Lifetime-income riders on VAs require discussion
In the March 24 issue article "Advisers still poke holes in retirement income products," you discuss opinions on the variable annuity lifetime-income riders.
In the March 24 issue article “Advisers still poke holes in retirement income products,” you discuss opinions on the variable annuity lifetime-income riders.
Financial advisers should take more care to understand and discuss the complexities of the products with their clients before assuming that a client understands the opportunity cost of placing their savings into these contracts versus other traditional income options.
The costs of the VA lifetime-income riders may be worthwhile to those who have an income need in the next 10 years, but only if there is a calculated need and a plan that identifies how the variable annuity and rider will cover that need.
These products are too often an easy “default” option for an adviser whose client expresses a concern about future retirement income.
Without calculating how the annuity will provide for income — in combination with other assets or in lieu of other options — an adviser is choosing a product where the variable annuity and rider costs can quickly make the client dependent on the annuity, whose high costs will limit the ability of the underlying assets to increase and be able to produce an income stream that can offset inflation.
This is because the rider fees are often charged on the “guaranteed” amount, which will make their percentage higher on a contract where the actual value is lower, and with some contracts, the fee percentage even increases automatically when the guaranteed amount exceeds the account value.
Due to the high fees and portfolio restrictions on most contracts, a client is likely to need to achieve stable returns consistently from a portfolio with a high exposure to equities to overcome the minimum-increase guarantees many contracts offer.
If equities don’t perform consistently, the chances are good that the minimum “guaranteed” amount will at some point be higher than the actual value and the fees will become a higher percentage on the actual value than the amount shown to the client in the sales brochures.
Clients are less likely to purchase contracts that guarantee 5% withdrawals for life when the total contract charges grow closer to that 5%.
Robert P. Schmansky
Wealth manager
Robert Schmansky CFP
Royal Oak, Mich.
Interview with Roubini strikes a chord
The Newsmakers interview in the March 24 issue with Nouriel Roubini, a professor at New York University’s Leonard N. Stern School of Business and the founder of RGE Monitor, a New York-based economic-research firm, was of particular interest to me.
As often happens when I read the numerous excellent articles in InvestmentNews, I immediately went to RGE Monitor to learn more about this worldly gentleman who, like me, is certainly of the bear disposition.
His March 19 piece on the financial crisis is terribly frightening.
As the Federal Reserve bailed out The Bear Stearns Cos. Inc. of New York in March, I opined that we were looking at $1 trillion in losses before the truth is known. Mr. Roubini saw me and raised me a trillion dollars.
And unfortunately, who will pay the bill? We, the American taxpayers.
A long time ago, as a novice certified financial planner and investment adviser, I adopted a mantra which one of the investment gurus, Warren E. Buffett, preaches: Don’t invest in that which you don’t understand. The fox has entered the henhouse now, and unfortunately, the chicken farmers have no idea what, if anything, their poultry is or was worth.
Tom Grzymala
Principal
Forensic Analytics LLC
Keswick, Va.
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