Variable annuities can get a bad rap in the financial industry. Some of the negative talk is true because variable annuities can be complex and are certainly not the right financial product for everyone. But variable annuities have their place in the industry, which is evident by their long history and the benefits that they can offer retirees. In Marketwatch’s “Variable annuity pros and cons,” Nerd Wallet’s Cliff Goldstein discussed variable annuity products. It’s important to know the ins and outs of variable annuities before making them a part of your financial plan. An expert advisor can help you determine if a variable annuity is suitable for you.
When you buy a variable annuity from an insurance company, you make either one or a series of payments to them. They then invest your money in mutual funds comprised of some combination of stocks, bonds and money market instruments. Your money grows tax-deferred during the accumulation phase. During the payout phase, you receive periodic payments from the insurer for the rest of your life or for as long as your spouse lives. Although that is a simplified explanation of variable annuities, many of the products have complexities that you need to be familiar with before purchasing.
Perhaps the biggest benefit offered by variable annuities is the lifetime income that they provide. Variable annuities with lifetime benefits ensure that you will not outlive your income as you progress through your retirement. Another benefit of variable annuities is that your money grows free of taxes until you start taking withdrawals. Any gains will grow and compound your interest over time. This increases the payout that you receive when you start taking income payments. The tax deferral benefit is especially helpful to wealthier investors who have maxed out other tax free investment vehicles like 401k and IRA plan contributions. Death benefits are another benefit offered with variable annuities. If you die before receiving your payouts, you can leave your annuity to an heir.
Variable annuity products can come with high fees. They don’t have to, but there are a lot of variable annuities out there with high fees. Make sure you know the fees up front; including underlying fund expenses, administrative costs, mortality and expense risk fees, insurance and contract charges. Average variable annuity fees are between 2-2.5% annually, but some are as high as 4%. As with similar investments, you will be penalized if you take your money out before age 59 1/2. Make sure that you are using your variable annuity as a long term investment. The most important things to consider when looking at any investment are your goals, risk tolerance and time frames. You need to consider these in relation to the variable annuity product you are looking to purchase. An Annuity FYI expert would be happy to assist you with any additional questions about variable annuities.