JUST PLAIN TALK: An investing lesson gleaned from Mother Nature

The snake did not hesitate and slipped into the cold water of Morrison Springs. Fear is the default emotion when I see a snake, but this was different. It was serene and beautiful watching the green snake glide across the stream.

I steered the bow of my kayak around and showed the critter to Joe Wyatt, a naturalist for Hammock Bay. Leslie Kolovich from 30A Radio and Lori Ceier of Walton Outdoors had enlisted Joe to explain some of the local fauna and flora as part of their “Day at Morrison Springs.”

Before you could say scat, Joe had the green tree snake wrapped around his arm. “Skinny short snakes aren’t venomous; they have to constrict their prey. The exception being a coral snake. Short fat snakes may be venomous since their venom can kill larger prey.”

Snakes are a part of our ecosystem. You need to know the ones that will hurt you. Venomous snakes, like the one of eastern diamondback heritage spotted crossing the Joe Baker Walkover in Blue Mountain Beach, are ones to avoid.

On the way home through Red Bay, it dawned on me that annuities are like snakes; some will hurt you, others won’t.

The prior week I recommended a retiree use a portion of his deferred compensation to buy a single premium immediate annuity to bolster his retirement income but gave the opposite advice to someone else. Why the difference? In the latter case the annuity in question was a variable annuity with annual costs coiled menacingly like a snake around 3 percent.

The August edition of the Journal of Financial Planning examined several different withdrawal strategies-mutual funds, immediate annuities, combinations of the two along with variable annuities, with and without guaranteed withdrawal benefits. There was no clear-cut winner.

Guaranteed benefit riders are prevalent on variable annuity contracts. This product appeals to investors who are wary of market losses. However ignoring the fees is as dangerous as playing with snakes. “Wealth balance in the low fee scenario is roughly $184,000 higher,” based on a million dollar initial investment.

Contrasted with variable annuities containing guaranteed benefit riders, a mix of mutual funds and immediate annuities “can generally provide investors with greater purchasing power.” Also, a mix of mutual funds and immediate annuities yields “similar or even higher income flows than variable annuities with guaranteed minimum withdrawal benefits.”

It is pretty elementary. Variable annuities with guaranteed minimum withdrawal benefits assess mortality and expense charges along with fees for the withdrawal benefit rider on the entire portfolio. These costs are absent from mutual funds.

Even with this headwind, under some circumstances a variable annuity with guaranteed withdrawal benefit may outperform. Under some circumstances it makes sense to pick up a rattlesnake … most people would wisely defer though.

From the article’s executive summary: Mutual funds combined with immediate annuities “deliver solutions broadly similar to and even more flexible than a variable annuity with a guaranteed minimum withdrawal benefit.”

Annuities are easy to understand - they provide a lifetime income stream. If your annuity does anything else you pay for it, each and every year. Freedom from stock market fluctuation or guaranteed account balances are benefits you buy - sometimes dearly - and are often unnecessary.

In certain circumstances an annuity with low annual costs may be appropriate for you. But buying an annuity without understanding the product is not dissimilar from picking up a snake without knowing what kind it is.

In nature or investing what appears to be a good idea can turn out to be the opposite. Joe told us that the chilly, spring water could have killed the snake or shocked it so much a predator would have nailed it for Sunday dinner.

Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at (850) 267-1068 or at buz@LivingstonFinancial.net.