Part II: Variable Rate Annuities
A variable rate annuity has some similarities to a fixed rate annuity in that you are placing your money into the annuity with the intention of being paid back at a later date, usually, after you retire. You can make regular monthly payments toward the annuity, or you can make one lump payment.
During the accumulation phase, your insurer will invest your money into a portfolio of stocks, bonds, and money market instruments with the intention of growing your savings until such time as you begin to draw from it.
variable rate annuity pros and cons
Variable rate annuities allow you to leverage a range of investments whose performance over time will determine the level of income you receive in retirement, an amount that is not guaranteed.
You will not pay taxes on income deposited into your variable rate annuity until you begin to draw on the account.
Wealth building potential
If your variable rate annuity portfolio is strong, there is very good potential for growth over time. Typically, the longer the annuity is held, the greater the potential for wealth building.
Your money will not outlive you
Even if you exhaust all of your other retirement funds, your annuity income will still be paid out until the end of your life.
A good supplement to other investments
While a variable rate annuity should not be your only strategy, it is a good supplement to other investments.
There is no limit on how much you can put into your annuity account
You can contribute as much as you want into your annuity.
Potential for high return
If the market instruments your annuity is invested in are strong, there is very good potential for some tax-deferred gains.
Cannot be accessed by creditors
Your annuities, like life insurance, cannot be touched by creditors either before or after your demise.
Guaranteed minimum income
This is an option you can choose – it costs a little more, but you will gain the confidence of having a guaranteed income when it begins to pay out.
High fees and expenses
In many cases, the fees for variable rate annuities can be up to 4 percent per year. Protecting your investment requires the purchase of additional riders, which can be very costly.
Since the value of your annuity is tied to other investments, there is a risk of loss in the event of a market downturn.
Penalties for early withdrawal
In most cases, you will be slapped with a 10 percent fee if you begin to withdraw funds before the age of 59½ or if you withdraw during the initial surrender period (usually six to eight years).
No capital gains treatment
Gains from your annuity are taxed as regular income, both for you and for your beneficiaries after you die. This means you or your heirs would be paying about 20 percent more than if capital gains tax were to be applied.
In conclusion, a variable rate annuity may not be the right decision for you if you are risk-averse, and it certainly should not make up the bulk of your portfolio. Variable rate annuities and highly complex and often not fully understood. Bottom line, a variable rate annuity is a costly and risky investment. It can be beneficial for a portion of your portfolio, but for some, it may not be worth the risk or the expense.