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Originally Posted by Funinthesun
Variable annuities do carry a large up front fee and seem very attractive with the 5%-6% guarenteed return. If the market does well you may be very happy with one. But you would be just as happy with a Vanguard fund if the market does well. The point is, there are a lot of If's and if everything goes well with all of them you will be delighted with a variable annuity. They are a bit complicated and need complete understanding so there will not be any surprises if all things do not go as planned. If you will never need the principal and could live without the income if you had to and want to leave all of it to someone else, you might be a good candidate for a variable annuity.
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Most annuities have no up front fees. The fees are generally what is called a "deferred sales charge" or a surrender fee, charged in the event the annuitant takes out more than 10% of the balance in a given year, and only for the first 7 to 10 years in most cases. Variable annuities also charge a mortality fee and seperate account fees (which are charged to the values of the seperate accounts just like the internal charges for mutual funds) There are some annuities that actually deposit a bonus amount upfront to the contribution of the annuity (which may be forfeited if withdrawn early).
Quote:
Originally Posted by brostholder
I will assume that a variable annuity is one that participates partially in stock market increases, but protects against stock market decreases. In 2008, I wish I had my money in a va instead of the market. For the past 3 months, I am glad my money is in the market (where it earned me 20%) than in an annuity that would have earned me 1% for the same 3 months. If I had millions of dollars, I would certainly put enough in an annuity to cover all my "costs". But, with my present net worth, an annuity would not throw off enough income to let me retire at the income level I want. So, I am forced to assume some risk in the market. A previous poster said an annuity should be part of a balanced portfolio. I agree and recommend shopping around for the ones with the lowest fees.
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Variable annuities generally don't protect one against market decreases (except in the case of the death of the annuitant) unless the owner chooses to use the money market or fixed interest seperate account. Think of a variable annuity like money in your company's 401(k). You can put it into any of a number of seperate accounts depending on your objectives, and can move it from account to account without incurring a taxible event. When money is withdrawn it is subject to ordinary income tax to the extent that it represents gain - on a last in - first out basis. There are many variations available that have "gimmicks" that may or may not appeal to any given person, but they can be valuable planning tools. Pick a well known, large national company and do your homework. Remember, the sales person may be honest and ethical but he/she stands to make about $6,000 or more, on your $200,000 investment, so they might not disclose all the potential downsides.