Retire With Ryan
5 Reasons To Not Invest Your Retirement Savings In Variable Annuities, #309
Why It Matters
Understanding the true cost and drawbacks of variable annuities helps retirees protect their hard‑earned savings and avoid products that benefit advisors more than investors. As the episode shows, even modest fees can dramatically reduce retirement wealth over time, making informed decision‑making essential for a secure financial future.
Key Takeaways
- •Variable annuities charge 3‑4% annual fees total.
- •Advisors earn up to 7% commissions on annuity sales.
- •Lack of transparency hides fees and performance differences.
- •Surrender periods impose 8% early‑withdrawal penalties.
- •S&P 500 outperformed typical annuity by 65% over five years.
Pulse Analysis
In episode 309, Ryan Morrissey breaks down why variable annuities, despite their marketed guaranteed income, often erode retirement wealth. He explains that these products generate hefty up‑front commissions—sometimes 7% of the sale price—and ongoing mortality, expense, sub‑account, and rider fees that can total 3‑4% each year. The tax‑deferral benefit mirrors that of traditional IRAs or 401(k)s, offering no real advantage while adding layers of cost and complexity.
Morrissey outlines five concrete drawbacks: high cumulative fees, opaque fee disclosures, an unfavorable risk‑return profile, limited inflation protection, and steep surrender charges that can start at 8% and decline over a seven‑year lock‑up. He illustrates the impact with a real client case: a $215,000 investment grew only 3.6% over five years, whereas the S&P 500 delivered a 65% total return in the same period. The example underscores how fees and sub‑par performance can cripple long‑term retirement outcomes, reducing both lifetime income and legacy value for beneficiaries.
For a professional audience, the episode serves as a cautionary reminder to prioritize fiduciary‑aligned advice and low‑cost, transparent investment vehicles. Instead of relying on guaranteed withdrawal riders, retirees can achieve comparable or superior outcomes through diversified portfolios, index funds, or annuities with clear fee structures. Understanding the true cost of variable annuities empowers investors to safeguard their hard‑earned savings and maintain purchasing power against inflation. The takeaway: scrutinize every fee, demand full disclosure, and consider alternatives before locking retirement dollars into a variable annuity.
Episode Description
Variable annuities are often promoted as a secure way to generate guaranteed income during retirement, drawing the attention of retirees seeking stability for their nest eggs. But beneath the surface, these products frequently come with complications and costs that can erode your savings and limit your financial flexibility. In this episode, I share the details of the often-overlooked downsides of variable annuities and give you some important insights every investor should consider.
You will want to hear this episode if you are interested in...
[03:14] What is a Variable Annuity?
[04:27] Understanding Annuity Benefits and Growth
[08:41] Lack of fee transparency in annuities
[09:45] Variable annuity investment drawbacks
[14:59] Avoiding variable annuity pitfalls
What Is a Variable Annuity?
A variable annuity is an investment product sold by insurance companies, offering a selection of investment accounts, referred to as sub-accounts, designed to mimic mutual fund performance. The tax-deferred growth inside the annuity is often touted as a major benefit. This tax deferral is redundant for retirement investors who already enjoy similar benefits in IRAs or 401(k)s.
Many variable annuities advertise living benefits, such as guaranteed lifetime withdrawals. For instance, a $100,000 investment could guarantee $5,000 per year for life, regardless of the contract's cash value. Some contracts offer guaranteed "growth" of your future income base, but crucially, this is not money you can cash out: it simply determines your withdrawal amount, not your walk-away value. The catch is that these appealing features come at a steep price.
Fee Structures are the Hidden Drain on Returns
One of the most significant drawbacks of variable annuities is their high-cost structure. These costs can be organized into three main categories:
Mortality and Expense (M&E) Charges: Annual administrative fees imposed by the insurance company, typically ranging from 1% to 2% per year.
Sub-Account Fees: Investment management fees that vary depending on your chosen investments. While some options are slightly less expensive, others can reach up to 2% annually.
Rider Fees: If your contract includes a guaranteed income benefit, expect an additional 1%-2% per year for this privilege.
Combined, these expenses can easily total 3% to 4% annually, making variable annuities arguably the most expensive retirement investment around.
What You Don't See CAN Hurt You
Transparency is another major shortfall in the world of variable annuities. Many investors are not fully aware of the high fees they're paying. While the fees are listed in the prospectus, many advisors fail to highlight them, and statements often obscure these charges. Understanding true costs requires diligent reading of the fine print, and even then, variations in sub-account performance can lead to unexpected results. You may believe you're mirroring mutual fund returns, but annuity sub-accounts are not identical and can significantly underperform.
The promise of guaranteed income comes at a heavy cost. For the insurance company's guarantee to pay off, you'd generally need to either live well beyond average life expectancy or experience long-term poor market performance. Since withdrawal rates are limited and fees are high, over the long run, variable annuities may yield less retirement income or reduce the amount left to your heirs.
Look Beyond the Sales Pitch
Variable annuities can be marketed to highlight only the positives, but it's important to consider the high fees, lack of transparency, poor risk-return tradeoff, inflexibility, and opportunity costs involved. Before committing your retirement savings, do your homework—or consult a truly fiduciary advisor—and make sure variable annuities are the best fit for your long-term goals.
Resources Mentioned
Retirement Readiness Review
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