The following features are common to most
- Variable Rate of Return
- Sub-accounts with multiple investment options
within the portfolio
- Tax-deferred Growth
- No Maximum Contributions
Variable Rate of Return
A variable annuity's
rate of return is determined much differently
than that of a fixed annuity. The difference is
similar to that of a mutual fund vs. a money
market account. There is no guaranteed rate for a variable annuity,
however there is also the opportunity for higher
upside growth. Your funds are invested in
equities composed of separate sub-accounts with
various investment options. You have control
over which investments are used, and how money
should be allocated across each investment option.
Variable annuities do offer the potential of unlimited upside return as a positive, however the
negative is they do not protect against downside losses. It is impossible to predict the rate of return, both positive and negative, because your funds are vested in market-linked equities and bonds. You could see a
positive yield of 10% one year, while the next year has a 10% negative return. Variable annuities are less predictable than fixed
annuities but can yield better returns. In the end, the trade off is the safety of a fixed annuity for the upside potential of a variable annuity.
Variable Annuity Sub-Accounts
With variable annuities, you have the option to place funds into sub-accounts that vest in different asset classes. Sub-account options vary from plan to plan, but can include:
- Money Markets
- Government Bonds
- Corporate Bonds
- U.S. Stocks
- International Stocks
Diversification and asset allocation
A strong variable annuity will offer a wide range of asset classes to invest in. Diversification and asset allocation are the two main benefits from multiple investment options. While those benefits may seem similar, they serve two different functions. Diversification is when funds are spread across multiple investments within the same asset class, such as a variety of U.S. stocks. This will mitigate against volatility resulting for individual stock performance. Asset allocation is when funds are spread across multiple assets classes like bonds and stocks. This will lessen your exposure from having only one type of investment.
As with all annuities, variable annuities provide tax-deferred growth. This means that any income or gains accumulated are not taxed until it's withdrawn. As a result, the money that would have been taxed is still working for you, increasing your overall yield. Other investment options, such as mutual funds or CDs, are taxed annually, meaning you lose future gains the taxed funds would have added to your overall account value.
No Maximum Contribution
A drawback of government sponsored retirement plan, such as a 401(k) or IRA is there is a maximum amount you are allowed to contribute each year. For wealthy investors, or those needing to jump-start their retirement plan, $15,000 per year is not enough. Variable annuities don't have these limits, giving you the flexibility of unlimited investment.
An additional feature common to most variable annuities are flexible premiums. The advantage is in being able to invest a smaller premium up front and continue adding to your account in the future. With flexible premiums you can keep funding your retirement plan, varying periodic contributions according to your changing financial position.