Personal Finance: How do variable annuities compare to mutual funds?
Like mutual funds, variable annuities do not offer a guaranteed cash value. Instead, the size of the payments received by the contract holder are directly dependent on the performance of a professionally managed portfolio. On a risk-adjusted basis, variable annuities perform similarly to mutual funds. On average, variable annuities offer slightly lower returns than mutual funds as well as lower levels of risk. Unlike mutual funds, variable annuities provide tax-deferred growth of dividends and capital gains. However, if these investment vehicles are held for a short time period—less than six years—the extra fees associated with mortality and risk expenses more than offset the tax-deferral advantages. Therefore, variable annuities are best viewed as relatively illiquid, long-term savings vehicles that are most useful for the funding or partial funding of retirement income. Variable annuities are appropriate for individuals who require a monthly income, desire flexibility and understand
