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Guarding Your Wealth for Seniors
Avoid More Financial Razor Blades
Why are 70 and 80-year olds being sold variable
annuities?
By Jeffrey D. Voudrie, CFP
Feb. 10, 2006 - Our nation has just enjoyed one of its most popular
annual rituals: the Super Bowl. One can draw many lessons from the drama
on the gridiron and all the hoopla surrounding it. But as I watched this
year’s spectacle, one thing in particular caught my eye. And what I saw
can teach a very valuable lesson about investing.
Why do so many Americans watch the Super Bowl every
year, anyway? For the commercials, of course! And every year, companies
try to wow us with their outrageous ads, or use the national spotlight
to launch their newest product.
This year was no exception, as one famous consumer
products company introduced a ground-breaking improvement: a razor with
five blades. That’s right, not a razor with four blades, which is so
old-fashioned, but one with five, yes, count them, five blades!
Razor blade companies aren’t the only ones trying
to sell us on the latest and greatest must-have upgrades. Have you
shopped for toothpaste lately? Talk about brand extension!
Why do products that work fine to start with need
to be upgraded and improved? There is one reason: sales. If one company
comes out with a new improved version, it means that all of its
competitors have to also. Otherwise, they might lose sales to the
improved version.
These improvements aren’t free. Take a quick look
at the cost of a five-blade razor and you realize all these bells and
whistles carry a hefty price tag, especially when compared to the
‘old-fashioned’ version.
The same ‘brand extension’ occurs in the financial
industry as well. They’re always adding an ‘extra blade’ to their
‘razor’ or ‘micro-cleansing beads’ to their ‘toothpaste’. Annuities are
a perfect example.
The first annuity in America was offered in 1759.
The first variable annuity was offered by TIAA-CREF in 1952 for use in
college retirement programs. The purpose of the variable annuity was to
allow a teacher to grow their nest egg during their working years and
then convert that growth into a steady income stream when they retired.
In effect, they were creating their own pension.
You would have a hard time recognizing that product
today. A guaranteed minimum death benefit was introduced in 1980. The
guarantee minimum income benefit in 1996, enhance earnings benefits in
2000, the guaranteed minimum withdrawal benefit and the guaranteed
minimum account balance in 2002.
With each ‘improvement’ the costs have gone up as
well. Whereas variable annuities used to be a low-cost way to create
your own pension, now they are bloated, expensive
all-things-to-all-people products offering every bell and whistle you
can imagine.
The total cost associated with variable annuities
can quickly climb to 3% or more with just the basic features—higher if
you add all the ‘benefits’. The main purpose of a variable annuity is to
provide greater returns then a fixed-annuity. All these costs make that
much harder to achieve. Moreover, these costs essentially are
transferring a large portion of the growth from your nest egg to the
insurance company.
Worse, few of these benefits are ever used. The key
selling point of a variable annuity is supposed to be a lifetime income
stream, but less than 5% of variable contracts are ever annualized.
If they are a long-term vehicle designed to save
for retirement, why are so many being sold to people already retired?
Why are 70 and 80-year olds being sold variable annuities?
I say ‘being sold’ because only 2% of people choose
to buy an annuity on their own. The rest are sold by banks, brokers and
agents. Could the fact that the commission is so high be a cause?
Call me old-fashioned. I still shave with a
two-blade razor. It works well and saves me money. If you want the
traditional benefits of a variable annuity, choose the two-blade kind.
They are the low-cost, plain vanilla variable annuities sold by
companies like Vanguard.
You already know what next year’s Super Bowl
advertisement will be: a razor with six blades! And you know what your
commission-based advisor will be pushing soon: an investment with
another costly feature! Don’t fall for it! Ignore the hype. Find
low-cost solutions to your financial goals and keep control of your
money
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or go to
www.guardingyourwealth.com. You can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“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 his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens. Click here
for all columns.
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 a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
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