I hear that variable annuities are a bad investment. Is that true? Why?

Question

I put a lot of money into this investment 5-yrs ago...and it's still there.

Answer 1

They can be bad investments and more often than not are.

On the plus side, they defer taxes until money is withdrawn. On the down side, for most people the fees above the mutual fund fees exceed the taxes that would have been paid. So you still have to pay the taxes and you have to pay additional fees. Even small fees have a large impact. Further, gains are taxed before cost basis unlike insurance, for example.

They can be bad investments compared to similar assets, but not necessarily. They tend to be good investments when they are annuitized but most people never annuitize them and for most people annuitization doesn't make sense.

Answer 2

Variable annuities typically pay the highest commissions of any investment instrument the person who sells them to you has to offer. They are often sold by preying on people's insecurities, stressing the fact that they will never fall in value. This is true of putting your money in a shoebox, too. (Both the shoebox cash and the variable annuity actually lose 'value', though, because of inflation)

How much has your investment grown over the last five years? Had you put it somewhere "risky" (like real estate, or the stock market) your money would likely have doubled in the last five years; but that is of no use if the risk stops you sleeping at night!

The worst thing about variable annuities, though, is that they often charge as much as 2% a year in expenses, which eats into any potential for growth you might have had...