5 Common Mistakes When Buying a Variable Annuity

NEW YORK (TheStreet) -- A variable annuity, especially those with living benefit riders, can be a valuable tool in the retirement planning process. However, as with any investment, variable annuities are not suitable all the time, and do have some drawbacks.

Today, many variable annuities provide a living benefit. One of the most popular benefits offered is a future guaranteed minimum withdrawal benefit, also referred to as a guaranteed minimum income stream, or guaranteed income for life benefit. And with that benefit comes the first common mistake:

Mistake No. 1: Not enough attention to investment choices

As a result of the guarantees offered and promoted, investors are often tempted to simply elect a standard asset allocation model within the variable annuity, and take a "set it and forget it" approach to this investment. This is a mistake.

In our view, as money managers, all investments -- regardless of how and where they are invested, should be monitored and managed in an effort to reflect the current market environment, changing economic conditions and of course, reflect any changes in your investment objectives and goals.

Mistake No. 2: Ignoring the ramifications of the "lock-in" frequency

A selected living benefit could have an impact on the current value of your investment. For example, different insurance companies may offer a daily, monthly, or quarterly "lock in" feature as well as annual step-ups of the future guarantee. A daily lock-in feature is likely to have a different impact on the underlying investment within the annuity than a monthly or quarterly lock-in. The frequency of lock-ins may have adverse consequences that you need to understand.

Mistake No. 3: Not focusing on the underlying portfolio performance

Variable annuities, just like any investment, have an underlying investment portfolio associated with them. This component reflects the current value of your annuity. The most important component of the variable annuity -- ultimately what should lead to the best results -- is the underlying value in conjunction with the selected benefit. Investors need to focus on the present value as well as the future benefit value.

The choices made in selecting the underlying investments, and their performance, are most likely to impact how much income you may be able to draw from the annuity at a later date.

Mistake No. 4: Not fully understanding portfolio behavior under changing conditions