The biggest diverse, invasive or pervasive culture that human kinds knows is football and I love the fact that at the altar of football human kind can come worship and celebrate. — Former Newcastle player Andy Harper

Football is an amazing game. The thrill to see a running back running with a ball — thinking only about the touchdown — while avoiding fullback’s aggression to snatch the ball makes this game fun to watch.

Is your life not a football game? Think twice before you nod your had with disapproval.

Everyday when you walk out in the rectangular field of life — like a prolific running back holding your ball of money — a fullback awaits to snatch your ball. And among those who want to snatch your stash ball(You won’t find this term in Webster as I have coined this term), sometimes, are your friends and family members.

It is up to you to play smart by keeping eye on your goal — your touchdown by achieving financial freedom — without allowing these folks to make you lose in the game of life.

You may have friends or family members selling life insurance policies, variable annuities or simply pressuring you to sign up for some multilevel marketing schemes. Unless you learn the to say NO, you will keep losing the grip of the ball and eventually even losing the game of achieving financial freedom.

I ended up running away from a fullback who was trying to snatch my  stash ball by convincing me to invest in a variable annuity.

For those of you who don’t have a clue about variable annuity: simply stay away! No one likes variable annuities except those who sell them. For the starters, commission is normally 3-4% for few hours of work. If you buy into $100,000 variable annuity product, you are paying up to $8,000 in just commission(Agent makes $4,000 and the issuing firm makes $4,000).  And, you are surrendering $100,000 for a guaranteed return in the future. That’s a double stab at your stash ball. And it gets worst as you know more about the investment to stay away from.

What are these creatures? Variable annuities are special type of mutual funds — they are called subaccounts — topped with a sweet layer(a mirage) of insurance. 

And insurance is not the insurance you think of. It’s only a guarantee to protect your investment, should it go down substantially in the long run. Well, history proves that stock market always goes up in the long run. That means, you are paying for an insurance policy that will never see a daylight.

Friend: Hey, I’ve got an investment that will be a great tax shelter for you when you retire. It’s variable annuity, a great way to get steady stream of income — usually 6% return on your investment — when you retire. It is taxed at an ordinary income bracket, but your bracket will be lot lower when you retire. So, you will beat the uncle(Sam).

Me: Okay, that sounds great. But is it? Let’s do some analysis. Most variable annuities cost 2% higher than a low-cost index fund such as Vanguard’s total market index fund. That 2% seem meager but $10,000 invested at that difference will compound to over $1.1 million compare to $470,000 due to 2% variable annuity fees every year. Unless you pay no taxes at all, lowest tax bracket of 15% still won’t be enough to offset the performance difference.

Friend: I don’t think you have to worry about that since you won’t live for the next 50 years.

Me: Aah, thanks for reminding me that. Now since you have the crystal ball, let’s talk about that. If I die in next 30 years, and let’s assume that my daughters receive $100,000 inheritance, they will pay taxes on $90,000 because variable annuities funded with after-tax dollars offer no step-up in the basis on the gains.  On the contrary, if I simply invest $10,000 in Vanguard fund, it will not only grow to over $200,000 but also provides a step-up in the basis as a great tax shelter for my daughters.

Why do I want to invest in a product that charges 2% annual fees over and above other fees such as the fund transaction fees. It lacks liquidity since I will end up paying more than 10% surrender penalty if I need money before I am 591/2 years old. It provides no-step up basis for heirs even when they receive much lower return on the investment. And to make it worst, my internal rate of return(IRR) for handing money over to someone in the first 15 years is 0% since all I get back is the principal that I surrendered for a guaranteed return of 6% in the future.

Needless to say, I have not talked to that friend since then. And my stash ball is still in my hand. Often, the best way to achieve financial freedom is to keep it simple.  And there is noting simple about variable annuities. Do you agree?

The best defense is a good offense — Mao Zedong

photo by: Sports-picture.org