- Many baby boomers are planning for a retirement that lasts 30 years. Informed investors generally understand that inflation and rising health care costs will keep driving their income needs up throughout their retirement years. According to the Harris study, sponsored by AIG SunAmerica, three-quarters of those polled had interest in an investment that can provide growth, guaranteed income for life and protection from investment losses. Two-thirds of the responders indicated a willingness to pay up to two percent of their annual returns to secure these goals. Annuity companies have increasingly stepped up their efforts to provide the solutions for these desires.
- The Securities and Exchange Commission advises consumers to carefully review the expenses in an annuity contract. A basic variable annuity typically insures a death benefit equal to the investor's cost basis. In addition, the insurer assumes the investment risk when the annuity investor converts the account to an income stream. The insurance cost for these features, or the mortality and expense charge, averages about 1.25 percent per year. In addition, the fee may cover commission payments to the financial adviser who sells the annuity. Other administrative fees for record keeping may add an additional .15 percent, or the annuity may charge a flat fee annually of $25 to $30. These fees do not include the expenses you will pay for the underlying mutual fund investments or the guaranteed benefits annuities now offer baby boomers to meet their lifetime income and growth protection desires.
- According to the Investment Company Institute, mutual fund expenses have been coming down since 1990. In 2009, equity fund expenses averaged about .99 percent in 2009, down from 1.98 percent in 1990. Adding that expense to the variable annuity's basic administrative fees, you will pay annual expenses higher than 2 percent. If you attach some of the desirable extras, such as a stepped up death benefit or a minimum income benefit, you could pay more than 3 percent annually.
- If the risk of running out of retirement income looms large enough, investors may still consider the benefits of a variable annuity valuable enough to pay the price. You can realize some of these benefits, however, without necessarily investing everything you have in a variable annuity. You can invest only a part of your retirement savings in an annuity, or wait until you are ready to start an income stream before looking at your options. An immediate annuity provides guaranteed income features without the excessive fees you pay for a variable annuity, according to Moneywatch. You can look for features such as inflation protection and guaranteed return of principal. Annuity guarantees depend on the financial strength of the insurance company, so check the insurer's ratings for financial strength before you invest.
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