Variable annuity.

In plain English

Instead of a guaranteed rate, a variable annuity invests your money in subaccounts that work much like mutual funds, holding stocks and bonds. Your balance grows or shrinks with those investments, so the upside is higher but so is the risk. Variable annuities often add optional riders, such as guaranteed minimum income, for an extra annual fee. The combination of investment costs, insurance charges (often called mortality and expense charges), and rider fees makes them among the more expensive retirement products, so the fee structure matters a great deal.

01Why it matters

The market exposure can grow your money faster than a fixed annuity, but layered fees can quietly eat returns over decades, and the gains lose their lower long-term capital gains tax treatment because withdrawals are taxed as ordinary income.

02The math, step by step

Suppose you invest $100,000 in a variable annuity with mixed stock subaccounts. In a strong year the balance might climb meaningfully, but the total annual cost stacks up across several layers: a mortality and expense charge, the underlying fund fees, and any rider you add. In an illustrative case those might combine to roughly 2 to 3 percent a year, though actual costs vary by contract and should be read in the prospectus. In a down market year your balance can fall just like any stock portfolio unless a paid rider protects income.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT