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Investing Under the Umbrella
By Dr. David Edward Marcinko MBA, CMP™
[Editor-in-Chief]
http://www.CertifiedMedicalPlanner.org
While participation in savings programs such as 401(k), 403(b), IRAs, and SEPs were at record numbers before the “flash-crash” of 2008-09, each of these plans is subject to a contribution cap.
Consequently, investors are always looking for tax-efficient methods to save more for retirement; especially medical professionals as the economy improves as it has been doing of late. Many have turned, or continue to use, mutual funds. In fact approximately 47% of mutual fund assets are composed of nonqualified funds. And, investors tend to buy mutual funds on the basis of before-tax performance rankings.
Enter the VAs
But these folks might far better off with variable annuities [VAs] according to C. Michael Carty and Robert E. Skinner in the article “Variable Annuities vs. Mutual Funds” (Financial Planning, November 1996, pp. 75–84, Securities Data Publishing, Inc). In fact, they present a strong case for investing in variable annuities (said to operate under an umbrella that protects them from current taxation and inflation) as compared to mutual funds, which may continue today.
The Dickson-Shoven Study
Carty and Skinner refer to a 1993 study by Dickson and Shoven conducted at Stanford University in which mutual funds were ranked on an after-tax basis. The change in relative rankings was dramatic. Dickson and Shoven concluded that:
- Investors should always use after-tax rankings to evaluate and select mutual funds.
- Given two investments with similar pretax returns, an investor should select the one involving fewer taxes.
- A variety of approaches to sheltering or deferring taxes should be considered.
And, in one of the first comparison of returns between variable annuities and mutual funds, Rodney Rhoda of Fidelity Investments demonstrated that the difference in expense charges between variable annuities and mutual funds are less than one would expect because of lower variable annuity trading costs and a more stable asset base, which is usually more fully invested.
Assessment
I am not a fan of VAs as several essays in this ME-P suggest. Fees, expenses, loads and commissions are just too darned high. And, most are sold, not bought.
However, the authors demonstrated that under either lump-sum or gradual withdrawal assumptions, variable annuities consistently beat mutual funds, particularly for medium to high tax-bracket investors who achieve only median investment performance. Low tax-bracket investors who achieve average or lower investment performance benefit least from variable annuities. Also, variable annuities have been shown to be more likely to withstand the ravages of inflation.
And so, the conundrum continues.
Conclusion
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Filed under: CMP Program, Financial Planning, Investing, Portfolio Management | Tagged: CMP, david marcinko, Fidelity Investments, Mutual Funds, Rodney Rhoda, variable annuities, www.certifiedmedicalplanner.com |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Historical Update
Variable annuities were getting much play in the media more than a decade ago.
According to Harold Evensky CFP, of Coral Gables, Fla, variable annuities were useful when clients spent down their investments during retirement, when clients had long accumulation and withdrawal expectations, or when asset protection was a significant issue.
But, should doctors consider variable annuities as part of their circle of investments today? Please opine.
Dr. David Edward Marcinko MBA CMP™
http://www.CertifiedMedicalPlanner.com
[Publisher-in-Chief]
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How Insurance Companies Mislead Their Customers
I companies know full well that their customers are not going to read beyond the first few pages of their hundred-page contract, so they put all the goodies on the first page and keep the disclaimers on the back pages.
Source: Michael Zhuang – Principal of MZ Capital
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Can I deduct losses from my variable annuity?
Generally yes, if the annuity is a nonqualified (e.g., not an IRA) commercial annuity.
Typically, a variable annuity allows you to invest your premium in various mutual funds, called subaccounts. Unfortunately, these subaccounts may not perform favorably, and your premium could actually decrease in value.
Sean
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On VAs
Annuities are sold because of the commissions they generate for the brokers. They lock clients into unrealistic expectations.
Most folks would be better off simply buying U.S. Treasuries, which are far more secure and for which get a similar return without locking up their money for 20 years or having to fees or pay surrender penalties.
Any why convert capital gains into ordinary income?
Chester
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Variable Annuities
[Forget them; IMHO]
Dr. Marcinko – Their high expenses often overwhelm the tax-deferral advantage of these contracts.
Variable annuities make sense only for a fixed-income asset such as bonds or cash, and only if you are saving for many years. In that case, the gains from compounding your interest free of any current tax hit may eventually outweigh the drag created by higher fees.
The exact number of years necessary to come out ahead depends on your tax bracket and the income yield from your investments.
Zvi-Bar
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VAs
Variable annuities are one of the most over sold and misplaced investment products on the market in my opinion.
A few of the things that drive me crazy is seeing non retirement age people paying for income riders for 10+ years and never using them. The client needed tax deferred growth and they got it, but they also get other misused riders.
Another one is a VA in an IRA. That is like riding in a submarine and breathing through scuba gear. You’ve got a tax deferred vehicle in a tax deferred account. Again, with the exception of guaranteed income riders or a different ‘guarantee’ this doesn’t make much sense.
Annuities can be a great investment when used appropriately. My opinion is, they are just ‘over-sold’.
Joe
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VAs
Variable annuities can offer some benefits, according to the U.S. Securities and Exchange Commission.
For example, these annuities make it possible to receive regular payments throughout the rest of your life. They also have a death benefit, meaning that if you die before you started receiving payments, your beneficiary can receive a specified amount. Finally, variable annuities are tax-deferred, so you won’t have to pay taxes on income until you withdraw the money.
But in comparison to other mutual fund options, variable annuities can cost 50% to 100% more in fees and surrender charges, according to Financial Mentor. Further, the gains on these accounts are taxed as normal income — not at the lower capital gains rate — upon withdrawal.
Dirk
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