Variable Annuities Explained: Costs Vs. Benefits

“Locking in Future Income” by Leslie Scism of the Wall Street Journal explains both the benefits and drawbacks of variable annuities.  While they help to protect your savings from losses in the stock market, you do need to be aware of both the guarantees and the costs associated with variable annuities.  They are popular because most products offer a guaranteed minimum payment which is paid in a stream over time.  It is important to note that you cannot usually withdraw your money in a lump sum, making variable annuities best for people looking for income like that you’d get from a traditional pension.

Your savings are invested into tax-advantaged funds, whether from 401k annuities transferred into a variable annuity product or from another source.  From there you’ll have an account balance of the basic funds which incorporates both your initial investment and any gains that you have accrued.  You will also have a guaranteed minimum benefit base, which insurers usually re-calculate each year and from which they base your lifetime payments.  While it is hard to find the 10% minimum increases of the past, you can still find 5% or 6% offered for at least 10 years or until your first withdrawal.

The fees associated with variable annuities are usually around 3.5% and can turn some investors off from the products entirely.  It is important to weigh those fees with the benefits though, because sometimes your reward is much more than your costs.  Since the market has extreme highs and lows, many insurers point out that the high increase years more than make up for the fees you are paying and still allow for a significant increase in your base amount.  It is important to speak with a financial adviser about variable annuities, because if you are ready to retire, immediate annuities might be a better product for you.  The Wall Street Journal lists as one of the only websites to help investors compare annuity products.

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