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Variable annuities offer buyers a range of investment choices.
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Variable annuities provide many of the benefits of
fixed annuities including tax-deferred earnings and a choice of payouts,
plus the opportunity to make a potentially unlimited contribution if the annuity
isn't part of an employer's retirement plan, tax-sheltered 403b plan, or an IRA.
In addition, variable annuities offer the potential for greater
returns and the opportunity to make your own decisions about how
to allocate your assets
among investment categories.
With variable annuities, lots of things can vary, or change: how your contributions
are invested, the rate
of return that you earn on the separate account funds that you select,
and the amount of income you receive if you
annuitize. What remains constant with all annuities, fixed or variable,
is the opportunity to select guaranteed lifetime income.
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CREATING A PORTFOLIO You allocate
your money among the underlying funds available through the separate account of
your variable annuity, also called investment portfolios. These funds are like mutual funds
and are either designed specifically for the annuity company or are versions of
retail funds designated for exclusive
annuity use. But while the names of the investment portfolios may
be the same or similar to those of retail mutual funds, they are not the same funds.
Your job is to choose among the underlying funds available through
the separate account of your variable annuity, much as you would with a 401(k)
or 403(b) retirement
plan or individual retirement annuity. Typically there will be a dozen or more funds,
usually including stock
funds, bond funds, a money market fund, a fixed interest account and the separate
account funds that are offered. Sometimes, you have an even wider choice drawn from
a number of different investment management companies.
MAKING THE INVESTMENT You can
allocate your money however you like, usually on a percentage basis. For example,
you might put 50% in a growth stock fund, 25% in a balanced fund, and 25% in a money
market fund - or some other combination.
Each time you add money, you buy a specific number of
accumulation units, or shares, based on the unit value of the separate
account fund you're putting money into. The accumulation unit value is the total
value of the separate account fund divided by the number of existing accumulation
units.
A BRIEF HISTORY Variable annuities
were introduced in 1952. Their history, like that of mutual funds and self-directed
pension and profit-sharing plans, is directly related to the increasing responsibility
individuals have for making their retirement financially secure.
PUTTING MONEY TO WORK
When you add money to your variable annuity either in a lump sum
or as incremental purchases during an accumulation period, you must decide how your
assets are going to be allocated among the separate account funds you have chosen.
With many variable annuities, you can allocate a specific percentage of your contributions
to each of your separate account funds at the time you buy. For example, if you
invest $40,000 and have selected four funds, you might buy $10,000 worth of accumulation
units in each of the funds. Or, if you invest $400 a month, you would allocate $100
into each of the funds.
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MAKING ADJUSTMENTSVariable annuities
let you create asset mixes that you're comfortable with, either at different stages
in your life or in different economic climates. This flexibility lets you share
in the benefits of a strong stock market, for example, or move money into more stable
funds if you're concerned about preserving your gains as you get closer to retirement.
No one mix suits every investor, though many investors emphasize stock funds, since
they have historically provided the strongest returns over the long term, and thus
the greatest opportunity for growth, despite their
volatility.
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Glossary
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