Why Variable Annuities Might Not Be the Safe Bet You Think
Retirement planning can be tricky. Many people near retirement age get offers for variable annuities, often wrapped in promises of guaranteed income. But financial expert Suze Orman warns that these products might not be as safe or beneficial as they seem, especially when bought within tax-deferred accounts like IRAs or 401(k)s.
What Are Variable Annuities?
Variable annuities are insurance contracts that invest your money in subaccounts similar to mutual funds. The key selling point is a promise that you will never lose your initial investment, but this guarantee only holds true if you pass away. Orman points out that this protection is tied to the death benefit, not daily account value, making it less useful for most investors.
The Double Tax-Deferral Problem
One big issue with variable annuities is the double layer of tax deferral. Since traditional IRAs and 401(k)s already offer tax-deferred growth, adding another tax-deferred product doesn't provide extra benefits. Instead, it adds unnecessary costs. Orman highlights that the fees associated with variable annuities, including mortality charges and fund expenses, can eat into your returns significantly.
Why Advisors Push Variable Annuities
Financial advisors often push these products because they earn high commissions, sometimes ranging from 4% to 7%. This financial incentive can cloud their judgment and lead them to recommend variable annuities even when simpler, low-cost options like mutual funds or ETFs might be better for the investor.
Better Alternatives
Orman suggests that instead of variable annuities, investors should consider diversified portfolios with:
- Individual stocks
- ETFs
- Certificates of deposit
- A small portion of gold
These options are often more transparent and cost-effective, providing the same or better benefits without the complex fees and restrictions.
Key Questions to Ask Before Investing
Before agreeing to any annuity pitch, it's crucial to ask the right questions:
- Is the money already in a tax-deferred account?
- What are the total annual costs?
- How long is the surrender period?
- What exactly is guaranteed?
Understanding these details can help you make an informed decision and avoid costly mistakes.
