Giving Away the Keys to Retirement

This is a part of a series of articles discussing why you should avoid variable annuities for the purposes of retirement income.

Congress is meeting with representatives from Prudential Financial Inc. regarding concerns over the company’s use of ‘retained asset’ accounts used for the payout of life insurance proceeds to military spouses and survivors. As Bloomberg Businessweek has recently reported, these accounts keep the policy proceeds with an account with the insurer, though funds are accessible to the beneficiaries when writing checks. The main concerns regard fair disclosure as well as whether or not the practice is appropriate, as the insurer may profit by managing policy money until the surviving beneficiaries move the funds elsewhere.

The use of such accounts by the insurer may or may not be a prudent way for beneficiaries to access their policy values. But the topic highlights a concern with utilizing insurers for any significant portion of your retirement income investments – you play by the rules and practices of the insurer (which may change from your initial understanding, disclosed in a generally lengthy prospectus), while your ability to change insurers is often not a practical option.

Typically the products insurance companies offer to investors require long periods of illiquidity in order to pay-off the commissions required to sell the products. Higher than average fees drain principal over time and leave many dependent on the insurers payout benefits, hoping for no future concerns over the company’s solvency, competitiveness, or ethical practices.

For those that opt to use insurance products as investment vehicles, the variable annuity for retirement income is likely to be their last stop for investing their funds. Because of this, it behooves prospective investors to find multiple opinions on a product, insurer, and strategy prior to investing.

In the past, illiquidity in investing required a premium and higher payouts. Today’s annuities are complex items that include high total costs, and significant risks that current products will not pay as much as current, or future, strategies. While rarely recommended, traditional strategies such as a government secured individual bond ladder, or a strategy of slowly purchasing immediate fixed annuities with multiple highly rated companies, may in fact lead to a more secure retirement.

When weighing the benefits and costs of an investing strategy that will put strings on wealth and leave open the possibility of a change in the insurers ‘rules’ in the future, one needs to consider not only what a rate of return is sufficient in the present, but also the value of the loss of control for a long uncertain future.

About the author

Robert Schmansky, CFP®

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