Where to Buy Top Variable Annuities
Variable annuities were introduced in the early 1950’s as a way for people to achieve greater rates of return while enjoying the guarantees and tax advantages offered through fixed annuities. Their popularity reached its apex during the bull markets of the 1980’s and 90’s. As tax rates began to decline and the markets increased in volatility, variable annuities came under closer scrutiny as a viable retirement planning vehicle. Today, many financial planners are reconsidering the advantages of variable annuities and there is a growing consensus that their advantages still outweigh any disadvantages. The discussion, therefore, is, once again, turning to where to buy top variable annuities.
Where to Start
Once a person understands what makes variable annuities unique today as a retirement vehicle, it becomes somewhat easier to narrow down the choices as to where to buy them. Today, many people are reeling from the devastating effects of recent market declines but they still seek upside growth for their retirement funds.
The resurgence of variable annuities can be attributed to their unique characteristics that enable investors to strike a balance between their desires for higher returns with their reduced tolerance for market risk. When this is understood, variable annuities become a viable choice for many investors.
There are two main differentiators of today’s variable annuities that should be used to narrow your search for finding the top variable annuity: Investment performance and expenses.
Also referred to as subaccounts, separate accounts are similar to mutual funds in that they are comprised of various portfolios of stocks, bonds, stocks and bonds, fixed yield instruments and cash. Each portfolio is professionally managed to achieve rates of returns that are commensurate with the underlying investment objectives of the portfolio.
The real differentiation with subaccounts is the effectiveness of the portfolio managers. As with any professionally managed account, past investment performance is the only true indication of the potential future performance. There should be, at least, a 10 year track record for each portfolio that can be compared to the performance of others.
It is important to seek those variable annuities that offer a broad range of separate account portfolios and that have a track record of solid returns in up markets and of outperforming the indexes in down markets.
Some annuity providers have teamed with leading mutual fund managers, such as Vanguard and Janus, to offer proven performance within the secure confines of their variable annuities. In any case, a thorough review of the separate accounts investment performance should be the first point of comparison.
Loads and Expenses
Long term investment returns can be impeded, or, even negated, by the on-going expenses that are inherent in most variable annuities. Critics often point to the higher expenses of variable annuities (averaging 1.8%) as compared to mutual fund expenses (1% average). Proponents point out that these expenses, including investment management fees and mortality charges, are more than offset by the tax favored treatment on the growth and the added security of return of principal and guaranteed lifetime income.
Another oft-criticized aspect of some variable annuity products if that they include a sales charge (load) which can reduce the amount of money that actually goes to work in the subaccounts. In response, no-load variable annuity products were introduced. In fact, there are now variable annuity products with no sales charges and reduced expenses.
While these may seem more attractive on the surface, you should be aware that lower cost annuities may not provide the same level of features, guarantees and service that make variable annuities an attractive investment alternative. For instance many no-load variable annuities don’t offer living income benefits, guaranteed minimum income benefits that mitigate the market risk associated with the investment accounts.
In addition, most no-load annuity providers, which sell their products directly to investors, do not provide much in the way of service or support which could be very important as your situation may dictate that adjustments be made in your subaccounts or annuity options.
Most investors might do better, in the long run, with the additional service and support provided by loaded annuity providers that provide more product education, planning assistance, asset allocation assistance as well as on-going consultation and service which may be important as your situation changes. For many, the additional .5% or 1% in fees is worth the additional service and support.
Even if you determine that you’re are willing and able to forgo the additional guarantees, benefits, service and support of loaded variable annuities, you should look at some of their top performers because, if their returns care substantially better than top performing no load annuities, they may be able offset their higher fees with higher returns.
The decision as to where to buy top variable annuities should come down to two main issues: 1) Selecting only those variable annuities that have a demonstrative, long term track record of consistently solid performance and 2) determining whether you have the knowledge and inclination to manage your variable annuity contract in the face of your changing financial situation as well as market fluctuations.
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