Monday, June 27, 2005
VA Benefits
No, not Veterans' Administration benefits. I'm talking about variable annuity benefits! And noted Miami financial planner Harold Evensky's having a Road to Damascus moment.
http://www.fa-mag.com/issues.php?id_content=2&idArticle=988
No, he's not a convert or a big annuity fan. He's just coming to accept that VAs may have a role.
Me? I like annuities, actually. But I like them as a risk management tool, and not as an investment tool.
As a risk management tool, they're important, because I don't think investors want to take the risk that they will outlive their retirement stream of income. That's a gamble they can't afford to lose. So it's entirely proper that that risk be transferred to an insurance company, which is in a better position to handle the risk.
As an investment, I hate them, because A.) Their fees are stupendously high (why should it cost more to maintain an annuity wrapper on an account, over and above mortality, than it does to open an IRA?), and B.) I'm not convinced yet that the tax deferral is worth as much as everyone thinks it is, considering that you wind up paying income taxes rather than lower capital gains tax rates.
Yeah, the tax deferral beats your run-of-the-mill, high-expense, high-turnover crappy mutual fund, which jacks up capital gains distributions with every trade and turns its portfolio over every year.
But I think when you compare the tax deferral in a VA to, say, a low-turnover tax-managed index fund, I'm not sure you come up with much of a benefit at all.
Anyone wanna argue different?
Splash, out
Jason
http://www.fa-mag.com/issues.php?id_content=2&idArticle=988
I believe that my first public pronouncement on the subject of VAs was a January 1997 quote in Humberto Cruz’s nationally syndicated column: “Under any rational scenario, the real value of the guaranteed death benefit is negligible.” Never one to hide my feelings, referencing the tax shelter benefits of VAs, I told Business Week in July ’97 that “I’ve run scenarios upside and down and backwards, but it just doesn’t work out. You end up turning gold to lead,” a reference to converting potential capital gains to ordinary income. Finally in September of 2000, I told Bloomberg Wealth Manager, “The only reason to consider buying an annuity is if the agent is your son or daughter.” Pretty strong stuff. In hindsight, I believe my heart was in the right place but my framing was far too narrow.
Since then, my thinking on the subject has evolved as I studied and learned more (as, I hope, my thinking on all of the planning issues important to my clients continues to evolve). By November 2002, I told Money Magazine “A year ago, I would have washed my mouth out with soap if I said the word ‘annuity.’ Now I believe they can be an important part of retirement planning.” What were the elements leading to my new perspective?
No, he's not a convert or a big annuity fan. He's just coming to accept that VAs may have a role.
Me? I like annuities, actually. But I like them as a risk management tool, and not as an investment tool.
As a risk management tool, they're important, because I don't think investors want to take the risk that they will outlive their retirement stream of income. That's a gamble they can't afford to lose. So it's entirely proper that that risk be transferred to an insurance company, which is in a better position to handle the risk.
As an investment, I hate them, because A.) Their fees are stupendously high (why should it cost more to maintain an annuity wrapper on an account, over and above mortality, than it does to open an IRA?), and B.) I'm not convinced yet that the tax deferral is worth as much as everyone thinks it is, considering that you wind up paying income taxes rather than lower capital gains tax rates.
Yeah, the tax deferral beats your run-of-the-mill, high-expense, high-turnover crappy mutual fund, which jacks up capital gains distributions with every trade and turns its portfolio over every year.
But I think when you compare the tax deferral in a VA to, say, a low-turnover tax-managed index fund, I'm not sure you come up with much of a benefit at all.
Anyone wanna argue different?
Splash, out
Jason
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