Variable Annuities: A Revolutionary New Twist on Annuities Lets You Enjoy Risk-free Stock Market Returns
by Dr. Mark Skousen, Chairman, Investment U
Friday, August 18, 2006: Issue #572
Billionaire Warren Buffett has two rules of investing: Rule #1: Don’t lose money; Rule #2: See Rule #1.
Of course, Warren Buffett was being half facetious. Nobody, not even the gifted Warren Buffett, can avoid violating Rule #1 if he invests in the stock market a la the “Warren Buffett Way.” Most of his stock and business picks have made a ton of money, but there’s no guarantee. Many have lost value from time to time, such as General Re Securities, and Coca-Cola (which has lost half its value since 1998).
Investing can be frustrating these days, given the uncertain world of war, terrorism, inflation, boom and bust, and a Fed policy that changes every year. Even Buffett’s method of buying “wonderful” growth stocks at a bargain doesn’t always work.
As Robert G. Hagstrom, author of the best-selling The Essential Buffett, wrote, “Today stock prices skyrocket with little reason, then plummet just as quickly, and people become frightened. There appears to be no rhyme or reason to the market, only folly.”
- Invest in practically any investment category you can name – U.S. stocks, U.S. bonds, energy, foreign stocks and bonds, money market funds, even emerging markets.
- Switch between these investments at any time for maximum profits.
- Invest without worrying about taxes. All taxes on gains (short- or long-term) are deferred until withdrawal (no, it’s not an IRA).
- Your principal is guaranteed. The value of your account can never decline; in fact, it will go up by at least 5% a year.
- The value of your account is reset every year at either a) the value of your account based on your choice of investment vehicles, or b) the value of your principal plus 5%. This is called the “automatic annual step up” plan.
- Minimum investment is $5,000 to start, but you can add to your account at any time, or invest automatically every month, with as little as $50.
- The investment offers a death and annuity benefit.
I know this investment product seems unbelievable, but it’s all true. “Guaranteed” variable annuities are being offered by leading insurance companies in the U.S., such as John Hancock, AXA (Equitable), Allstate, American Skandia and Jackson National, among many others.
Perspective II gives you a choice of 65 funds managed by:
- Franklin Templeton
- T. Rowe Price
- J.P. Morgan
- PIMCO and
- Mellon Capital
Choose among small-cap, mid-cap, large-cap funds (both here and abroad), bond funds, oil and gas, etc. (The company doesn’t offer a gold fund or a bear fund; however, AmericanSkandia/Prudential does offer these alternative funds). And you can switch from one fund to another at any time without penalty.
Naturally, the insurance company is going to take its cut to administer this plan and make the guarantees. The cost of the Jackson National variable annuity is 3% a year, but note that the 5% guaranteed step up is net of expenses. In my opinion, I think that’s a small price to pay for such a low-risk investment opportunity.
How the Variable Annuity Guarantee Works and How to Eliminate a 40% Decline
To see how valuable this guarantee is, take a look at this example. Suppose you invested $250,000 in 1996 in a U.S. stock index fund. Your investment would have done extremely well, reaching $860,162 by 2000. Then the market fell sharply, so that by mid-2006, your account was down to $511,328. This shakes out to a 40% decline!
Ah, but instead you purchased a LifeGuard Protector Advantage from Jackson National in 1996, and invested $250,000 in its Perspective II (or a similar plan). Instead of taking a 40% loss, you actually gained 5% a year during the down years (2000-03), so that by mid-2006 your guaranteed withdrawal balance grew to $929,187! See the chart below for reference.
Word of Caution:
Since variable annuities are not FDIC insured, you’ll need to check on the viability of the insurance company. Jackson National, by the way, is top rated A+ by A.M. Best and AA rated by Standard & Poor’s, and is the 15th ranked insurance company in the U.S., with more than $50 billion in assets.
For more information on getting started, contact your life insurance agent.