Benefit
These can easily add up to 4 percent p.a. And that’s before we include the cost of the actual investments.
In other words, the investments in an annuity have to make about 4 percent more per year than similar investments outside of the annuity just to break even.
How This Impacts Your Wealth
We had a client with $800,000 to invest who was shown an illustration by an unscrupulous insurance agent to invest in a product that had fees like this. Assuming an investment made 8 percent per year after fees, an investor in the fund would have about $2 million more than the annuity after 20 years and $5 million after 30 years. While the effect is less if you forego the living benefit, it is significant. But luckily, this client was not stupid. He thought twice before making this investment.
This was just one invitation to “get rid of risk.” He heard many “financial advisors” pitch annuities. But luckily, the client was not in a hurry and did some research.
Before this client contacted me, he had already interviewed four other firms. And every one of them recommended investing in some kind of annuity. One firm recommended a combination of equity indexed annuities and immediate annuities. Another firm suggested he roll his pension over into a variable annuity. Worst of all, one firm, hiding behind the term “fee based,” recommended indexed annuities.
Luckily this client eventually contacted me, and the real education process began.
Equity index annuities were created in the mid-1990s to give the return of a Certificate of Deposit. Because they are so profitable for insurance companies, they pay enormous commissions, often more than 10 percent. Even if the commissions aren’t as bad, the fees can eat you alive.
Unfortunately, investors fall for these pitches all the time. Everyone loves a “free lunch.” But just like these annuities they’re trying to sell you, nothing is free!
What to Watch For
Still intrigued by “risk free” investing? Here are a few things to look for to avoid becoming one of the retirement horror stories you’ve heard about.
Most of the time, Guaranteed Minimum Lifetime Income benefits go unexercised, which means they are simply a transfer of wealth from the beneficiary to the insurance company because most annuities end up paying a death benefit of the amount of premiums or contract value. They do not pay beneficiaries the “guaranteed” income benefit value.
If the benefit is exercised, it is rarely hedged against inflation, which means high inflation will erode the benefit. Add this to the fees and you transfer wealth to the insurance company.
If the benefit is exercised and you need more than 7 percent or so in a given year (every policy is different) you lose the guarantee, which means the annuity falls back to its contract value.
Think about it: If a 5 percent guaranteed minimum income guarantee is exercised when you are 70 years old, and you live to 90, all you get back is a return of principal – you get your own money back.
At Global View, our team of Certified Financial Planners (CFPs) work hard to educate our clients and make investments that are not only suitable for them, but that are also in their best interests. We are not just fee-based, we are fee-only. We never get paid by anyone other than our clients.
Again, watch out for the word fee-based. As I say time and time again, the financial services industry is a confusopoly, and investment firms use terms like this to purposely confuse their clients. Some retirement horror stories are financial success stories for a salesperson.
As an acknowledged fiduciary, I am obligated to put my clients’ best interest first – even before my own. And with that said, I have yet to find a loaded annuity that I believe is in our clients’ best interest.
Instead, Global View offers strategies to rescue investors from inappropriate, high-cost annuities – strategies like our low-cost, tax-efficient stock portfolios and access to boutique managers that simply won’t pay to play with the larger banks and insurance companies.
Whether your goal is to make 5 percent per year or 8 percent per year, we have strategies designed to do this.
At Global View, our managers invest alongside our clients, which means that instead of investing other people’s money, we have skin in the game.
Worry-free retirement isn’t about empty promises of no risk. Worry-free retirement is not about insurance. Worry-free retirement is not about annuities. Worry-free retirement is about debt, a good financial advisor and a plan.
If you or a friend owns a variable annuity or whole life insurance, Global View can help. Contact us and try us out.
For more about annuities and how they can hurt you, read some of our recent blog posts:
Don’t become another retirement horror story.