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 The insurance company that is offering the variable annuity and its living benefit has taken steps to try to ensure that it is able to meet its future obligations. These steps often involve the ability to restrict investment choices, as well as moving money in or out of the subaccounts you have selected. It is absolutely critical that you understand how the annuity will behave in various market cycles. You need to know what happens to your asset allocation in market down cycles, as well as any subsequent rallies. Of course, understanding this can be very complex and difficult. At the very least you should make sure that your broker or adviser understands how the annuity will behave. Mistake No. 5: Working with an adviser who is not a variable annuities expert Annuities can be helpful tools in the retirement planning process, but they can also fail investors if utilized incorrectly. Ask your broker or adviser how many different annuity providers he or she works with, how long he or she has been working with them and what the selection process is. There are hundreds of choices available, many of which frequently change. A firm with a dedicated staff to review these changes and keep the advisers or brokers aware of all the changes will, in my opinion, provide better long-term results and reduce the chance of owning an investment that does not behave the way you thought or intended. Some other common mistakes:
Selecting unneeded benefits, unnecessarily adding to the cost of the investment Selecting the wrong registration (individual vs. joint) Ignoring tax loss opportunities from underperforming annuities This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.