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Annuities can be useful tools, whether you're using them for retirement income or building your nest egg. The reassurance annuities offer can help you focus on other things during your retirement, whether that be traveling to new destinations, volunteering more often or spending more time with your loved ones.
Both fixed and variable annuities may offer a vehicle to create
Understanding variable annuities
When you are ready to begin your retirement income, the annuity value at that time can be turned into a guaranteed payout stream. This series of
Pros of variable annuities
Variable annuities may offer the potential for long-term growth.
They also provide:
- Tax-deferred growth of earnings. Any interest, dividends, or other gains in your contract are sheltered from current-year taxation until withdrawn.
- Guaranteed income in retirement. You have the option of converting your annuity’s value into a guaranteed stream of income. You can establish annuity payments that last for your entire life, including the life of your spouse.
- Payouts that can increase if the market performs well. Annuity payments are based on the annuity’s value when you elect an income option. Investments might experience significant gains, but there is no guarantee of that, and you may lose money investing. If investments gain value, you have more income in retirement.
- The potential to offset the effects of inflation over long periods. By accepting additional risk, your annuity has the potential to keep up with inflation—or even get ahead.
- A tailored investment subaccount mix. Your contract may have numerous subaccounts to choose from, enabling you to build a portfolio that's aligned with your goals.
- A way to transfer wealth to heirs. At your death, any remaining funds in a deferred annuity contract could pass on to beneficiaries via a death benefit.
Cons of variable annuities
The possibility for growth comes with more complexity and costs.
- Performance will fluctuate and is based on the subaccounts you select. You can't know in advance how investments will perform. If investments lose value, you could end up with less capital to fund your income.
- Fees may be higher than for other annuities. Investment options, death benefits, and optional benefit guarantees that might grow your assets add cost. It's essential to evaluate features and associated fees to ensure that you're not spending more than you need to.
- Annuities typically have surrender charges. An annuity is a long-term retirement product where surrender charges may apply if you withdraw the money within a specified timeframe.
Understanding fixed annuities
A fixed annuity can provide a fixed interest rate of return so you can count on steady accumulation of assets. For example, an annuity may have a 1% minimum guaranteed rate for the life of the contract and a 3% current rate for a specified time. The current rate is generally not changed more than once every 12 months.
Pros of fixed annuities
Fixed annuities are predictable savings vehicles. They offer:
- A reliable and predictable fixed interest rate. You will know how much you'll earn at a minimum. In some cases, you earn more than the guaranteed minimum.
- Guaranteed income in retirement. You have the option of converting your annuity’s value into a guaranteed stream of income. You can establish annuity payments that last for your entire life, including the life of your spouse.
- Tax-deferred growth of earnings. Any interest inside the contract is deferred for federal income tax purposes until you begin withdrawals of the funds.
- A generally lower cost than variable annuities. Fixed annuities have less risk and administration costs, so you will see lower costs and fees in a fixed annuity contract.
- Efficient wealth transfer. A deferred annuity contract can pay out any remaining funds to beneficiaries through a death benefit.
Cons of fixed annuities
There are tradeoffs with any product, and it's important to consider the pros and cons carefully.
- A fixed interest rate offers modest returns. You can potentially earn more over the long term by taking more risk—but you also can lose money. Fixed contracts avoid market risk, and the tradeoff is less growth potential.
- Might not keep up with inflation. With conservative products, you are less likely to outpace inflation over long periods.
- Annuities typically have surrender charges. An annuity is a long-term retirement product where surrender charges may apply if you withdraw the money within a specified timeframe.
Choosing between variable & fixed annuities
Tax deferral | Yes | Yes |
Fixed crediting rate | Only in fixed options | Yes |
Principal protection | No | Yes |
Exposure to market upside | Yes | No |
Lifetime income | Available | Available |
When could a variable annuity make sense for you?
Variable annuities might make sense in the following cases:
- You want to pursue long-term growth potential and invest in the markets. A variable annuity might be appropriate if you have a higher risk tolerance and are pursuing long-term growth. You also may benefit from tax deferral during that time. While these contracts benefit from any investment gains, they also can lose money when investments lose value.
- You have a desire to choose investments. You can customize your annuity’s investments by selecting from a variety of variable subaccounts inside and take a level of risk you're comfortable with.
When could a fixed annuity make sense for you?
Fixed annuities might make sense under the conditions below:
- You want predictable growth. As you grow older, you may be most comfortable in a lower risk tolerance with a fixed rate of return.
- You want principal protection. A fixed annuity offers principal protection, and you can continue to grow your assets with a fixed rate of return without facing market fluctuations
Discover the type of annuity that fits you
Both fixed and variable annuities can play a valuable role in your retirement strategy. Either option can offer tax deferral while (ideally) growing your assets, and you can set up lifetime income payments from both contracts.
Ask yourself what factors are most important to you going forward. Do you want to take additional risks in the market, and are you OK with inevitable market downturns? Or do you prefer a more slow-and-steady approach with 100% principal protection?
Annuities can be complicated, and a careful analysis can help point you in the right direction. But you don't have to do it alone. Connect with a