Variable Annuity Alternatives for Retired People

Variable annuities provide a tax shelter for your savings.

Creatas/Creatas/Getty Images

Variable annuities are tax-advantaged investment vessels that generally buy mutual funds. Annuity contracts include life insurance benefits, and they guarantee a portion of your investment as an income stream if the market takes a downturn. Despite the obvious upsides, variable annuities also have drawbacks that include limited liquidity and hefty fees. Fixed annuities, mutual funds and bonds are among other investment vehicles that offer some of the same benefits as variable annuities without some of the pitfalls.

Annuity Alternatives

By definition, fixed annuities provide you with a set rate of return for a certain period. Typically, you can make penalty-free withdrawals of principal at any time. As with a variable annuity, you can eventually convert your fixed annuity into an income stream. When you buy a fixed annuity, you limit your growth potential but you also safeguard your principal against market fluctuations. Equity-indexed annuities are hybrid products that provide you with a minimum fixed rate of return and an upside potential that's based on market performance. Generally, indexed annuities have longer terms than variable annuities. Additionally, surrender penalties are higher than on other annuity products. Their contract lengths mean that indexed annuities are not ideal for some retirees.

Mutual Funds

Variable annuities provide you with growth potential as well monthly income. Investing directly in mutual funds is another way to generate income. When you buy funds directly rather than through an annuity company, that reduces your costs and eliminates the middleman. Additionally, mutual funds are highly liquid, which means you can access your money at any time without paying surrender penalties. On the downside, mutual funds offer no principal protection. In theory your investment could drop to zero. A variable annuity would include insurance guarantees protecting part of your investment.


Bonds are inherently safer than stocks, because bondholders' claims are dealt with ahead of those of stockholders when a firm goes bankrupt. Consequently, bonds are less volatile than stocks and mutual funds. Many retirees generate income by investing in a range of government, corporate or even mortgage bonds. You can sell bonds at any time, although you might have to sell at a discount if you trade a bond midterm. If investing directly in one bond issuer makes you nervous, you can invest in bond mutual funds. Bonds do not offer the protections that you get with variable annuities, but they have a high degree of liquidity and minimal investment costs.

Roth IRA

Unlike bonds and mutual funds, variable annuities grow on a tax-deferred basis. As a retiree, you can benefit from the same type of tax benefits if you invest in a Roth individual retirement account. Regardless of your age and work status, you can invest in a Roth if you have income. Your annual contributions are capped based on your age and income level. You invest on an after-tax basis, but your withdrawals are tax-free assuming you keep your money in the Roth for at least five years and until you reach the age of 59 1/2. In contrast, withdrawals from variable annuities are fully taxable.


No single product offers the same features as a variable annuity, but you can get the same overall benefits if you invest in a range of products. You can invest your Roth IRA contributions in bonds, mutual funds and or fixed annuities. You can duplicate the life insurance death benefits of variable annuities by purchasing a term life contract. Variable annuities reduce paperwork by offering you a one-stop shop. However, by spreading your cash between a variety of investments you can save money and enjoy a higher degree of liquidity.