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…