Variable Annuity

Dave talks the pros and cons of variable annuities to Diane, who has $500K she wants to invest from retirement.

QUESTION: Diane has inherited $500,000. She wants to invest it and live off the earnings for retirement. She’s not sure that variable annuities (her financial planner’s advice) are the place to put it, but Dave disagrees a little.

ANSWER: I would disagree, not strongly though. The benefits of the variable annuity are that, in this case, variable means you can choose mutual funds inside the annuity, and it allows them to grow without paying taxes until you take it out. Some have guaranteed principals and floors, and you can name a beneficiary and keep it from probate.

The downsides are the fees that go with it, but it’s probably worth that. It’s also not very flexible. Once it’s in there, it’s in there. One more thing … a lot of insurance agents that say they’re planners; this is the only thing they can sell that doesn’t stink. So it’s what they always come up with as the answer. They tend to make a higher commission because of that. Put part of it in the annuity and the rest in a mutual fund, but only if you’re out of debt and have a full emergency fund.