| Tutorial about Variable Annuity Optimization |
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If you already own a variable annuity, what your options are and how to get better performance You'll know our "recommended VA carrier" when you buy the Money eBook or the Model Portfolios. The Vast Majority of Variable Annuities are very BAD and should be avoided! Why? Annuities and life insurance come from the same place - the life insurance industry. So they suffer from the same enormous and ubiquitous problems. First, if you don't already own an annuity, then you'll be better off staying away from them. The same goes for using life insurance as an investment (cash value life insurance, AKA: Universal Life, Variable Universal Life, and Whole Life insurance). There are very few advantages. One of them is purely for obtaining life insurance death benefits on an uninsurable person that will never use the money, and wishes to pass it on to heirs. That’s about it. The biggest reason is to avoid them is because variable annuities are by far 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 fees and charges is whole 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 usually 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 59½, there are substantial tax penalties. VA are a tax-qualified product, meaning once you buy it, you’re basically stuck until you’re retired - you can’t sell it or get income from it until then without severe tax penalties. Then even if you chose to endure the tax penalties, you get dinged again with all of the usual life insurance company early surrender fees (which could be as high as 10%!). So if you buy a VA, and then want to get out of it soon after you buy it, over a third of your money just vanishes for no good reason. So no matter how you look at it, this is the investment vehicle that results in you being more “stuck” than just about any other. Only the spider benefits from you being stuck like a fly in their web. Variable annuities are marketed and 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. Just the VA 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 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 eight ways of tax-qualified investing, the only method that gets worse performance than a VA is a low-yielding bank CD. After doing all of this, you'll see that you'd most likely 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 IC product accounts for all of these tax benefits that don’t add to squat). 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. See the section on fixed annuities to see why you can’t win with this product either. 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'll probably 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 it’s just part of their business model, and of course, they legally can once you sign their policy CONTRACT. The best thing to do is get a quote (AKA ledger) 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 your VA 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 compared to what they really cost). Letting this situation fester for decades could lead to having less than half of the retirement paycheck you expected when you start withdrawing from it. This is because the difference in long-term returns are usually way more than 2% (and all it takes is getting 2% less to cut your retirement paycheck in half). 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. Not buying a VA (or VUL) is about the only disaster that you can easily choose whether or not to avoid! 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 (even if they play out “as expected” you’ll still lose big time compared to better ways of investing). 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 better-performing flat-insurance fee variable annuity. In English, it's a truly no-load VA that you can get just by trading in your old one for a new one - for free There's also a new answer: Some life insurance companies are letting people sign up for deals where they can get most any mutual fund. When you can do this, then you should 1025 exchange your VA in for one of these, then just use our model portfolios. So when advisors want you to exchange your annuity for one where they can trade in it, this is what they're talking about. The data shown here was as of Jan '09, and changed a lot since then, but the concepts remain the same. 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 asset 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 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 ~170 subaccount choices, which results in having more than twice the number of asset 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 annuity in for a 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 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 or 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 usually 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. 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 you won and you’ll tell others. 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. Don’t feel bad for them - they more than likely told you several huge lies to dupe you into feeding them too much. 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, if you're set on keeping it. 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 just 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 VA product. There's nothing else whatsoever anyone can do. You’re totally stuck in every way no matter what you do. Some life insurance companies 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 December 2008 (these are not updated anymore due to lack of interest). 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 just serves as a baseline to compare performance. Sorry, but all of these charts and graphs that used to be here were deleted mostly because they're way too old. Then Morningstar wanted way too much money for just one CD of recent VA data. Then this consulting work didn't generate enough interest to justify the time. Then our recommended carrier was too broke and lame to feed us any money for touting their deal and driving business their way. So it's all kaput until either interest increases or a recent Principia VA CD magically appears (got one and want to trade for software?). How to Get the (very old) Variable Annuity Models The VA models are part of the Asset Allocation Models (prices are at the bottom of that page). So when you buy the regular model portfolios, you'll also get the 16 VA models used to create the charts above, and you'll be able to see the name and contact information of the no-load VA policy we recommend. Each of the 16 model allocations above have the usual five investment risk tolerance categories, for a total of 80 VA model portfolios. Individual investors do NOT need to use an agent to make the 1035 exchange! Our recommended VA carrier has a free service where you can call a toll-free number and they will make the free exchange for you (unless you're in NY, FL, or NC, then you'll need a licensed agent to make the exchange). These portfolio models are all you'll need to manage your own variable annuity money after you've traded in your old VA for the new one (or if you just want to manage one of the other 15 VAs). You can also buy the monthly subscription service to keep the subaccounts updated (so when a subaccount in an asset class goes bad and is replaced, you'll know what the new pick is so you can make the change). Fee-based advisors can now tap a fresh source of revenue if they know people with VAs. It's an easy sale when you can compare performance between what they own and our no-load VA recommendation. The VA carrier will do the free 1035 exchange, and then you'll be able to charge investment management fees for managing the money using our model portfolios. Easily earn thousands in annual fees, and the most it's going to cost is $299 per year! Now there's no reason for anyone to be stuck in old horrible variable annuities. This is a wonderful no-brainer win-win-win-win scenario for everyone except the old VA company. All it takes is $99, a couple phone calls, a few forms, and everyone's life changes for the better!!! The recommended no-load VA carrier is Jefferson National Monument Advisor. Call (866) 667-0564 and choose option 1 to talk with someone that can make the free 1035 exchange (not available in NY or NC). Please tell them you found out about them via Toolsformoney.com! We can also use any VA policy to create custom model allocations for $50 each (if we had the data, which we don’t buy anymore due to lack of interest - so if you have data, then we can do it). Here's the shortest bottom line on all forms of annuities (and all forms of whole life insurance, AKA VUL): If you work in the life insurance business, either as an agent or an employee of a life company, or hold life insurance company stock; then annuities and whole life are the greatest invention since the wheel (because they pay by far the most in immediate commissions of any financial product available today, making them by far the most profitable part of the life insurance company business model). But if you're an investor, then not so much. Just "do the math" and you'll see in a New York minute. Why all of the usual "tax wrappers" (IRAs, Roth IRAs, 529 plans, and all forms of annuities and and all forms of whole life insurance) have around half of the value they did back in the "good 'ol days," is explained on the 529 plan page. This is what life insurance companies will do to you if you're not paying attention If You already Own a Variable Annuity, this Page Tells what Your Options are, and How to Get Better Investment Performance How to use asset allocation techniques to reduce risk and increase investment returns with variable annuities 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 just uses an Investment Fact Finder to determine Investment Risk Tolerance, invests according to the corresponding model allocation, and rebalances quarterly. The following section shows the returns of asset allocation models made from the ten major variable annuity vendors. They can be created for any variable annuity, variable life insurance product, 529 plans, or 401k / 403b plans. Performance of Asset Allocation Models Made from Ten of the Most Popular Variable Annuities, and Our Recommended VA All returns are as of 31 December 2008 (these are not updated anymore due to lack of cost-effective data and interest in variable annuities in general by most everyone) First, Please note that we used the same recommended life insurance company's variable universal life insurance policy to compare against buying term life insurance here. Next, 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 just serves as a baseline to compare performance:
Next, returns for the 15-asset class variable annuity models we recommend:
Next, our recommended VA models are compared to the Benchmark Index models. Positive numbers means the VA beat the index model by that much:
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 15 of the most popular variable annuity models and our recommended VA models. Allianz Rewards (has 13 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 3.4% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
Ameritas Life No-Load (4080) (has 14 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 1.10% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
AXA Accumulator Elite 2002 (has 14 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 1.10% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
Fidelity Personal Retirement (has 13 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 0.50% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
Hartford Director M (has 10 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 2.30% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
ING Golden Select ES II (has 14 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 2.80% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
Lincoln American Legacy Retirement VA (has 11 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 2.50% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
Monumental Life (AEGON People's Benefit): Advisor's Edge (has 13 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 1.10% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
This chart shows the difference in the growth of $100,000 over 50 years using the three-year average annual rates of return of our recommended VA Moderate Model (blue) and the Moderate Advisor's Edge model (yellow). This hypothetical example shows buying the VA at age 40, then making monthly contributions of $100, and then in year 26 (at age 66), withdrawing $100 per month, inflating at 3% annually. At the end-of-year 26, you'd have around 22% more money in our recommended VA than Advisor's Edge. Monumental Vanguard (has 13 asset classes) Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 0.60% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
This chart shows the difference in the growth of $100,000 over 50 years using the three-year average annual rates of return of our recommended VA Moderate Model (blue) and the Moderate Vanguard model (yellow). This hypothetical example shows buying the VA at age 40, then making monthly contributions of $100, and then in year 26 (at age 66), withdrawing $100 per month, inflating at 3% annually. At the end-of-year 26, you'd have around 124% more money in our recommended VA than Vanguard.
Nationwide BOA (Best Of America) Elite Venue (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): 3.50% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
This chart shows the difference in the growth of $100,000 over 50 years using the three-year average annual rates of return of our recommended VA Moderate Model (blue) and the Moderate Nationwide model (yellow). This hypothetical example shows buying the VA at age 40, then making monthly contributions of $100, and then in year 26 (at age 66), withdrawing $100 per month, inflating at 3% annually. At the end-of-year 26, you'd have around 300% more money in our recommended VA than Nationwide. Pacific Life Odyssey (has 13 asset classes)Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 0.80% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
This chart shows the difference in the growth of $100,000 over 50 years using the three-year average annual rates of return of our recommended VA Moderate Model (blue) and the Moderate Odyssey model (yellow). This hypothetical example shows buying the VA at age 40, then making monthly contributions of $100, and then in year 26 (at age 66), withdrawing $100 per month, inflating at 3% annually. At the end-of-year 26, you'd have around 120% more money in our recommended VA than Odyssey.
Pacific Value & Pacific Innovations Select (has 13 asset classes)Total annual life-sucking fees (that our recommended VA doesn't have and that are subtracted from the model returns below): 2.80% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
This chart shows the difference in the growth of $100,000 over 50 years using the three-year average annual rates of return of our recommended VA Moderate Model (blue) and the Moderate Innovations Select model (yellow). This hypothetical example shows buying the VA at age 40, then making monthly contributions of $100, and then in year 26 (at age 66), withdrawing $100 per month, inflating at 3% annually. At the end-of-year 26, you'd have around 281% more money in our recommended VA than Innovations Select.
Prudential/American Skandia: 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% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
Schwab OneSource (has 13 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% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
This chart shows the difference in the growth of $100,000 over 50 years using the three-year average annual rates of return of our recommended VA Moderate Model (blue) and the Moderate Schwab model (yellow). This hypothetical example shows buying the VA at age 40, then making monthly contributions of $100, and then in year 26 (at age 66), withdrawing $100 per month, inflating at 3% annually. At the end-of-year 26, you'd have around 134% more money in our recommended VA than Schwab.
Security Benefit Advisor Designs (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): 3.40% Positive differences in the second and bottom rows mean our recommended VA beat it by that much annually
This chart shows the difference in the growth of $100,000 over 50 years using the three-year average annual rates of return of our recommended VA Moderate Model (blue) and the Moderate Advisor Designs model (yellow). This hypothetical example shows buying the VA at age 40, then making monthly contributions of $100, and then in year 26 (at age 66), withdrawing $100 per month, inflating at 3% annually. At the end-of-year 26, you would have around 259% more money in our recommended VA than Advisor Designs. How to Get the Variable Annuity Models This is an old service that is not updated anymore because of lack of interest in VAs. You can still get the old VA models, they just haven't been updated since Jan '09. The VA models are part of the Asset Allocation Models (prices are at the bottom of that page). So when you buy the regular model portfolios, you'll also get the 16 VA models used to create the charts above, and you'll be able to see the name and contact information of the no-load VA policy we recommend. Each of the 16 model allocations above have the usual five investment risk tolerance categories, for a total of 80 VA model portfolios. Individual investors do NOT need to use an agent to make the 1035 exchange! Our recommended VA carrier has a free service where you can call a toll-free number and they will make the free exchange for you (unless you're in NY or NC, then you'll need a licensed agent to make the exchange). These portfolio models are all you'll need to manage your own variable annuity money after you've traded in your old VA for the new one (or if you just want to manage one of the other 15 VAs). Fee-based advisors can now tap a fresh source of revenue if they know prospects with VAs. It's an easy sale when you can compare performance between what they own and our no-load VA recommendation. The VA carrier will do the free 1035 exchange, and then you'll be able to charge investment management fees for managing the money using our model portfolios. Easily earn thousands in annual fees, and the most it's going to cost is $268 per year! Now there's no reason for anyone to be stuck in old horrible variable annuities. This is a wonderful no-brainer win-win-win-win scenario for everyone except the old VA company. All it takes is $99, a couple phone calls, a few forms, and everyone's life changes for the better! We can also use any VA policy to create custom model allocations for $75 each. Asset allocation models made from the limited options in 401k and 403b plans, are discussed here. Read the short version of estate planning and estate planning software |
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