retirement

Variable annuities on cusp of change

Granted, variable annuities are still a bit wobbly on their feet from the numerous beatings their reputation has taken in recent years. During the explosion of mutual funds in the go-go '90s, it became fashionable to knock variable annuities for their relatively high fees (roughly double that of mutual funds), high commissions (anywhere from 8 percent to 18 percent) and inflexibility (i.e., steep withdrawal fees). A guaranteed income stream? Bah, critics said. Simply annuitize your own portfolio and save the fees. Variable annuities truly were the Rodney Dangerfield of financial products -- they couldn't get no respect.

A mixed reputation 

If that wasn't enough, the lure of those high commissions prompted some unscrupulous sales reps to sell variable annuities inappropriately to the elderly, prompting a firestorm of lawsuits, consumer complaints and increased scrutiny from their two regulatory entities, the Securities and Exchange Commission and the National Association of Securities Dealers.

When the technology bubble burst with the new millennium, followed shortly by the Enron scandal, variable annuities were no longer the only punching bag in the schoolyard. In fact, in light of new concerns about market volatility, the stability of pension funds and the predicted demise of Social Security, annuities began to be seen more for what they can do -- remove the risk that you will outlive your money -- than for what they can't, which is provide a return on investment directly competitive with mutual funds.

Add in recent studies that indicate today's retirees could live far longer than their parents, even into the triple digits, and annuities start to look downright attractive again.

Not supposed to solve all problems 

Scott Sanderson, vice president of marketing and strategic relationships for The Hartford, says now that boomers are focused less on return on investment and more on going the distance, variable annuities are being viewed in their proper context.

"First of all, we're talking about a portion of somebody's assets, certainly never all. Where it matches up really well is with those income needs that are really nonnegotiable: your housing, your food, your health care. Those things you have no room to play around with," he says. "You can decide to play less golf, travel less or give away less money, but you can't decide not to spend any more money on essentials."

Variable annuities were never designed to be the whole enchilada. Instead, used correctly, they can augment Social Security and pension benefits to provide for living essentials should the rest of your nest egg suddenly spoil. In fact, the SEC recommends that you max-out contributions to tax-favored 401(k)s and IRAs before buying an annuity product.

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Designed to provide (emotional) security 

Frank O'Connor, product manager with Morningstar, says variable annuities are best viewed alongside other insurance products and not strictly as financial investments. If you fear you may outlive your assets, that risk is real to you, and may be worth paying a price to avoid.

"I would argue that fees only matter in the absence of value. If you are deriving value, even if it's perceived value like homeowner's insurance where the value may never be extracted, it can be a good thing," he says.

Who is most likely to benefit from a variable annuity? Forget the rich; they have little reason to believe they will wind up as wards of the state. Mackey says a good place to start would be the 80 percent of workers not covered by a defined benefit pension plan.

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