What would you say if you met a great money manager with an outstanding track record and he told you that he was going to charge you 5% to manage your money every year regardless of results and put you in inefficient tax products so that if you made a profit it would be subject to ordinary income tax and not capital gains? I’m guessing most of you would run the other way…and rightfully so.
So then why do variable annuities — which are mutual funds wrapped around an annuity with fees of 3.5% to 5% — remain popular?
The tax consequences upon death are ordinary income on any profit or death benefit instead of being exposed to the step-up basis.
Defenders say that the fees are for the insurance, but there’s no doubt that — over time — buying mutual funds directly is far superior.
As for income, lower-cost hybrid indexed annuities usually provide higher guaranteed income because of lower fees.
There’s a psychological term called “cognitive dissonance.”
It’s basically justifying your actions when the results aren’t as planned, which explains why people in the past who bought expensive, luxury cars that did not perform well and were in the shop all the time would fill out surveys saying how happy they were with their purchase. These individuals could not justify having spent so much money and being so unhappy with their purchase.
I think that’s a lot of what happens with purchasers of variable annuities. It’s hard for them to look at themselves in the mirror and admit a mistake.
If you have one of these, email me, I’ll show you how to maximize it.
For more info:
Pwasserman@aol.com or 800–254–9567.
Phil Wasserman, The Official Annuity Expert for MoneyShow and Annuity Expert & Tax-free Wealth Transfer Strategist,American Tax & Annuity Advisors