One of the biggest negatives continually re-hashed about annuities is that just like IRAs they are taxed at ordinary income tax rates on earnings. So why not avoid tax all together with a Roth Annuity! Oh, did I mention that when the IRA is converted to a Roth the tax must be paid in full in the next tax year. However, if you think taxes are likely to go up it may make a lot of sense to get the tax paid now when it is lower.

Dick and Eric discuss the many ways to use annuities that are tax free or tax advantaged in this short video.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Want more Roth & Annuity information? Kelly Greene of the Wall Street Journal authored two articles that look at the impact of Roth conversions.

Annuity Payments Using a Roth IRA Are Tax-Free

As long as you meet the holding and age requirements for a Roth individual retirement account, your annuity payments should be tax-free.

Many retirees are considering immediate fixed annuities these days. Generally, you hand over a large chunk of money to an insurer, which issues you a monthly check for life. The appeal in a recession is that annuity payments could soften hits suffered by your other investments. (The main drawbacks: Once you hand over your money to the insurer, you generally can’t get it back. And your fixed payments might not keep up with inflation.)

As Roth accounts increase in size, using them to buy plain-vanilla annuities might make sense for a portion of conservative retirees’ nest eggs, said Jeffrey Landers, an investment adviser with Wachovia Securities in New York.

A Roth annuity could assuage two of the three top concerns his retired clients have, he said: outliving their income and future tax increases. He suggests addressing the other big retirement worry, inflation, by using 25% to 30% of a nest egg to buy an annuity covering basic expenses, and continuing to invest the rest in a diversified way.

Or, if you are willing to accept a slightly smaller annuity payout, you could buy an annuity with annual raises.

Of course, if you purchase an annuity, payments usually end with your death. Thus, if you use a Roth IRA to buy an annuity, your heirs might not get to enjoy one of its best features — a tax-free inheritance.

To hedge your bets, you could buy an annuity with your Roth that **guarantees payouts for a set time period, such as 10 years. [Read More…]

Why It May Pay To Convert to a Roth IRA

Investors and financial advisers are preparing to take advantage of a new tax law that makes it easier to gain access to Roth IRAs—even if it means breaking a sacrosanct rule about Roth conversions.

Starting, Jan. 1, the $100,000 income limit disappears for converting traditional individual retirement accounts and employer-sponsored retirement plans to Roth IRAs, one of the biggest changes on the IRA landscape in years. Roths, of course, have long been viewed as one of the best deals in retirement planning; after investors meet holding requirements, virtually all withdrawals are tax-free. [Read More…]

Annuity Guys® Video Transcript:

Eric: Today, we are talking about tax-free annuities.

Dick: Better get them while they last, Eric.

Eric: They are in limited supply. When their shelves are empty, they are all gone.

Dick: That is right.

Eric: You better act quickly.

Dick: How about that? Tax-free annuities; isn’t that the opposite of what we’re told? Stereotypically, annuities are taxed at ordinary income tax rates, just like IRAs.

Eric: You know what the CPAs are calling right now, “They are wrong. The tax-free annuity doesn’t exist.”

Dick: Our phone’s going to be blowing up.

Eric: They’ll tell you it doesn’t exist. I have not seen anyone advertise for a tax-free Annuity.

Dick: Here we have a limited supply.

Eric: That is right; we’ve got them in short supply. Dick, you got to tell us, how does one get one of these limited supply annuities?

Dick: Here we go. What we have is no different than what you have, and that is you have your traditional IRA, that IRA can be converted to a Roth, of course, you will have to pay your tax the following year.

Eric: They are not tax-free then.

Dick: You have to pay the tax in the IRA.

Eric: It’s the first, okay.

Dick: Folks, once that you’ve actually converted to the Roth, you can then put that money into an annuity. That annuity becomes fully tax-free. It can give you a tax-free income for the rest of your life; it can pass tax-free to your heirs. It can actually become a retirement account for your heirs. There’s some intricacies to that, which we can talk about. The idea of using a Roth strategy in an annuity is not that well-known, it’s not talked about that often, and it can be a great advantage.

Eric: We say limited supply; why do you say limited supply? We’ve Roth’s for how long? There’s been a recent change though, it used to be there was an income threshold out there.

Dick: In 2010 they wiped it out. If you make over $100,000, it doesn’t matter, you can convert. Limited supply, we’re having a little fun with this, folks, like an annuity sale. The limited supply really comes down to Uncle Sam giveth . . .

Eric: And Uncle Sam taketh away. When someone’s looking for tax dollars . . .

Dick: Our government needs money.

Eric: If you believe taxes are going up, raise your hand. If that is the case, is better to then . . .

Dick: It is likely that Roth could be an endangered species.

Eric: Roth will turn to Moth.

Dick: It could.

Eric: It is going to mothballs very soon.

Dick: Getting poetic.

Eric: Yes, I am trying to rhyme.

Dick: If we’re in this situation where taxes were likely to rise, the government is looking for revenue, the Roth advantage benefit could be closed, tightened up. What we really experienced in the past Eric, with various insurance products and tax advantages, as long as they were entered into legally and under IRS and government-type sanctions, then usually, there was a guy in there who grand fathered in. It’s the new folks coming in that were somewhat penalized.

Eric: usually, they won’t go back and try to take it away from you, usually. Right now we believe that if people get it in before the government decides that this money is too tempting, we’ve got to reach in there and get [inaudible: 03:46].

Dick: We can just let these people this tax-free advantage.

Eric: Or their kids or their grandkids.

Dick: That’s where we go into it is potentially limited supply. Folks, this is something you genuinely want to consider, you want to use an advisor that really understands the Roth-IRA, the tax advantages, and the ways to incorporate that into annuity. Eric, I’d like to point out another thing while I’m thinking about it here; there’s different ways to convert an annuity to a Roth-IRA. We could use an existing annuity that’s an IRA.

Eric: You are saying if I own an annuity that has an IRA wrapper with it already . . .

Dick: You can convert it.

Eric: I don’t have to convert the annuity? I don’t have to go get a new annuity?

Dick: You do not. You can actually convert that annuity in to a Roth. Even better, in some situations where you’re doing proper planning and you know in advance that you’re going to be converting this, you may want to go ahead and convert your Roth inside your present account then transfer the Roth into an annuity, if that was the purpose or the reasoning; pick up that 10% bonus, tax-free, 8% bonus, or whatever you get with the annuity. Again, as maybe you have an income rider. I’m getting too much here.

Eric: I just got a tax-free bonus.

Dick: It is just the whole package of being tax-free, and the fact that if you put an income rider on it, that you’re going to have potentially tax-free income. Even if your account value goes to 0 because you have lived a long, long life, your income will just continue tax-free.

Eric: Obviously, there are standard benefits of the Roth that you don’t have to worry about RMDs; the transfer of wealth tax-free. In many ways, it [inaudible: 05:44] life insurance. One thing that I was looking at earlier was the Social Security Tax aspect. The reason that comes into play, even with annuities with IRA wrapper, a lot of times you are going to take those RMDs that are going to kick that Social Security income level to a level that’s taxable.

Dick: It really can push it up in to that taxable.

Eric: If that is one of the things you can potentially avoid by converting it into a Roth, there’s even sometimes that it’s . . . usually, the rule of thumb used to be you want to be able to pay for that conversion, those taxes basically, out-of-pocket. You don’t want to reduce your balance.

Dick: Exactly.

Eric: Some of the formulas that we’ve looked at actually said, “You can save more on the backend by not having those RMDs force you in to a higher taxable consequence.” Now we’re talking all sorts of fun things.

Dick: I think a lot of it, Eric, gets down to; do we believe taxes are going to go up? If you believe taxes are going up, folks, raise your hands. It’s unanimous, no hold-outs. Most rational folks . . .

Eric: And some irrational.

Dick: . . . believe that taxes have nowhere to go, at least for the next 10 or 20 years, but up. It’s a perfect place to look at Roth and say, “Whether I’m going to use the money or I’m going to pass it to my heirs, I want to protect them from increasing taxes.”

Eric: If nothing else, it needs to be one of the things you consider for your retirement future, is how it will impact. Work with a good advisor, discuss the possibilities, and it should be one of those pieces that’s on the table. Taxes are going up; limited supply.

Dick: That’s right. Get them while they last. Thank you.

Eric: Have a great day.

The post Tax Free Annuities – Limited Supply! appeared first on Annuity Guys®.

On top of that, the immense costs of healthcare today––along with constantly rising inflation––continue to compound an already stressful situation for many. However, there is an option available to retirees that can help ease the stress of outliving their savings while providing them with an income stream almost immediately upon funding it. That financial vehicle is an immediate annuity.

While many annuities are created to build up the account value for retirement, an immediate annuity is actually designed to provide income immediately to its holder.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Immediate annuities are insurance products that pay their owners a regular income––monthly, quarterly, or over another desired time frame––for as long as the annuity holder lives.

These products are essentially a contract between the annuity owner and an insurance company. They are typically purchased with a large cash lump sum by retirees in order to pay living expenses in a reliable pension style INCOME over a long period of time. In exchange for this lump sum deposit, the insurance company will provide them with a regular income for a specified time OR long as they live, regardless of how long that may be.

Plus, if it is a lifetime annuity, this benefit will continue for as long as the single or joint annuitant is living. Therefore, an immediate annuity actually pays for living a long life instead of the emphasis being on heirs receiving a large payout when the immediate annuity owner dies. It is possible for the immediate annuity owner’s heirs to receive some of the deceased owners intended income if he or she should die prematurely.

Immediate Annuity Features

Throughout the years, there have been some modifications to the original immediate annuity design. Many of these annuity features, which may or may not be available on all immediate annuities, or offered by all insurance companies, are discussed below:

Inflation protection: With this option, the immediate annuity income payments offer some form of a hedge against inflation. Here, the annuity owner may choose to have his or her income payments increase by a certain percentage each year, typically around 3 percent. Another choice may be to have the annuity income payments actually tied to an inflation rate by the use of a consumer price index. When this option is chosen the initial payout of the annuity starts lower.

Refund, liquidity, and withdrawal options: The traditional refund feature on immediate annuities has typically been either a cash refund or an installment refund that ensures after the annuity holder’s death that the beneficiary will receive an amount of money that represents the difference between the initial deposit amount and the amount of the income payments that the annuitant received during his or her life. This, however, reduces the amount of the systematic payout when comparing to life only with no beneficiary benefit.

There are several different ways to structure an immediate annuity with regard to the income payment options. These options include:

Life only: A life-only immediate annuity can also be referred to as a straight life annuity. This means that the annuitant will receive annuity income payments for the rest of his or her life, regardless of how long that duration may be. The payments will cease and all of the unused initial premium will be to the insurance company’s benefit or detriment based upon the annuitant’s actual death and life expectancy underwriting calculations.

Certain period: This structure is not considered to be a life annuity. Rather, the annuity payments will only go on for a fixed period of time, such as for ten years. Even if the annuitant is still living at the end of the stated time period, the annuity payments will cease at that time. However, should the annuitant pass away within that time period, the beneficiary will continue to receive the payments until the period of time has expired.

Life with period certain (or certain and life): This type of immediate annuity payment structure is a combination of both the life and the certain period structures, meaning the annuity will pay income benefits to the annuitant for as long as he or she lives. However, if the annuitant passes away during a specified period of time, say ten years, then the beneficiary will continue to receive income payments from the annuity until the end of that ten-year time period.

Life with cash refund: This can be considered a money-back **guarantee annuity. The income benefit payout is for life. However, if the annuitant passes away before the payments that total at least the amount of premium paid, then a lump sum payment is made to the annuitant’s beneficiary.

Life with installment refund: This, too, can be considered a money-back **guarantee annuity. This immediate annuity payout option is similar to the life with cash refund option, except the annuitant’s beneficiary will continue to receive the monthly annuity income instead of a lump sum until the full amount of the premium has been paid out.

Joint and survivor: This annuity income payout option will **guarantee that the income payments will continue for the lives of both annuitants. Along with this, period certain options can also be added. This particular payout option is typically used with married couples in order to provide income as long as either one of them is still alive. In some instances, the income benefit may drop when the first spouse passes away.

COLA SPIA: This annuity income payout structure has payments that increase or decrease by a floating percentage which fluctuates when tied to a consumer price index, each year. In this case, however, the initial income benefit will likely be lower than those that are non-COLA (cost of living adjustment) annuities.

Annuity Guys® Video Transcript:

Dick: Today, we want to talk about immediate annuities and do a little comparison with immediate annuities and why you might consider an immediate annuity.

Eric: One of the things we often hear, in today’s world, where you have this hybrid annuity, which gives you lifetime income as well as some other bonuses/extras, why would you ever want to actually look at using an immediate annuity, where you’re going to give up your assets?

Dick: Right. That is the difference, Eric. When we think about the hybrid annuity, it’s kind of your cake and eat it too annuity, where you can get your lifetime income, but you don’t have to give up your asset. Yet, there is a place for an immediate annuity.

In fact, let’s do a little history lesson. How about some trivia here? When we think about an immediate annuity, it literally goes back to the early Roman Empire. They called it the “annua,” and that’s where the word annuity comes from. So it is a very early form of an annuity, and it has really gone through the test of time, spanned the centuries.

Eric: So next time you have your toga on, you’ll know to get your annua language out. Exactly. It’s an old standard. It was the first kind of annuity out there, the standard lifetime annuity. You gave up a lump sum, and you got a lifetime income stream.

Dick: It is probably the truest pension-style income. In fact, immediate annuities, a lot of companies will offer a choice of a lump some or an immediate annuity.

Eric: I talked about immediate annuities with a lot of clients, when they were saying, “Hey, I’ve got a 401(k). I want a lifetime income. What can I do to get my own personal pension?” That’s kind of how we think of it. The thing is you’re usually giving up that 401(k) in exchange for that lifetime income stream. Now, the big thing here is you realize that none of those dollars are going on to heirs.

Dick: Yes. Well, in a true pension, there’s no money in a pension, as a rule. When you have a pension, when you pass, the money ends, or if you’ve chosen a survivorship option, you’ve probably taken a little bit lower payment on your pension, and then some of those payments will go on to perhaps a spouse.

Eric: Exactly. When I grew up, my parents were educators. So they had a traditional kind of benefit program, where they have a retirement that’s there as long as they live. The bad thing is, once they’re gone, nothing goes on to me. Being a little self-serving here now. The 401(k) plan . . .

Dick: Why didn’t they get a hybrid annuity?

Eric: Exactly. Why can’t they get a hybrid annuity? So when they’re looking at it, that’s the old style. The hybrid, on the other hand, allows you to pass some of those dollars on to heirs typically.

Dick: Right. So, really, where the immediate annuity fits, let’s just give some examples. Someone who really wants to start income right now.

Eric: With an traditional immediate annuity, typically you’re going to get a higher payout than you would with a hybrid. You’re going to start with a little bit higher. . .

Dick: Typically. But we have seen a few instances where . . . you’ve got to run some illustrations to know.

Eric: Exactly. So that’s one of the things that when people are going that direction, that’s usually the reason.

Dick: General assumption is you’re going to get more income.

Eric: A little bit more. A higher percentage to start with.

Dick: Right. Then the other key factor would be that, perhaps, if you’re going to use an immediate, you really aren’t as concerned about giving money over to heirs.

Eric: Right. Are there ways to get money on to either survivors or heirs? That’s one of the things we . . .

Dick: With an immediate?

Eric: An immediate annuity. You can structure it so that it’s a joint lifetime payout. So if you and a spouse purchase an immediate annuity, you can set it up so that it is the lifetime of both of you or either of you. Whoever lives the longest, those payments will continue. There are little tweaks that you can even do there, where you can set it up so that once one passes, it sometimes reduces by a percentage.

Dick: A percentage, so they only get three-quarters or one half of the annuity.

Eric: Right. The other way that you can somewhat pass on dollars to heirs is there are a couple of things. You can do a period certain, where it’s lifetime with a certain number of years **guaranteed. A lot of times you’ll see somebody do a lifetime annuity with 20 years **guaranteed. So that 20 years of payments is **guaranteed.

Dick: So if I pass in 5 years, somebody is going to get another 15 years of payments. But what does that do to my income?

Eric: It’s going to reduce your payments. You have to realize going in, if your goal is the highest payout possible, you don’t want to add any of these other pieces. But if you’re wanting to try to pass on money to somebody, that’s a way of **guaranteeing basically that some of that comes back. One of the things I always look at is either the installment refund or the cash refund, which says once you purchase the immediate annuity, if you haven’t gotten back at least what you paid in principal wise, that amount will be refunded either to your heirs or to your estate.

Dick: Well, isn’t that the installment refund?

Eric: The installment refund keeps the payments coming back to your return of principal.

Dick: Okay. So you’re talking about the full lump sum.

Eric: Yes, just a refund of whatever you’ve put in, so it’s either a lump sum or installment refund.

Dick: One of the biggest vulnerabilities that Eric and I look at with our clients, and what we think you should be concerned about, is inflation. That is probably one of the biggest vulnerabilities we face. We have had historic inflation the last 4 decades of over 4%. We believe that the stage is really set for some higher inflation over the next two or three decades, which is going to cover most retirees. So if we would happen to go through a stretch of 4% or 5% – I’m not talking about runaway hyper third world country inflation – but if we’re talking 4%, 4.5%, 5%, 6% inflation, that makes that immediate annuity, if you have no inflation cost of living adjustment, a COLA on it, it really puts you at a disadvantage.

Eric: Yes, especially if you’ve got longevity in what you’re looking at. You realize you’re taking a level payment and you’re stretching it over your lifetime. So your purchasing power is going to diminish with inflation.

Dick: Right. So one of the things that we do suggest, very strongly, is that whatever type of annuity, whether it’s an immediate annuity, a hybrid annuity, a deferred annuity where you’re deferring it for a long time, that you’re really taking inflation into account. There are different ways to structure for inflation, but if you’re not taking it into account, you’re really setting yourself up for a bad situation.

Eric: Right. That’s another aspect that you can add to an immediate annuity. Some of them you can add a cost of living adjustment. Others have a fixed percentage.

Dick: Tied to a consumer price index or a fixed percentage.

Eric: So those are things you can add, but you realize you’re going to start lower.

Dick: Your payments are going to start lower. Right.

Eric: So it’s all about the tradeoffs.

Dick: I love the idea of a real cost of living adjustment. So if things get carried away and we start seeing 5% or 6% inflation, we’ve covered a major vulnerability in a retirement plan.

Eric: Yes. That’s what we’re looking at here. When we’re looking at immediate annuities, we’re looking at you creating your own personal pension.

Dick: Yes, that’s right.

Eric: If you’re into this marketplace, where you’re going to create a personal pension, and you have that magic number you know that you need to hit and you can anticipate the growth, that’s where this product really comes in.

Dick: So if we’re to kind of wind up this discussion on immediate annuities, being a true pension-style income, where would we summarize that this is going to fit? What type of person should buy an immediate annuity, should really consider it for their retirement portfolio?

Eric: I always say it’s someone with no heirs, that doesn’t have to worry about passing on dollars to somebody in the future. They’re not worried about that. They want the highest payout now, and that’s really the person that I start with.

Dick: Right. I think that, in winding this up, we just want to say, do a fair comparison. You may be the ideal person for an immediate annuity, but get with a professional advisor, run some illustrations, compare it. We have actually seen situations where a hybrid annuity can right off the bat outperform an immediate annuity. It’s not often, but it does happen.

Eric: Yes. Very good.

Dick: Thank you.

The post Understanding Immediate Annuities appeared first on Annuity Guys®.

Before we continue our thoughts we must express what we feel is obvious. All financial products have a cost of doing business whether it is a reduction of dividends returned, a fee or a charge. Financial professionals, investment and insurance companies are all compensated for their efforts in assisting you. So as we proceed we are not seeking to find the “free lunch” financial product – we are trying to make sure that you understand what you are paying so that you can make the determination as an informed consumer.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Dick and Eric discuss annuity fees and some of the hazards and misconceptions of with differing types of annuities.

Annuities come in many “Flavors”

A trip to your local financial professional to select an annuity can seem a lot like a visit to Baskin Robbins… you may end up wishing there were only 31 flavors.

Let start on the most basic level (the chocolate, vanilla & strawberry if you will), here we have variable, immediate and fixed annuities. Variable annuities have fees… lots of them typically. Fixed and immediate annuities typically do not have any fees or charges.

Variable Annuities

Variable annuities all have at the very least mortality and/or expense charges (M&E). This fee pays for the insurance **guarantee, commissions, selling, and administrative expenses of the contract.

Your next questions should be, “What do I get for paying this fee?”  You usually get an added death benefit that basically **guarantees that your account will hold a certain value if you die before the annuity payments begin. This typically means that your beneficiary will at least receive the total amount invested even if the account has lost money.

The other expenses in the M&E are just truly that – expenses.

In addition to M&E expenses variable annuities^# (VA) also have management fees on subaccounts.  The subaccounts are the mutual fund^{^} choices available within a VA. The management fees are the same as an investment manager’s fees within a mutual fund^{^}. These fees will vary depending on the subaccount options within the annuity. Typically, they will be less than those charged by a managed mutual fund^{^} within the same investment category — though not always.

The fees associated with a VA’s riders and options can increase the cost of the VA significantly, but these are optional. However, I would hazard to say that most of today’s variable annuities^# are sold because of the riders and **guarantees associated with them.

Why would anyone consider a VA with the amount of fees attached, two primary reasons; tax deferral and unlimited market upside potential.

Immediate and Fixed Annuities– the NO Fee Option

For the purpose of our fee discussion when we look at these annuities in their basics forms there are no fees are charges associated with these products. How do the agents and insurance company make money then you ask… similarly to the same way banks make money when you obtain a certificate of deposit. The expenses and cost are figured into the price of doing business by limiting or “managing” what they will return to you in the form of interest or dividends.

What about Equity Index or Fixed Index Annuities

Let me state this emphatically. A fixed index annuity is still a fixed annuity! So there are still no fees.  All the index does is offer a choice to tie interest crediting to a gain in an index rather than a fixed number stated by the annuity provider.

Ready for the Chocolate Sprinkles – of Fixed Annuities

Due to the popularity of the income riders on variable annuities^#, fixed annuities have begun to add their own riders – typically for a fee. Some of these annuities are referred to as “Hybrid Annuities” because the riders let you construct an annuity that can combine pieces from the fixed, immediate and variable worlds.

The Ever Popular Hybrid Annuity – Fees can be Tricky

Hybrid annuities typically charge fees for income riders. The income riders typically have fees of less than one percent. However, you need to be sure you know which account the fee is based from. Hybrids with income riders have an account or ledger that tracks the value of the income rider account growth – this account typically grows at a higher percentage than the cash accumulation account.

A key for understanding hybrid account fees is to determine which accumulation total the fee is based upon. Some companies use the number to determine the amount of fee, even though you cannot use this account for a lump sum withdrawal. Other companies use the actual cash accumulation amount to determine the fee. However, the fee is always deducted from the case accumulation account and never from the account.

Why would you pay a hybrid rider fee? Much like the variable income rider, the hybrid rider fee allow for predictability of accumulation for an account geared toward retirement income. The main difference is that the insurance company is assuming the investment risk with a hybrid annuity.

Conclusion

The fees and expenses imposed by some annuities can be costly to own. You have to understand what you are getting for those dollars you are giving up. Annuities of all varieties are basically tools to give you insurance on you income. They are vehicles that are designed to provide a . When utilized correctly they can provide a level of comfort and security for anyone wanting a **guaranteed lifetime income.

Annuities are multifaceted devices that can be key pieces of a savings or retirement plan. Do not let the popular media discourage you from choosing the best decision for your future! Understanding what each annuity fee does empowers you to the best decision for you.

Annuity Guys® Video Transcript:

Dick: We want to clear up some misconceptions maybe about annuities and fees, because you see that in the press a lot don’t you, Eric?

Eric: Oh, the conventional wisdom, everything you read, headlines, “Oh, annuities fees, don’t use them. They’re so bad, nasty, nasty, nasty.”

Dick: Now there is some truth to high fees in annuities. We don’t want to say that there isn’t any aspect of that that needs to be brought out.

Eric: Well, the analogy is throwing the baby out with the bathwater.

Dick: Yeah, we don’t want to do that.

Eric: If you’re going to cast all annuities as being bad, then you’re going to lose some good opportunities, because not all annuities if your fee driven, are bad.

Dick: Well, even the annuities that have the higher fees, in the right situation, if they’re presented properly, they may fit certain situations.

Eric: Exactly, usually you’re exchanging a fee for some kind of service or some kind of piece that you’re given.

Dick: Right, so you’re either going to pay a higher fee or perhaps you may earn a little less.

Eric: Let’s deal with the first flavor of what the highest, the typical highest fee annuity, which is the one that is most castigated about and written about, which is the variable annuity^#. Variable annuities typically have higher fees.

Dick: Much higher fees.

Eric: And the reason is…

Dick: They have more upside potential. That’s one aspect of a variable annuity^#, yet the fee structure has to do with mortality, because they have a death benefit.

Eric: A lot of them have a death benefit. Then they also have mutual fund^{^} options, their investment options. So what you’re doing is taking out an annuity wrapper, so to speak and wrapping it around a mutual fund^{^} option.

Dick: And typically Eric, when we have a mutual fund^{^} just an average fee structure for a mutual fund^{^}, is approximately what?

Eric: Oh, you’re getting at least a.50%.

Dick: A half is minimal, pretty much.

Eric: Now I’m not talking about the load expense that you’re going to pay up front, your ongoing expenses could be .50% and usually 1.50%, so those fees exist in either world.

Dick: And I believe according to some data on Morning Star that they kind of look at the average and the average mutual fund^{^}, is somewhere around 1.15% now. It used to be 1.5% not very long ago, but it is right around 1.15%. So you take 1.15% and say on a variable annuity^# your mortality expense, your mortality and your expense ratio, M&E charges, you’re looking at an average of somewhere around maybe 1.50% or so. You put that with 1.15%, now you’re pushing you’re pushing 3.0%.

Eric: And then you start adding on the riders and that’s where the variable annuities^# get really expensive, but that’s the…

Dick: That’s the **guarantee part of a variable annuity^#.

Eric: Exactly, those are usually what most people are sold on, when they buy a variable annuity^#. You want that insurance on your investment.

Dick: Right. So if the investments are not performing very well, obviously those fees are going to eat in pretty quick to the principal. In addition if you’re taking money out, so the principal may be at a little more risk, but the income is not or the potential for your heirs with a death benefit, because of the rider on the variable annuity^#.

Eric: Right, but that’s typically the one thing we see out there when people are looking at fees, they’re looking at that variable annuity^# and so you can have variable annuities^# as low as .25% and as high as over 5.0%, if you start adding on all those riders.

Dick: It really adds up fast.

Eric: So there’s your high fee option. If you’re fee adverse knowing that your principal’s at risk and some other things with the variable knowing how they work, you have to make the educated choice.

Dick: Right, right and then a lot of times all annuities as we started out saying, in the press you tend to see annuity, high fee, but there are a lot of annuities that have no fees.

Eric: Exactly and when you look at fixed annuities and immediate annuities there are no fees.

Dick: There is no fee. It’s kind of known that you’re not, maybe going to earn as much—when I say you’re not going to earn as much; you’re don’t have as much earning potential, as you would have maybe in a variable annuity^#, where it can earn as high as the market goes. You may have a declared interest rate in a fixed annuity or you may have an index option, which indexes to a popular S&P or Dow Jones or something of that nature.

Eric: And those are your low fee/no fee options. People say, “How do you get paid? How do those places make money if there are no fees?” Well, it’s the same way a CD at a bank. The bank doesn’t say, “Oh, I’m going to charge you a fee. I have to pay the salary of the guy that sold it to you.” It’s all factored in as a part of the price of doing business. It’s all built-in to that expense. So what you’re earning on that annuity is truly all, basically earnings. There are no fees that are taken out of those products.

Dick: So I think that’s one thing that we just want to clarify, is that when you are buying an annuity that there are some annuities that really virtually have no fees. They protect your principal. They maybe don’t have as much upside potential. They’re purchased for other reasons than just the potential of a high return. They are purchased for safety, for a more secure retirement vehicle, and those are the ones that do not have fees.

Eric: Now when we talk about fixed annuities and we say there are no fees there is of course the mystical hybrid annuity, which is built off of a fixed annuity chassis, in the sense of your principal is not at risk. However, there are fees associated typically through the riders.

Dick: Yes, there are.

Eric: That is one of the things, when you look at a fixed annuity you can’t just throw the blanket over the fixed annuity and say none of them have fees.

Dick: There are some fees.

Eric: Because if you’re going for that hybrid option, which has basically, an income rider or a long-term care rider, if you’re adding a rider on, that’s where you are going to potentially see fees.

Dick: Right. I do think that we have to add the caveat that the fees typically are very low on the indexed annuity, under 1.0% as a rule, and sometimes some of those riders come with no fee involved. We do want to make that clear.

Eric: Exactly, so it’s understanding, if the rider that you’re buying gets you further to what you’re trying to accomplish with either your savings plan or your retirement cash flow plan, those are the times you’re willing to give up some of that upside or you’re willing to pay for that **guarantee. It’s insurance on your money. It’s insurance on your retirement plan.

Dick: Well, you know that you can potentially by buying a rider, by paying a fee, say it’s a .50% or .75% something of that nature, you know that you can **guarantee that your income potential could double in 10-years of what you would have today, just by buying that rider. That could be money very well spent.

Eric: Well, you’re putting a **guarantee of your future income in the bank. You’re banking on that retirement dollar being there, you’re buying an income stream. That’s what those riders are designed for. They’re designed for income, not for accumulation. If you’re designing them for accumulation, you’re being sold a bag goods, because that’s not what they’re for. They’re income riders, for your future income.

Dick: Exactly. Well Eric, I don’t know that if we’ve cleared up everything on fees, today.

Eric: Well, not necessarily everything. I guess the one thing we should in closing with the hybrid annuity. There is one caveat that you always have to be careful, when you’re working with your adviser you want to ask, “Is the fee based off of the cash account or the accumulation account?” Now we’re not going to explain that in this video, because it would take us another 30 minutes.

Dick: But there’s another part of that I want to give a little clarity to and that is that the fee never comes out of the income account, so even though we haven’t gotten into the detail of the income account and the cash accumulation account, we’ve done that in some other videos. That the fee always comes out of the cash account, so it reduces your cash value, but the income account has whatever the compounding amount is in there, say if it’s 8.0%, it’s not deducted. There is nothing deducted. So now we’ve really confused you.

Eric: I was going to say, “Now we’ve confused you.”

Dick: You have to watch our next video.

Eric: Perfect time to call your financial adviser or to give us a call.

Dick: Or give us a call.

Eric: Thanks very much for watching.

Dick: Thank you.

The post Annuity Fees – The Nasty Truth appeared first on Annuity Guys®.