How to escape or get better variable annuity performance.

First, if you don't already own an annuity, then you'll probably be better off staying away from them. The same goes for using life insurance as an investment.

The biggest reason is because they are the most expensive investment vehicles you can own. The only other type of "investment" that gives such poor performance and sucks your money away like cancer with an endless parade of charges is life insurance. The average annual life-sucking fees of the ten VAs used in the performance comparisons below is 2.2%. So you're giving around a quarter of your returns away and getting little-to-nothing in return.

Variable annuities have other problems as well: They're not standardized, not uniform, and they have expensive bells and whistles (insurance riders) that hardly anyone understands and are seldom used. They also pay agents by far the most money compared to every other type of investment, so they have the most incentive for abuse and for agents to oversell them just to maximize their income.

Common problems are losing money or not making money due to bad performance of the investment choices (called variable subaccounts), lack of investment choices, high internal fees, lack of diversification opportunities because of the limited number of asset classes, and lack of knowledge and support from your agent/life insurance company on how to obtain decent performance.

Then there's the problem of being stuck in them because of paying the high initial commissions/fees/loads to get into them. After that, then you have to pay high surrender fees to liquidate them. Then there are high taxes to pay to make up for the taxes you saved along the way. Then if you sell it before you're 59 and a half, there are substantial tax penalties.

Variable annuities are sold primarily based on their tax deferral benefits. But after the loads, expenses, commissions, charges, and fees, most all of the tax deferral benefits are eaten away. When calculating the math correctly, the tax deferral of a VA is only worth about 0.75% in annual returns. Fees average three times that.

Then because of the limited asset classes, and poorly-performing investments (subaccounts), you're stuck with one of the worst investment vehicles ever created. Then once you fall for the trap, you can't get out. Because of the huge tax penalties and surrender fees associated with trying to get away from all of these problems, most people assume that they're stuck with their variable annuities for life (or until age 60).

All you need to do is look at column AE and AF on the demo of the only financial software that accurately compares all of the different ways of investing, and see for yourself. We illustrated the actual optimized performance / fees / expenses of the most popular variable annuity. The bottom line is that out of the 23 ways of investing, the only method that gets worse performance than either a qualified or non-qualified VA, is a bank CD getting 5% interest.

After doing all of this, you'll see that you'd have much more money in a well-allocated portfolio of no-load mutual funds, than in most all variable annuities, even after the wonderful tax benefits of the VA.

The taxes saved on the growth (realized dividends and capital gains distributions) over the years is not nearly as significant as the industry leads people to believe. This is because this is the #1 tool they use to earn their massive profits. All one needs to do is get 0.75% percent more in investment returns annually to make up for the tax-sheltering benefits of variable annuities.

Then to compound this disaster, some people fall for the very worst thing one can do with their 401(k), which is to roll it over into an annuity (of any kind). Then the absolute worst thing you can do is annuitize the annuity. This is like giving half of your money away to the life insurance company and getting nothing in return.

So, if you own a variable annuity or variable (universal) life insurance product (VUL), then you've probably been very disappointed. The longer you own it, the more disappointed you become.

If you suffer through all of this until age 60, and want to start withdrawing from it, the amount of monthly paycheck is usually about a third less than you expected. This could be less than half of what you expected if you annuitize an annuity (trade the market value for a stream of guaranteed lifetime income). This is because the life insurance company keeps most of the money. This is because they can.

The best thing to do is get a quote to see how much of a monthly paycheck you can get from an annuitized annuity BEFORE you get locked into a deal. But most people neglect to follow through on this minor detail. The ones that do usually just say no after seeing the numbers.

Most people would rather suffer with all of these problems than liquidate and face substantial fees and taxes. With minimal paperwork you can transfer it into another variable investment product (with the same or different life insurance company), but the best you can do here is move it to something that's essentially the same thing, with just a little better investment performance (or maybe an expensive new slick feature that an agent may be tickling you with). Then you may have to pay another huge initial sales load/commission again, and then endure another long period of not being able to withdraw money because of the surrender charges. If the investment performance is just a little better, then it could take a decade to recoup the initial commissions.

Of course, when you talk with your agent about any of this, they're just going to go into sales mode again, and be a broken record about all of the tax benefits and expensive slick features (that have hardly any real benefits compared to what's being touted and what they really cost).

Letting this situation fester for decades could lead to having half of the retirement paycheck you expected when you start withdrawing from it.

This is what we see in our practice: The #1 reason people can't reach their retirement goals is inadequate savings over the last decade before retirement. The second biggest reason is being stuck in poorly performing life insurance company products for decades. The third is lack of asset class diversification (having too much money in one asset class, usually real estate). #4 is being done in by a major crisis - divorce, uninsured death, accident, lawsuit, or not being able to afford health (or long-term) care/insurance. #5 is being locked into a having a lifestyle that costs too much.

So the second biggest reason people can't retire the way they expected, is because the variable annuities and variable life insurance they bought didn't perform nearly as well as expected. Then once your money is in the clutches of a life insurance company, there's usually little to no way out without taking a substantial loss. Then when it comes time to start withdrawing retirement income, it's around a third less than expected.

But don't despair! You are not stuck anymore! Finally, there's a way out!

The Answer: The great-performing flat-insurance fee Variable Annuity! In English, it's a truly no-load VA

Not only is this VA not going to suck your life away with an endless parade of useless charges, it's one of the very few variable annuities with enough assets classes, AND great-performing subaccounts that's needed to get good investment performance. This is the only way to avoid the devastating double-whammy of variable annuities: High costs and poor investment performance.

Only this variable annuity can solve both of these main problems at the same time. It's the only VA that has 0% M&E Risk fees, 0% Administrative charges, 0% Distribution charges, and 0% for Insurance Expenses. So all of your money is always working for you.

This new variable annuity product has no front-end loads so you pay no commissions / sales charges / loads to buy it initially. Then there are no redemption fees, so you can withdraw money at any time without paying any commissions / loads / sales charges.

It has 167 subaccount choices, which results in having more than twice the number of assets classes than most variable annuities. This also results in having access to more subaccounts that have good performance - both because of having more choices, and because it's the VA that does the best job at selecting subaccount managers.

It only charges $20 per month regardless of how much money you have in it. Most all VAs charge a percentage of assets, so you're paying more than this monthly with most variable annuities if you have more than $15,000 in it.

You can also contribute millions annually. You can't do that in your IRA.

You can take any existing variable annuity, and then do a 1035 tax-free exchange to trade your old crappy annuity in for a brand-new high-tech, no-load annuity. It's a variable product that will suit your needs better, will obtain better investment performance, with NO front- or back-end loads or commissions! That's right, other than the $20 per month fee, it's totally free. You also do not need to involve an agent to make the transfer! Just call the company's toll-free number and they have a free transfer service (unless you're in NY, Fl, or NC).

This allows you to make a critical change without paying any taxes, fees, or sales charges to buy the new product. If there are no surrender fees on your existing product, then you could get a much better-performing product without paying any sales commissions/front-end loads, back-end loads, or taxes. All it takes is a few phone calls and filling out a few forms.

Why you've never heard about this before should be obvious - no life insurance company agent is getting rich selling them. So they really really don't want you to know about it. Only fee-based investment advisors use them, because the only way they get paid is via investment management fees.

So if you're a fee-based financial advisor, you can make good money advising people on what to do with their VAs whether you're insurance/FINRA licensed or not. So if you know people with variable annuities, then this will open up a whole new world of easy business.

Usually there are five barriers to escaping the clutches of a life insurance company once they've trapped you:

1) The initial fees / loads / commissions you paid to get into a product.
2) The back-end redemption fees / loads / commissions you'd have to pay if you liquidated it before a certain amount of time goes by.
3) The initial fees / loads / commissions paid on the new product if you 1035 exchange into a better performing version of the same thing.
4) Paying income taxes and the premature distribution tax penalties if you sell or withdraw before age 59 and a half.
5) Putting up with the paperwork, sales pitches, and whining the life insurance agent and company will put you through when they find out you want to fire them.

Once you pay the initial load (barrier #1), that money just vanishes anyway, so it's gone whether you stay or make the switch. So barrier #1 is mostly psychological.

Barrier #5 usually doesn't cost you any money and only lasts a few minutes.

This method of sales load-free and tax-free exchange eliminates the losses due to barriers #3 and #4. This is because you don't pay any initial front-end loads/commissions when buying the better product. Then because it's a 1035 exchange, you're exchanging it for a similar product, and not liquidating, so you don't pay any taxes on the transaction at all.

The new product will more than likely have much better long-term investment performance than the vast majority of other variable annuities. So even if you did have to pay a redemption fee to get out (barrier #2), the improved investment performance (using asset allocation techniques described below) usually makes up for that in less than a year.

This method is a win-win-win-lose proposition. You win because it didn't cost you any taxes or front-end load commissions to get the better lower-risk investment performance. We win because of the increased business. If there's an advisor involved, then they win because of the increased business. Our recommended life insurance company wins because of the increased business. The only loser is the life insurance company/agent/and subaccount managers with the inferior product you got out of.

How to use asset allocation techniques to reduce risk and increase investment returns with variable annuities

You can also keep your variable annuity or variable life insurance product, and use asset allocation modeling techniques to optimize its performance, using only the existing subaccount choices you're stuck with. This is the ONLY way to squeeze something good out of something bad.

The concept is the same as the asset allocation models discussed on the model portfolios page. It just uses the existing limited number of variable subaccounts to fund a smaller number of asset classes. One uses an Investment Fact Finder to determine Investment Risk Tolerance, invests according to the corresponding model allocation, and rebalances quarterly.

Having a seasoned team of experienced professionals with this money management strategy makes this ALL you can do to get optimal investment performance, if you want to keep your existing product. There's nothing else whatsoever anyone can do.

Some say they have a system that uses asset allocation strategies with their variable products. But everyone we've seen was so pathetic and wrong that it didn't do much good. This is because they usually just use it to steer money to the subaccount managers that are either on a temporary hot streak (so you'll be buying high and selling low), or are kicking back the most money to them.

The following section shows the returns of asset allocation models made from the ten major variable annuity vendors. They can be easily created for any variable annuity, variable life insurance product, or 401k / 403b / 457 / TSA plan.

Performance of Asset Allocation Models Made from Ten of the Most Popular Variable Annuities, and Our Recommended VA

All returns are as of 31 July 2008

First, we didn't skimp on these VA models to make our recommended VA look good. Our customers pay us to make them so they can get the best returns for their clients that hold them.

Next is the 15-asset class model funded with benchmark indices. This is the same asset allocation model as the actual VA model we recommend, but funded with benchmark indices (that can't be invested in). It serves as a baseline to compare performance:

Time Frames	Conservative Index Model	Moderately Conservative Index Model	Moderate Index Model	Moderately Aggressive Index Model	Aggressive Index Model	S&P 500	MSCI EAFE	Lehman Brothers Agg Bond
2008 YTD (31 Dec '07 to 31 July '08)	-0.73%	-2.93%	-4.52%	-5.44%	-6.60%	-12.65%	-13.82%	1.04%
Last 12 Months	3.39%	0.61%	-0.64%	-0.62%	-1.82%	-11.09	-12.19%	6.05%
Last 3 Years Annualized Average	5.23%	5.15%	5.85%	6.77%	6.99%	2.85%	10.50%	4.37%

Next, the 15-asset class variable annuity models we recommend:

Time Frames	Conservative Model	Moderately Conservative Model	Moderate Model	Moderately Aggressive Model	Aggressive Model	S&P 500	MSCI EAFE	Lehman Brothers Agg Bond
2008 YTD (31 Dec '07 to 31 July '08)	-0.96%	-2.49%	-3.53%	-4.32%	-4.54%	-12.65%	-13.82%	1.04%
Last 12 Months	5.33%	4.50%	4.20%	5.26%	5.08%	-11.09	-12.19%	6.05%
Last 3 Years Annualized Average	8.00%	9.17%	10.40%	13.29%	13.88%	2.85%	10.50%	4.37%

Next, our recommended VA models are compared to the Benchmark Index models. Positive numbers means the VA beat the index model by that much:

Time Frames	Conservative Model	Moderately Conservative Model	Moderate Model	Moderately Aggressive Model	Aggressive Model
2008 YTD (31 Dec '07 to 31 July '08)	-0.23%	0.44%	0.99%	1.12%	2.06%
Last 12 Months	1.94%	3.69%	4.84%	5.88%	6.90%
Last 3 Years Annualized Average	2.77%	4.02%	4.55%	6.52%	6.89%

As you can see, our VA models creamed the benchmarks. This is very hard to do using the whole universe of no-load mutual funds, and almost impossible using the limited choices of subaccounts in most variable annuities. Compare the index model returns above to the other ten VA returns below, and you'll see that none of them even beat the index model.

Below are the return differences between ten of the most popular variable annuity models and our recommended VA models.

American Skandia/Prudential: Advisors Choice 2000 (has 15 asset classes)

Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 1.30%