What to Expect
Variable annuity performance is difficult to estimate because yields depend on market performance and an individual investor’s portfolio choices. The best metrics to use in this case are historic asset class performance figures. A portfolio consisting primarily of equities (stocks) can return 10-14% annually when averaged over 10-20 years. Due to market volatility, it’s impossible to estimate future performance for durations shorter than 10 years.
Historic Asset Class Performance
The three green bars above represent equities. Over the past 80 years, small and large cap stocks yielded just about 12-14% annually. The S&P 500 — a blend of small and large cap stocks — returned 12.5%.
Compared to interest based asset classes (shown above in blue), equities perform two to three times as well. Realistically retirees or investors nearing retirement will not want to invest exclusively in equities to hedge against short-term market downturns. Blending stocks with fixed-rate instruments like bonds will lower you variable annuity yield to 5-10%, but is recommended for secure retirement planning.
The Tax-Deferred Variable Annuity Advantage
Although variable annuities don’t qualify as capital gains, they offer substantial benefits over those instruments taxed year-over-year at ordinary income rates. Such instruments include mutual funds, CDs, and money market accounts. With a variable annuity, you can delay tax payments until making income withdrawals, which typically occurs after appreciable growth. Over the long-term, this added benefit adds up:
Variable Annuity Tax Performance
As we can see in the chart above, a $100,000 variable annuity gradually overtakes a mutual fund of similar yield. After 20 years, the difference is quite pronounced: nearly $50,000.
Compared to fixed-rate investment options, variable annuities always offer better returns. As their name implies, rate variability exists, but over spans of 10 or more years, market fluctuations give way to consistently higher growth. In relation to mutual funds and stocks, variable annuities offer near-identical yields with a few extra advantages:
- Penalty-free withdrawal allowances
- Death benefits
- Probate avoidance
- Lifetime income option
For retirement planning, a variable annuity is a good supplement to a 401(k). As a mutual fund alternative, variable annuities are recommended on account of their tax benefits. As a straight-up stock market or index alternative, variable annuities are recommended on account of their lower risk and desirable retirement options.