Comprehensive Guide to Variable Annuities

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Understanding Variable Annuities

What is a Variable Annuity?

A variable annuity is a contract between you and an insurance company designed to provide you with income in retirement. Your payments are invested in various asset options like stocks and bonds, and the value of your annuity will fluctuate based on the performance of these investments. This provides you with the potential for growth but also introduces some level of risk.

How Do Variable Annuities Work?

When you invest in a variable annuity, your money is allocated to various investment options, often similar to mutual funds. These funds can increase or decrease in value based on market performance. During the accumulation phase, your investment grows tax-deferred. When you decide to annuitize, you receive periodic payments based on the value of your investments and any guarantees provided by the annuity.

Benefits of Variable Annuities

Variable annuities offer several benefits, including tax-deferred growth, a steady income stream in retirement, and death benefits for your beneficiaries. You can also add optional riders to your annuity for extra protection, such as a guaranteed minimum income or death benefits.

Considerations and Risks

Variable annuities come with high fees, including mortality and expense charges, administrative fees, and fund expenses. Additionally, investment risks mean that the value of your annuity can fluctuate with the market. They can also be complex products with surrender charges if you withdraw funds early.

Ideal Candidates for Variable Annuities

Variable annuities are ideal for those seeking tax-deferred investment growth and who tolerate market volatility. They are best suited for long-term planners looking for a secure income stream in retirement.

How We Can Help

At The Annuity Expert, we understand the challenges and complexities you face when planning for retirement. Our 15 years of experience as an insurance agency, annuity broker, and retirement planner have equipped us with the knowledge to guide you through these decisions.

We believe in finding the best solution for you at the lowest cost. We understand that your core problem is securing a stable financial future without the worry of outliving your savings. Symptoms of this problem include anxiety about market volatility, confusion about complex investment products, and fear of high fees eating into your savings. We empathize with your concerns and have the expertise to provide clear, trustworthy advice that addresses these issues head-on.

Variable Annuity Pros And Cons

What We Recommend

First Step: Schedule a Consultation

The first step is to schedule a free consultation with us. During this session, we will assess your financial situation, retirement goals, and risk tolerance. The main benefit of this step is gaining a clear understanding of how variable annuities can fit into your overall retirement plan.

Next Step: Personalized Plan Development

After the consultation, we will develop a personalized annuity plan tailored to your needs. This includes selecting the best investment options and riders to provide you with the desired growth and protection. The main benefit here is a customized strategy that aligns with your financial goals and provides peace of mind.

Final Step: Implement and Monitor

In the final step, we will help you implement your annuity plan and provide ongoing monitoring and support. This ensures that your investments are performing as expected and adjustments can be made as needed. The main benefit is continuous support and assurance that your retirement plan remains on track.

Features and Benefits

  • Tax-Deferred Growth: Your investment grows without immediate tax implications.
  • Income Stream: Provides a reliable source of income in retirement.
  • Optional Riders: Customizable protections to suit your needs.
  • Death Benefits: Ensures your beneficiaries are taken care of.

Common objections include concerns about high fees, market risks, and complexity. We counter these by offering transparent fee structures, diversified investment options, and clear, simplified explanations of each product. Not working with us may result in missed opportunities for growth, higher fees elsewhere, and increased financial stress.

By choosing The Annuity Expert, you will experience peace of mind, financial security, and confidence in your retirement plan. Contact us today for free advice or a free quote and take the first step towards a secure financial future.

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Questions From Our Readers

What happens to a variable annuity when I die?

Upon death, your variable annuity’s designated beneficiaries receive the contract’s value or a guaranteed minimum amount, avoiding probate. The specifics depend on the annuity’s terms and chosen death benefit option.

Can you lose money in a variable annuity?

Variable annuity risk is the possibility of losing money in a variable annuity if the investments perform poorly.

What is wrong with variable annuities?

Some people believe that variable annuities are too risky because the value of the annuity can go down and up. However, this is true of any investment, and with a variable annuity, you can earn a higher return than a traditional fixed annuity. Unfortunately, variable annuities also come with fees ranging between 3% and 4% annually, which eat into your retirement savings.

When can I withdraw from my variable annuity?

Withdrawals from a variable annuity are available during retirement, starting at 59 1/2. You may also be subject to a withdrawal penalty if you withdraw funds before.

How are variable annuities paid out?

Variable annuities are paid out much like a traditional fixed annuity. You can receive your payments in a lump sum or over some time. The amount you receive each month will depend on the performance of the investments within your annuity.

How does a variable annuity work when you retire?

A variable annuity can provide you with a stream of income during retirement. The amount you receive each month will depend on the performance of the investments within your annuity.

What is the difference between a variable annuity and a mutual fund?

A mutual fund is an investment vehicle that allows you to pool your money with other investors to buy stocks, bonds, or other securities. A variable rate annuity is an insurance product that allows you to invest your money in various options. The value of the annuity will fluctuate depending on the performance of the investments.

What is a variable annuity contract?

A variable annuity contract is an investment product offered by insurance companies that allows the policyholder to invest their premium in various investment options, such as mutual funds. The investment returns and the value of the contract can fluctuate based on the performance of the underlying investments. The policyholder can choose from a range of investment options and can switch between them as market conditions change.

Are variable annuities a good retirement investment?

Variable annuities can benefit long-term retirement planning by offering tax-deferred growth, income streams, and investment flexibility. However, they require careful consideration due to associated fees, complexity, and market risk.

What are the risks associated with variable annuities?

Variable annuities carry investment, market, longevity, interest rate, surrender, complexity, and fee risks that can reduce investment value and income.

Which two entities regulate variable annuities?

Variable annuities are regulated by state insurance commissioners and, for sales practices and disclosures, by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).

What is an interest sweep in a variable annuity?

An interest sweep is typically performed on a monthly basis. The process begins by calculating the excess cash that is available in the portfolio. This excess cash is then swept into the investment option with the highest rate of return. For example, if you have a portfolio with $100,000 and an interest rate of 0.75%, you would have $750 in excess cash that could be swept into another subaccount.

How do you reallocate funds in a variable annuity?

Variable annuities allow you to invest in various subaccounts. Reallocating funds may involve switching your investments from one subaccount, such as moving from an equity subaccount to a bond subaccount, to adapt to market changes and your risk appetite.

What are the variable annuity guarantees?

Variable annuity guarantees are provisions offered by insurance companies that ensure a minimum level of income in retirement, regardless of market performance. These guarantees protect investors from the risks associated with market fluctuations and offer a steady income stream during retirement.

How do benefit payments fluctuate over time in a variable annuity?

Benefit payments in a variable annuity can fluctuate over time due to changes in the performance of the underlying investments. If the investments perform well, benefit payments may increase. However, if the investments perform poorly, benefit payments may decrease. This variability makes variable annuities a popular choice for individuals seeking potential growth, but it also introduces risk.

My mother-in-law passed away last September. She had a variable annuity (traditional IRA) that was paid out to my wife and her sister (half each). The insurance company said no RMD was required. Yet, Turbo Tax is telling us an RMD was due. Help!

Understanding the Required Minimum Distributions (RMDs) for inherited IRAs can be complex, especially with changes introduced by the SECURE Act of 2019. If your mother-in-law passed away after 2019 and hadn’t reached the age of 73, the new RMD age, the rules generally require the entire balance of the inherited IRA to be distributed within 10 years. However, if she was already taking RMDs, the rules may differ. Given that TurboTax, a software that follows general IRS guidelines, might not account for the nuances of your specific annuity contract, it’s advisable to seek advice from a tax professional or financial advisor who is well-versed in estate and inheritance laws. They can offer tailored guidance for your particular circumstances.

Why would I replace my variable annuity with a fixed indexed annuity?

You might consider replacing your variable annuity with a fixed-indexed annuity for more protection, as fixed-indexed annuities often have less exposure to market volatility. Additionally, they typically have lower fees compared to variable annuities. In many scenarios, fixed-indexed annuities can offer higher income potential, although this depends on various factors, including the specific terms of the annuities and market conditions.

Why would I replace my fixed indexed annuity with a variable annuity?

You might consider replacing your fixed-indexed annuity with a variable annuity primarily because of the higher upside potential associated with variable annuities. They offer greater returns due to their direct exposure to market investments. However, it’s important to be aware that this comes with increased risk and typically higher fees compared to fixed-indexed annuities.

 I am 73 and have a variable annuity purchased with 100,000 30 years ago. It is worth 450,000. Should I cash it out? What other options are available?

Cashing it out is an option, but taxes will be owed on all gains.  The other option would be to move it to another policy that pays a lifetime income and then pay the taxes on the withdrawals each year, which would spread the taxes out over time.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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