This is the question one of our clients asked recently. A good friend in the business had recommended they consider putting a chunk of their savings into the Jackson National Lifeguard Freedom 6 variable annuity and they did what we ask all of our clients to do, call us or contact us with your questions so we can give you our unbiased independent third party point of view.
The proposal or illustration that was passed along to us was for a $500,000 investment and here's what we found. There's a surrender charge starting at 8.5% of the invested amount that comes out to $42,500. The surrender charge gradually declines to 0 over seven years.
The total insurance and annuity company fees and expenses added up to 4.4%. This amounted to $22,160 being deducted from the annuity every year and that assumes the annuity never increases in value. That's before the money is invested in the different subaccount options, which are similar to mutual funds.
Investment fees for different investment options ranged from a 0.5% to a little over 2%. If we just blend everything together and assume money gets invested on all the different options the average fee came in at a little over 1.34%. That's another $6700 a year being deducted from the account.
The total annual fees and expenses came in at a little over 5.75% or almost $29,000. That money's going to be deducted from the annuity every year. You've got to make that amount of money on the investments just to break even.
There's an up front commission paid to the broker or sales agent recommending the product. That commission ranges anywhere from 5.5% to 7.5% so that works out to $27,000 to as much as $37,000.
You ever use an annuity for income all the profits are taxed at ordinary income tax rates. You would lose the long-term capital gain tax rate, which under current tax laws is always lower than your ordinary tax rate.
There's been numerous independent research studies that show the tax deferral benefit of an annuity is lost once annual fees and expenses exceed 3%. This product was almost twice that amount. As you may have guessed we suggested they pass on this investment opportunity.
Knowing all the internal fees and expenses of an annuity before you decide to buy one will help move you one step closer to experiencing your version of an incredible retirement doing what you want when you want.