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Annuity Costs | How Much Should You Spend?

Annuity Cost

For some odd reason, many people buy into the false statement that “all annuities are expensive.” Of course, that is a false statement. The majority of annuity types have absolutely no annual fees or expenses. Even Variable Annuities (VA) can be purchased in a no-load (i.e. no fee) format.

Now that that’s cleared up, annuity costs are still front and center to the uninformed masses of baby boomers, pre-retirees, and retirees searching for that perfect contractual guarantee to add to their current retirement plan. Unfortunately, your financial advisor and unregulated agenda driven media messages will try to steer you away from the only product that can provide an income stream that you can never outlive. Annuities.

Let’s strip away the noise and look at the facts concerning annuity costs, and how to make sure you are making an informed decision.

Actual Annuity Costs

There are many types of annuities. The most popular consumer annuity types are Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), Fixed Index Annuities (FIAs), Variable Annuities (VAs), and Multi-Year Guarantee Annuities (MYGAs). All these annuity contracts are issued and back by a life insurance company.

When it comes to management fees, surrender fees, expense ratios, and annuity fees in all depends on the type of annuity. SPIAs, QLACs, DIAs, MYGAs, and FIAs have no annual fees. VAs can have very high fees but can also be purchased in a no-load version. VAs, FIAs, and MYGAs typically have surrender charges attached to specific surrender periods. Only at the time of application when an Income Rider is attached do FIAs have annual fees. Otherwise there are no annual fees.

Now that I’ve established that the contractual costs are not an issue with annuities, let’s look at the other “cost” arguments.

Opportunity Cost

This is the alarmists “go to” reason for not buying an annuity. The dreaded and undefinable “opportunity cost.” It’s important to point out that brokerage firms and financial advisors make the majority of their money on consumers by charging a fee to manage their portfolios. Most annuity types can’t be “wrapped” in an advisory fee, which means no recurring revenues.

For some odd reason, many people buy into the false statement that “all annuities are expensive.” Of course, that is a false statement.

Opportunity cost means that if you buy that annuity contractual guarantee, you will miss the next market spike. You won’t be able to brag about your stellar returns at the cocktail party. You would have missed out on that next big “opportunity.” Always remember that fear and greed sell, especially the greed part.

The brutal reality? Annuities are not investments. They are transfer of risk contracts that primarily fit into the retirement income planning part of your portfolio. Annuities have a monopoly on lifetime income and are the only financial product that can provide a payment stream that you can never outlive. Over 10,000 baby boomers reach retirement age every single day, most of them need more income than that Social Security (annuity) payment. Annuities contractually fill that gap.

Market experts will tell you that they can manage the money, and you can just peel off 4% from the gains. Life will be perfect. History shows that it works. The proposal numbers look great.

Pandemic anyone? So much for hopes, dreams, and opportunities. Contractual guarantees do matter when “things” start hitting the market fan.

Minimize The Cost

When it comes to annuity costs, I’m the first person shouting from the roof tops to not put too much money into a specific annuity strategy. I know that the bad chicken dinner seminar agent loves to take someone’s entire 401k asset and slam it into their favorite indexed annuity. But that’s total non-fiduciary garbage. The annuity industry frowns on those types of “all in” sales practices. Most carriers do not want to see more than 50% of a person’s investible (i.e. non-home) assets placed into annuities. Not just with that specific carrier, but total. The only way an agent can get around that rule is to purposely fill out the application to bloat the numbers so it can get past carrier compliance. Because of that, always ask for a copy of your annuity application.

The best way to minimize “cost” when buying an annuity is to use as little money as possible to contractually solve for your specific goal. Perhaps instead of putting $500,000 into a Single Premium Immediate Annuity and then just accepting the highest contractual guarantee after shopping all carriers...figure out the exact monthly income dollar amount needed. From that specific income gap number you can then “reverse engineer” the quote by shopping all carriers to see which one requires the least amount of money to achieve that contractual goal.

In other words, keep as much of your “powder dry” as possible. Put the least amount of money needed into the annuity strategy. If it’s an income annuity and future inflation hits, then do the same reverse engineered strategy. Figure out the exact inflation dollar amount you need to solve for, then quote all carriers to find the best deal.

A logical question would be “Isn’t there an annuity that adjusts for inflation so I don’t have to buy another annuity to fill the inflation gap?” Remember that annuity companies have the big buildings for a reason. They don’t give anything away without some repercussions, and your income stream is primarily based on your life expectancy at the time the payments start. Annuity companies have strategies that “adjust/increase” for inflation, but they price that into the contract and compared to the same annuity without that increase, significantly lower the initial payout when. It’s better to just keep your powder dry, and solve for that inflation gap when needed.

So, when people ask me how much they should spend with annuities, my answer is “as little as possible to contractually solve for the specific goal.” That’s the best annuity cost-cutting strategy you will ever get.