BALTIMORE — Investment firms, financial planners and business journalists have been drumming a message into Americans' heads for years: Your employer and the government will probably not sustain you through retirement; you must save and invest on your own.
Baby boomers, who now see retirement on the horizon, appear to have gotten the message. So much so that many have reached the limits of their tax-deferred IRAs and 401(k) plans. Thus they've helped turn the variable annuity--a hybrid insurance and investment product--into one of the fastest-growing retirement vehicles around.
From annual sales of $4.5 billion in 1984, variable annuities shot up to $50.4 billion in 1994, according to the VARDS Report, an industry newsletter published by Financial Planning Resources Inc. of Roswell, Ga. VARDS estimates that annual sales will hit $78 billion by the year 2000.
T. Rowe Price Associates Inc. is among the newcomers of the roughly 180 companies offering the product. It will offer a low-cost variable annuity starting next month. Similar offerings are available from the Vanguard and Scudder mutual fund companies, and the Janus and Schwab investment houses will trot out their own soon.
Variable annuities are sold by insurers, investment firms and banks. Customers sock money away each year in one of a number of vehicles, typically mutual funds. Because the buildup in value of an insurance policy is not taxed, the funds accrue tax-deferred until withdrawn, typically after the owner retires and his or her tax bracket is lower.
The insurance benefit is a guarantee to pay the value of the retirement account either at death or when the payment period starts, whichever comes sooner. Most promise to pay at least the principal amount the customer invested, even if the stocks perform poorly.
This is not a product for everyone, however. Customers must fund the annuity with after-tax dollars. Further, there are significant penalties for early withdrawal.