Variable Annuity Information for Retirement
Insurance companies design and sell insurance policies called annuities. These insurance policies insure your future income. They do this by accepting a deposit from you and later turning that deposit into a guaranteed income payment. This payment can be immediate, in the case of an immediate annuity, or it can be deferred. A deferred payment is called a deferred annuity. One type of annuity that is commonly used for retirement purposes is a variable annuity. Make sure you understand how this annuity works before you invest in it.
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Function
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A variable annuity functions by directing your savings into mutual funds. A mutual fund is a collection of stocks or bonds with a common investment objective. These funds diversify your savings to attempt to reduce the risk of loss in your annuity.
Significance
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The annuity account balance is directly determined by the annuity's mutual funds. If the mutual funds perform poorly, you'll lose some or all of your savings. If the mutual funds do well, you could realize significant gains in your annuity and strong growth of your savings.
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Benefits
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The benefit of a variable annuity is primarily in that you get tax deferral on your savings while it is in the annuity. You also get the benefit of strong interest crediting potential from the mutual funds in the annuity. These investments can grow your retirement savings to an amount sufficient to support you in your old age. Finally, a variable annuity can guarantee payments to you during retirement so that you never run out of money.
Disadvantages
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The disadvantage to a variable annuity lies in the fee structure of the product. The annuity often charges a policy fee for administering the policy. In addition to this, mutual funds charge fees for management of the fund. This layering of fees can diminish your annuity's returns over time.
Considerations
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An alternative to a variable annuity is a mutual fund inside of an IRA. IRAs are retirement accounts that provide similar tax advantages as annuities, but generally do not have fees that are as high as variable annuity fees.
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