Variable Annuities Can Be Pricey
Variable annuities can get very expensive. Any time you consider one, you need to understand all the fees that come with it to be sure that you pick the best option for your goals and situation.
Variable annuities have administrative fees, as well as mortality and expense risk fees. Insurance companies charge these, which often run about 1-1.25% of your accounts value, to cover the costs and risks of insuring your money. Investment fees and expense ratios vary depending on how you invest with a variable annuity. These fees are similar to what you would pay if you invested independently in any mutual fund.
Fixed and indexed annuities, on the other hand, are actually fairly cheap. Many of these contracts dont come with any annual fees and have limited other expenses. But in an effort to let you customize your contract, companies will often offer additional benefit riders for these. Riders come with an additional fee, but they are completely optional. Rider fees typically vary up to 1% of your contract value annually, and variable annuities may offer them too.
Surrender charges are common for both variable and fixed annuities. A surrender charge applies when you make more in withdrawals than youre allowed to. Insurance companies usually limit withdrawal fees during the early years of your contract. Surrender fees are often high and can also apply for an extended period of time, so beware of these.
How To Find An Annuity Death Benefit
Beneficiaries can find death benefits on the deceaseds annuities by contacting the National Association of Insurance Commissioners . A death certificate from the funeral home that conducted the burial or cremation would improve the NAICs search for any forgotten policies. The policy locator service is free with no limitations, and the process could take up to 90 business days. Be prepared to have as much personal or account information on the deceased as possible.
How Does An Annuity Work
An annuity is an arrangement in which the owner of the policy transfers the risk to an insurance/annuity company. Through the premiums it charges, the company offers the annuity assumes the risk for the owner. Annuities can have a single payment or several payments, depending on the type. Premiums are paid during the accumulation phase.
As opposed to other types of insurance, annuities do not require continuous premium payments. As time goes on, youll no longer need to make annuity payments and will begin receiving payments instead. This is when the payout phase of your contract begins.
There are a number of ways in which annuities can be paid. You can design an annuity to provide you with payments throughout your lifetime or the lifetimes of your heirs. You can also combine a lifetime income stream with a guaranteed payout over a specified period.
How does a âlife with a certain periodâ annuity work? It promises lifetime income. But, your beneficiary will receive the remaining value of the account if you die within a specific timeframe.
It is common for annuities to be paid over an extended period of time. Like Social Security, they are also based on life expectancy. As a result, if you begin receiving income much earlier in life or if the term is longer, you should anticipate smaller payments.
Annuities can be paid monthly, quarterly, annually, or even as a lump sum. Furthermore, they can be begun immediately or deferred for a long time.
Don’t Miss: All Inclusive Retirement Communities Mexico
Your Beneficiaries Will Not Get A Benefit If You Die
Some annuitants select the highest monthly income possible in certain annuities in exchange for zero death benefits for their beneficiaries.
Helpful tip: Life insurance might be a good option if you want to leave money to your beneficiaries. You dont have to take a medical examination in some cases. Compare quotes online to see if you can purchase cheap life insurance. Coverage starts at $9.37 per month.
The Role Of Annuities In A Retirement Portfolio
An annuity is a contract with an insurance company that is specifically designed for retirement purposes. When you purchase an annuity, you make a payment to an insurance company, that, in turn, agrees to pay out an income stream or a lump-sum amount at a future date. When used as part of your retirement portfolio, an annuity may provide you:
Annuities are designed to deliver a predictable income stream that you can use to help cover your essential living expenses.
Annuities may help protect you from down markets with full or partial guarantees on your principal, backed by the issuing insurance company.
Annuities allow you to accumulate assets that can grow in a tax-deferred manner, potentially helping you accumulate more assets to fund your retirement lifestyle.
Don’t Miss: Southern Pines Gracious Retirement Living
Which Type Of Annuity Is Best For You
The answer to which annuity is optimal for you is entirely dependent on your situation. For example, if youre a ways away from retirement, the higher potential returns of a variable annuity could be enticing. On the other hand, those closer to retirement may want to go with a shorter-term fixed annuity that safely grows based on a set interest rate.
More specifically, because variable annuities earn returns through investments, they offer the most opportunity for growth. Annuity companies typically provide hundreds of potential investments with their variable contracts. The vast majority of these are investment funds, with each focusing on specific pools of securities. These can include bond funds, large-cap stock funds, small-cap stock funds and more.
As we state above, the tradeoff with variable annuities is the hefty fees they incur. This makes them even riskier products than just their investments. If this is a turn-off for you, an indexed annuity might be more preferable. These contracts offer a handful of indexes you can have your assets follow without actually investing in the index, which means you cant lose money. However, participation rates and rate caps can limit your overall growth.
What Is A Good Retirement Income
According to AARP, a good retirement income is about 80 percent of your pre-tax income prior to leaving the workforce. This is because when youre no longer working, you wont be paying income tax or other job-related expenses. However, this number can change based on a variety of factors, including your:
Statistically speaking, your income slowly decreases as you age, as shown in the chart above. This is due to several factors one being that most people arent making money during this period, but rather spending their life savings.
Another prevalent factor for the decrease in retirement income is the long list of retirement risks that arent considered when planning for this phase of life. This includes taking into account a longer lifespan, costs of healthcare, long-term care and inflation.
So although it makes sense that your income would slowly decrease if you werent making money, youre likely to need more money as you age and as your health declines. This is something to consider when you begin withdrawing retirement funds and as you make plans for your retirement years.
Also Check: Wells Fargo Retirement Phone Number
You Need To Know What You Want
Income annuities provide guaranteed lifetime income. But there are other types of annuities that are much more complicated and potentially much more expensive . Most of them may be more appropriate for sophisticated investors. Among these types of annuities:
- Deferred fixed annuities can offer to pay a guaranteed rate of return on your investment for a set period of time, and taxes on the amount that you earn above what you initially invested are deferred until you take withdrawals.
- Variable annuities let you invest in mutual-fund-like accounts and the money also grows tax-deferred. However, a normal variable annuity also exposes you to the risk that your investments may lose value. These annuities are more an investment vehicle with tax benefits than a way to get guaranteed retirement income.
An income rider to a variable annuity guarantees, for an additional fee, that you’ll receive at least a minimum income for the rest of your life, no matter what happens to your investments.
These annuities are most attractive to people who want to risk some of their money in the stock market but plan to retire within three to five years and worry about a downturn in the first few years of retirement. If it’s a bad first five years, it’s really difficult for you to recover from it, says Mark Cortazzo, a certified financial planner and founder of MACRO Consulting Group in Parsippany, N.J., who helps people compare variable annuities and other investment options.
Timing Of First Payout: Immediate Vs Deferred Annuities
When would you like the distribution phase to begin? Do you want payments to start immediately or be deferred to the future?
- Immediate: With an immediate annuity, you pay the principal and begin receiving payouts right away. This is a popular option for those about to retire.
- Deferred: With a deferred annuity, you make contributions ahead of time and receive the first payment on the date specified in your contract. Because your money has more time to accrue interest tax-deferred1, your payout amounts can be higher than those of an immediate annuity.
Read Also: What Is A 403 B Retirement Plan
Reasons Why Annuities Make Poor Investment Choices
- Annuities are long-term contracts with penalties if cashed in too early.
- Income annuities require you to lose control over your investment.
- Some annuities earn little to no interest.
- Guaranteed income can not keep up with inflation in certain types of annuities.
- The annuity might not provide a death benefit to your beneficiaries.
- Annuities offer regular but limited liquidity, sometimes none at all.
- Fees can be high in investment-based annuities.
- You have to wait until age 59.5 to withdraw from the annuity.
You Will Receive Regular Payments
The most basic feature of an annuity is that you receive regular payments from an insurance company. These payments provide supplemental income during your retirement, and can help if youre afraid that you havent saved enough to cover your regular expenses. Keep in mind that the value and number of your annuity payments will vary depending on the type of annuity you have and the terms of your contract.
Don’t Miss: Gay Retirement Communities In Texas
Is An Annuity Right For You
Now that you understand the basics of annuities, consider asking the following: When is the right time to stop working and retire? Will your money last as long as you need it to? How can you protect your retirement income from losses?
These are key questions to discuss with an Ameriprise financial advisor, who will provide you with personalized advice to help you achieve your financial goals.
Death Benefits Are Typically Available
Variable annuities carry risk because they have the potential for you to actually lose money. But they also provide an extra perk: a death benefit. A death benefit is a payment that the insurance company will make to a beneficiary if you die.
For a basic variable annuity, the death benefit is usually equal to the amount that you contributed to the annuity. If you get an annuity contract worth $100,000, then the death benefit payout will likely be $100,000. It does not matter how your annuitys investments perform.
Alternatively, you can find variable annuities with enhanced death benefits. With an enhanced benefit, the insurance company will record the value of your annuitys investments on each anniversary of your annuitys start date. If you die, the insurance company will pay a death benefit equal to the highest recorded value of your annuity.
For example, lets say you have an annuity contract worth $100,000. You aggressively invest your money and on the anniversary of your annuitys start date, your investments are worth $125,000. Your death benefit would then be $125,000, even if your investments decline in value for the rest of your life.
Note that an annuity probably isnt your best choice if youre just looking for a death benefit. In that case, you can help your beneficiaries defer funeral and burial costs with a life insurance policy.
You May Like: How Much Should You Have For Retirement
When Should I Buy A Retirement Annuity
The best time to buy a retirement annuity depends on your financial situation. If you are looking for immediate income, you may want to purchase an immediate annuity.
If you are younger and have many years until retirement, you may want to consider a deferred annuity. A deferred annuity allows you to grow your money tax-deferred and provides the potential for higher returns.
How Does An Immediate Annuity Work
An immediate annuity is designed to provide you with income payments for a set period of time in exchange for an initial lump-sum investment. Theyre called immediate annuities because you begin receiving annuity income payments almost immediately after you deposit your money .
There are many types of annuity contracts, featuring a wide range of different features and fees. Like immediate annuities, they all aim to help investors create their own retirement paycheck. You provide an upfront investment, and the annuity company guarantees regular income for the life of the contract.
You May Like: Retirement Payout Calculator With Social Security
Pros And Cons Of Annuities
Pros and cons accompany any investment product for retirement, and annuities are no exception.
Here are five of the pros of annuities.
Here are five of the cons of annuities.
Risk Tolerance: Fixed Vs Variable Annuities
Different annuities carry different amounts of risk. Do you feel more comfortable with a fixed interest rate on your principal investment or are you willing to accept more risk for a variable possibly higher or lower rate of return?
- A fixed annuity offers a specified rate of return. You havent invested your principal in the markets, so your returns will not fluctuate with the markets.
- A variable annuity offers the potential for greater income than a fixed annuity because its invested in the markets. However, with the potential for greater returns comes greater risk of potential loss of principal.
Recommended Reading: How To Lower Taxes In Retirement
Who Can Benefit From Annuities
Annuities arent for everyone. But they might be a good choice for people who are nearing retirement or are already in retirement, thanks to the ability to receive regular income payments that can help replace regular paychecks, experts say.
A very popular strategy with annuities is to structure the account to provide a lifetime income, much like a pension, for the annuity owner and as well as a lifetime income for a surviving spouse, Brabham says. Once a person reaches that certain age, safety for ones nest egg becomes paramount and annuities are a natural choice. Remember that safety, growth and liquidity should be your goal, and annuities just may be the answer.
Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan, suggests digging into the details, such as payouts and structures, to find out whether an annuity is right for you.
The biggest advice I can give to someone who is thinking about whether an annuity is right for them is to ask questions, because annuities can be structured in many ways, Tallou says.
When An Annuity Is Not A Good Investment
If you’re being sold an annuity without having the chance to look at your entire financial picture, proceed with care. Some people selling them mean well, but they might not have a complete notion of the products they are selling. They might not have a good grasp of the tax issues. Plus, if they haven’t done any planning for you, they can’t see how that product would fit into your retirement picture.
You also want to be aware of the fees that come with the annuity. High fees will lower your returns. High fees in some annuities mean that, in most markets, your purchase will earn low returns.
Don’t buy an annuity unless you have crafted a plan and know how it fits in with that plan. Annuities are not going away, so you should not feel pressure or a sense of urgency to buy one until you’ve done your research. Some sales agents will tell you that an annuity product will only be on sale for a short time. This could be true because insurers will stop selling some of their products from time to time. Still, don’t let this fact pressure you into making a choice before you are ready. You will likely be able to buy a product with similar features to the previous one.
Also Check: Mutual Of Omaha Retirement Calculator