Karen Vogelsang

Terry: I need your help! When you spoke at our event in Valpo a few years back, a client thought you were against variable annuities. His wife has a large 401k plan and I am convinced that this account should be in a VA with an income guarantee. They are both 62 and the majority of their money is in bank savings accounts. He is a big fan of yours and said that since you do not like VAs he would not consider one. HELP! I know this is their best option. Thanks. Karen

SAVAGE SAYS: Hi Karen, and good to hear from you.  You know I have the greatest respect for your investment advice.  I did not say I am against variable annuities, but I definitely did say that I am against equity indexed annuities (which don’t give you all of the upside potential of the stock market, but charge big fees).  That said, the use of a variable annuity, even with an income guarantee, depends on the individual client (which you know) and their goals — and the costs and limitations of the specific annuity.

I purchased a Prudential variable annuity for myself many years ago, thought I had researched it well –and was astounded to find out that they had the right to transfer the money out of my stock fund investments and into a low-yield fixed rate investment!   They did that right at the bottom of the market in 2009 — against my wishes!   Although I do get a nice annual return, and my earlier, guaranteed high-water base upon which to withdraw income,  the insurance company’s ability to adjust my “variable” investments meant I lost out on a good part of the market’s upside, which could have generated a much higher income base! That’s a warning I pass on to those considering this type of investment.  I always learn more from my mistakes than my successes!

I’m surprised that a 40l(k) plan offers a variable annuity an investment choice within the plan.  Are you suggesting that they are in a position to roll out of the plan into an IRA, and then purchase this type of annuity with their qualified IRA?  The guaranteed income feature is certainly attractive for a portion of the money, but the annuity contract limits their flexibility and liquidity.   You’re in a better position than I am to know about their overall investment picture, the need for a portion of their assets to be in stocks to generate growth, but also their tolerance for risk, need for liquidity, and exposure to future taxes.  So I leave this couple in your good hands!