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Variable Annuities: A Special Tool
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Investing for retirement for some can be a little nerve-racking as there are no guarantees that you won't run out of money in retirement. Enter the variable annuity.
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A variable annuity is a contract between you and an insurance company in which you agree to invest your money in a range of investment options (subaccounts)–typically mutual funds. In return, the insurance company will make a series of payments to you when you retire for either a specific length of time or for your entire retirement. This is designed to reduce the chance that you will run out of money in retirement. Any earnings you make on these investments grow tax-free, just like in your employer's retirement plan.
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A variable annuity also can have a death benefit. Your beneficiary may receive either the greater of your account value or a guaranteed minimum amount, such as your total purchase payments.
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Variable annuities, though, may not be suitable for every investor. First, they can be expensive. Many variable-annuity subaccounts charge more to manage your money than mutual funds do. In fact, if these fees are too high, they can wipe out most of what you'd save in taxes. So, if you're going to buy a variable annuity, shop around for no-load (commission-free), low-cost offerings.
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The second drawback of variable annuities is that your money is locked up for a while–usually seven to 10 years. Get at it before then and you may have to pay a penalty. In addition, most investors could earn more than their guaranteed death benefit in the stock market.
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Finally, some variable annuities carry charges that will reduce the value of your account. Those charges include such things as surrender charges, mortality and expense risk charges, administrative fees, etc.
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As a result, for many investors it probably makes more sense to contribute as much as they can to their retirement plans and IRAs before investing in a variable annuity.
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