With employer-sponsored defined benefit pension plans going the way of the dinosaur, more people are having to create their own retirement income stream(s). One way to do this is with an annuity.
Annuities can provide you with a number of enticing features – like tax deferred growth and an ongoing income stream. However, not all annuities are the same – and some of them, like the variable type, could actually put your retirement funds directly in harm’s way.
This is one of the many reasons why you should consider running from variable annuities before you make a long-term commitment to purchasing one.
How a Variable Annuity Works
Annuities that are variable in nature can offer you a way to participate in stock market appreciation by tracking one or more underlying investments. When these mutual funds and/or other investment vehicles perform well, the value of the account can increase. This, in turn, can provide you with much more growth than that of a fixed annuity or other types of fixed, “safe” investments.
The growth that takes place in a variable (and fixed) annuity is tax-deferred. This means that there is no tax due on the gain until the time of withdrawal. Therefore, depending on how the underlying investments in the variable annuity perform, the account value could increase significantly as compared to a taxable account.
This type of annuity product could also pay you income in retirement. But even so, there are some definite drawbacks to having one or more of them in your retirement portfolio – and you should know what these are, as well as understand just how much they could impact your overall financial security.
Why a Variable Annuity is Not an Ideal Retirement Saving or Income Vehicle
Five of the biggest reasons why you may want to steer clear of variable annuities include:
- Risk of loss (including your original principal)
- Lack of liquidity
- Surrender charges
- Fluctuating income amount
When the underlying investment(s) incur losses, so can the value of your variable annuity. So, if you are inching close to retirement, you may not have time to “make up” for these losses – and there is no guarantee that the account value will ever get back to even.
These financial vehicles are also considered to be illiquid – particularly in the early years. While many annuities will allow you to withdraw up to 10% of the account value penalty-free, anything over and above that will incur a surrender charge. This is in addition to any taxes that you might owe.
If you plan to use this type of an annuity for retirement income purposes, you could run into some surprises here, as well. This is because unlike a fixed or fixed indexed annuity, the amount of income you receive from a variable annuity may change over time, based on underlying market conditions.
And then there are the fees…
Variable annuities are known for charging an exorbitant amount of fees, which can include:
- Mortality & Expense (M&E)
- Administrative fees
- Investment management fees
- Surrender charges
All of these fees can negatively impact the return you ultimately generate from a variable annuity.
Will You Have Regular Income in Retirement?
If you’re seeking safety and financial security in retirement – along with a known amount of income – talking with an income planning specialist can help. At Annuity Gator, we focus on ensuring that our clients will generate one or more reliable streams of income in the future – and that these incoming cash flows coordinate with each other.
When you have steady income that continues to flow in, regardless of what is happening in the stock market, it can help to make retirement that much more enjoyable because you are able to focus on other important things.
Are you ready to create a secure retirement income plan? If so, contact the experts here at Annuity Gator and set up a time to chat. You can reach us at (888) 440-2468, or you can send us an email by going to our secure online contact form. We look forward to helping you design an enjoyable retirement.