Variable Annuities

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Variable annuities are long term investments. The longer you let your money build, the more you are likely to gain from it. However, unlike a fixed annuity (where your money sits in an account from which you are paid a fixed income throughout a fixed period), a variable annuity gives you more control over your investment–but also gives you the burden of risk.

The money you deposit into variable annuity can go into your own account, separate from the investment portfolio of your broker or insurance company. The investment choices are, therefore, yours to make.

You may want to play the money market, or invest in stocks, bonds, or equity funds. Your annuity return depends on your account's performance rather than just rising and falling with the fortunes of the firm that holds your annuity.

A variable annuity can provide you with a wider spectrum of investment opportunities for your retirement savings, while giving you professionally managed fund options as well.

Annual Expenses

Your broker or insurance firm may guarantee your principal investment, minus withdrawals for any of the following annual expenses.

• Annual annuity charge. This fee is based on the total value of your variable annuity, plus the cost to your broker or insurer of administering it and giving you the option of a lifetime's worth of annuity income. When the contract with your annuity broker provides for death benefits, annual annuity charges increase. This is generally computed by adding M&E (mortality and expense risk) to administration charges.
• Maintenance fee. This is simply a yearly fee for maintaining your contract. It pays for contract administration and communication services.
• Underlying fund fees. The broker holding your variable annuity will normally charge you annual fees for managing your investments.
• Surrender charges. If you withdraw your money within the first 3 to 10 years of the day you took out you variable annuity, you have to pay surrender charges based on a scale of declining charges from 7% to 0%.

How to Fund Your Variable Annuity

If you have already maximized your retirement options as far as your individual retirement account (IRA) or employer-sponsored program are concerned and, after paying your taxes, find yourself left with some money you would like to invest towards your retirement, then a variable annuity is a very good option for you.

You can either purchase a variable annuity outright or make regular deposits to it over time. You have the option of trading any current annuity you possess for a variable annuity.

However, although many annuity brokers will allow you to put money from an already tax-deferred plan (e.g., from your 401k) into your variable annuity, doing so will add no value to your investment, since you would just be paying your broker all those fees for tax deferral you already possess!

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