Dear Mr. Berko: I’m considering putting $100,000 into an Allianz variable annuity. Please explain how the guaranteed minimum income benefit works.
And please tell me which of the 30 mutual funds available in this High Five annuity I should invest in. I don’t want to be taken to the cleaners. Is this a good 10-year investment for someone who is 56?
CD, Vancouver, Wash.
Dear CD: I’m suspect of any investment calling itself High Five and then giving you a short, 100-page prospectus so bloody boring that by comparison, reading a New York City phone book would be a hilarious experience. Allianz is a French company. Beware of the French; they guide their economic lives by a different set of principles than Americans do. However, Allianz is a respected insurer, and with the exception of some disappointing unilateral changes in its annuity policies during the past few years, it is an honorable company.
The guaranteed minimum income benefit portion is your safety net. The annuity company promises to credit your original $100,000 investment with an annual fixed interest rate as long as you own the annuity. Most companies guarantee to pay 5 percent (some pay more) each year to your GMIB account. Even if the mutual funds (insurers insist you call them subaccounts) perform poorly, as many do, the 5 percent guaranteed rate is always credited to your GMIB; that is, unless the insurer changes horses in midstream. And insurers have, and they can, and when they do, things get too rough. But this accumulation isn’t a value that you can take to the bank in 10 years; rather, the annuity allows you to take a fixed withdrawal from the GMIB over the remaining years of your life.
Assume you invest $100,000 in an annuity with a 5 percent income guarantee. Be mindful that most mutual funds offered by annuities have been scrubbed to reduce volatility that might be harmful to the insurer’s future liabilities. Allianz, like many annuity companies, runs its own proprietary mutual funds with placid, passive and pablum portfolios. So it’s wise to assume the worst: that those Allianz mutual funds have been scrubbed so clean that your $100,000 annuity grows to $65,000 in 10 years after you pay those enormous annual fees plus management costs and mortality expenses. However, all is not lost, because that $100,000 investment has compounded at 5 percent annually in that time frame, so your GMIB is now $163,000. And because you are 66, you can turn this into an income stream of $8,150 for the rest of your life or until you move to Jupiter or Mars.
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