The Guaranteed Minimum Income Benefit
“Guarding Your Wealth” is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments.
(PRWEB) August 17, 2005 -- “Guarding Your Wealth” is a nationally syndicated
weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie
is the President of Legacy Planning Group, a private wealth management firm that
employs sophisticated proprietary strategies designed to protect and grow its
clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our
archive.
Variable Annuities now offer a Guaranteed Minimum Withdrawal
Benefit which allows you to earn 5% or 6% even if the market drops
significantly. Undoubtedly, you will be pitched a variable annuity or pressured
to transfer your existing one into a new contract with this benefit. Should you?
Read on to uncover the truth behind this feature and see if it’s right for
you.
The Guaranteed Minimum Withdrawal Benefit provides a guaranteed
minimum return on the annuity contract that can be accessed prior to death. For
instance, the GMWB rider might guarantee a minimum return of 6% per year. So
even if the market value of the account drops and doesn’t recover you will still
be guaranteed of earning 6%.
Most people who owned a variable annuity
between 2000 and 2002 quickly regretted the purchase. They were stunned to see
their account values drop significantly. Sure, the variable annuity has a death
benefit but that doesn’t help you fund your lifestyle while you’re alive.
As a result, the sales of variable annuities have declined over the last
few years. In fact, the majority of variable annuity sales the last few years
have simply been from people moving money from one annuity contract to another.
Insurance companies had to find a way to attract new investors. They think the
Guaranteed Minimum Withdrawal Benefit will do that.
Should you buy one or
switch your existing annuity to one with this new benefit? Not in my opinion.
Here’s why.
It’s too long-term. To take advantage of this benefit you
have to keep your money tied up even longer. The GMWB isn’t immediately active.
In most contracts, money must be invested for ten years before you can take
advantage of it. Usually, you then must annuitize the contract for a minimum of
five years in order to receive those benefits. This means you are looking at a
minimum of a 15 year investment. By the way, you lose the GMWB benefit on any
money you withdraw prior to the initial 10-year waiting period.
It
increases your costs even more. The additional charges for the GMWB can be ½ of
1% or more every year. And you pay the additional annual fee on the full account
balance regardless of whether you ever use the benefit.
That’s in
addition to the 1.5% per year charge for administrative and mortality expense
fees. That’s in addition to the management fees of 1%-1.5% paid to the people
running the sub-accounts. All in all, you could be facing annual fees of 3.5%
per year or more!
There is a low probability of needing it. The insurance
companies know history. The lowest 10-year period on the S&P 500 since 1975
was 5.8%. Eighty-two percent of that time, the S&P 500 delivered average
gains over 10% ! There is a very low probability of this benefit ever being
used.
The expense of this benefit will have produced a drag on
performance each and every year. Over a ten-year period, your account value
could be 20-30% less in a variable annuity with this benefit then in a low-cost
exchange-traded fund. If you average 6.1% in the variable annuity over 10 years
then all you were paying for was a false sense of security.
It distracts
you from why you invest in the first place. People use stock market-based
investments to generate a higher return than on other investments. You invest
for performance. The reason variable annuity sales have declined the last
several years is because of poor performance.
I’ve never heard anyone
say they chose to invest in a variable annuity because it had better performance
than the alternatives! Don’t let pricey gimmicks distract you from the fact that
you are making a stock market-based investment. Would you invest in a mutual
fund that charged 3.5% a year in fees when there were others available that
charged much less? That’s essentially what you are doing when you buy a variable
annuity.
So beware of the advisor that recommends you buy a variable
annuity. A properly managed, well diversified portfolio is a much better choice.
It may not be flashy, but it works--while allowing you to maintain control and
flexibility over your money.
Have a financial question? Send me an email
and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’.
In
addition to being a nationally syndicated columnist and Certified Financial
Planning Practitioner, Mr. Voudrie provides personal, private money management
services to clients nationwide.
Looking for an energetic expert who is
passionate about financial and wealth management? Mr. Voudrie is an excellent
speaker who will excite and inspire your audience. Mr. Voudrie is available for
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Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth
Article Archive.
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Source : http://www.prweb.com/releases/2005/8/prweb273268.htm