Should I cash out my variable annuity to avoid high fees?
I have a variable annuity that has a GMDB and GMIB growing 5% annually. However, the fees are .85% for each guarantee as well as a $30 administrative fee. This year my cash value lost $1,000 due to performance and fees ($700). The annuity is now out of the surrender fee so I can cash it out. My investment was $26,000 in 2009. I'd still have made about $6,000 in the 7 1/2 years I've had the annuity. Should I cash it out and look for something with less fees? Or should I stick with it and start withdrawing $1,900 a year guaranteed? I'm currently 58 years old and retired.
Interesting scenario you have here. On the one hand, if you do collect $1,900 off of the $32K value (if I'm reading the situation correctly), then you have a very attractive distribution rate of almost 6%. On it's own, that seems like a pretty good signal to keep the policy. However, there are some other things you should probably consider.
1.) Will that $1,900 continue to increase? Does that 5% guaranteed income benefit continue to grow post-annuitization? I would doubt it. If it does, is it growing 5% simple on the original balance or is it 5% compounded? If it's simple, then that 5% really isn't as attractive as it initially sounds.
2.) What is your purpose for these dollars? Do you need the income from it or are you hoping to keep this growing? If you don't need the income it could make sense to liquidate the policy.
The moral of the story is that financial planning is rarely black and white. Your scenario is very much one of those gray areas.
Hope this helps!
You are asking all the right questions now that you are out of the surrender charge period for this annuity I'd need to look at the annuity as well as speak with you about the remainder of your personal finances and goals to offer specific advice.
However, here's some general advice for people in similar circumstances:
Your instincts are good to be questioning the value here. High fees coupled with mediocre investment performance often make annuities a bad deal. For a more detailed explanation of this, you can check out my perspective on annuities by visiting the attached link:
With that said, we're in somewhat of a "spilled milk" situation here because you've endured the bad part of owning an annuity and now are entering the good phase, which is starting the guaranteed cash withdrawals. By my math, a $1,900 a year withdrawal on the current cash value of $32,000 is a decent 5.9% guaranteed return which is really pretty good in today's ultra-low interest rate environment.
For now I'd hang onto the annuity but think about unloading it in the future if:
1.) We have a MAJOR stock market correction of 40% or more and you can buy into stocks at a significant discount versus current levels.
2.) Interest rates significantly rise and better guaranteed options present themselves.
Good luck with this decision and I wish you the very best in your retirement!
With Kind Regards,
You're asking an extremely smart question. From my experience, variable annuities can often have some of the highest fees out there. Having said that, the question I always ask is: what are the fees you are paying, and what is the value you are receiving for those fees?
The big question to ask yourself is: what do I want this money to do for me? If you have no interest in the guaranteed income, then it is silly to be paying these fees. However, if you have any concerns about outliving your money due to longevity and/or inflation, then this account may still be a good choice for you. If this is the case, since you are past the surrender charge timeframe, I would attempt to make the best apples to apples comparison. Determine what the guaranteed lifetime income would be out of this account. Then get a quote to find out if you transferred this account into a fixed indexed annuity with an income rider to find out what type of guaranteed income this alternate annuity would provide. Whichever contract offers you the higher income should be the better choice for you.
I hope that helps, and I wish you all the best!
Generally speaking, one should not take it lightly about surrendering a VA, precisely because of the costs involved. Furthermore, think back why you selected those riders for the VA. Was it for your lifetime guarantee and future benefits for the beneficiaries? If so, surrender the VA means you will lose all those promises. Furthermore, most VA withdrawals are restricted by the age, the so-called “Age Band.” Usually, the higher the age, the bigger the withdrawal percentage is available to you. Also, being single has a higher withdrawal percentage than the couple.
VA is very complicated. You may want to review your contract and find a CFP® who can interpret that to you and hopefully offer you some better solutions than simply surrendering it. Best!
Given some of the information you have given, the answer is probably yes. You are paying 1.70% for these two riders. In addition, the annuity has management expenses that you may or may not know about. These expenses could be 1% or more. On top of that, the annuity might have more expenses you are not aware of. You could be paying more than 3% annually to have your money managed! Ouch! Annuity companies give you those guarantees primarily because they know the odds. They know they can invest your money and earn the market return, then take their 3% and you get what's left. If you are comfortable investing money in the market and you understand that your investment will fluctuate from time to time, you are going to be better off investing outside of an annuity. If your goal is income, you would probably still be better off investing the money another way and calculating a percentage of income you would like to receive from the investment. If you cash out of the annuity, you will have tax consequences to consider. Since you are already in the annuity, a great option is a low cost, fiduciary annuity. These types of annuities have very low expenses and typically don't have any surrender charges. This will allow you to get out of the expensive product and take control of your money. To find this type of product, you will want to find a financial advisor who holds him or herself out as a Fiduciary.