Understand Why Your Annuity Is Underperforming and What to Do Instead
A variable annuity (VA) is one of the riskiest and most expensive annuity types on the market. While many are sold under the promise of market growth and lifetime income, they often end up underdelivering due to fee drag, market volatility, and misuse. If you’re seeing your annuity contract value shrink—or if your investment hasn’t grown as expected—here’s why, and what you can do to protect your money.
How a Variable Annuity Really Works
A variable annuity is an insurance contract that allows you to invest in subaccounts (mutual fund-like investment options). Your money grows or shrinks depending on how those investments perform. There are no guaranteed returns unless you pay for optional riders. This is fundamentally different from fixed annuities, which offer principal protection, or fixed indexed annuities (FIAs), which allow for growth potential with a floor of 0% (no loss).
If you want to zoom out and look at the bigger picture beyond just variable structures to see if can you lose money in an annuity of any type—including fixed and indexed options—make sure to read our comprehensive risk breakdown before digging into the specific variable performance drains below.
Every Reason Why Your Variable Annuity Is Losing Money
No Downside Protection
Your principal is exposed to market losses. If your subaccounts are invested in aggressive equity positions and the market crashes (e.g., a bear market or recession), your account value can drop significantly—just like a 401(k).
- Why It’s Unique: Unlike fixed indexed annuities, there’s no 0% floor. You are fully at risk.
- Who Needs To Worry: Retirees and pre-retirees who need income soon and cannot wait for a recovery.
Fee Drag Eats Into Performance
Variable annuities are the most expensive annuity type. Common fees include:
- Mortality & Expense Risk Charges (M&E): Typically 1.2%–1.5%
- Administrative Fees: 0.15%–0.30%
- Fund/Subaccount Fees: 0.5%–2.0%
- Living Benefit Rider (GLWB) Fees: 0.95%–1.5%
- Optional Death Benefit Riders: 0.2%–0.5%
Total fees can easily reach 3%–4.5% annually. So even if your investments earn 5%, you’re only netting 0.5%–2%. If your investments lose value, your fees still apply—amplifying losses.
- Why It’s Unique: No other annuity type charges this many layers of fees.
- Who It Hurts Most: Investors who expect long-term growth and ignore how fees compound against them during down years.
Investment Risk with Poor Subaccount Options
Subaccounts may not be well-diversified or high-performing. Many variable annuities limit your investment menu to proprietary funds with higher internal expenses.
Example: If your variable annuity only offers actively managed mutual funds with high turnover and poor long-term returns, your portfolio underperforms while still incurring high costs.
- Who Needs To Watch Out: Investors who don’t actively manage allocations or believe “set it and forget it” is a valid strategy.
Sequence of Returns Risk
If you’re taking income or withdrawals and your investments lose value early on, you lock in those losses. This reduces the account value faster than expected, especially if the market doesn’t rebound quickly.
- Why This Is Dangerous: It’s the same risk retirees face with 401(k) drawdowns, but worse because VA fees are higher.
GLWB Rider Confusion
If you paid for a Guaranteed Lifetime Withdrawal Benefit (GLWB), it’s important to understand the income benefit base is not the walk-away value—it’s a fictitious value used to calculate income. Meanwhile, your real account value can decline to zero.
- You may be losing money and not even realize it if you’re focused on the “income base” growing while your real account balance is shrinking.
- If you stop paying for the rider or surrender the policy, the income benefit disappears, and you’re left with the declining real value.
- Who Should Care: Anyone relying on a VA for retirement income but unaware of how GLWBs are calculated or how the income stream compares to annuitization.
You’re Not Using the Rider You’re Paying For
You may be paying 1%–1.5% per year for a GLWB but haven’t started income yet. That fee is still deducted annually, even in down years. If the rider is meant to guarantee income and you’re not using it, you’re draining the account for nothing.
Withdrawals Reduce Account and Income Base
Excess withdrawals (above the free withdrawal limit or GLWB max percentage) can reduce both your contract value and your future guaranteed income. It may also void rider guarantees.
- Who This Impacts: Clients withdrawing money during the surrender period or early in retirement without a structured income plan.
Who Should Buy a Variable Annuity
- Investors with high risk tolerance and a long time horizon (15+ years).
- Individuals who want tax deferral on active, high-growth investment strategies.
- People who need income guarantees but still want exposure to equities (though a fixed indexed annuity often does this better).
Who Should Avoid Variable Annuities
- Retirees or near-retirees who can’t stomach market volatility.
- Those seeking low fees or capital preservation.
- Anyone who doesn’t want to monitor investments and riders closely.
- People who don’t understand that the income benefit base is not real money—it can’t be withdrawn like an account value.
Smarter Alternatives to Protect and Grow Your Money
Fixed Indexed Annuity (FIA)
- 0% downside protection (you can’t lose due to market declines).
- Participation in index gains like the S&P 500 with no direct market exposure.
- Optional GLWB for guaranteed lifetime income with control and liquidity.
- Fees: 0%–1.5% max, depending on rider.
Multi-Year Guaranteed Annuity (MYGA)
- Works like a high-yield CD with fixed interest for 3–10 years.
- No fees, guaranteed principal and interest.
- No market exposure or GLWB, but excellent for conservative growth or a laddering strategy.
Permanent Life Insurance
- Options like Indexed Universal Life (IUL) offer tax-deferred growth, market-protected cash value, and tax-free withdrawals.
- It can be used as a supplemental retirement income stream, especially if retirement plans are underperforming.
Deferred Income Annuity (DIA)
- You invest a lump sum now and receive guaranteed income starting years later.
- Best for planning income starting in 10+ years, especially for longevity protection.
What Type of Accounts Can Fund These Options?
- IRA or 401(k) rollovers → Use to fund FIAs, VAs, and GLWB income riders tax-deferred.
- Roth IRA → Ideal for tax-free income strategies via FIAs or IULs.
- Non-qualified (after-tax) savings → Use for MYGAs, FIAs, or IULs, depending on your tax goals.
Additional Insurance Worth Considering
- Long-Term Care Annuities: Combine income with coverage for chronic illness expenses.
- Long-Term Care Insurance: Reduces the risk of a long-term care event draining your annuity or retirement accounts.
- Life Insurance: Used to replace wealth or protect family legacy if an annuity underperforms or is annuitized and can’t be passed down.
Bottom Line
Variable annuities lose money for three reasons: market volatility, excessive fees, and investor misunderstanding. If you’re not actively managing the contract or taking advantage of guaranteed income features, you’re likely overpaying for underperformance. Worse, if you’re nearing retirement, this could permanently damage your income outlook.
Don’t keep losing money. Contact The Annuity Expert now for a free fixed indexed annuity quote or a GLWB income comparison. We’ll reverse-engineer your goals and find a better strategy—at lower risk, with less cost, and more guaranteed control over your retirement.
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