An annuity contract, known as a variable annuity, provides investors with both the growth potential of the stock market and the security of a guaranteed income stream in retirement. A variable annuity, like a retirement account, enables you to choose an investment portfolio that suits your goals. By doing so, you expose yourself to more risk than a conventional annuity, but you also open up the possibility of receiving larger returns. How a Variable Annuity Works To start with a variable annuity, you must buy an annuity contract. This can be accomplished through a lump sum deposit, a transfer from another retirement account, such as a 401(k), or progressively replenishing the account with smaller payments over time. Then you must determine how to proceed with the contract. Variable annuities are classified into deferred variable annuities and immediate variable annuities. With a deferred variable annuity, you delay receiving income payments from the contract until later, giving your balance additional opportunity to grow. An immediate variable annuity begins paying you as soon as you sign up and deposit your money. It would be beneficial if you also decided how the funds would be invested. A variable annuity invests your money in annuity-specific investing subaccounts comparable to mutual funds. These subaccounts invest your money in asset pools, including equities, bonds, and money market funds. Your annuity provider will supply you with a list of the investment emphasis of each subaccount. For example, you could be offered the option of selecting one subaccount that is entirely comprised of stocks, another that is entirely comprised of bonds, and still another with a 50/50 mix of stocks and bonds. You determine how to divide your funds among the subaccounts. The Pros of a Variable Annuity
- High possibility for profit: A variable annuity may provide more than other annuities if your assets perform well. They can be an excellent strategy to grow your investments over time while also protecting you against inflation.
- Tax-deferred growth: Taxes on investment gains in a variable annuity are deferred, so you won’t owe them until you take money out of the account. This is the same advantage as with a 401(k) or individual retirement account (IRA).
- There are no income or contribution limits: Contributions to 401(k)s and IRAs are limited to a certain amount per year. There is no limit to variable annuities. Suppose you’ve maxed out your current retirement accounts but still want to save more for retirement. In that case, annuities can be a suitable supplement to your retirement strategy. In addition, unlike certain Roth accounts, there are no income restrictions, so you can set up a variable annuity regardless of your annual income.
- Investment security: You might buy a variable annuity that ensures you at least your initial contribution will be returned, even if your investments lose money. That’s extra security over investing on your own.
- Income assurance: Even if your account balance runs out, you can set up a variable annuity so that future payments are guaranteed to last the rest of your life. There is an additional fee for doing this, but it eliminates the possibility of you running out of money due to a bad investing stretch.
Cons of a Variable Annuity
- Increased investment risk: Variable annuities do not provide investors with guaranteed investment returns. If your investments perform poorly, your balance may not grow, or you may even lose money.
- Planning is more difficult: With a variable annuity, you must pick the investments you want to use and keep track of them over time to ensure they remain the best option. More labor is involved than in conventional annuities in which the annuity firm oversees your investing.
- Possible high fees: Variable annuity fees can be much greater than fees on other types of annuities. They also outweigh the expenses you’d pay if you invested in equivalent securities on your own because you’re paying both investment and annuity fees.
- Surrender fees for withdrawals: Variable annuities often come with a six- to eight-year surrender charge. If you try to take a lump sum withdrawal or cancel your contract before then, you will be penalized severely.
What is the Cost of a Variable Annuity? Fees for a variable annuity are typically 2.3% each year but might exceed 3% depending on your insurance. This percentage comprises several fees your annuity firm deducts from your balance yearly. The following are some of the costs associated with a variable annuity:
- Mortality and expense risk charge: These fees reward the annuity business for running the contract and assuming the risk of ensuring you get future annuity payments. The standard M&E charge is roughly 1.25% of your account balance annually.
- Administrative costs: An additional fee for administration fees may be charged by the annuity provider. This could be as little as 0.15% of your account balance or a flat price of $20 to $40 per year.
- Fees for investment funds: Variable annuity investment funds may also charge their yearly fee, similar to a mutual fund’s expense ratio. Mutual fund fees range from roughly 0.2% per year to 1%, depending on the type of investment and strategy.
- Surrender fee charge: If you need to remove a significant amount of money before your surrender time, you’ll be subject to the surrender charges specified in your contract.
As with any significant financial choice, consult a financial counselor to see if an annuity may assist your retirement plans.
Contact Information:
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Bio:
For over 30-years Joe Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
