Annuities Rant Part II – Low Returns And High Fees

<< Read Part I: Annuities Rant – On Complexity

Another reason I don’t like fixed rate, fixed index, and variable annuities is their low returns and high costs. These are directly related. The higher the costs to you, the lower your returns.

To begin with the simplest of the three types, fixed rate annuities are the exception in that they do not charge high fees. In fact, generally, they don’t charge you any fees at all. Instead, they offer you very low returns. 

I recently pulled some quotes from my preferred insurance company. For amounts less than $100,000 I could earn 2.6% guaranteed on a fixed rate annuity for the next five years, and I could earn 3% if I invested more than $100,000. I checked rates with another provider online and received quotes in a similar range of 2.8% and 2.95% respectively. That rate changes over five years. Mine had a minimum reset rate of 1.3%, after the five-year term. 

What should we think about these rates?

With a product like this, you should always reasonably expect that the annual return on a fixed rate annuity, adjusted for inflation and taxes, will be approximately zero. That’s not a typo. That’s just a rule of fixed-rate annuity products and risk-less products in general.

Now, figuring the returns of fixed index and variables annuities is trickier because they are somewhat market driven and depend on what you pick as underlying investments and risks. But we can understand what the costs are, and therefore their expected underperformance versus comparable assets you could buy from a brokerage company.

With a variable annuity, you have the chance to purchase mutual funds similar to funds at a brokerage account. Costs will weigh down your returns, however. 

The management fees of mutual funds offered inside a typical variable annuity are typically very high. In the 2018 Brighthouse Financial Life (formerly MetLife) policy variable annuity contract I reviewed, the costs of mutual funds ranged from a low of 1.56% to a high of 2.71%. Hello? 1987 just called, and it wants its mutual fund fees back.

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