A variable annuity is a retirement savings product which provides the opportunity for market growth which is tax-deferred and can give you a guaranteed income for life.
An annuity is an insurance product that allows you to build or convert some of your retirement savings into a stream of guaranteed income payments that last for life, much like a self-created pension. With an annuity as part of your retirement plan, you will never be at risk of outliving your savings.
There are two main ways to grow your retirement savings with an annuity. A fixed annuity grows at a steady rate that is set when you purchase it. The contributions to a variable annuity are invested in stocks, bonds, mutual funds, or other vehicles based on your preference. That gives an opportunity for a greater return, but the growth is not guaranteed.
Every annuity is unique, and you have options in how to invest your funds over a broad selection of market-based investment options that span a range of different asset classes. With each investment option, it’s important to consider the objectives, risk factors, and potential fees. Your personal risk profile should guide you in choosing how you will diversify your portfolio of investment options within the variable annuity.
Because variable annuities are insurance products with investment elements, they are subject to the rules of a number of different regulatory bodies. They are subject to state insurance law. Variable annuities are also defined by federal laws and the Internal Revenue Code, and they follow the same checks and balances as other investment vehicles. They are regulated by the Securities Exchange Commission (SEC), and registered representatives who help you create your annuities are overseen by the Financial Industry Regulatory Authority (FINRA).
Whenever you invest money in a market, you are taking a risk. For many people, the opportunity for growth outweighs those risks, but depending on your retirement goals and where you are now, you’ll need to weigh the risk factors carefully. In general the closer you are to retirement, the less risk you want in your portfolio.
There are often additional terms you can purchase for your annuity that help protect your savings from losing value. These “riders” can ensure that your principal contributions won’t diminish, even if the market does. This can potentially make them safer than other investments during a volatile market.
Variable annuities are unique investment products because they offer guarantees, such as death benefits and access to principal protection riders. In order to offer these benefits to the investor, most variables come with some fees. Fees include mortality and expense risk charges, sales and withdrawal charges, administrative fees, investment management fees, and rider charges. With any investment product, it’s important to fully understand all the fees you’ll be paying, as they can materially affect the growth rate of your savings. Always ask for a prospectus that clearly defines the benefits and fees of any investment, so you can compare them.
Any earnings in variable annuities is tax-deferred, just like a traditional IRA and 401(k). With a tax-qualified annuity, you invest pretax money and pay no taxes on your original investment and any investment gains until you withdraw your money. This allows your savings to grow at a faster rate than they would if gains were taxed immediately, and that means you’ll have more savings down the road. You can also transfer your annuity funds from one investment option to another without paying taxes. When you do finally withdraw your money, it’s taxed as ordinary income. Withdrawals are subject to ordinary income tax treatment and if taken prior to age 59, may be subject to a 10% income tax penalty.
A nonqualified annuity is purchased with after-tax funds and has no cap on how much you can contribute. It is allowed to grow tax-deferred, and you pay taxes on earnings only (not the principal) when you begin to withdraw funds.
Tax-qualified plans already provide tax deferral under the Internal Revenue Code, so the tax deferral of an annuity does not provide any additional tax advantages. As they offer both insurance and investment features, variable annuities are subject to additional fees to which other tax-qualified funding vehicles may not be subject.
A variable annuity isn’t right for everyone. Depending on your situation, other investment options or a fixed annuity may be better. That said, there are many different configurations of variable annuities that can add great options to your retirement savings portfolio. Consult your financial professional to go over all your options.
These taxed-deferred retirement savings vehicles are similar to variable annuities, and most financial professionals advise taking full advantage of them. But both have caps on how much you can contribute each year. Also, these savings aren’t guaranteed to last for your entire lifetime. Lifetime annuities provide the extra security of payments for life.
You are in your 40s and just got a promotion at work. You’re already contributing the maximum into your company-provided 401(k) and would like to find a way to save further for a comfortable retirement. A variable annuity will give you a second way to grow tax-deferred savings in the market that you’ll be able to count on for your entire lifetime, even if other savings don’t last.
You are retiring next year and want to convert some of your investments into an annuity to protect against running out of savings. You first look at an immediate annuity, which will begin payouts immediately, but the payouts will be modest. You’d like some market-based growth, and since you plan to live off other investments for at least a few years, a variable deferred annuity has the opportunity to be worth more when you finally need to annuitize these savings.
Variable annuities are just one of many important retirement savings tools. To find the right mix and ensure that you and your family are taken care of now and in the future, you should have a knowledgeable financial professional on your side. We can help you go over your retirement checklist and create a customized plan to get the most out of your golden years.
Please consider the charges, risks, expenses, and investment objectives carefully before purchasing a variable annuity. The product and fund prospectuses contain this and other information and can be obtained from a financial professional. Read the prospectuses carefully before you invest or send money.
New York Life Annuities are issued by New York Life Insurance and Annuity Corporation (“NYLIAC”), a Delaware Corporation or by New York Life Insurance Company. Variable annuities are offered by NYLIFE Securities LLC, Member FINRA/SIPC. Both NYLIAC and NYLIFE Securities LLC are wholly-owned subsidiaries of New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010.
Guarantees are based on the claims-paying ability of the issuer.