How to Decide Whether To Invest Retirement Money in an Annuity

While variable annuities can offer many benefits, they also come with a price. Find out whether the features and benefits that they contain are worth the cost for you.

Things You'll Need

• Just a clear picture of your own risk tolerance, time horizon and investment objectives

Instructions

1. Analyze your investment objectives, risk tolerance and time horizon. While it may seem pointless to put a tax-deferred investment inside a tax-deferred retirement savings account, there are often good reasons for doing so.

2. If your investment objective is long-term growth, then you may be better off investing your retirement account in straight mutual funds instead of a variable annuity, as the former option will charge lower annual maintenance fees than VAs do. However, variable contracts offer dollar-cost averaging programs and asset rebalancing services that are not available to straight fund investors.

3. Determining how beneficial these services are for you is the key. Are you investing in volatile sectors of the markets, such as tech, biotech, energy, or small cap stocks? If so, the rebalancing feature offered within a variable contract may substantially improve your portfolio's efficiency. This feature will automatically sell off units of the subaccounts that are invested in sectors that are growing quickly, and then reallocate the sale proceeds to buy more units of other subaccounts that invest in underperforming sectors. This effectively keeps the overall asset allocation within the original parameters that you prescribed.

4. If the overall markets are very volatile, a dollar-cost averaging program may be in order. Many variable annuity carriers run DCA specials that offer a high rate in a fixed account (I've seen rates at least 2 to 3 percent above CD or other guaranteed fixed income investment rates in these programs). Then the money in the fixed account is systematically transferred over into a preset asset allocation of your choice.

5. Another important factor to consider is withdrawals. Is it absolutely vital that you have a guaranteed payout from your retirement savings? If so, then a guaranteed minimum income benefit rider can provide you with peace of mind, as it can guarantee not only a monthly payout, but a payout based upon a guaranteed hypothetical rate of growth.

6. If you have a long-term time horizon and don't mind market volatility, then the features offered by variable annuities may not be worth the price you must pay for them. If you intend to take a lump-sum distribution of your retirement savings, then income riders will obviously not be necessary.

Tips & Warnings

• If you are considering investing in a variable annuity, carefully examine the costs and features that are available in several different contracts. These costs can vary somewhat from one carrier to another, and the payout features can vary as well.

• Some variable contracts will have much better mutual fund subaccounts to choose from than others. But, be careful when looking at historical performance of subaccounts, because the underlying mutual fund that is being offered within the contract has probably been around much longer than its corresponding subaccount.