Financial Management Network

Helpful Planning Ideas

The Basics:

First, a primer. A variable annuity is basically a tax-deferred investment vehicle that comes with an insurance contract, usually designed to protect you from a loss in capital. Thanks to the insurance wrapper, earnings inside the annuity grow tax-deferred, and the account isn't subject to annual contribution limits like those on other tax-favored vehicles like IRAs and 403(b)’s. Wycliffe members have the ability to save in both a non-qualified variable annuity, or the 403(b) at Lincoln Alliance. Members can choose from a menu of mutual funds, which in the variable annuity world are known as "sub-accounts". Or members can opt to invest in the fixed investment that will guarantee that your principle will never go down by guaranteeing a rate of return. Withdrawals made after age 59 1/2 are taxed as income. Earlier withdrawals are subject to tax and a 10% penalty.

Fees, Fees and More Fees:

Variable annuities are notorious for the fees they charge. Indeed, the average annual expense on variable annuity sub-accounts currently stands at 2.08% of assets, according to Morningstar. (This figure includes fund expenses plus insurance expenses.) The average mutual fund, on the other hand, charges just 1.38% and the average expenses of the American Funds investments are even lower at 0.66%. The Lincoln 403(b) and non-qualified investments through Wycliffe were designed for the members to take advantage of the fixed guaranteed option, not the sub-accounts. The reasons are clear, if the members want to invest in mutual funds for faster growth, than it is much less expensive to use the American Funds options, not the sub-accounts inside the Lincoln contracts.