Jon Had No Clue He Was Paying 4.85% in Annual Fees…

Webster.com defines the word “variable” as: “able or likely to change or be changed; not always the same; subject to variation or changes; fickle, inconstant.” That sounds like a pretty accurate description of the stock market, doesn’t it? There is a reason the variable annuity has its name, and that’s because it can be just about as unpredictable and dangerous as the stock market. This is especially true for people heading into retirement (or already in retirement).

I think variable annuities can work well for some people. However, retirees often don’t fit into that category for the simple fact that retirees need consistent and reliable income, which variable annuities cannot provide.

To give you a “real life” example of a variable annuity working against someone, I want to share with you a story of a guy I met in 2003. To protect his privacy, I am going to call him “Jon.”

When Jon came to see me, he had a $600k variable annuity that he had purchased on January 1, 2004. At the time, Jon thought he was only paying 2.4% in annual fees for his variable annuity. Jon is actually a very bright man, but he didn’t ask all of the questions he was supposed to ask before purchasing his variable annuity…

Had Jon been appropriately equipped with the right questions to ask, he would have learned much sooner that he’s actually been paying 4.85% in annual fees this whole time! Actually, I take back the first half of that sentence. Had he known the right questions to ask, Jon wouldn’t have even purchased the variable annuity in the first place! He would have discovered how much he would have ended up paying in fees before signing the contract, thus not even taking that step.

Let’s take a look at what Jon’s variable annuity account looked like when I met him. Between the volatility of the stock market coupled with the fees for which he had no clue he was paying, it wasn’t a very pretty picture…

Year Beginning of   Year Account Value Minus Fees (4.85%) S&P 500 Price Index ROR End of   Year Account Value
2004 $ 600,000 $ 570,900 8.99% $ 622,224
2005 $ 622,224 $ 592,046 3.00% $ 609,807
2006 $ 609,807 $ 580,232 13.62% $ 659,259
2007 $ 659,259 $ 627,285 3.53% $ 649,428
2008 $ 649,428 $ 617,931 -38.49% $ 380,089
2009 $ 380,089 $ 361,655 23.45% $ 446,463
2010 $446,463 $ 424,810 12.78% $ 479,100
2011 $ 479,100 $ 455,864 0.00% $ 455,864
2012 $ 455,864 $ 433,755 13.41% $ 491,921
2013 $ 491,921 $ 468,063 29.60% $ 606,610

As you can see, Jon’s $600k was eaten by the stock market and variable annuity fees, and at a pretty rapid rate. He had some good years in there, but not nearly enough to make up for the substantial losses that he incurred. In Jon’s case, the good years did not make the bad years worth it.

Fortunately, when I met Jon, it wasn’t yet past the point of no return. With some meticulous strategizing and maneuvering, we were able to help him get back on his feet. His single, only request was to lock in a guaranteed stream of income from a safe place. After that disaster, he no longer wanted to be vulnerable to the stock market in retirement, and rightfully so.

It isn’t always so easy to recover, though. In many cases like Jon’s, it can be too late to recover the way you want to, let alone recover at ALL. The bottom line is… Before buying a variable annuity, you should talk to someone who specializes in retirement planning.

There are a ton of smart financial advisors out there, but it takes a retirement income specialist to really give you the best advice. Don’t get stuck in a situation like Jon’s. Take the proper steps to avoid that from even being a possibility!

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