Variable annuities carry more risk than most retirement products on the market. The same multiplier that boosts gains in a strong market amplifies losses when it turns. For anyone near retirement, that math rarely works in your favor.
We talk with retirees every week who were sold these products without a clear explanation of the downside, and most of them shouldn’t have been in the product to begin with. Here’s what every investor should know before committing to one.
How Variable Annuities Work
A variable annuity ties your returns to the performance of the market through what’s essentially a leverage or multiplier effect. The product moves in both directions with more force than the market itself.
The Leverage Or Multiplier Effect
Variable annuities use leverage to amplify market performance. Think of it as a multiplier on your returns. When the market performs well, your variable annuity performs even better, and that amplified gain is the selling point most agents lead with when pitching the product.
Why The Downside Hits Harder
The same multiplier that boosts gains in good years magnifies losses in bad ones. When the market drops, a variable annuity drops further. That’s the side of the product that rarely makes it into the sales pitch, and it’s the part that hurts retirees the most when timing goes against them.
Key Takeaway: The same feature that makes variable annuities attractive in a bull market makes them dangerous in a bear market. The leverage cuts both ways.
Who Variable Annuities Are Built For
Variable annuities aren’t for everyone. The product is designed for a specific investor profile, and most people approaching retirement don’t fit it.
Why Variable Annuities Don’t Fit Most Retirees
If you’re entering retirement or already in retirement, a variable annuity is probably not the right product for you. The timing risk alone makes it a poor fit. A market downturn during your first few years of retirement can permanently reduce the income you draw for the rest of your life.
The High-Risk Investor Profile
Variable annuities are designed for investors comfortable with extreme risk. Extreme upside potential comes paired with extreme downside loss, and the person buying the product has to be willing to live with both outcomes. For most of our clients, that risk tolerance isn’t a fit.
Pro Tip: Before buying any annuity, ask the agent to walk you through the worst-case scenario as clearly as the best-case one. If they can’t, you don’t have enough information to decide.
Need expert help with variable annuities? Contact Senior Benefits Plus for a free consultation.
The Hidden Costs Of Variable Annuities
Variable annuities also carry costs that catch most buyers off guard. The fees and the timing risk both deserve attention before you sign on.
Fees Buried In The Fine Print
Fees on variable annuities live on page 12 of your 17-page disclosure document. The fine print covers what’s called the cost of ownership. With a variable annuity, you take on:
- More risk than traditional retirement products
- More upside potential when the market cooperates
- A higher cost of ownership than most alternatives
The total adds up fast, and most buyers don’t run the math until they already own the policy.
Sequence of Returns Risk
As you near retirement, the order in which market events happen matters more than ever. A downturn early in retirement leaves less rebound time before you have to start drawing on the account. The longer recovery takes, the longer your income takes a hit, and that timing damage stays baked into your retirement income for years.
Key Takeaway: Variable annuities combine extreme risk with a higher cost of ownership. The closer you are to retirement, the less sense that combination makes.
Make A Confident Annuity Decision
There are good annuities on the market, and the right one depends on where you are in your retirement timeline. We help clients sort through the options and identify the products that match their risk tolerance, income needs, and retirement goals. Call Senior Benefits Plus today for a free consultation and find the right alternative to variable annuities.
