Which annuity is better for a hands on investor?
My wife and I are in our early 60s. We plan to retire in about 3 years. We are interested in a variable annuity for part of our retirement plan. We are considering LifeGuard, Freedom with Jackson, or a similar Vanguard plan. Which is better? We are hands on investors. We will consider a managed portfolio when we are in our 80s.
I recommend consulting with a CFP and/or CPA before making any decisions.
With annuity selection, I advise clients to read the fine print. The devil is in the details. Be aware of:
- High commissions/sale incentives for the individual selling the product,
- High expenses for investor,
- They are illiquid and frequently have surrender periods,
- There is no step-up in cost basis at death,
- Guarantees are not always what they look like
For clients where annuities are appropriate (based on personal circumstances), I recommend checking out TIAA-CREF Intelligent Variable Annuity or a Vanguard annuity.
This is an unusual question. There is a saying in the financial planning industry that variable annuities tend to be sold rather that bought. I am curious as to why you are attracted to this product?
The knock on variable annuities is, of course, that the total internal expenses, including rider costs, M&E, operating expenses etc. tends to be high - often totaling 3%+ per year. From a long term investment return perspective, it is very difficult for a VA to compete with investments such as individual stocks and bonds and/or low cost index funds and ETFs. Given the major cost disadvantage, the primary reason why some investors have been drawn to VAs is for the lifetime income guarantee features. Obviously, none of the aforementioned traditional investments offer any kind guarantee, so the questions then become (1), are these guarantees worth paying for or are they merely gimmicks and (2) among the VA products, which provide the best value for the guarantees they offer?
In 2014, I co-authored a paper that sought to answer these questions. The paper was called, Demystifying the Value Proposition of Variable Annuities with Guaranteed Lifetime Withdrawal Benefit Riders, and it was published in Retirement Management Journal. The paper concluded that variable annuities might add value only for a very small subset of investors, particularly those with no bequest motive. For that subset of investors, our analysis found that the prevailing wisdom that VA investors should seek out guarantee riders with the lowest fees may be flawed. Contrary to this opinion, our research concluded that investors who are interested in obtaining a lifetime income guarantee should seek out the most robust guarantees they can find, regardless of the cost of the rider. Put another way, in the absence of a bequest motive, investors should care little about whether the asset value of the portfolio is depleted, since the contract issuer is obligated to pay for life.
Thus, to answer your question, the first issue I would urge you to consider is whether a VA is truly a suitable choice for your objectives. If you really are comfortable with the idea of converting these assets to lifetime income, then a VA may be a wise choice. If you are certain that it is, you may next wish to compare the guarantee features side by side. Per our research, the one with the most robust lifetime income guaranteed would seem to be the better choice. However, caveat emptor when considering these features, as they are often much more complicated and restrictive than most investors realize.
The bottom line is that I encourage you to be very, very careful in choosing to invest in a VA.
I hope this is helpful.
Hi there, thanks for your question.
If you consider yourself a "hands on" investor, I think you're going to be very disappointed with any VA product. These often come with higher fees than a normal investment account, which will quickly eat in to returns. If you're interested in the income portion of an annuity, I'd suggest you look into a Fixed Indexed Annuity with a guaranteed minimum and then fulfill you're "hands-on" itch through a small investment account that you can manage. Hope that helps!
Your question is really impossible to answer without knowing more about you, your goals, your health, and what is most important to you. Annuities are available with a dizzying variety of features and nobody can answer your question without first knowing more about you.