Mar. 1, 2007

How do variable annuities compare with other retirement accounts, such as 401(k)s and IRAs for long-term capital growth and flexibility? I have just rolled over some IRAs and 401(k) plans into a variable annuity, and started another annuity for planning, as I am not yet eligible to participate in my new employers' 401(k).

Does this strategy make sense?

Randy, Oregon

I cannot tell you whether your strategy "makes sense" because I am a journalist, not a financial planner, and I do not know the details of your financial situation or long-term goals. However, I can give you some background information that may help you decide whether a variable annuity or other retirement product is best for you.

VAs are considerably less flexible than other options, such as IRAs and 401(k)s, and carry hefty fees. Morningstar says the average annual fee for a VA is 212 basis points, or 2.12 percent of your investment; 401(k) fees are paid for by your employer. IRAs carry an annual fee of $10 to $20 per account, and the average fee for a mutual fund is 1.37 percent of your investment, according to Morningstar.

Unlike 401(k)s and IRAs, once you've purchased a variable annuity, it is expensive to back out of the contract. VAs carry "surrender fees" that usually apply for the first seven or eight years you own the annuity, with the fee decreasing each year until it hits zero. For example, you could have an 8 percent surrender fee in the first year, 7 percent in the second, and so on. After you begin annuitizing, or receiving a monthly payment stream from the annuity, you cannot change the amount each month that you receive.

Because of these facts, variable annuities are most often looked to after you max out your 401(k) and fully fund an IRA.

We have several stories that may interest you:

Five variable annuity salespitches to look out for

The basics of annuities

Back to the Forum

Disclaimer: We are journalists, not financial planners or insurance brokers. Nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice.