Jul 02
Regular readers know where I stand on Variable Annuities, and I though thought I’d share this quote from a Suze Orman interview on CNN Money which caught my eye;
“I hate them with a passion - a passion! - especially in a retirement account like an IRA. Variable annuities have all these extra fees and tax issues and penalties, but - oh, that’s okay! - because they give you a tax deferral. But a retirement account is already tax-deferred without all those fees. It’s absolutely ridiculous. I think variable annuities exist for one reason only: to make money for the financial advisers who sell them.”
I’ve had some disagreements with some of her advice, but lately I’m finding more of her quotes that are right on target.
Joe
July 2nd, 2008 at 3:04 pm
Are variable annuities more expensive because they are charging for ‘tax deferral’? What does tax deferral cost and who’s collecting the fees for tax deferral? Last time I checked tax deferral was free.
The proper question is what am I getting for the extra fees the variable annuity charges? Perhaps an income that rises at the roughly the same rate as the cost of everything I buy. An income that is provided until death, no matter how long that is. If that is of no value to an investor looking to provide a guaranteed income through retirement than buy an index fund and hope for the best.
By the way, what extra “tax issue” is Suze speaking of for variable annuities inside of an IRA? That’s a new one to me.
July 2nd, 2008 at 3:16 pm
Well, two tax issues I can suggest is 1) VAs take potential long term gains and convert them to ordinary income, although to be fair, an IRA is guilty of the same, and 2) the growth within the account does not get a stepped up basis on death, but again is treated as an IRA with some basis. I’m certainly an IRA/401(k) fan, just not a fan of the huge expenses the VAs carry.
Joe
July 2nd, 2008 at 5:19 pm
Joe,
You’re entitled to your own opinions on variable annuities but you and Suze are not entitled to your own facts. The facts are the annuity adds no “tax issues” to an IRA and you both lose credibility when you make that claim. Your response confirms that fact.
Again, the question is whether or not an income that provides for a husband and wife over potentially three decades of retirement that rises with the cost of everything you buy each and every year is worth the additional fees. With the lack of guaranteed sources of lifetime income available in America today (pensions, etc) it might be worth taking the time to study that issue.
July 2nd, 2008 at 5:30 pm
I don’t see where I made up any facts. Both VAs and IRAs are both subject to the two negative tax issues I state above. It’s the extra expense of the VAs that still have my objection. FWIW, I have no issue with a good immediate annuity.
Joe
July 2nd, 2008 at 8:06 pm
Where is your discussion around what you are actually getting for the extra fees in a variable annuity? According to you and Suze the fees pay for tax deferral. Nothing could be further from the truth. Tax deferral is FREE. No charge for that gift from the federal government. So what are you actually paying for?
My guess is you have no idea what annuities provide beyond tax deferral. Otherwise you would mention the fact you for a fee you get an income that addresses the duration problem (a paycheck until I die) and the direction problem(rising at roughly the cost of inflation). Let the reader decide if the fees are worth it. But to mention fees without any discussion of what you get for the fees beyond tax deferral is irresponsible.
By the way, you like a good immediate annuity. If the cost of everything we buy increases each year and you propose to “FIX” my income with a level payment of an immediate annuity how do I pay for goods and services at prices 30 years from now assuming I’m 65 and live to 95 or 100? Have YOU received any pay raises over the last 30 years of your career? I would hope so. What if you didn’t? What if you were receiving the same amount of income as you did when you were 21? The loss of purchasing power is EVERYTHING over longer retirements. Your obsession with fees rather than solving for the real problems of running out of money and purchasing power can really hurt those without guaranteed sources of income in retirement.
July 3rd, 2008 at 9:21 am
Variable Annuities do have much of the same tax treatment as IRAs and 401(k)s. The reason is that a VA is designed to be a retirement income vehicle, and the tax-deferral they are granted is a result of that. That is an act of congress, not a feature that a VA issuer can legally charge for.
The reason you would consider a VA over mutual funds, as an example, is that you want some of the features unique to VAs, such as guaranteed lifetime income. Sure, you can structure a portfolio of mutual funds and if you take out no more than 4% per year as income, you PROBABLY won’t die broke, but you might. See T. Rowe Price’s website for some good calculators to illustrate this.
VAs offer guaranteed income through insured systematic withdrawal programs, that allow the owner to take 5 or 6% per year, maybe even more depending on their age, for their entire lifetime and their spouses — guaranteed.
You can also annuitize, and create pension-like income. Remember, annuities were spawned from pensions as a way to provide pensions to those who were not fortunate to have a pension plan at work. That used to be a minority, but now the majority of workers don’t have a pension.
Get the facts straight on just exactly what you are paying for with a VA. It is not the right investment for everyone, but anyone who wants guaranteed income needs to understand that as of 7/3/2008, annuities are the only investment vehicles that can guarantee income. Period. Everything else can probably provide income for life.
July 3rd, 2008 at 3:47 pm
Well said and I guess it’s my point in trying to call out those “experts” that really don’t have the facts on just exactly what you are paying for with a VA.
To “hate” something with a “passion- a passion!” as Suze writes and Joe agreeing with her hatred by making up facts that VA’s have additional “tax issues” when owned inside of an IRA borders is very silly.
Stop “hating” Suze and Joe and get your facts straight! Then we can have a meaningful discussion on the pros and cons of an investment that just might provide the income so many Americans will need.
July 3rd, 2008 at 6:40 pm
Jason - I approved this comment, but I’d like you to accept my offer. I emailed you to send me a Pro-VA post, which I will publish within a few days of getting. Offer the facts. If VAs are ‘good’, tell me why, and who they are best for. Stay away from personal comments, and I’ll publish it, unedited, fair enough?
Joe
July 3rd, 2008 at 11:26 pm
[...] my eye;. “I hate them with a passion - a passion! - especially in a retirement … Source: Suze on Variable Annuities Who Would Be A Worse Mom? Paris or Lindsey? Vote Now And Get A Free iPhone. Suze Orman Used [...]