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Annuities and their Costs

Many people invest in annuities. Almost every new doctor I see or other clients have one. Understanding the background and goals of the investments in a portfolio is a crucial part of any investment adviser’s due diligence. The most frequent responses I get when I ask people why they bought annuities are, “We didn’t have to pay any fees or commissions.” “There are no recurring costs.” “Every penny I have is working for me.” The principal is secured. But there’s more Anytime you read or hear the words “free,” “guaranteed,” “no fees,” “no commissions,” or “no expenses” in connection with an investment, beware. Every investment, including annuities, comes with expenses. Before moving forward, you should inquire deeply about those costs. Fixed Annuity Illustration Let’s examine the prices for a common type of annuity—the fixed annuity. You are simply given a stated rate of return, which, like a bank certificate of deposit (CD), is sometimes subject to annual modification. Let’s say Investor A is offered a fixed annuity with a 3.5% return on investment (ROI). Investor B places her money in a plain mutual fund portfolio with 60% stocks and 40% bonds and a long-term expected return of 6%. The annuity provider must make enough money off Investor A’s investment to cover costs, pay commissions, and give Investor A something back. There is no secret method for accomplishing it. The insurance provider makes investments in the same asset types open to everyone. For the sake of this illustration, it is appropriate to suppose that the insurance firm would own a 60/40 portfolio. The annuity incurs internal expenses for administration, money management, ensuring principal returns, and commissions paid to salesmen. Even though they differ slightly from business to business, a price of 2.5% is appropriate. The balance is given out as a “fixed” return of 3.5% if the company makes 6% and subtracts 1% to cover the upfront commission paid to the salesperson, 1% for management expenses, and 0.5% for administrative expenditures. Only Investor A sees that set return of 3.5%. Investor A will also be charged a “surrender penalty” roughly equal to the remaining commission paid to the broker who sold the insurance if he decides to leave the policy before the upfront payment is fully recovered (typically 4 to 15 years). The 60/40 portfolio of Investor B will have a gross return of 6%, matching that of the insurance company’s portfolio. Investor B would receive a 5.9% return if she bought index funds from a company like Vanguard, where expenses may be as low as 0.10%. Let’s say that Investors A and B amass $1 million in retirement savings each. Investor A’s guaranteed return of 3.5% and Investor B’s average, unguaranteed return of 5.9% might result in an additional $2,000 per month in retirement income Guarantees have a price, which is the price of the guarantee. Why even try? You might be perplexed as to why someone would buy a fixed annuity in light of these figures. Why even try? One factor for this is that many customers lack the assurance that they can invest their money correctly or the fortitude to endure the inevitable peaks and valleys of the portfolio. Another factor is that most consumers don’t fully comprehend the costs. Breakdown of common for annuities? Several different kinds of fees are frequently attached to annuities. These fees may consist of the following:

  • Management fees: These fees help defray the cost of overseeing the annuity. They are billed by the company that manages the annuity and are typically calculated as a percentage of the account’s assets.
  • Mortality and Expense Charges: These charges go toward paying for insurance. The insurance provider of the annuity typically assesses them.
  • Surrender Fees: If you take money out of your annuity before a specific date, you will be charged these fees. They are often evaluated over a certain period and are typically calculated as a percentage of the account value.
  • Rider Fees: You will be charged for any additional features you decide to add to your annuity. Depending on your chosen options, they may be a one-time or a monthly charge.

In conclusion, there are costs involved with every investment. In my experience, those fees tend to be more expensive when they are less transparent.
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After spending many years studying information technology, specializing in web development, digital marketing, and search engine optimization (SEO), I enjoy applying my skills and experience in helping others achieve their goals online.As a marketing specialist at Credkeeper, I help people get the most out of their online reputation. Your prospects perform Internet searches for your name before they buy from you. What they see on the first page of Google outweighs almost all other marketing! What do people currently see when they search your name on the Internet?If you would like to know more about Credkeeper and what we can do for you, feel free to reach out to me!

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Dante J

After spending many years studying information technology, specializing in web development, digital marketing, and search engine optimization (SEO), I enjoy applying my skills and experience in helping others achieve their goals online. As a marketing specialist at Credkeeper, I help people get the most out of their online reputation. Your prospects perform Internet searches for your name before they buy from you. What they see on the first page of Google outweighs almost all other marketing! What do people currently see when they search your name on the Internet? If you would like to know more about Credkeeper and what we can do for you, feel free to reach out to me!

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