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The biggest advantage to variable annuities is that many of these vehicles allow their owners to allocate funds within them. This means that an annuity owner can decide what funds invested in the annuity can be spent on.

Allowing annuity holders to allocate funds is a means of reducing risk from the annuity. This is supposed to keep a person from suffering losses in case the value of a particular stock or investment fails. It is also designed to help annuity holders lessen the risks from inflation.

The allocation of funds within an annuity will usually be determined by the kind of annuity a person purchases. There are a number of different annuities available and some of them give owners more control over fund allocation than others. Not all variable annuities give owners complete control over fund allocation.

Types of Variable Annuity and Fund Allocation

The first choice an annuity holder will have to make about fund allocation is the amount of funds that will be fixed and the amount that will be variable. There many annuities that allow a person to decide what level of the funds can be variable and what can be fixed.

The fixed funds will pay out at a fixed rate while the variable rate will be based on the value of the investments. Persons who do not like the risks associated with the market should put most of their funds in a fixed rate. Individuals concerned about inflation should invest most funds in variables because the market usually beats inflation. Keep in mind, its smart to lock in your fixed annuity rates early because rates go up and down fairly often throughout the year.

There are also EIA or Equity Index Annuities where most of the funds are invested in a fixed rate Annuity and some in an index annuity. The amount invested in each of these vehicles should be based on the level risk a person is willing to tolerate.

Fund Allocation in Deferred Variable Annuities

The best strategy for an individual or couple using a deferred annuity to save for retirement would probably be to invest as much of the annuity in investments with a higher return. The annuity owner should do this because any gains they make in the market will be reinvested in the annuity.

This could give the holder a higher stream of income from the annuity upon retirement. There will be more income because the annuity will be larger and capable of a larger payout. Persons who are more risk tolerant will often be able to do better with such an arrangement.

Allocating more funds in the variable portion of annuity can help it grow faster. This means that annuity holders should be willing to take some risks. Something to consider is that funds in annuities are not taxed until they are dispersed. That can help a person avoid taxes on investments.

Another reason why a person should consider investing more in variables is inflation. Rising costs will mean that persons will need more income for retirement and increasing the return from a variable annuity can provide some of that income.

Other factors that can affect fund allocation can include the performance of other investments. If a person’s other investments are doing well he or she should definitely consider concentrating on fixed annuity investment in order to reduce risks.

Saving for retirement is tough. It’s already hard enough to get to the end of the month before you get to the end of the money. Then you have to put that money into savings rather than spend it on a well-deserved vacation. Then you need to figure out how to invest it properly. Then you need to leave it there until it’s time to retire without letting the market freak you out. And then Uncle Sam wants his share!

It doesn’t need to be that way.  You can make investing easier, and avoid taxes, by following a few simple steps.

First, if your employer offers a retirement plan, sign up for it. This is great because the money is taken out of your paycheck, before you ever see it. It’s also taken out before the tax man ever sees it, so you never have to pay taxes on it until you start taking disbursements after you retire. Once you have an emergency fund taken care of, you should be funneling as much money as possible towards your retirement plan until it’s fully funded.

If you’re up for a little more work, once you’ve maxed out your employer contribution on the 401(k), switch your investing to a Roth IRA. Whereas the 401(k) is funded with pre-tax dollars and then taxed later, a Roth IRA is funded with after-tax dollars and then never taxed again. The question of which is better,  401(k) vs Roth IRA, can be debated endlessly, but the author tends to default to the IRA in most circumstances. Of course, investing in either is much better than not investing at all! Once the IRA is maxed out, go back to investing in the 401(k) until it is full as well.

What should you invest in? Well, that’s the most complicated part, and yet the simplest. You can read any number of opinions as to what’s the best investment to make, but here’s an easy one: pick several major mutual funds, one each of several types (such as a growth fund, an international fund, and a small cap fund) and then leave them alone. No stress, no worries, and you’ll probably do better than 90% of those who actively manage their portfolios!