If you’re looking for income after retirement, here’s a key alternative to know –

By: John D. Kolb, CFP®

Everyone has experienced a case of buyer’s remorse at some point in their lives. Sometimes, the stakes are low. Maybe you bought one pair of shoes, only to realize it was the other pair you really wanted. Maybe you splurged on a really expensive guitar, only to remember that you don’t actually play the guitar, and you’re too busy to find the time to learn.

Sometimes, though, the stakes are much higher. Think of the person who bought a car they couldn’t really afford. Or the couple who purchased a new home with an adjustable-rate mortgage they couldn’t end up paying for.

Or, the retirees who locked themselves into a long-term contract with all sorts of fees and fine print they didn’t know about, didn’t understand, and were never told about.
I’m referring, of course, to variable annuities.

If you’re reading this, you’ve probably bought a variable annuity in the past. But in case you haven’t, or if you need a refresher, an annuity is a type of insurance contract. After buying an annuity from the insurance company, you have the option of converting your contract into a guaranteed income stream for either a period of time or the rest of your life. Until you withdraw funds out of the annuity, or begin taking income payments, any growth in the contract is tax deferred. There are three main categories of annuities, fixed, indexed, and variable. For the purposes of this article, we will focus on variable annuities.

On the surface, variable annuities are simple…but they can come with a plethora of restrictions and costs. Many annuities may promise a high rate of return, but the fees they require are equally high. Even worse, such high-fee variable annuities may come with nasty surrender charges, meaning if you need to withdraw the money from the variable annuity and use it for something else, you’ll have to pay a steep penalty.

As a CERTIFIED FINANCIAL PLANNER®, I can tell you that this last situation is unfortunately very common. Many people purchase variable annuities because they’re looking for income in retirement or tax deferred growth, and have been told that variable annuities are generally safe from the kind of volatility we often see in the stock market. But variable annuities can be much more complicated than they seem. The benefits you might expect to get from them may only apply in very specific situations, or they could end up costing much more than you expected.

Here’s an easy way to think about it. Imagine getting a gift certificate for your favorite smoothie place. But when you go to claim your free smoothie, you find that it only applies to the least popular flavor on alternate Wednesdays…and it only works online, not in the store…and it’s expired, anyways. That’s how high-fee annuities often work, except the stakes aren’t just a few dollars in gas and the time you wasted driving.

They could be your entire retirement.

Unfortunately, here at Hudock Capital, some of our clients originally came to us because they were sold a variable annuity without being told the true costs, fees, and stipulations associated with it. In other words, they didn’t know what they were actually buying. As a result, a few years will pass and they will see that they’ve made very little money – while the same time, the markets were on a tear.

For example, I once met with a couple who bought an annuity with a 15-year surrender penalty. They didn’t realize, when they bought it, that they were required to leave their money in the annuity for 15 years or else pay a penalty if they wanted to invest that money in something else.

On another occasion, I once met with a gentleman who’d been sold a variable annuity that supposedly guaranteed a return of 5%. Unfortunately, this was right before 2008 – the start of the Great Recession. He lost quite a bit of money, and when he asked his advisor why he was losing so much, he learned that the “guaranteed return” was only on the variable annuity’s income. He thought he was signing up for product that guaranteed a 5% return no matter what. In the end, he was sold the wrong type of product for him and his situation.

Why does this sort of thing happen so often? Well, traditional annuities are offered through a broker-dealer – a firm licensed to sell individual securities – and then actually sold by a financial advisor. In return, the advisor may receive a hefty upfront commission, or even a trailer fee, meaning they will be paid annually so long as you hold the variable annuity. In other words, many financial advisors have a major financial incentive to sell high-fee annuities.

This is the kind of situation that drives many retirees up the wall. After all, you simply wanted a steady stream of income in retirement, or tax-deferred growth, right? Why does it have to be so hard?

Fortunately, it doesn’t. Because there’s an alternative to traditional, high-cost variable annuities that every retiree and pre-retiree should know about. They’re called Registered Investment Advisor (RIA) variable annuities – and here at Hudock Capital, we have used them to replace high-fee variable annuities all while maintaining the same tax deferral benefit.

What’s the difference? Well, RIA variable annuities come with advantages over traditional ones, mostly in terms of fees and flexibility. For starters:

No Surrender Period. With RIA annuities, if you decide you need the money for something else, there’s neither a surrender period nor a surrender penalty. You can withdraw your funds without waiting or paying unnecessary fees.

Lower Fees. Because RIA variable annuities are designed to remove the commissions generally paid to advisors through the traditional variable annuity. The contract comes with a lower overall mortality and expense ratio. This is one of the greater cost savings we see using these RIA variable annuities.

Lower sub-account fees. When you buy a variable annuity, the investment options – aka “sub-accounts” – inside the annuity come with differing expenses. These are called expense ratios. We have found that RIA annuities generally offer investment options with lower expense ratios compared to traditional variable annuities. That’s important, because when you’re trying to save money for retirement, every dollar matters.

Now, it’s important to remember that, while we highly recommend RIA variable annuities over traditional, high-fee variable annuities, no investment is right for everyone, and all investments are subject to risk. That’s why, at Hudock Capital, we never recommend any investment until we have a deep understanding of you. What you want, what you need, what risk you can afford to take on and which risks you must avoid at all costs. But if you’re looking for income in retirement or tax deferred growth, then RIA annuities are certainly an option worth considering.

If you would like to learn more, we would be happy to send you a report that shows the actual expenses for any current variable annuities you own compared to an RIA variable annuity. Please feel free to contact us for more information!

In the meantime, remember: Buyer’s remorse is something every person experiences at some point in life. But you should not have to experience it when it comes to your retirement. There are always options and alternatives to consider. And since financial planning is all about finding the right option for you, please let us know if we can ever be of assistance! Our goal is to be an easy-to-find and helpful resource to fellow members of the Williamsport community. We would be delighted to help you in any way we can.