Our series of Real World Scenarios continues:
The guy on the radio says to buy the Vanguard annuity, and that it is the best because the fees are so low. What should I do?
I don’t know that he said it was the best, but I’ll take your word for it. I’ve heard several people on the radio and read several newsletters making similar claims, and personally it bothers me when I hear it. Vanguard is a very good company in my opinion, and second-to-none when it comes to indexed funds (i.e. S&P’s 500 Index, Mid Cap Index, etc). I say second-to-none because all indexed funds are essentially the same, and Vanguard’s are the least expensive.
But when it comes to annuities as with most things in life, I believe you usually get what you pay for. Many people get very caught up in fees and fail to focus on the bottom line. The cheapest is rarely the best. If someone’s rate is low and they are good at what they do, it won’t be long before their rate goes up. That’s simple supply and demand. The opposite is true also. If someone’s rate is higher and they aren’t doing a good job, they will lose business and their price will have to fall in order to attract more business. My father always said, “There’s no such thing as cheap quality.” I’ll add one more t o that: “Price is only an issue in the absence of value.” If you needed brain surgery, would you go to the cheapest doctor you could find? If you hit someone in your car and they were suing you for everything you own, would you shop for an attorney by using their hourly rates as your main criteria?
When it comes to your retirement nest egg, very few things are more important and demand more attention and careful consideration. Search for performance, fund selection, management tenure, fund features, and benefits, but don’t get overly hung-up on fees. If one variable annuity is charging 2.25% in annual fees (the industry average) and has a 5-year track record of 30% per year (net of fees), all with the same management team, and another variable annuity is charging 0.50%, but they’re averaging 20% per year net of fees, which would you rather own? Seems like a simple answer, but you may be surprised by how many people would say the latter.
