Annuities

The Three-Legged Chicken of Investments: Why Guaranteed Products Aren't Always What They Seem

Have you heard the tale of a three-legged chicken? It serves as an apt metaphor for the "too good to be true" products marketed to unsuspecting investors. Recently, a client of mine was reminded of this tale when dealing with a complex Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuity. Sold by a "friend" years ago, this annuity promised guaranteed income and stock market growth. Unfortunately, it turned out to be more of a cautionary tale than a golden goose.

Years later, the underlying investment value hadn't grown significantly. My client had been paying high annual fees—over 2%—which steadily eroded returns. When he wanted to move the account, he faced hefty surrender penalties, as high as 7%. Thankfully, we found a solution that helped him preserve his investment, but it underscored the dangers of chasing unrealistic guarantees.

For anyone considering "guaranteed" products, let me share a story about a chicken...

Guaranteed Annuities and other Three-Legged Chickens

One of my first Accountable Update posts was about Three-Legged Chickens. I was reminded of this recently as one of my clients dealt with a complicated Guaranteed Minimum Withdrawal Benefit (GMWB) variable deferred annuity that a “friend” sold him for his IRA several years ago.

As is usually the case with products like this, it sounded too good to be true when it was sold to him. He could invest in the stock market but have a guaranteed minimum return of 7%. If only it were so simple.

Long story short, after over a decade, the value of the underlying funds were not much more, if any, than his original investment. After a few years, he decided to transfer the account somewhere else, but had been discouraged from moving it due to surrender penalties that were as high as 7% of his account balance. While market conditions and fund selection contributed to the dismal performance, the fact that he was paying over 2% in annual fees was the primary culprit.

We ultimately found a solution for him after carefully reading his annuity contract. The insurance company now sends him a check each year for the rest of his life and we deposit that into his IRA within 60 days of the distribution so it can continue to grow tax deferred. If you want to hear all of the details, or if you have a similar product and feel stuck, get in touch to discuss.

If you are considering any new investments, especially those touting guarantees, let me tell you a story about a chicken…

Are Texas Teachers Getting the Shaft?

It was a good week for schools in the Austin area. Several school districts passed bonds and a couple made adjustments to their tax structure, known as "Golden Pennies", that will allow them to retain more of their local tax money. All the measures should help provide better facilities, staffing, and learning opportunities for the students in those districts. But while some districts found gold, many teachers and district employees across the state may still be getting the shaft.