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The biggest potential drawback of a variable annuity is the cost. Variable annuities can charge high fees.

Variable Annuities

These include administrative fees, fees for special features and fund expenses for the mutual funds you invest in. When you add up these fees and charges, variable annuities can be a pricey place to store your money. In addition to their relatively high cost, variable annuities may not offer tax benefits beyond what you could get with a simpler, more affordable investment vehicle like an index fund. As mentioned above, variable annuities are tax-deferred. But the money you withdraw in retirement is taxable at your regular income tax rate, not the long-term capital gains tax rate.

If you still have money left over, you might want to consider a variable annuity for further tax deferral, but not instead of a k or IRA. Finally, variable annuities often come with a surrender period. This can last for as many as 10 years. Generally, the charge is equal to a certain percentage of your withdrawal. Variable annuities usually have surrender charges that decrease with each year you own the annuity, until the charge disappears altogether.

With some annuities, however, each contribution you make carries its own surrender period. Variable annuities come with some tax advantages, but they can be expensive. The opposite of a variable annuity is a fixed annuity. Instead, the company will offer you a fixed interest rate that it will then apply to your balance.

On top of this, fixed annuities typically guarantee the return of your principal. In the end, while fixed annuities are much safer, the returns you could garner from a variable annuity are significantly stronger. An indexed annuity is very similar to a variable annuity, but it adheres to different investments.

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But what they aren't telling you is that you can't choose from any mutual fund — you must choose from their predetermined list of sub-accounts. I don't know about you, but I love to have choices. What's even more frustrating is trying to do research on the sub-accounts within variable annuities.

I've personally spent hours trying to do research on several variable annuity sub-accounts using both Morningstar and Thomson Reuters research tools only to find myself beating my head against my desk after hitting dead-end after dead-end. While companies that sell variable annuities may boast about how many options you have inside of a variable annuity say, around 80 to mutual funds , you have many more options if you just open any online brokerage account around 29, mutual funds and it will be MUCH less of a headache trying to do research on them.

You read that right. Another required certain changes to be made or the riders would be eliminated. Cut the red wire! No wait, the blue wire! Yes, the blue wire! Oh well, you just lost your money. And guess what? You really didn't have a choice anyway.

What the Vanguard Variable Annuity offers | Vanguard

This can happen to you. As Mike Lester at Fortune. Well, we already covered how death benefit and income accounts aren't really guaranteed. But sometimes there are more restrictions. This particular "time bomb" restriction has to do with income or death benefit riders that are restricting the investment options to portfolios that are requiring a minimum percentage of bonds held at all times in the account.

Well, many times these insurance companies who offer variable annuities don't offer a fixed interest option or money market option in the account. Now, the idea of using equities and bonds to create a balanced portfolio isn't new, and it's certainly not bad practice. But if you're forced to stay in the market because of the restrictions of your variable annuity, you may be also forced to watch your account lose money while interest rates are going up and quit markets are correcting.

Because the funds invested in a variable annuity are in the market, you can potentially lose your money.

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Oh, and just because you read the word, "guaranteed," that doesn't mean you'll necessarily get a guaranteed return. Yes, I know I'm repeating myself. But I'm doing so for a very good reason.

What is a variable annuity?

Listen, the last thing you want to do is pay outrageous fees. Too many variable annuity policies have these unreasonable fees, and they will eat away at your money. Here's what Todd Tresidder at FinancialMentor. Now, you might be asking, " Okay Jeff, so how do I invest without paying those high fees?

See how a variable annuity works

AssetLock is proprietary software that is only available through a select group of advisors. The software is designed to monitor your stock market accounts every single day and provide a "stop-loss like" benefit in the event the stock market has an unexpected downturn. The bottom line is that variable annuities stink.

I mean, really. Does that necessarily mean that all annuities are bad investments? First, you have the outrageous fees. Remember the 3. You also can't be too sure that these companies are going to want to keep your death benefit and income account benefits around. Variable annuities are incredibly complex, and are difficult for most financial advisors to understand, so I don't expect the vast majority of consumers to really understand how they work.