Posted By Paul
As I go through the various types of annuities I seem to be gradually moving towards the more controversial types of annuities, and that brings us to one of the more controversial members of the annuity family, the variable annuity.
So what's a variable annuity? Here are the basic characteristics of a variable annuity:
1) Tax deferred - gains are only taxed when you withdraw them.
2) Fund based - your money is going into some sort of mutual or bond fund that you select (generally an annuity offers 6-12 funds that you choose from).
The variable part just means that your money is going into an investment, your return is based on how well those investments do. There is no guaranteed return.
I'm guessing that a lot of you are thinking: "This sort of sounds like a 401k." and you're right. It is SORT OF like a 401k, but that SORT OF is important.
In my research the main thing to watch in this sort of annuity is the fees. There are often high management fees, commissions for the agent who sold it to you, and other little fees like that. The fees may seem like a minor thing, but imagine if the fees end up being 2% of your total investment, you need to make 2% to just break even, and even more to beat inflation.
It seems that these fees are what typically give these types of investments a bad name. Even if you don't see any specific up front fees, the funds themselves might have a very high expense ratio. To see what that means go to my earlier post:
A Few Quick Tips On Mutual Funds
The question now is, are variable annuities something to avoid at all costs? Well I'd say that you should ONLY look at a variable annuity if you are already taking full advantage of your allowed contributions for your 401k AND Roth IRA.
If you decide to look into a variable annuity I would be VERY careful. I hate to recommend paranoia but this is one of those situations where I would suggest going into the situation with a very skeptical eye. Assume that the variable annuity is of the "bad" type (high commissions, high fees, etc.) and only invest if you are convinced this isn't the case.
Also, I would suggest that you observe the agent you are dealing with very closely. If they seem to be trying to conceal or downplay various fees and commissions, I would be VERY careful.
Finally, if anyone tells you that you should take your IRA or 401k and roll it into a variable annuity, consider this a HUGE RED FLAG! I found several articles that said that this sort of suggestion is essentially like saying:
"Hey let's take your big pile of money in a low fee environment and roll it into an investment with high fees and commissions without any added tax benefits."
If you have money in a variable annuity, I would suggest that you take a very hard look at it and see just how much you are paying in fees and then see how that is affecting your investments.
Sunday, October 11, 2009
Subscribe to:
Post Comments (Atom)
2 comments:
Hi Paul,
You seem to have not mentioned any of the guarantees that surround variable annuities. 2% would be a terrible deal for just tax deferral and if that were the case, no one would invest in a VA inside an IRA, but VA sales occur in tax deferred environments over 50% of the time, so there must be something else at play. I think you should have a discussion about the guarantees you get when you purchase most VAs (both living and death benefits).
Hey Jeff,
Thanks for your comment! A discussion on annuities would be great, I would welcome comments from people who have them and love them! Also, I have two more posts on annuities coming up, one is on VA with life insurance and the final one is just a wrap up with some informational links that I liked.
There are SOOOO many annuity products out there, I would love to hear from people who are willing to talk about their own annuities and how well they've worked for them.
Post a Comment