Variable Annuities Pros and Cons

If a fast-talking salesman tries to convince you that a top-rated variable annuity is the best type of annuity you can buy, you should take that statement with a good degree of skepticism. With a variable annuity, you get to choose how your money is invested. Usually, you can allocate your money between stock, bond, mutual funds and money-market type funds, set up as sub-accounts within the annuity.

High Risk Investment Annuity

The salesman would not be lying if he told you that in 2013, when the stock market was up by 30 percent, the best variable annuities had returns of more than 20 percent. However, he probably would not tell you that if it was 2008, when stocks were in free fall, that same annuity would probably have shrunk in value by 20 to 30 percent.

In good economic times, when the stock market is doing well, there are plenty of good things to say about owning a variable annuity. However, the variable annuity disadvantages are magnified when stocks start to decline.

Variable annuity pros

  • You maintain control over how you invest your money
  • When your underlying investments rise in value, your annuity returns will also do well
  • You have the option of transferring money from one investment to another

Variable annuity cons

  • High variable annuity fees, sales commissions and surrender fees
  • You can lose money if your investments do not perform as expected
  • Individual funds usually have a high expense structure (management fees)

Although it is nice to have the potential to earn high returns, most people buy annuities because they want a safe, low-risk investment that will provide them with income for retirement. Instead of putting your safe money at risk in a variable annuity, you can invest in index annuities that allow you to participate in up markets and not lose any money in down markets.

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