Should you get a variable annuity when you retire? The company I work for hopes you will, but many financial advisers, gurus, and authors steer people away. The reason is simple—the benefits in the form of gains don’t outweigh the fees and diligent investors can manage their retirement money in the form of index mutual funds, at least with a long-term time horizon.
Ben Stein holds a differing opinion. He is a fan of variable annuities in moderation. He admits that only a portion of a portfolio should be invested in annuities in order to ensure a modicum of guaranteed income. Here are his reasons:
- Variable annuities allowed his parents, both economists but not great investors, to retire comfortably.
- Some annuities will “lock in” your stock market gains to guarantee you won’t lose your money. Of course, the stronger the guarantee, the higher the fee.
- Old people get Alzheimer’s. Even skillful investors can lose their ability to control their portfolios and can benefit from a regular check.
Ben admits that individuals who are successful at investing and continue to be through retirement can manage to perform better investing on their own. He is thoroughly convinced that most people should consider putting at least a portion of their savings into annuity products when they retire.
I’ve generally been strongly against variable annuity products, especially after hearing story after story of elderly people being encouraged to enroll their life savings into products from which they would be unlikely to receive a benefit worth the fees. I do see Ben Stein’s perspective and perhaps annuities would be worthwhile for some individuals in varying degrees.
Why Ben Stein Loves Annuities [Money Magazine video]
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Just like any investing vehicle, VAs do have their place in certain circumstances with certain types of people. Like Ben said, anyone with reasonable abilities and knowledge in regards to investing, there are obviously much better ways to put your money to use.
But some people will never have the ability or even desire to set up their investment portfolio, or maybe they just really want to have that guarantee of income.
While I won’t recommend them, I see people doing more harm to their finances with other investment vehicles than a VA could ever do.
I think Ben Stein’s parents have probably had a better experience with variable annuities because I have to assume as academics they invested via TIAA-CREFF which is not the bloodsucker that many of the companies offering variable annuities are. As a vehicle variable annuities have their place and purpose. The problem is that they are so laden down with fees and extra charges that the benefits are often wiped out. Ben has good points, but finding a worthwhile variable annuity offering is more easily said than done.
I read a few of Ben’s books (Yes, You Can Still Retire Comfortably and Yes, You Can Be A Successful, Income Investor) and I gave the first one as a gift to both of my sisters.
In the first book Ben mentions that for someone of good health (typically the type of people who go for these) it could well be beneficial. He strongly cautions aginst the esoteric nature of these complex financial instruments (think life insurance type complexity) and I agree they could have their place in these limited situations.