5 Responses to “ What is downside of variable annuities? We have money in a fixed annunity but it is performing poorly.? ”

1. Heather M on August 31st, 2010 12:07 am

   Variable annuities can be extremely good or extremely poor investements. Each company has its own bells and whistles, some worthwhile while others not so much. So it really depends on what the annuity offers and the strength of the company offering it.

   The positives about variable annuities are:
   Most annuities will guarantee what you put in them i.e. you will get back your inital investment regardless of market performance.
   Some annuities will guarantee a minimum return some as high as 6% regardless of market performance.
   Annuities can be annuitized which can give you income for life (or longer) meaning you can pull more money out than you put in.
   Some annuities will lock in your gains every year meaning that even if the market tanks you will get your principal plus your gains for that year.

   Annuities also have their downsides:
   Annual expenses are higher than mutual funds.
   There are surrender charges that last between 5-15 years depending on the company.
   Sometimes to get to the guarantees you will have to annuitize the investment, which means you may not take a lump sum all at once. (which you don’t want to do anyway, taxes..)

   I personally have an annuity that has outperformed my no-load mutual funds over the past 10 years because even in 2001 when the bottom dropped out of my stocks and mutual funds, I still was given a 5% return.

   If your fixed annuity is performing poorly and you have time to wait for the surrender charges to fall off, an annuity can give you safety with the chance of growth. In a rising market a mutual fund will provide a superior performance, but in a declining market an annuity will be a savior.

   Personally I think a good idea is to spread the wealth, a fixed annuity, a variable, mutual funds, real estate, cash, even individual stocks, and bonds should all play a part of your portfolio if possible. Never put all your eggs in one basket, so look strongly at the annuity but still keep part of your fixed and look at other options at the same time.

2. Terry on August 31st, 2010 12:07 am

   The only people for which an annuity is a good investment are the sales people. This is a VERY bad investment for almost everyone. Do not be persuaded to buy another.

   You will do much better putting your money into no-load mutual funds, preferably indexs.

3. jeff410 on August 31st, 2010 12:07 am

   Besides high fees you pay tax on them when you take it out at your ordinary tax rate. Captial gains taxes are capped at 15 percent on mutual funds. And your heirs dont get a stepped up basis like mutual funds do.

4. Susan C on August 31st, 2010 12:07 am

   The downside of variable annuities are that you can lose all of your money! Nothing is guaranteed or protected. Annuities are great safe investments for a lot of people, depending on your age and goals The fixed may not be paying a great return right now, but when interest rates were down to 1% a few years ago, Annuity holders were thrilled with their 4%. Mutual funds, and the stock market may get you more of a return, but with them come the risk of losing it all. That is why the word guarantee can only be used with annuities. Unfortunately, people don’t understand what a great retirement/estate planning tool they are and give out terrible advise. INvestment brokers make more buying and trading your stocks, bonds, and mutual funds over 10 years than an agent makes selling you an annuity. Stay away from the Variable. If you want unlimited gain of the S & P 500, and a safe guarantee go with the Equity Index Annuity. You can 1035 exchange with no tax liability, and make your money work for you better than the fixed.

5. derobake on August 31st, 2010 12:07 am

   99% of variable annuities are dog crap on a stick, because of their blatantly unecessary costs. Most variable annuities are sold because they make insurance agents lots of money in commissions, all while making you poorer.

   First thing, download my free book at http://www.invest-for-retirement.com and go straight to chapter 19 to read about costs. It will take you only 20 minutes to read, but might be the most important 20 minutes of your investing career. It talks about some of the costs of a variable annuity. Then read these articles about variable annuities http://www.investopedia.com/articles/04/111704.asp and http://www.investopedia.com/articles/pf/06/variableannuity.asp . It will only take a little of your time, but is well worth it.

   If you do go with a variable annuity, there are only two firms that I recommend. They both have only 0.3% mortality fees, and no surrender charges. Plus, the funds themselves are of low costs and have no loads. For example, with Vanguard, your total annual expenses (the fund and the insurance fees) are around 0.5 – 0.6% TOTAL. So, unless your insurance agent can offer you a variable annuity with costs this low, tell him politely to go jump off a building while you invest your money elsewhere:

   - http://www.vanguard.com
   - http://www.fidelity.com

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