Variable annuities are a popular way for people to fund their retirement, but many argue that they are not a good investment for most. A variable annuity is a type of mutual fund that is overlaid with insurance. People who own them get dividends every month after the initial waiting period is over. There are certain circumstances when variable annuities are a good thing, but take a look at these five reasons when you should stay away.
Financial Advisors Make Too Much Commission
Financial advisors are notorious for pushing variable annuities on clients to make a fast commission. They often get as much as three or four percent of the annuity amount. So if the annuity is $250,000, the financial advisor can easily make between $7,500 and $10,000 quickly. That’s why you should only work with a financial advisor that sells advice instead of one that works on commission. Some people don’t realize that the main interest of most financial advisors is to make money, whether their investment advice helps their clients make money or not.
It’s Hard to Access Your Money
Another reason why a variable annuity is not a good investment for many people is that it is hard to access your money. There are pros and cons of variable annuities: fees and expenses, which are the biggest drawback. For instance, if you want a lump sum, it costs you a substantial amount of money in fees to get your money, even as much as seven percent. Plus, variable annuities usually have these early withdrawal charges for the first 10 years or more of your investment. This isn’t a problem if you know you’ll never want to withdraw money early, but most people can’t predict this circumstance.
There Are Cheaper Investment Options
Variable annuities are good because they guarantee dividends for life. However, they are double or even triple the cost of a quality, no load mutual fund. This means you’ll earn more money in the long run if you avoid variable annuities. Yes, you’ll be subject to higher risk, but even a variable annuity is not immune from losing value. As a matter of fact, many people find that it’s better to terminate a variable annuity and put the money in an index funds instead, even with the early withdrawal fees. Plus, the investment options start out pretty limited with variable annuities.
You’re Required to Purchase Insurance
Additionally, variable annuities require you to purchase insurance, but it isn’t what you normally think of in terms of coverage. Variable annuities guarantee that you will receive at least as much money as you initially invested if you die. The insurance isn’t a good value unless the market plummets, causing the value of your variable annuity to be dramatically less than your initial investment. The chances of this happening are slim to none. However, the insurance is a requirement, which will cost you money that isn’t involved in other types of investments.
There Aren’t Good Tax Benefits
Variable annuities are tax deferred investments, which is cool because you don’t have to pay taxes on the money until it is withdrawn. This is a pretty big benefit, but you lose long-term capital gain treatment. All those profits get taxed at normal rates. Also, if you lose money in a variable annuity, you can’t claim the loss on your taxes.
Another disadvantage to variable annuities is that they create an income tax burden for your heirs, including your spouse. Heirs must immediately sell and pay money to the government. This doesn’t happen when you pass on a stock or bond. Those are taxed based on their current value. There are other tax advantages and disadvantages to variable annuities, but these are the biggest ones.
As you can see, variable annuities aren’t a good option for most people because the fees, taxes, and regulations have too many restrictions. If you’re looking for better investment options to help with your retirement, index funds and mutual funds are much better option. There are still drawbacks to these types of investments, but they cost you less money in the long run. Do you have a variable annuity? Do you wish you would have chosen a different type of investment for retirement?