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Question for the Money Doctors

Question submitted on Oct 25, 2011.

Question

I recently did a rollover of my mutual funds to a variable annuity with 6% annual return. I would like your opinion of the advantages and disadvantages of this change. I am retired and understand I must take 4% when I am 70 (Oct.2012).
Thank you for you opinion.

Answer

Thank you for the question.  I am not sure what you mean when you say it has a 6% annual return in the variable annuity (VA).  Variable annuities are typically invested in accounts that are very similar to mutual funds, and the return of the account is typically not guaranteed.  Your funds could go up or down depending on how they are invested.  What you may be referring to is an income rider that will grow at 6% over a set amount of time until you "activate" it.  If that is the case, then the income rider will provide protection for your income stream if your account goes down in value.

If you are unsure of what you have, then I would ask your agent/broker to explain fully.  One way to think of a variable annuity is to assume you have a basket of mutual funds held inside an insurance company (they are called sub-accounts rather than mutual funds though).  Again, I have never heard of a VA that guarantees any type of return on your investment; especially one as high as 6% in the current market and interest rate environment.  Variable annuities are actually classified as securities (like stocks, bonds and mutual funds) by the regulatory agencies.  

Overall, I don't think there is a big difference from your point of view between the VA and the mutual fund account as far as the investment return goes.  Both would be invested and would generate the return of the underlying funds (minus expenses).  If the VA provides an income rider, then that could be an advantage if you want a guaranteed lifetime stream of income.  Be careful about "activating" the income rider though, because typically when you do, it will stop growing.  At that point, you could be locked into that income amount the remainder of your life.  

I hope this helps.  Please make sure that you completely understand what you have purchased because some of the features of annuities can be complicated.  

Thank you, 


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