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Variable Annuities: Another Retirement Savings Tool

From time to time, we all take stock in our lives and resolve to make positive changes going forward.  However, this personal evaluation doesn’t always include a hard look at our own retirement strategy.  No matter how investor’s envision their retirement years, one thing is certain – investors will want to make sure that they have adequate savings and investments to enjoy their future.

Until recently, retirement planning experts estimated that approximately 60-75% of pre-retirement income was needed in order to retire comfortably.  That percentage, however, assumed that an investor’s lifestyle would stay the same after they retired.  If their retirement plans include travel and recreation, they may actually spend more money in these years than while they were working.  How can investors make sure their savings and investments will be sufficient to cover their retirement plans?

Saving For  Retirement Years

When it comes to retirement savings, the most common advice is also the simplest – start saving early, save as often as person can and take advantage of as many investing opportunities as person can.  In the past, Social Security formed the cornerstone of most retirement plans.  Today, many people plan to supplement their Social Security income by participating in employer sponsored retirement plans, such as 401(k)s and Simple IRAs, or by investing in traditional IRA or Roth IRA accounts.  But what can an investor do once they have contributed the maximum amounts possible to these plans?  Investors may want to consider the tax-deferred advantages of a variable annuity.

The Tax-Deferred Advantage of Variable Annuities

A variable annuity is a long-term investment vehicle designed for retirement purposes. In essence, a variable annuity is a contractual agreement in which payment(s) is/are made to an insurance company, which agrees to pay out an income or lump sum amount at a later date. There are contract limitations, fees and charges associated with variable annuities, which include, but are not limited to, mortality and expense risk charges, sales charges, administrative fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values.

A variable annuity allows the owner to allocate contributions to several investment sub-accounts.   Contributions to an annuity contract are not tax deducible, but the earnings on the investment accumulate tax deferred until someone withdraws the money.  This means the investment has the potential to grow faster than with taxable investments earning the same rate of return.  The benefit of tax-deferred compounding is just one of the features that make variable annuities an attractive retirement planning tool for many investors.  Others include:

  • No contribution limits,
  • Ability to transfer money between investment options in the annuity without paying capital gains taxes,
  • A variety of withdrawal options, including, in many cases, guaranteed payments for as long as someone lives.

Is a Variable Annuity Right for a Retirement Portfolio?

Your financial advisor can explain how variable annuities work and help an investor decide if someone could benefit by investing in one.  In general, an investor should consider a variable annuity if:

  • An investor is contributing the maximum amount to a company 401(k) and personal IRA plans,
  • An investor has money to invest that they will not need until after age 59 ½. Earnings withdrawals made prior to age 59 ½ are subject to ordinary income taxes and may be subject to a 10% premature withdrawal penalty. Investors should leave the money in the account for at least 15 years before starting to take withdrawals.  This allows enough time for the benefits of tax-deferred accumulation to outweigh the additional expenses associated with an annuity. Also, time can help smooth out the impact of volatility, since a variable annuity’s value will fluctuate with market conditions.  Note, when redeemed, a variable annuity may be worth more or less than the amount originally invested.

Variable annuities are offered by prospectus. An investor should carefully consider the investment objectives, risks, charges and expenses of a variable annuity and the underlying fund options before investing. A variable annuity prospectus has more complete information on the charges, expenses and risks and the investment objectives of the sub-accounts. Read the prospectus carefully before you invest or send money. For further information to help you decide if a variable annuity will help your retirement plans, you should consult a financial advisor. Guarantees are subject to the claims paying ability of the issuer.