Look For Low-Cost Annuities

- Alan Lavine and Gail Liberman

Douglas Fabian, publisher of Doug Fabian's Successful Investing, Potomac, Md., conducted a study that showed that you can save tons of money by sticking with a low-cost variable annuity.

The annual charge on one of the top-selling broker-sold variable annuities is 3 percent. This means that if you had invested $200,000, you would pay $6,000 in annual charges.

By contrast, the total annual charges on a low-cost variable annuity that you buy directly from the company run about 1.42 percent or $2,840 per year. That's a difference of $3,160!

Over 10 years, the difference is $31,600. Over 20 years, the difference is $63,200.

Variable annuities are insurance contracts that let you invest tax-deferred in mutual funds. When you retire, you can get income for life from the annuity, or you can withdraw the cash. You pay taxes on the part of your annuity income that represents earnings. Annuities guarantee your principal--no matter how your mutual funds perform. If you die, your heirs should collect your principal or market value, whichever is greater. But to make certain you reap the benefits of this guarantee, it is critical that you invest with a financially strong insurance company.

All of an annuity's benefits come at a cost. Unfortunately, with an annuity, you pay a host of steep fees. These include a mortality and expense charge, fund management fees and fees to insure your principal. The annual cost for a variable annuity can range from about 1 percent to as much as 3 percent. Plus, some annuities come with what are known as "back-end surrender charges." This means that if you cash out the annuity, you pay an exit fee typically during the first seven years of ownership.

Fabian recommends that you stick with low-cost directly sold variable annuities, such as Ameritas, Fidelity, Schwab and Vanguard. These annuities also charge no back-end exit fees.

Does this mean you should avoid higher-cost annuities? Not necessarily. Annuities should be part of an overall financial plan. So the fees you pay could well be worth it if you get good professional help. Also, due to adverse publicity about high prices, the cost of many annuities sold by financial representatives is starting to drop.

Prefer to deal with a broker? You also can keep variable annuity costs low by avoiding enhanced principal guarantees.

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).