Annuities can be complex instruments with a range of fees and conditions that make them hard to understand and need to be studied carefully. Essentially they offer tax deferred growth with a range of income guarantees and life insurance.
One of the key problems is understanding their real earnings potential and getting the best out of them because tracking the funds in the Sub-Accounts is not easy. Nevertheless, it is possible to build an effective portfolio that can compete with an ETF portfolio if done right.
In this first of two articles, we measure historical returns from a number of variable annuity products based on strategic and tactical asset allocation.
This graph (click to enlarge) summarizes the results for a moderate profile for a range of different annuity programs.
|Annuity||TAA 5 Yr Return Annualized||Plan Rating|
|Western Reserve Life Insurance VUL No Profunds New||11%||69%|
|Vanguard Variable Annuity||13%||74%|
|Schwab Select Annuity||15%||85%|
|MERRILL LYNCH IRA ANNUITY||7%||32%|
|MassMutual Transitions Select Variable Annuity||7%||37%|
|John Hancock Venture Vantage Variable Annuities Plan||12%||70%|
|Hartford Leaders Fundation Edge Series 1 Annuity||10%||42%|
|Fidelity Personal Retirement Annuity||14%||87%|
|Charles Schwab Income Choice Variable Annuity||14%||72%|
|AXA Equitable Accumulator Select Variable Annuity||10%||56%|
|American Legacy Shareholders Advantage Variable Annuity||15%||68%|
The returns and plan ratings for the best of the annuities are in a reasonable range. It is important to note that the returns do not include fees which vary but can be in excess of 2%. This can be tolerated with good returns but will significantly reduce what goes in the investor's pocket.
For those with annuities, it is critical that you have a solid portfolio generating the best possible returns -- note that as the growth is tax deferred, active trading has no consequence.
In the next article, we will compare the best and worst annuities with an ETF portfolio and determine whether a tax deferred investment vehicle has real benefits in the long term.
Disclosure: No Positions