Variable annuities provide you with more flexibility and earning potential than traditional or fixed-indexed annuities. However, with this increased flexibility and earning potential, comes the ability to lose more money.
In this article, we’re looking at some of the benefits of variable annuities and who they might suit best. If you’re at or nearing retirement an annuity might be an excellent choice to guarantee a stream of income. Though the type of annuity you choose should depend on factors such as your risk tolerance.
The Advantage of Choice and Flexibility
Diversification is on every investor’s mind. Most variable annuities provide at least some form of diversification and help to avoid risk. They often provide a range of diversification and spread your money across various asset classes, strategies, styles, and sectors. Spreading your money across investments can reduce your risk during down markets and enable you to transfer money from investment to investment without sales or withdrawal charges.
The Advantage of Tax Benefits
Variable annuities mean your account is tax-deferred until you start withdrawing money at a later period. This means all the money you would normally pay in taxes stays in the account and grows until you make withdrawals, giving you the flexibility to rebalance or move your money within investments without incurring annual taxes.
You can only take advantage of this type of tax deferral if you buy your annuity with non-qualified retirement accounts, such as 401(k)s, 403(b)s, and IRAs. Most people choose to buy these annuities with nonqualified funds because they can take advantage of other annuity benefits, such as death benefit options, a range of investments, and guaranteed income payout options.
If you consider annuities with funds from qualified accounts, you should speak to your tax advisor.
Guaranteed Income
All annuities can provide income in two ways: annuitization and optional lifetime guarantees.
Annuitization
If you’re ready to take income, you can annuitize and turn control of your money in the account to an insurance company so you receive a regular stream of income payments. When you’re ready to start taking income, you can annuitize, which means you would turn over control of the money in the account to the insurance company in return for a regular stream of income payments in retirement. These types of payments can continue for life, a specified period of time, or a combination. When you pass away, the insurance company can fulfill any payment obligations to your beneficiaries for a selected period of time, and they will be able to keep any remaining money.
Optional Lifetime Income Guarantees
Outside of annuitization, today’s annuities offer living benefits for an additional fee. These function similarly to annuitization but provide more flexibility. With income guarantees including lifetime income, you can essentially ensure your future income without giving up total control of your money.
Once you purchase a variable annuity with an income guarantee, you can predict your future income level and protect it even if your account’s investments don’t perform well. Some living benefits also offer guaranteed income growth as well as an opportunity for gains when the market increases. Once you start accepting income you can withdraw certain amounts each year to guarantee your income for life. This guaranteed income is of course subject to limitations specified in your contract.
These optional lifetime income benefits are often available for additional fees but they can be built into the annuity.
Bottom Line- What Are the Advantages of Variable Annuities?
The advantages of variable annuities primarily come from their flexibility and their ability to provide those looking for retirement income with higher gains as well as guaranteed streams of income. Though the drawbacks of variable annuities stem from their increased risk compared to other annuities, such as fixed and fixed-indexed annuities, they are suitable for those looking to increase their earnings potential.
Interesting Related Article: “Top Factors to Consider When Seeking the Best Annuity to Boost Your Retirement Savings“