Jane M. Young CFP, EA
Due to the high costs, lack of flexibility, complexity and unfavorable tax treatment variable annuities are not beneficial for most investors. Traditional retirement accounts and Roth IRAs meet the tax deferral needs for most investors. In some instances a variable annuity may be attractive to a high income investor who has maximized all of his traditional retirement options and needs additional opportunities for tax deferral of investment gains. This is especially true for an investor who is currently in a very high tax bracket and expects to be in a lower tax bracket in retirement.
Generally, money in retirement accounts should not be invested in variable annuities. The investor is already receiving the benefits of tax deferral.
A variable annuity may also be an option for someone who is willing to buy an insurance policy to buffer the risk of losing money in the stock market. For most investors, due to the long term growth in the stock market, this guarantee comes at too high a price. However, some investors are willing to pay additional fees in exchange for the peace of mind that a guaranteed withdrawal benefit can provide. A word of warning, guaranteed minimum withdrawal benefits (GMWB) can be very complex and have some significant restrictions. Do your homework, make sure you understand the product you are buying and read the contract carefully.
According to a study conducted by David M. Blanchett – the probability of a retiree actually needing income from a GMWB annuity vs. the income that could be generated from a taxable portfolio with the same value is about 3.4% for males, 5.4% for females and 7.1% for couples. The net cost is about 6.5% for males, 6.1% for females and 7.4% for couples.