Variable Annuity Performance Benchmark Analyzer

Variable Annuity Performance Benchmark Analyzer

The Real Cost (or Problem)

Variable annuities seem like a golden ticket for retirement, but the reality is that they often come with hidden fees, poor performance, and a lack of clarity that can cost investors dearly. Many professionals underestimate the impact of management fees, mortality and expense charges, and the cost of optional riders. These can erode returns significantly over time.

Moreover, the performance benchmarks used for comparison are often misleading. They can create a false sense of security, leading investors to believe their annuity is performing well when, in fact, it's not keeping pace with market averages or properly adjusted for risk. The lack of transparency in the underlying investments further complicates matters, as many are not directly comparable to traditional investment vehicles.

For professionals managing client portfolios, understanding these nuances is critical to avoid poor investment decisions that can lead to substantial financial losses.

Input Variables Explained

To effectively use the Variable Annuity Performance Benchmark Analyzer, you will need the following key input variables:

1. Initial Investment Amount: The total amount invested at the time of purchase. This information can usually be found on the initial purchase confirmation statement or the annuity contract itself.

2. Annual Fees: This includes all management fees, mortality and expense charges, and any additional rider costs. These fees are often detailed in the annuity prospectus, which you can obtain from the issuing insurance company.

3. Investment Returns: The historical performance of the underlying investment options within the annuity. Look for this data on the insurance company’s website or in the annuity’s annual statements. It's important to use net returns that account for fees.

4. Benchmark Index: This is the index you will compare your annuity's performance against. Choose one that reflects the investment strategy you expect from your variable annuity (e.g., S&P 500 for equity-focused products). Benchmark data can typically be found on financial news websites or investment research platforms.

5. Holding Period: The length of time the investment is expected to be held. Determine this based on the client's retirement timeline or investment strategy. Confirm this period aligns with the annuity's terms.

6. Withdrawal Rate: If applicable, the anticipated annual withdrawal rate during retirement. This information is often discussed during financial planning sessions and can be influenced by the client's overall income needs.

Each of these variables plays a crucial role in accurately assessing the performance and viability of a variable annuity as part of a broader investment strategy.

How to Interpret Results

Results from the Variable Annuity Performance Benchmark Analyzer will yield several key metrics that you must carefully interpret:

• Net Performance Relative to Benchmark**: This tells you how the annuity's returns stack up against the selected benchmark. If the annuity consistently underperforms, it may be time to reconsider its place in the portfolio.

• Total Costs as a Percentage of Returns**: This metric reveals the percentage of returns that is consumed by fees. A high percentage indicates that fees are eroding the investment's value, often leading to a net loss despite positive gross returns.

• Projected Growth Based on Withdrawals**: If the analysis incorporates potential withdrawals, it provides a realistic view of how long the annuity will last under various withdrawal scenarios. This is crucial for planning sustainable income during retirement.

Understanding these metrics allows professionals to make informed decisions about whether to hold, adjust, or potentially replace a variable annuity within a client's portfolio.

Expert Tips

• Always Read the Fine Print**: Terms and conditions related to fees and investment options can be buried in the contract. Ensure you understand every charge before recommending a product.

• Reassess Regularly**: Economic conditions and personal circumstances change. Regularly revisit the performance of variable annuities to ensure they still meet client goals.

• Consider Alternative Investments**: Don't be afraid to compare variable annuities with other investment vehicles. Often, mutual funds or ETFs may provide better performance at a lower cost.

FAQ

Q1: What are the typical fees associated with variable annuities?
A1: Fees can vary widely but generally include management fees (1-2%), mortality and expense charges (0.5-1.5%), and costs for optional riders (typically 0.5-1%). Always review the prospectus for detailed fee structures.

Q2: How do I choose the right benchmark for my annuity?
A2: Select a benchmark that closely matches the investment strategy of the annuity. For example, if the annuity invests predominantly in U.S. equities, the S&P 500 is a suitable benchmark.

Q3: Can variable annuities be a good investment for everyone?
A3: No. Variable annuities are complex products best suited for those with specific retirement income needs and risk tolerance. Always assess individual client circumstances before recommending them.