Variable Annuities: The Numbers
Back in february I wrote about certain situations where a variable annuity may make sense. My conclusion was that there are particular investments it makes sense to put in a variable annuity: high-yield junk bonds, intermediate-term corporate bonds, and REITs, provided you have:
- Maxed out all other tax-advantaged retirement options like your 401k and Roth IRA
- Built a taxable portfolio of low-cost, tax-efficient index mutual funds or tax-managed mutual funds
- Carefully weighed the cost benefit of the tax deferral against the higher expense ratios inherent in variable annuities
- Chosen the absolute cheapest VA option (Vanguard more often than not)
- You are investing for retirement and are absolutely certain you won’t need these funds until you turn 59 1/2
I recently came across an article at efficientfrontier.com entitled A Limited Case For Variable Annuities by Willian Bernstein (author of two excellent investing books: The Intelligent Asset Allocator
As expected, the tax-deferral of the variable annuity eventually won out in three asset classes: REITs, high-yield junk bonds, and intermediate term corporate bonds; however, the time period required for the variable annuity to prevail varied dramatically. For intermediate bonds, the variable annuity out-performed its taxable equivalent almost right out of the gate while it took junk bonds nearly 13 years to break even. The REIT variable annuity, on the other hand, took a full 38 years to overcome its taxable equivalent, so unless you’re in your 20′s or start out with an exceptionally high initial yield, it’s likely not worth the trouble for REITs.
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