| The stock market's downward momentum has investors worried, as their statements bring in more bad news about their investments. News of accounting debacles at Enron, WorldCom, and others is helping to cut consumer confidence. So with all of that in mind, what do you do with your variable annuity? Most experts have the same one-word answer: nothing.
| Some tips to help you in turbulent times
If you own a variable annuity and the stock market's roller coaster ride is making you queasy, consider these tips before you take action with your contract:
Ask about subaccount or contract transfer fees. If you're thinking about switching your subaccount investments or exchanging them for a fixed annuity, ask your insurer how much it will charge you to do so.
Know when you plan to access the money. Keep in mind that variable annuities are long-term investments. If you're retiring next year and plan on accessing the money in your contract soon, you may consider moving toward more conservative investments. But if you're a long way from retirement, you may lose out on future growth if you switch your current investments.
Consider "fixed" annuitization. When you annuitize — which means you begin to receive payments from your annuity — your monthly payments can either be a fixed amount or can still reflect stock market performance. Choosing a fixed amount will guarantee a certain payment, but keep in mind that if you choose the fixed option, you will miss out on any growth that may occur in the future.
Consider a guaranteed minimum income benefit rider. These riders guarantee that payments from your variable annuity will never fall below a certain amount of your investments. Keep in mind that these riders may be expensive, costing as much as 0.5 percent of your investment.
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Experts point out that variable annuities are long-term investments, and while most people can't ignore the stock market when it drops 10, 20, or 30 percent off of its heights, investors shouldn't try to time the market. As Eric Sondergeld, director of retirement research for LIMRA International points out, if you had a crystal ball you would have moved all of your variable annuity assets into fixed investments prior to the stock market's tumble. However, market timing is risky at best and, as Sondergeld rhetorically asks, exactly when would you get back into stocks?
Unfortunately, many variable annuityholders put money into the stock market expecting the strong double-digit returns of the 1990s to continue indefinitely. Many analysts now say you should expect normal historical average returns, about 8 to 10 percent per year.
However, if you need to tap into your variable annuity (VA) money soon, or the current volatility makes you too squeamish, you may want to consider moving your money into more conservative subaccounts until you are more comfortable with investing in more aggressive growth funds. "People are scared — people are not anxious to get back in" the stock market, says Scott Dunn, competitive analyst for MassMutual.
Cynthia Crosson, senior financial analyst for A.M. Best, the insurance ratings company, says that if you're not able to stomach the lows of a VA, you shouldn't own a VA in the first place. Crosson says that as people continue to live longer, they are going to need investments that bring in large returns over the long haul. She says that if people pull their money out of risky investments that can reap potentially large returns, they will miss the boat when the market rebounds.
Crosson says that even if you are retiring this year or next year and tapping into your money shortly, you still may live for a long time and thus need investments that at least beat the rate of inflation. "I just think there's much too much jumping around and worrying about the stock market day-to-day," Crosson says. "If everybody jumps back into fixed [annuities], they'll lose a lot of the growth they might need."
| "If you are truly in it for the long haul you kind of have to ignore what is happening in the markets in the short run." |
If the stock market ride is too volatile for your taste, you can move your investments to more conservative subaccount. Fees vary by company, but you often have to pay an administrative fee (usually around $20 to $25) for moving your money into different subaccounts. In some cases, the first 12 transfers are free or the fees may be waived if you have a minimum amount in your investment (check your annuity contract for details). Dunn says that at MassMutual during June and July, 2002, money market subaccounts saw large inflows of money, as did bond fund subaccounts.
Dunn says that annuity sales throughout the industry were formerly evenly split between fixed and variable annuities. Currently, new sales of variable annuities only make up about 20 percent of the market.
Skittish variable annuityholders may be unwise to switch to a fixed annuity that pays out a guaranteed interest rate because they may have to pay a surrender fee to get out of their original contracts. However, if you're sure you want to change your investment strategy permanently, it may be worth it to surrender your contract and opt for a fixed annuity. While you could instead invest in more conservative subaccounts in a variable annuity, fixed annuities are cheaper to maintain than variable annuities because there are no subaccount maintenance fees. Kim Pilgrim of Jackson National Life urges annuityholders considering changes to their investments to first consult with their financial advisors.
Says Sondergeld, "If you are truly in it for the long haul you kind of have to ignore what is happening in the markets in the short run."
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