Beware of Variable Annuities

Variable annuities can seem like ideal solutions for retirement income, but their drawbacks typically outweigh their benefits. With both variable and fixed-rate annuities, you pay a financial services company a bunch of money, and in exchange, you receive payments (or possibly a lump sum) beginning immediately or in the future. While variable annuity payouts rely on the performance of an underlying security or the stock market, simpler fixed annuities offer specified payouts, with less mystery, and are often preferable. When you’re being pitched a variable annuity — and that’s often how they’re sold, by salespeople pushing them — you’ll be told of their benefits, which will sound terrific. For example, you can receive income for the rest of your life, reducing or eliminating your chances of running out of money before you die. The annuity is tax-deferred, so your money grows without being taxed and is taxed when you withdraw funds. You can often include a “death benefit,” choosing a beneficiary to receive a certain sum should you die before you receive all guaranteed payouts, or if your account’s balance is above a certain level. Those are all good, but you can get the same or similar benefits from less problematic annuities, such as fixed and/or immediate annuities. As variable annuities let you choose how the money in your account is invested — conservatively, aggressively or somewhere in between — you can end up with exceptionally good results — but only if the investments perform as you hope. Many end up receiving less from the annuity than they’d hoped. Variable annuities are also problematic because they often feature steep fees and costs. Even seemingly small fees can eat into your return, making a big difference in the long run. A variable annuity is likely to charge you fees for mortality and expense risk, along with general administrative fees. Variable annuities charge “surrender” fees, too, which can be substantial. Learn more at