I bought a Fidelity variable annuity years ago. It was a mistake and if I could walk that dog back I would. But, I have made it part of my plan for my wife in the likely event I predecease her. (I am almost 73; is 71). So, I look at it that, to some degree, I've made lemonade out of lemons.
- Fidelity was low-cost (for an annuity), no commission, no surrender fee, a pretty good range of funds to invest in.
- But when I became a Vanguard guy, I did a 1035 exchange of the annuity to VG and got slightly lower fund costs with other characteristics similar to Fido's. (I'm currently invested in 3 VG funds with the annuity. Fees are 40 - 45 basis points, depending on the particular fund. This includes both fund ERs and annuity charges. More than a straight VG index fund, I realize, but still very low by VA standards.)
- Funds have appreciated nicely over the years. The fees are admittedly a drag compared to the corresponding VG non-annuity counterparts but not horrendous.
- We don't need the income from the annuity now so no reason to annuitize at this point.
- But if I go first the survivor benefit on my military pension will be about 1/3 of what I'm getting now. Plus, her SS will go away and be replaced by the value of mine. So the total hit to regular, predictable income streams is significant. That's where the annuity comes in.
- The annuity becomes hers as she is my beneficiary, she annuitizes it and a good chunk (but not all) of the lost income is replaced. This may mean she won't have to tap the taxable portfolio for living expenses. If she does, so be it but since those assets will step up, they're the ones to leave to our kids.
- If she predeceases me, I'll use any gains for charitable contributions (that are provided for in our wills anyway) down to the point where only the original basis remains. I'll withdraw that tax-free and either invest it in taxable or spend it on wine, women and song.
As I indicated at the outset, if I were considering a variable annuity all over again with what I know now, I wouldnt buy one. But I think that I've come up with a good - but not perfect - plan which keeps me from being completely screwed on the deal. Not having bought the VA way back then (and leaving the money in taxable investments) would have been preferable and still would have provided the option of her buying a SPIA when/if needed. But I think it'll still turn out OK.