Due to the fact that yields depend on market performance and an individual investor's portfolio choices, Variable annuity performance is difficult to estimate. Using historical asset class performance figures, a portfolio consisting primarily of equities (stocks) can return 10-14% annually when averaged over 10-20 years. Due to market volatility, it's impossible to estimate future performance for periods less than 10 years.
Over the past 80 years, small and large cap stocks yielded just about 12-14% annually. The S&P 500 averaged a 12.5% return.
Compared to interest based options like Treasury Bills & Government Bonds, equities historically have performed two to three times as well. Under most circumstanced neither someone close to retirement age nor investors already retired will not want to invest exclusively in equities due to the risk of short-term market downturns. Although blending stocks with fixed-rate options such as bonds may lower your variable annuity yield to 5-10%, it is recommended for a well-rounded, secure retirement plan.
Performance information based on the past performance of a product's investment options is not an indicator of future results.
The Tax-Deferred Variable Annuity Advantage
Although variable annuities don't qualify as capital gains, they offer substantial benefits over those instruments taxed year-over-year at ordinary income rates. Such instruments include mutual funds, CDs, and money market accounts.
With a variable annuity, you can delay tax payments until making income withdrawals, which typically occurs after appreciable growth. Over the long-term, this added benefit adds up.
Compared to fixed-rate options, variable annuities have historically offer greater returns. By definition, rate variability exists with Variable Annuities, but over timeframes of 10 or more years, market fluctuations give way to consistently higher growth. In relation to mutual funds and stocks, variable annuities offer near-identical yields with a few extra advantages:
- Penalty-free withdrawal allowances
- Death benefits
- Lifetime income option
For retirement planning, a variable annuity is a good supplement to a 401(k). As a mutual fund alternative, variable annuities are recommended on account of their tax benefits. As a straight-up stock market or index alternative, variable annuities are recommended on account of their lower risk and desirable retirement options.
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