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  • Writer's pictureWiseWallet

Making Sense of Variable Annuities in the Wise Wallet Way

Updated: Feb 13



In our previous two blog posts - "Golden Wisdom: Building a Secure Wallet with Annuities" and "Is a Fixed Annuity Right for Your Retirement?" - we explored the fundamentals of annuities and fixed annuities for retirement planning. Armed with this foundational knowledge, we now dig deeper by delving into variable annuities. This will allow us to expand our understanding of the annuity landscape.


What is a Variable Annuity?

A variable annuity is a contract between an individual and an insurance company. It is a long-term investment that combines insurance features with investment options. During the accumulation phase, you make payments that are invested in various subaccounts containing a mix of bonds, stocks, and money market instruments. The value of your annuity can fluctuate with the market performance of these investments. Upon retirement, you receive payouts which may be a lump sum or periodic payments.


So What?

Grasping the key features of variable annuities is crucial for deciding if they're in line with your individual financial objectives and retirement planning. Here are the specific advantages and disadvantages of variable annuities to consider:


Advantages

  1. Professional Money Management: These annuities offer a selection of professionally managed investment options.

  2. Tax-Deferred Growth: You don’t pay taxes on capital gains or dividends until you make withdrawals.

  3. Income Stream: They can provide a steady income during retirement.

  4. Death Benefits: Beneficiaries are guaranteed a specified amount, typically at least the amount of your purchase payments (Reference).

  5. Flexibility: Offers a range of investment choices and the ability to switch between them.

Disadvantages

  1. High Fees: Variable annuities can have fees and expenses upwards of three percent.

  2. Complexity: They can be difficult to understand due to complex structures and terms.

  3. Surrender Charges: Early withdrawal can lead to substantial fees and tax penalties.

  4. Investment Risks: The value of investments can fluctuate with market conditions.

  5. Tax Implications: Gains are taxed at ordinary income rates.


Now What?

  • Assess Your Needs: If you’ve maxed out your retirement contributions, a variable annuity could supplement your savings.

  • Understand Fees: Be aware of the costs associated with variable annuities.

  • Risk Tolerance: Consider your comfort with market fluctuations.

  • Seek Professional Advice: Consult with a financial professional to understand how a variable annuity fits into your financial plan.


Variable annuities are complex financial instruments with a mix of benefits and drawbacks. They can be a valuable part of your retirement plan, offering tax-deferred growth and income options. However, understanding their fees, risks, and complexities is crucial. As always, consult with a financial advisor to ensure that a variable annuity aligns with your financial goals.


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