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  • Writer's pictureRob Schmansky

Have a Spouse? Don't Invest in a Variable Annuity

This is a series of articles I've labeled 'Variable Annuities are Retirement Snake Oil' on why today’s deferred annuities are not investments to consider for retirement. Over at least ten columns I’ll cover why you should avoid these ‘investment’ pitches and the people that want to put your retirement savings into them like the plague.

Reason #1. The cash flow stream for spouses makes little sense.

You and your spouse are 60 years old and have entered retirement. What is it you dream of doing?

Hopefully it is spend as much time together as possible. Experience things you have always wanted to. Travel. And at your passing make sure your spouse can continue to live comfortably, and in dignity.

Today’s variable annuities do not help you live theses dreams. While they are sold as providing ‘retirement income’, they really have only one option for so-called ‘income’ (really, it is a guarantee you can withdraw your money for several years, and then a lesser guarantee of ‘income’), and it is so inferior to other guaranteed cash flow choices that it is almost laughable.

Your choice? One flat, low amount.

According to Fidelity / MetLife’s calculator available at, if you placed $500,000 into a one of these deferred, ‘lifetime income’ annuities at age 50 to being to take withdrawals at 60 (you and spouse are the same age for this example), you would be ‘guaranteed’ a monthly income over both of you and your spouse’s lifetimes of $1,666.

While there are no perfect apple-to-apples comparisons, let’s take a look at if you put your $500,000 in a risk-free investment, US Treasury STRIPS earning 4% over that time period. Even over the ‘lost decade’ a balanced portfolio earned between 5-6%, so this is an extremely conservative assumption.

At retirement, at a 4% average annual return, you would have a portfolio value of $740,122. Placed entirely in an immediate annuity that covered both of your lives, you would have an annuity income of approximately $3600 per month.

If you were against the possibility of both you and your spouse dying and handing over your money to the annuity company, there are plenty of options that could guarantee an income with return of given amounts of money that still make an immediate annuity much more attractive than the variable annuity.

Conversely, you could keep a conservative portfolio and withdraw 5%, or $3,083 per month, and keep your portfolio liquid.

But let’s assume you are convinced that an annuity is the way to go for ‘guaranteed’ cash flow.

As a couple, wouldn’t your first concern be to maximize the amount you both could spend while you were both alive, but at the same time not relegate the surviving spouse to poverty?

The variable annuity payment never changes, so the surviving spouse has 100% of the payment as when there were two people alive. We’ve seen it is significantly less, but it is exactly what we were used to previously.

But, does this approach make any sense for couples? The variable annuity has no option to provide more for two than for one. The payment, once again, never changes.

Do you believe that two need as much to live on as one? Would the goals of a couple be to have a flat income stream; having less when you both are alive, and more when one passes?

Using common sense to realize that one person can live less expensively than two, we can use an immediate annuity to give the surviving spouse 66% of the payment and increase the payments while both spouses are alive to roughly $3,800. Meaning you and your spouse can spend $200 more a month or $2400 more per year while you are together over the immediate annuity. We've now achieved $2,134 more per month, or $25,608 more per year, than the ‘guarantee’ for the variable annuity with the same amount of investment.

I think you'll agree, $25,608 is a lot of additional cash to enjoy with your spouse.

If you are married, and if you want true guarantees, and significantly more cash flow from your investments to spend while you both can enjoy it, don’t consider a variable annuity.

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