A variable annuity ties your returns to market sub-accounts rather than a fixed rate. That means higher potential growth — but also the possibility of loss. This calculator shows three scenarios simultaneously (optimistic, base, pessimistic) and lets you see the exact impact of annual fees (called mortality and expense charges, or M&E fees), which typically run 1.0%–1.5% per year on variable annuities.
How Fees Affect Variable Annuity Returns
Variable annuity fees are the most overlooked factor in long-term performance. A 1.25% annual M&E charge on $100,000 growing at 6% gross reduces the net return to 4.75%. Over 20 years, that fee difference amounts to approximately $47,000 in lost value — more than the initial investment return in a conservative year. Always ask your advisor for the full fee disclosure, including fund expense ratios, rider fees, and administrative charges, as these can push total costs to 2.5–3.5% per year.
When a Variable Annuity Makes Sense
Variable annuities are most valuable for investors who have already maxed out tax-advantaged accounts (401k, IRA, Roth IRA) and want additional tax-deferred growth. The tax deferral benefit is real — compounding without annual tax drag can add meaningfully to long-term returns. However, for most investors under 55 with tax-advantaged space remaining, low-cost index funds in a brokerage account will outperform a variable annuity after fees. See how fixed alternatives compare in our fixed annuity calculator.
Frequently Asked Questions
What is a variable annuity?
A variable annuity is a contract with an insurance company where you allocate your premium into investment sub-accounts — similar to mutual funds — and your account value fluctuates based on market performance. Unlike fixed annuities, there's no guaranteed return. The insurance company typically provides a death benefit guarantee and may offer optional living benefit riders (for an extra fee) that guarantee a minimum income regardless of market performance. The SEC regulates variable annuities as securities.
Are variable annuity fees too high?
Variable annuity fees are a legitimate concern. Total annual costs typically range from 1.5% to 3.5%, including mortality and expense charges (0.5%–1.5%), administrative fees (0.1%–0.3%), fund expense ratios (0.5%–1.0%), and optional rider fees (0.5%–1.5%). For comparison, a Vanguard S&P 500 index fund charges 0.03% annually. This fee gap is the main reason fee-only financial advisors often recommend variable annuities only in specific situations where the guaranteed benefits justify the cost.
Can I lose my principal in a variable annuity?
Yes — unlike fixed annuities, your account value can fall if the underlying investments perform poorly. However, most variable annuities include a death benefit that guarantees your beneficiaries receive at least the amount you put in (or the account value, whichever is higher). Living benefit riders can also protect against running out of income during your lifetime, but these riders come with additional annual fees. Always read the prospectus carefully before investing.
How is a variable annuity taxed at withdrawal?
All earnings in a variable annuity are taxed as ordinary income upon withdrawal — not at the lower capital gains rate. This is a significant disadvantage compared to holding index funds in a taxable brokerage account, where long-term gains are taxed at 0%, 15%, or 20%. For non-qualified variable annuities, each withdrawal is treated as earnings-first (LIFO accounting) until all gains are distributed, then principal returns tax-free. The 10% early withdrawal penalty applies before age 59½.