Are Variable Annuities Really That Bad?
If you’ve done research on annuities recently, you likely would have been scared away to the point of never wanting to hear the word Annuity again. Sadly, the quality information available to consumers, with regard to annuities, has not yet become as readily available as the information regarding mutual funds, ETFs and managed accounts. With improved living benefit riders offered today, such as a Guaranteed Withdrawal Benefit, variable annuities can help provide stability to your retirement planning that other investment options cannot.
The functionality of an annuity is not far from that of a defined benefit pension plan, except that it is managed, and funded, by the individual rather than an employer. An annuity is an insurance contract between an annuitant (the investor) and an insurer (insurance carrier) which can be obtained using one single premium deposit or multiple deposits. The intent behind purchasing an annuity is to create a secured income stream during retirement, using a tax-efficient strategy. Specifically with variable annuities, your premium payment is invested in one or more of the available portfolio subaccounts.
Emotions and Investing
Unfortunately, many individuals are guided by their emotions when it comes to investing, which can create inefficiencies in their investment planning process. As we have seen in recent history, investors have personal thresholds which when reached, can lead to irrational thinking and costly investment decisions. Using the living benefit riders* offered by many of the variable annuities today, an individual can be partially invested in securities but still have underlying guarantees regardless of market performance – potentially allowing them to invest more wisely and with less emotion.
Professional Money Management
The average investor does not select individual stocks and bonds based on personal knowledge and research, but instead may select specific funds which are managed by professional money managers. This is one of the more common strategies for an investor to diversify amongst various asset classes, risk assumptions and investment objectives. Although this can be more effective than a self managed process, even the professionals still get it wrong. Including a variable annuity within an overall retirement plan, can provide security that only an insurer can offer.
Variable annuities are not the right option for everyone, but in certain circumstances, can be attractive. To learn more about variable annuities or speak with a financial representative call 240-683-9700 or contact a representative.
Michael Relvas, CFP® is a Financial Advisor of Park Avenue Securities LLC (PAS), 1355 Piccard Drive, Suite 380, Rockville MD 20850. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor, 240-683-9700.
Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. MR Insurance Consultants is not an affiliate or subsidiary of PAS or Guardian. PAS is a member FINRA, SIPC.
Variable annuities are long-term investment vehicles that involve certain risks, including possible loss of the principal amount invested. The investment return and principal value may fluctuate so that the investment, when redeemed, may be worth more or less than original cost. Withdrawals of taxable amounts will be subject to ordinary income tax and possible mandatory federal income tax withholding. If withdrawals are taken prior to age 59˝, a 10% IRS penalty may also apply. Withdrawals affect the variable annuity's death benefit, cash surrender value and any living benefit and may also be subject to a contingent deferred sales charge.
Variable annuities and their underlying variable investment options are sold by prospectus only. Prospectuses contain important information, including fees and expenses. You should read the prospectus carefully before investing or sending money. You should consider the investment objectives, risks, fees and charges of the investment company carefully before investing. The prospectus contains this and other important information. A prospectus may be obtained by calling your financial professional.
There is no additional tax deferral benefit for contracts purchased in an IRA or other tax-qualified plan, since these are already afforded tax-deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if the client values some of the other features of the annuity and is willing to incur any additional costs associated with the annuity to receive such benefits.
*Living Benefit Riders are offered at an additional fee to that of the underlying annuity.