Variable Annuities & Subaccounts: Grow Your Retirement Savings?

Imagine wanting your retirement savings to potentially grow faster than a fixed interest rate allows, but still desiring the tax-deferred benefits and potential income stream that an annuity offers. That’s where a variable annuity comes into play. Unlike a fixed annuity, where your money earns a guaranteed interest rate, a variable annuity lets you invest your money in various investment options, called subaccounts. Think of a variable annuity as a container, and subaccounts as the different investment funds available within that container.

So, how does it work? You purchase a variable annuity contract from an insurance company, either with a single lump sum or through a series of payments over time. The money you contribute is then allocated to the subaccounts you choose. These subaccounts are essentially mutual funds, or portfolios that mimic mutual funds, offered within the annuity. They invest in a range of assets – stocks, bonds, and money market instruments are common – each with different levels of risk and potential return.

Now, let’s dive deeper into subaccounts. When you invest in a variable annuity, you’re not directly buying stocks or bonds. Instead, you’re buying units of subaccounts. Each subaccount has a specific investment objective and strategy, managed by professional investment managers hired by the insurance company. For example, you might find subaccounts that focus on:

• Growth Stocks: Aiming for capital appreciation through investments in companies expected to grow rapidly. These subaccounts typically carry higher risk but also the potential for higher returns.
• Bond Funds: Investing in a variety of bonds, from government bonds to corporate bonds. These are generally considered less risky than stock funds, but offer potentially lower returns.
• Balanced Funds: A mix of stocks and bonds, aiming for a balance between growth and income, and moderate risk.
• International Funds: Investing in companies or bonds outside of your home country, providing diversification and exposure to global markets.

The performance of your variable annuity is directly tied to the performance of the subaccounts you’ve chosen. If your subaccounts perform well, the value of your annuity grows. Conversely, if they perform poorly, your annuity’s value can decrease. This is the “variable” part of the variable annuity – your return isn’t fixed; it fluctuates with the market performance of your chosen subaccounts.

This market-linked aspect brings both opportunity and risk. The upside is the potential for greater growth compared to fixed annuities, especially over the long term. If you choose subaccounts that invest in growth-oriented assets and the market performs well, your annuity value could increase significantly. However, the downside is the risk of loss. If the market declines, the value of your subaccounts, and therefore your annuity, can decrease. It’s crucial to understand that with variable annuities, you are taking on investment risk.

It’s important to remember that variable annuities also come with fees and expenses. These can include mortality and expense risk charges, administrative fees, and investment management fees within the subaccounts themselves. These fees can impact your overall returns, so it’s essential to understand them before investing.

In summary, a variable annuity is a contract that allows you to invest in market-linked subaccounts within a tax-deferred wrapper. Subaccounts are essentially investment portfolios, similar to mutual funds, offered within the annuity, giving you a range of investment options to choose from. They offer the potential for growth tied to market performance, but also carry investment risk. Understanding how subaccounts work and carefully considering your risk tolerance and financial goals are key to determining if a variable annuity is the right choice for your retirement savings strategy.