Variable Annuities and the S&P 500

Dear Mr. Berko:

My sister is 42, and I'm 46. We have a $110,000 certificate of deposit we inherited from our parents. It pays 4 percent and matures next month. Our uncle is a stockbroker and has recommended that we invest $55,000 in an AXA variable annuity with a great 6 percent income guarantee (I can send the prospectus if needed) and $55,000 in the SPDR S&P 500 exchange-traded fund, which pays 1.9 percent. He tells us the fund has averaged 18 percent during the past five years, which is a fantastic return. All of us--husbands, too--have been employed by the state of Ohio for many years, so we have excellent and guaranteed retirement and health plans. Both of our husbands agree that this is our money to invest and won't interfere with our investment decisions. But my sister and I would like your thoughts on these two investments before we invest.

--TS, Cleveland

Dear TS:

At your tender ages, you shouldn't be so comfortable with your retirement benefits. Your union has represented you well, and as a result, Ohio has one of the largest unfunded worker pension and benefit liabilities in the nation. The plan invests in stocks, bonds, real estate and other assets to produce investment income. And these investments, combined with the state's annual cash contributions, are supposed to grow over time to pay extra-juicy benefits to retired workers. But the unions relentlessly continue pushing for more benefits. As a result, today's unfunded benefits represent nearly 45 percent of Ohio's gross domestic product. So this $110,000 may be more important than you believe.

Keep that AXA prospectus. It's too complicated for me--even my daughter, an attorney whose IQ is off the atomic scale, has difficulty understanding prospectuses for variable annuities--so I'll wager a cubic yard of dimes to a mile-long line of $2 bills that your uncle-broker hasn't read AXA's legal trash. AXA, a French insurer, is just an average insurance company peddling average annuities. Yes, the 6 percent rate is a guaranteed minimum income benefit, but as with all insurance products, you've gotta pay for it. In this instance, it's 1.15 percent of your principal value each year. Did your uncle-broker tell you that? Then there are mortality costs, money management fees and other expenses (about 1.85 percent), bringing the annual cost of owning this annuity to 3 percent. So in order for you to net 6 percent, your variable annuity must earn 9 percent annually, and it must do this year in and year out. Did your uncle-broker explain this to you? Annuities are terribly complicated products, with nearly a zillion complex moving parts that are only a little less confusing than our tax code. You don't need these complications in your investment lives. But you can consider a $55,000 portfolio of no-load funds (see enclosed list) that should outperform that annuity by an Ohio mile. And they won't cost you a hidden 5-6 percent commission.

Now, the SPDR S&P 500 fund (SPY-$186.44) isn't all it's cracked up to be. Between January 2008 and January 2013, its return was less than stellar--less than 2 percent a year. That's nothing to holler home about. Granted, 2013 was an explosive year, so including last year's impressive results (from January 2009 to January 2014), SPY's five-year return did zoom to an explosive 18 percent. (What a difference a year can make!) But your uncle-broker needs to go back to broker school.

I would rather see you and your sister use the second $55,000 to buy a dozen dividend growth issues that are in the S&P 500 index. Johnson & Johnson, McDonald's, Procter & Gamble and Kimberly-Clark are just a few that have grown their dividends by more than 10 percent annually for years. Make sure you reinvest the dividends. These stocks won't set the world on fire, but over the coming 20 years or so, their average annual dividend payouts should equal 26 percent of your original principal. And that's something to holler home about.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at Visit Creators Syndicate website at

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Published: Tue, Apr 15, 2014