Variable Annuity vs. Indexed Annuity (Compared with Guaranteed Income Riders)

I recently worked with a client who was comparing a Variable Annuity with an Indexed Annuity. Knowing that he was healthy and going to live a long time, we planned to add on a Guaranteed Lifetime Income Rider. After my comparison was finished, it was amazing to see how the costs within the VA affected the underlying investment and really gave us a snap shot of what would need to happen in order for that VA to out perform the IA.

This initial investment was $150,000 and the client at the time was 62 years of age. He did not need to begin accessing the funds for 10 years which left plenty of time for growth.

The VA came with a 6% bonus on the front end. The Single Annuitant Guaranteed Income rider included a 6% roll-up interest rate if grown for less than 10 years and a 7.2% interest rate of grown for 10 or more years. We illustrated the 7.2% rate for comparison.

The IA came with a 8% bonus on the front end. The Single Annuitant Guaranteed Income rider included 7.2% regardless of how many years the investment was left to grow.

At the ten year mark we could guarantee that the client would have a value to provide lifetime income within the VA of $318,672.79.  At age 72 he would be eligible for a 5% guaranteed withdrawal rate for an annual income of $15,933.64 for life.

Since the IA gave a larger bonus, the total amount grown after ten years was $324,685.48. The percentage for calculating the guaranteed income was also substantially different.

At age 72 the client would be eligible for a 6.0% withdrawal rate which gave him an annual income of $19,481.13 for life. Thats roughly $3500 of more annual income, Guaranteed!

Now let’s look at the costs for both products. The IA has no annual fees, no M&E charges, no trading fees and no broker fees. The rider on this IA did cost .45%.

The VA had an M&E charge of 1.85%, an Investment and Management fee of 1.2% and a guaranteed income rider of .85%. Total fees for the VA are 3.9%.

What I have done here is calculate the guaranteed values of both a Variable Annuity and an Indexed Annuity. Just the guaranteed values. I have no idea what the market will bare over the next ten years for my client. So what I did was gave him the information that these products guarantee.

We can speculate on interest rates all day, but these are numbers his retirement can count on.

In the end if you think about it, The Variable Annuity would need to outperform the Guaranteed Roll-up Interest Rate of 7.2% that the IA provides, after making up the charges built into the VA of 3.9%. That means that the VA would need to consistently grow at a rate of 11.1% for 10 straight years just to tie the Indexed Annuity. 11.1% !!!!!

I have 5 other points I would like to mention regarding the nuts and bolts of these product, but I’ll write about them a little later.

If you would like me to build a proposal for you and show you who can guarantee you the most retirement income for your future. Call me or fill out my Annuity Form. You’ll have it within 48 hours, comparing the 3 top companies for your retirement.