Home » Retirement » How One Woman Paid Over $3,500 in Variable Annuity Fees and Didn’t Even Know It
Prepare to be shocked as we reveal the hidden fees lurking behind variable annuities. In this real-life case, an investor paid over $3,500 without even knowing it, underscoring the critical importance of understanding the financial implications of these investments.
“I think I’m paying around $50 per year.”
That’s what I heard from one woman who actually paid a lot more on a variable annuity.
A whole lot more.
If you haven’t guessed it yet, I’m not a big fan of variable annuities.
I’ve seen too many investors who were sold this horrible product – having no clue what it does and why they should even own it.
They just know the advisor who sold it to them claimed it was some sort of “guarantee.”
What’s worse is the client typically has no idea what they are paying. This is why I recommend you check out our great reviews on different investing options such as our review on Motif Investing.
Table of Contents
- The Details
- Annuity X-Ray
- How Much Are You Paying in Variable Annuity Fees?
- Other Investment-Related Articles
Don’t believe so? Here’s an actual client scenario that shows just that.
The Details
For anonymity, I am changing a few detailsbut you’ll get the gist.
A prospective client found my blog and was interested in working with me. When she came in I learned they were working with a local office of a big brokerage firm that rhymes with Bells Cargo – once again, I’m protecting anonymity here ;-).
She contacted me because she didn’t feel her current advisor was being straight up about her financial situation and wanted a second opinion. The advisor had sold her a variable annuity and also some mutual funds. She wasn’t as concerned about the mutual funds but confessed she didn’t exactly understand how the variable annuity worked. The advisor claimed the annuity had some sort of guarantee to it.
When I inquired how much she thought she was paying for hervariable annuity she sheepishly admitted she really didn’t know. I did find out on one of hermost recent statements she saw a fee of $50. I tried to probe a little bit to see if she truly believed that’s how much she was paying without making herfeel stupid.
I couldtell by the conversation she really didn’t think there were any additional costs just because of the guaranteed nature of the product. I think she thought of hervariableannuityas a fixed annuity. When I asked herif she’dbe curious to know how much she was really paying for hervariable annuity, she was more than interested to find out.
Annuity X-Ray
The client had deposited $100,000 into the annuity over the two years prior to our conversation.
As you can see by the illustration below, it had grown 2.79% to $102,790. Considering the market growth it had over thoseyears this doesn’t seem like a lot, but that’s a conversation for another day. What we want to focus on is how much she wasactually paying for the annuity.
Most variable annuities have several fees most investors aren’t aware of. By googling “SEC variable annuities” you’ll happen upon a longdocument produced by the Securities Exchange Commission warning prospective investors about the fees associated with variable annuities.
In fact, in that 12-page document, you’ll find five caution boxes all warning about the fees and complexities of variable annuities. Some of the fees you’ll encounter are:
- Mortality and expense risk charges;
- Administrative fees;
- Rider fees (which are typically death benefit and guaranteed minimum income benefit riders);
- Surrender charges; and
- And other fees.
Below you’ll see the basic contract charges on hervariable annuity contract:
- Hermortality and expense fee was 1%
- Heradministration fee was 0.35%
- Herincome rider was1.25% (and that’s all before the cost of the subaccounts otherwise known as the mutual fund inside the variable annuity)
Those total fees were 0.94%.That brings the total charges up to 3.54% on the annuity contract, based on a $102,000 contract value.
The totalfees per year were$3,603.89. I’ll let youdigest that for a second . . . .
That’s not $3,600 upfront. That’s not $3,600 for the first year. That’s $3,600 per year for the life of the contract.
For an investor whotruly believes they’re only paying $50 per year to have this investment that’s quite a big shockand reinforces why I hate variable annuities. I also have to admit I don’t hate the product as much as I hate the advisor who doesn’t disclose how much is being spent.
Let’stake a look at what an annual charge of 3.54% will do based on different annualized returns.
For example, if the mutual fund inside the variable annuity actually made 6% after fees and expenses, then an effective net return is only 2.25%. This is how you don’t make money in the stock market. See below.
The final chart below shows the effective rate of return over 10 years of having the fee charge while only averaging 2.79% return based on what the contract has done at this point.
As you can see, there’s a huge benefit to eliminating all those fees: almost $41,000.
Did somebody say almost $41,000? Yes, I think they did!
How Much Are You Paying in Variable Annuity Fees?
Do you know how much you’re paying in annuity fees? No?
Well, it’s time to change that . . . and the good news is I want to help free of charge!
I’d like to give you the opportunity to discover exactly how much money you’re spending onannuity fees. You see, annuities are by far the most complex investment products available in the financial world. Their fees are often numerous and confusing. Their benefits are pretty difficult to understand.
Don’t get me wrong, some annuities are worthwhile . . . but many of them can hurt your financial situation without you even realizing it.
That’s why I created the Annuity StressTest. It’s a free report that will help you:
- Calculate all of your annuity’s fees;
- Identify the long-term impact of your annuity’s fees;
- Compare your annuity’s performance against other financial scenarios;
- See how your annuity performs against other annuities to ensure you’re getting the highest rates, we can help you get annuity quotes to make sure you are investing in the right plan for your needs; and
- Calculate how many years it takes for your annuity to “break-even” when selecting certain income riders.
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