"Get Your Finances Ready for Retirement"-The Pros & Cons of Variable Annuities
Monday, January 12, 2009SUZANNE PRATT: With Americans living longer, many are worried about outliving their money in retirement. That concern is providing a big boost to sales of annuities, many of which promise lifetime income. Tonight, we continue to "Get Your Finances Ready for Retirement." Connie Hicks wraps up our two-part look at annuities with the pros and cons of variable annuities.
JUNE GORDON, RETIREE: I've been going through some of the things relating to your adventure, there, during World War II.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: As a Navy pilot, Bill Gordon's adventure was to successfully bomb a Japanese submarine. Returning home, the young man got a job as an industrial engineer. He and his wife, June, retired 10 years ago to Sarasota, Florida. That's where they met Phil Couture, a certified financial planner. Couture recommended the Gordon's put part of their funds into variable annuities, which in their case, had tax advantages. That's because variable annuities let investments grow tax-deferred, like money in an IRA or a 401(k).
PHIL COUTURE, CFP PRESIDENT, COUTURE FINANCIAL: In the case of Bill and June's investments, we have lots of profits we've generated over time that we were able to avoid taxes and will now be able to pay them at a lower tax bracket for them so they have less tax to pay than they would have had 15 years ago.
HICKS: Funds in the Gordon's variable annuity are spread among various sub-accounts, which are like mutual funds. Because the sub-accounts contain stocks or bonds, their returns will vary. That's what makes variable annuities different from fixed-rate immediate annuities. While Gordon, with his military background, is used to taking risks, others like the peace of mind knowing that they've got a guaranteed income. That's exactly the case with Myra Wolf. She continues to work part-time as a real estate agent in Aventura, Florida. She says she needs an investment she can count on. So Wolf's financial planner, Austin Frye, sold her a variable annuity that features guaranteed income. He says this assures her an annual payout of 5.5 percent on her original investment for the rest of her life and possibly even higher returns.
AUSTIN FRYE, CFP/PRES & FOUNDER, FRYE FINANCIAL CENTER: Now if in fact, the market does very well and she has more money, that's terrific, but that really wasn't the key. The key is guaranteed income and the possibility later on of increasing it. But security is what's most important to Myra.
HICKS: But Phil Couture, the Gordon's planner says extra features like guarantees, often end up being expensive with limited benefits and variable annuity charges can add up. Typical ones are: management fees on sub- accounts; custodial fees to the insurance company; mortality and expense charges. To see if charges are excessive, Couture says finding out the insurer's annual custodial fee is a good place to start your research.
COUTURE: The actual custodial cost in most of them is at least 1 percent a year of the actual asset value to as much as 1.5 percent or more per year on the asset. That's a big charge just to provide a custodian account and unless there's a real reason to do that, it doesn't make any sense.
HICKS: Couture says it's also important to look at surrender charges, which can mean big penalties if a variable annuity is cashed in early. But Hugh McHaffie of John Hancock, which sells variable annuities with guarantees, says they can still be a good retirement investment for many people.
HUGH MCHAFFIE, PRES., JOHN HANCOCK WEALTH MANAGEMENT: Mutual funds don't provide guaranteed levels of income. Savings accounts don't provide guaranteed levels of income. So we feel they are fairly priced and we think they are well-suited for a portion of someone's financial planning in their retirement years.
HICKS: As Bill Gordon knows from experience, risks and costs aren't to be taken lightly. So if you're thinking of buying a variable annuity, be sure to consider those carefully before you buy. Connie Hicks, NIGHTLY BUSINESS REPORT, Sarasota, Florida.
