Monday, May 14, 2012 - 6:36 AM

WSJ: Case For And Against Variable Annuities

In this Wall Street Journal article, a retirement plan consultant advocates the benefits of variable annuities, and a professor of finance describes why variable annuities are a bad deal. I tend to favor what the professor says:

Variable annuities offer the siren song of guaranteed returns and tax benefits. But when we look behind the curtain, we see that the guarantee may not be as strong as it seems and in any event may not provide much more safety than a bond—and it costs too much.

KenBDG5,153 posts since
Nov 29, 2009
Rep Points: 117,127

1. Monday, May 14, 2012 - 8:44 AM

One possible reason for a variable annuity is for tax-deferred retirement savings above the annual contribution limit ($5000 if under age 50, $6000 if above) that may be invested in IRAs. I think the key is to find a low-cost variable annuity, and that means, in all probability, one that doesn't offer guaranteed returns, and then choosing funds with low expense ratios. For example, the Fidelity Personal Retirement Annuity has an annual annuity charge of only 0.25%, and no surrender charges. A variable annuity, even with low costs, will still have disadvantages compared to mutual funds when it comes estate planning (i.e., no "step-up" in cost basis for your beneficiaries). So, I would think that upon retirement, one would want to draw on the savings in the variable annuity first, before tapping into a ROTH IRA.

Wil183 posts since
Feb 26, 2010
Rep Points: 932