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Cost-Effective Annuities to Exchange for Those You've Been Sold

To pick up where we left off in our last blog post on the role of annuities in a retirement portfolio, immediate annuities can serve a useful function.  But like any other financial product, there are cost-effective, well-engineered annuities and expensive, poorly-designed ones.  Here are some welcome and interesting annuity features that you may be unaware of if your only prior experience with annuities is through an insurance salesperson:

1. No-load, no-surrender-charge variable annuities.

Cost-effective variable annuities isn't necessarily an oxymoron.  No-load, no-surrender-charge variable annuities have actually been around for years and years.  Of course, most investors aren't aware they exist because annuity salespeople don't sell them.  

With variable annuities, expenses that drag on your investment performance exist at two levels.  The insurance company issuer levies an administrative and insurance (M&E) charge almost always based on the account balance, and the mutual funds that serve as investment options within the annuity shell have their own management expenses.  Fortunately, there are companies that offer variable annuities with minimal expenses at both levels, and with no surrender charges to boot.

2. Variable annuities with flat M&E charges.

For investors with large retirement nest eggs, there is at least one variable annuity issuer that levies administrative and insurance charges as a fixed dollar amount per month, rather than as a percentage of the account balance.  This pricing structure can save you a considerable amount of money over time if your variable annuity account is large.

3. Variable annuities with index or exchange-traded funds as investment options.

Clients know I'm a big fan of index and exchange-traded funds for their cost-efficiency (among other reasons).  There are several variable annuity issuers that offer these vehicles as investment options within the annuity shell.

4. Annuity payouts with inflation protection. 

While Social Security benefits rise with inflation, pension payouts typically don't (if you're lucky enough to have a pension).  There are annuity issuers who also offer a lifetime stream of income that will keep pace with inflation.  

The takeaway?

If you've been sold an expensive, poorly-designed annuity, there are alternatives in the marketplace available for exchange to improve your chances of successfully funding your retirement.

About the Author

Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.  

Contact Paul