Variable Annuity

A variable annuity is a type of insurance contract designed to provide income during retirement, which allows you to invest in a variety of assets like stocks and bonds. Unlike fixed annuities, the returns on a variable annuity can fluctuate based on the performance of the investments you choose. For example, if you invest $100,000 in a variable annuity with an average annual return of 5% over 20 years, you could accumulate approximately $265,000, assuming no withdrawals or fees.

Common misconceptions about variable annuities include the belief that they are simple and risk-free. In reality, they carry investment risk and can be complex, with fees that may reduce your overall returns. It's crucial to understand the fee structure, which can include surrender charges, management fees, and mortality and expense risk fees. For instance, a variable annuity might charge an annual fee of 1.5% on top of the investment fees, which can significantly impact your long-term growth.

When considering a variable annuity, it's important to evaluate your risk tolerance and investment goals. Many investors mistakenly think they should only focus on the potential for high returns, overlooking the importance of liquidity and fees. An actionable takeaway is to thoroughly read the prospectus and consult a financial advisor to ensure that a variable annuity aligns with your retirement strategy. Remember, this investment product is best suited for those who seek both growth potential and a reliable income stream in retirement.