The Problem with the Chart: Tax Deferred Annuity vs Taxable Investments
Across the financial industry, investors are bombarded with an endless stream of charts, projections, and “what-if” scenarios—each crafted to make a particular product or strategy look superior. Mutual fund companies, insurance carriers, and annuity providers all publish their own versions, often based on selective or exaggerated assumptions: perfect timing, static tax brackets, no fees, or implausible turnover rates. The problem isn’t the math—it’s the motivation. These illustrations are designed to sell an idea, not to model reality. Without understanding the inputs behind the chart, investors can easily be misled into believing that one vehicle or structure guarantees a better outcome when, in truth, the difference often depends more on behavior and management than on the wrapper itself.
Take this one which illustrates that you’d be better off by $228,267 over the course of 30 years by investing in a tax-deferred vehicle – which just happens to be an annuity.
Sounds pretty straight forward right? Most people have heard of the benefits of tax deferral and for good reason. Tax deferral is a powerful strategy with benefits to the investor when used properly.
However, this particular illustration that was obtained from a firm that manages over $750 billion in assets (at the time of writing) is a little deceptive.
To show you why, let’s first recreate it. To recreate this, you need a simple year by year account projection using a straight 8% rate of return.
I did that here.
Boom. Just recreated marketing material from a firm WAAAY bigger than me. Anyway…
Anyway… let’s go through a few of the assumptions that no reasonable investor or advisor would think is prudent.
- 100% Portfolio Turnover
The model assumes every dollar in the portfolio is sold and reinvested every year—triggering full taxation annually. That would be the equivalent of a manager day-trading an entire retirement portfolio. You don’t need a high turnover rate to keep a portfolio in balance. In reality, most well-managed portfolios have turnover rates under 20%, and this is often much lower for index-based or ETF strategies. Lower turnover means fewer realized gains and lower annual taxes. - Highest Ordinary Income Tax Rates
The taxable investment is penalized by assuming all gains are taxed at the top ordinary income rate rather than the long-term capital gains rate. Now this assumption would actually be accurate if you do have 100% turnover; but in practice, most investment returns are taxed at 15%–20%, not 37%, and many investors hold a mix of short- and long-term positions.
- No Investment Fees
Ironically, the “tax-deferred” account in the chart—modeled as a non-qualified annuity—ignores both the base policy fee and the underlying investment management expenses that every annuity carries. Even the best Investment-Only Variable Annuities (IOVAs) have a base cost, plus subaccount or ETF expenses.
So let’s alter some of those assumptions to perhaps be a little more realistic.
Portfolio Turnover = 20%
Tax on LTCG = 15% (this bracket goes up pretty high so most people will fall in this bucket)
Ordinary Income = 22% (I’ll be fair and say this is a more likely scenario for most people)
Investment Fees = 30 bps (.3% for taxable) and 55 bps (.55% for a cheap IOVA. Most will be higher)
Look at that switch! By changing just a few assumptions, it went from $228,267 in favor of tax deferred to $58,270 in favor of just investing in a taxable account.
That’s a swing of $286,537. 😮
On top of that, the taxable account could be even better as you could donate appreciated securities, receive a tax deduction, and not pay taxes on the gain.
The best a tax deferred account can do is potentially offset the income it generates if you donate.
The Takeaway
Charts like these aren’t designed to educate; they’re designed to sell. By choosing extreme assumptions, firms can make one vehicle look far superior to another. The intent may not be malicious, but it’s certainly misleading.
A truly independent advisor will cut through that noise—testing assumptions, modeling realistic turnover and tax scenarios, and helping clients see what’s true for their actual portfolios and tax situations.