One of the biggest worries you might have about your retirement is the prospect of outliving your assets. With many people in the developed world now living 20 or more years past retirement, those fears may be justified. That's why some individuals opt to purchase 澳洲幸运5官方开奖结果体彩网:variable annuities in order to achieve a fixed stream of payments and 澳洲幸运5官方开奖结果体彩网:tax-deferred growth.

How Annuities Work

澳洲幸运5官方开奖结果体彩网:Annuities have long been a popular strategy for managing this so-called “longevity risk.” A standard 澳洲幸运5官方开奖结果体彩网:fixed annuity is an 澳洲幸运5官方开奖结果体彩网:insurance contract that allows an individual to pay premiums—either in a lump sum or by m♒onthly installments—and obtain set income payments for life.

However, one drawback for some consumers is the modest rate of growth earned on the contributions. Historically, the 澳洲幸运5官方开奖结果体彩网:internal rate of return has been close to long-term 澳洲幸运5官方开奖结果体彩网:Treasury bond yields, often in the low single digits. In other words, you’re lucky if the money you put in keeps pace with 澳洲幸运5官方开奖结果体彩网:inflation.

One alternative is the variable annuity. With a variable annuity, you select multiple sub-accounts, which are essentially 澳洲幸运5官方开奖结果体彩网:mutual funds that invest in stocks, bonds, and other instruments.

Typically, a person contributes money to the annuity during their working years—called the 澳洲幸运5官方开奖结果体彩网:accumulation phase. As contributions are made, the funds are invested with the goal of building up enough money to have adequate income in retirement. The more money invested during the accumulatio🐽n phase, the more will be received when withdrawals are taken in🔯 retirement. The value of your account—meaning the amount of your payments during the withdrawal phase—also depends on the performance of the underlying investments. 

Those who pay in for a long-enough period before making withdrawals often do better than they would have with the fixed returns they’d otherwise receive. That’s particularly true if they select investments that suit their age and 澳洲幸运5官方开奖结果体彩网:financial goals. However, if the markets take a ജdive, there’s also the possibility that your account could lose value.

Pros and Cons of Annuities

Variable annuities share certain features with 澳洲幸运5官方开奖结果体彩网:individual retirement accounts (IRAs) and 澳洲幸运5官方开奖结果体彩网:401(k) plans, including tax-deferred growth. As a result, you can hold off paying taxes on gains until you start receiving payouts. (Like these other retirement plans, you normally can’t make withdrawals before the age of 59½ without incurring a 10% penalty.)

Annuities may also provide benefits that other retirement vehicles don’t have, such as a death benefit for loved ones. Typically, the person you select as yourও beneficiary will receive either the balance of your account or a guaranteed minimum payment. 

Unfortunately, annuities also have some less-appealing characteristics. Among them is less-favorable tax treatment once you hit the 澳洲幸运5官方开奖结果体彩网:annuitization phase. Any growth in your annuity above and beyond your contributions i♋s treated as ordinary income. If you’re in a higher tax bracket, that aspect alone can take a huge bite out of your earnings.

Further eroding your account are the notoriously high fees that insurance companies charge their annuity customers. You’ll really feel the squeeze if you take money out of the policy within the first few years and incur a 澳洲幸运5官方开奖结果体彩网:surrender charge. The amount of this fee is usually based on the amount you withdraw, with the percentage gradually decreasing over a period of several years. For example, taking funds in year one may incur an 8% charge, while a withdrawal in year eight o♔nly takes a 1% hit.

Figure 1. Example of surrender charges associated with a variable annuity

Even if you don’t take money out dur🌊ing the surrender period—anywhere from six to 10 years after signing up, depending on the annuity—you still face pretty stiff annual fees. These can include:

• Mortality and expense-risk charges: These offset the risk that the insurer’s customers will live longer than expected.
• Underlying fund expenses: These cover the cost of managing funds within the annuity.
• Administrative fees: These compensate the carrier for record-keeping and other expenses associated with servicing the contract.

According to the 澳洲幸运5官方开奖结果体彩网:Financial Industryꦦ Regulatory Authority (FINRA), these yearly expenses can easily total 2% or more of the annuity’s value. And if you’re looking for additional features with your variable annuity, such as a guaranteed-minimum-income benefit or a stepped-up death benefit, you’ll probably🧜 confront even higher fees.

The Bottom Line

On the surface, variab💙le annuities look like an attractive wa𝄹y to plan for retirement, with tax-deferred growth, payouts for life, and even a death benefit for your family. However, because other retirement accounts, such as IRAs and 401(k)s, offer the same tax-deferred growth with lower fees, most people will probably want to start there.