With some types of variable annuities, you can take advantage of dollar cost averaging ( DCA ). With dollar cost averaging, you make equal purchases at regular intervals. A likely outcome of this strategy is that you end up paying less than the average cost price per unit, on account of the fact that you purchase a majority of the units at lower prices.
Dollar cost averaging can be implemented using a variable annuity in two ways. First, you can regularly add contributions to the annuity in the form of new purchase. Secondly, you can arrange to have already contributed funds to be invested into one or more investment portfolios on a regular basis.
Market Volatility and Dollar Cost Averaging
While dollar cost averaging does not by itself shield investors from market downturns, continuous and scheduled purchases over an extended period of time tend to cancel out the ups and downs of the market, and leave the investor with a net gain and a minimized risk.
A variable annuity is more suited for taking advantage of dollar cost averaging because it allows for a specific portion of your annuity investment to be transferred tax free on a monthly into equity portfolios. By calibrating purchases in tune with short term market fluctuations ( buying less when markets are up and more when they are down – Always a good strategy ), a variable annuity holder can actually end up paying less per unit as compared to a one time purchaser at any point of the entire period.
Earning Interest with a DCA Strategy
Also to be noted is that some insurance companies offer interest on the dormant funds allocated for future purchases under a dollar cost averaging strategy. These are specifically known as dollar cost averaging accounts, and are meant to maximize returns for investors seeking to spread purchases of a specific stock or selected stocks over an extended period. Variable annuities also offer pre-specified minimum guaranteed returns, thus providing a tax deferred safety net for investors which is generally not available with mutual fund investments, while qualified retirement plans do not have the flexibility and opportunity for higher gains which variable annuities offer. In this way, a variable annuity using dollar cost averaging during the accumulation phase provides for a relatively risk free option for long term investing and retirement planning.
Please note that DCA is an investment strategy which requires a certain amount of knowledge and awareness regarding the money markets and the history of the stocks in question. You should also take into consideration the annual and administrative charges associated with annuities, early surrender penalties imposed by the IRS and the issuing company, as also the minimum guaranteed rates of return and other additional benefits and riders. Due to the large number of annuity products and issuing companies, you are advised to implement DCA in consultation with your financial planner, and regularly review the status and performance of the purchases and your average cost price per unit.