Variable Annuity Performance Assessment Tool

The Real Cost (or Problem)

Variable annuities are marketed as safe, long-term investment vehicles, but they often come with a host of hidden costs that can erode your returns. The primary issue lies in the myriad of fees—mortality and expense risk fees, administrative fees, and investment management fees—tacked onto the policy, which can easily exceed 3% of your investment annually. For example, over a 30-year investment horizon, a seemingly small difference in fees can result in substantial losses, potentially costing you hundreds of thousands of dollars in retirement savings.

Furthermore, the performance of the underlying investments is often tied to market indices, and the annuity's growth may underperform due to these high fees and subpar investment choices. Moreover, surrender charges can penalize any early withdrawal, effectively locking your money for longer than you might want. This tool helps you identify these costs and assess the true performance of your variable annuity, enabling you to make informed decisions rather than falling prey to flashy marketing and "simple estimates."

Input Variables Explained

To effectively utilize the Variable Annuity Performance Assessment Tool, you need to gather several critical input variables:

1. Initial Investment Amount: This is the total amount of money you initially invested in the variable annuity. You can find this on your annuity contract or account statement.

2. Annual Fees: This includes all types of fees associated with the variable annuity. Look in your contract for sections labeled "Fees and Charges." Note the mortality and expense risk fee, administrative fees, and any investment management fees.

3. Projected Rate of Return: This is the expected annual return from the underlying investment options. While this might be available from your financial advisor, it's crucial to base your estimate on the historical performance of the investment options rather than the optimistic projections often provided by sales agents.

4. Time Horizon: Specify the time frame for your investment, usually in years. This would typically be the length of time you plan to keep the annuity before making withdrawals.

5. Surrender Charges: If you expect to withdraw funds within a certain period, identify the surrender charge schedule in your contract. This often diminishes over time but can significantly impact your returns if you exit early.

6. Tax Considerations: While variable annuities grow tax-deferred, any withdrawals may be taxed as ordinary income. Consult your tax documents or a tax advisor for specifics.

How to Interpret Results

Once you input these variables into the assessment tool, the results will provide a comprehensive view of your variable annuity's performance.

1. Net Gain/Loss: This figure shows the actual growth of your investment after accounting for all fees. A negative net gain indicates that your annuity is costing you more than it earns, a red flag for any investor.

2. Growth Rate Comparison: The tool will present your variable annuity’s growth rate against a benchmark index (like the S&P 500). If your annuity consistently underperforms the benchmark by a significant margin, it may be worth considering alternative investment options.

3. Impact of Fees: The results will break down how much fees have detracted from your overall returns. This is essential for understanding the true cost of maintaining the annuity.

4. Withdrawal Scenarios: If you plan to take distributions, the tool will simulate various withdrawal strategies and their impacts on your remaining balance, factoring in surrender charges and tax implications.

Expert Tips

• Read the Fine Print**: Always scrutinize your annuity contract for fees and charges. Many investors gloss over this, assuming they understand the costs involved. You don’t want to be blindsided down the line.

• Consider Alternatives**: Sometimes, the best option is to surrender your variable annuity and invest elsewhere. Evaluate if the fees and performance justify keeping the annuity in your portfolio.

• Reassess Regularly**: Your financial situation and market conditions change. Reassess your variable annuity performance at least annually to ensure it aligns with your long-term financial goals.

FAQ

1. Can I get out of a variable annuity without losing money? Yes, but it depends on the surrender charge schedule outlined in your contract. If you are nearing the end of the surrender period, you may be able to withdraw without penalties.

2. Are all variable annuities the same? No. They can vary greatly in terms of fees, investment options, and features. Always compare multiple products before making a decision.

3. How do I know if my variable annuity is performing well? Use the Variable Annuity Performance Assessment Tool to compare your annuity’s performance against benchmarks and to calculate net returns after fees. If it significantly underperforms, consider other investment strategies.