These days, with people living longer, pensions becoming a thing of the past, and the future of Social Security provoking uncertainty, securing guaranteed income has never been more critical.
But how do you turn your hard-earned assets into lifetime income? Variable annuities can help.
Incorporating variable annuities (VAs) into your retirement plan can help ensure you won't outlive your money.
We spoke with our own David Atlas, an annuity specialist with Thrivent, to break down how variable annuities work and their role in growing and securing your lifetime income.
"For many, [building your retirement portfolio] looks like sticking as much as you can into a 401(k) or other retirement accounts," says Atlas. But what happens when your primary source of income is gone? "You need a plan for turning your assets into a reliable income stream for the rest of your life. That's where variable annuities come in."
Annuities are one of the only products that allow you to build your assets in the market and then turn those assets into guaranteed income later in retirement.
What is a variable annuity?
The contract is an agreement that the insurer will provide those income payments—iand the nature of the contract will determine when and how those payments are given.
There are two phases of a variable annuity contract: the accumulation phase and the annuitization phase.
1. Accumulation phase
During the accumulation phase, you may make either a single payment or additional premium payments, which are then invested into your annuity investment account, also known as sub-accounts. (Sub-accounts operate similarly to mutual funds, but you cannot purchase sub-accounts outside of the annuity contract.)
You can choose the sub-accounts that you would like to allocate with your VA, giving you control over how aggressively you want to invest.
2. Payout phase
Once you're ready to receive payments for your investment, you enter the annuitization or payout phase. This simply means you are converting the annuity investment into periodic payments. The annuitization payment method offers a few different additional considerations, like the joint-life option, which allows you to continue payment to your spouse when you die.
If you decide to add a Guaranteed Lifetime Withdrawal Benefit (GLWB rider) to your annuity contract, you will gain access to a lifetime withdrawal benefit that offers a guaranteed income stream with the potential for growth—without having to annuitize your contract.
"A GLWB rider allows you to invest in the marketplace and participate in the market while guaranteeing an income stream that will last for your lifetime," says Atlas. "You can invest in equities between now and when you're going to retire."2
You need a plan for turning your assets into a reliable income stream for the rest of your life. That's where variable annuities come in.
How variable annuities work: An example with a GLWB rider
As with any investment, risk is inevitable. When considering risk and variable annuities, it's important to distinguish the risk associated with the account value of your investment from the risk of income loss.
- Your account value is the amount of money within your annuity sub-accounts. This value is the balance of your premiums, fees and gains and losses based on the assets the account is invested in.
- Your income is provided by the insurer and comes from either annuitizing the contract or from implementing the additional living benefits rider. Though, you may not receive growth from the market.
Account value fluctuation does not impact your guaranteed lifetime income with variable annuities when they are in the payout phase or if you are using a GLWB. Let's look at how a lifetime withdrawal benefit could work with a variable annuity product:
Let’s say your variable annuity contract includes a GLWB designed to guarantee that for every year you don't take income out of your annuity investment, your benefit base,3 which is what's used to calculate your income, will increase by 6% in years that no withdrawals are taken, with potential to increase with the market. This will occur for up to 10 years or age 80, whichever comes first.
For example, if you invest $100,000 and you don't take any income or investment gains, your benefit base after one year would be $106,000. After two years, your benefit base would be $112,000.
Let's say that in the third year the market tanks and the actual cash value of your investment drops to $50,000. Despite the market fluctuation, your income is still going to be based off the $112,000 because it's calculated off the benefit base, not the account value. So, your income won't go down, but it could potentially go up some again if the market improves.
In that same example, where after two years your income would be based off $112,000, let's say in year three there's a huge up year in the market and the account value jumps up to $125,000, rather than the anticipated $118,000.
The annuity issuer will give you the greater of the 6% or what the market has returned. Now your income will be based off $125,000, even if the market crashes your contract to zero in the following year, your income is still going to be based off $125,000.
Is a variable annuity right for you?
If you're interested in growing your retirement funds with the added protection of guaranteed income,1 then variable annuities can be a great option.
As you consider your investment options, note that variable annuities include a cost in addition to the risk of fluctuation of the market. However, that cost is the insurance component, with the added benefit of solely upside potential through the market. Mutual funds, on the other hand, can go up and down without that guaranteed income stream provided through an annuity contract.
So, if you're more concerned with guaranteeing income for life, then variable annuities could be the safer choice because you will receive income regardless of market performance. The "variable" part is the opportunity for growth.
It's also important to consider that your investments grow with time, so the longer your investments can benefit from the market, the stronger they'll be. If you have 20+ years to invest toward retirement, then a variable annuity could make more sense for you than if you plan to retire in the next 5 to10 years.
Of course, everyone's road to retirement is different, and working with a financial advisor can help you gain clarity on the right investments for your circumstances and goals.
Guaranteeing lifetime income with Thrivent: More control, more clarity
As with any investment, there is risk involved with variable annuities. But when you partner with an organization that values transparency and your best interests, you have more control over your financial decisions and confidence in your future.
Learn more about our variable annuities,