With an annuity, you have a stream of income where a purchaser makes periodic or one-time payments during an “accumulation phase” so that they are able to trade those payments for an income stream in the future. They are considered variable instead of fixed because they depend on the shifting performance of the sub-accounts in which they are invested.
These sub-accounts are usually invested in mutual fund holdings that have stocks, bonds, and other such investments, and people discuss the pros and cons because of it.
How Variable Annuities Can Help You
When you plan your retirement, having an annuity can help because of the predictability. It can be tough to budget for your retirement because you never know what expenses will come up.
The same can be said of inflation and whether or not the percentage you withdraw each year will be enough to support you without affecting the principal. The last thing you want to do is outlive your assets.
Many annuities have add-ons that are called riders to help you try and avoid these situations. Some of these riders are as follows:
- Death Benefit – With this type of payment, your spouse or another named beneficiary will receive money after you die. They will either get a sum of your payments or whatever the remaining value is.
- Accumulation Riders – Some riders offer step-ups if you wait before taking distributions. This will allow you to get the highest possible value before payments begin. The annuity can either give you a percentage of the value of the contract or another amount. It depends on which is higher. Some annuity contracts offer 5% or 6% credit to the income base for every year you don’t take a withdrawal. That means you could get more than the principal when you finally do take withdrawals.
- Guaranteed Minimum Income Benefit – This is a rider that protects against downturns. If you have this, you can withdraw a maximum percentage of your investment until what you put in has been recovered.
- Long-Term Care Insurance – This variable annuity rider offers increased or advanced payouts if you qualify for long-term care. It usually isn’t comprehensive care but can act as a strong complement.
These are the basics of variable annuities and may be worth discussing with your trusted financial advisor, depending on your circumstances. Some investors find them ideal, while others prefer insurance contracts for death benefits and brokerage accounts with bonds and dividends for their income.