Everyone knows that nothing is free and folks need to earn their living. Nevertheless, there is some point at which a line is crossed and we move from “I deserve to be paid” into gouging. Our society needs some serious exploration as to But where exactly does that line lie.

My old friend Debbie recently asked me to look over a financial product and tell her my thoughts. She had been working with a “financial advisor” for a number of years and had grown to trust her. Until recently, all the investment recommendations had been mutual funds, ETFs, and stocks. Now this advisor was suggesting my friend put a quarter of her wealth (about $200,000) into a complex investment that made many promises, offered guarantees, sounded too good to be true, and was hard to understand. The pitch was that this was an intelligent way to help fund her retirement.

One who has been at this as long as I have usually knows what is going on in less than two seconds. “A variable annuity,” I guessed, without even looking. My friend said it wasn’t called that but she hoped I would take a look. I was glad to help.

Of course, it was yet another variable annuity product. They are the contract with a thousand different names. So many variations of what is essentially the same thing. They are very lucrative to sell and, as a result, are widely held by folks from many social strata.

Most knowledgeable financial professionals despise them for a variety of reasons. I could write a book about those many rationales. Or, at the very least, I could put together an informative, entertaining and useful two-hour talk on the subject. (Full disclosure: I have given such a talk to a number of Bar Associations.) For now, though, let us examine just one of the reasons that variable annuity products are a very bad idea.

These products, by whatever name they may be sold, are wildly expensive. Their very high costs make it almost certain that the investor will have dramatically less money than if she had chosen one of the many reasonable alternatives. Remember this economic fact: costs reduce returns.

Just how much do they cost? Let’s return to the example handed to me by my old friend. The “product” costs 1.3% per year. Of course, that fancy thing is merely a container that will hold other investments. Those investments also impose costs. And those internal fees were disclosed as ranging between 0.7% and 1.3%. Thus, every dollar put into this thing is going to be charged between 2% and 3.6% each year. Let’s assume that investments are chosen that put it at the very middle of the range and cost 1% per year. That would mean an overall annual cost drag of 2.3% per year.

How much will 2.3% per year cost my old friend? It depends on the return of the underlying investments. Let’s make a reasonable assumption here, so we can move forward and try to find out. Historical returns on balanced portfolios suggest that 8% average annual returns would be realistic.

If a portfolio of investments brings an annual return of 8% before costs and is then subject to 2.3% in fees, its actual return to the investor will be 5.7% each year. So the math question we are examining is the difference between annual returns of 8% and 5.7%. Because Debbie was asked to invest $200,000, that is the starting number we will use. Get out your compounding calculator and take a look.

Here is what you will find. Over one year, if the sum of $200,000 grows 8% it will become $216,000. If it were to grow 5.7%, it would become $211,400. So the difference over one year would be $4,600.

Over twenty years, though, $200,000 growing at 8% annually will become $932,191. If it grows at 5.7%, it would become $606,080. The difference over twenty years would be $326,111.

Since Debbie is a remarkably healthy and athletic woman, let’s get some kicks and see how much this thing will cost her if she lives for 40 more years. In that case, $200,000 growing at 8% annually will become $4,344,904. If it grows at 5.7%, though, it would become $1,836,663. The difference over forty years would be $2,508,241.

So back to the question at hand:how much does this really cost? ? As a fair estimate, this variable annuity product would cost Debbie $4,600 over one year. Over a twenty-year period, it is estimated to cost her $326,111. Over a forty-year period, that estimated cost grows to $2,508,241.

Certainly the woman trying to sell this thing deserves to get paid. But how much?