A variable annuity can provide you with lifetime monthly income, or payments every month for pre-determined number of years. While its is fairly common to start receiving income payments from afixed annuity immediately, most variable annuities do not start out providing immediate income. This is where the name “Deferred Annuity” comes from.
When you are ready to start to receiving income from a deferred variable annuity, you “annuitize” it. When purchasing a deferred annuity, you select the terms of annuitization.
There are a few things to keep in mind when thinking about a variable annuity for retirement income:
1) Many variable annuities sound like they provide you with income for the rest of your life but do not. If lifetime income is your goal – you want a variable annuity with a Guaranteed Lifetime Withdrawal Benefit.
2) Payments for most variable annuities will fluctuate up and down. In theory, a variable annuity should outperform a fixed annuity (provided markets behave according to historical norms). However, those living on a tight budget might want to avoid variable annuities.
3) Variable annuities are designed for two purposes. To generate retirement income and to pass along an inheritance. Immediate fixed and fixed indexed annuities are solely designed to generate a stream of income.
4) So far, we have been using the word payments to describe the income that a variable annuity generates. In fact, the word “payment” is a bit of a misnomer. Really, the payment from a variable annuity is a scheduled withdrawal from the annuity. The withdrawal lowers the value of the annuity, decreasing the potential value which you can pass on.
Below are some standard options:
- Guaranteed lifetime withdrawal benefit (GLWB), allowing you to withdraw a certain percentage of your principal investment each year for as long as you are alive. While the percentage of the principal will vary from firm to firm, it should be in the ball park of 5%.
For example, if your principal investment is $500,000. You should receive a minimum of $25,000 per year for the rest of your life. The key benefit with Guaranteed Lifetime Withdrawal Benefit is that even if the value of the annuity was to drop to zero (for example, you live to 100 or the stock market crashes), you would still receive “5%” of the initial premium per year.
- Guaranteed minimum withdrawal benefit (GMWB) basically guarantees that you will be able to take money out of the annuity, at least the cash value of the annuity at the time of annuitization. You don’t have to worry about the stock market falling and wiping out your savings, but can get the benefit of the market rising. You get to withdraw a set percentage of the the initial principal per year for a set number of years. If your investment performs well, your variable annuity will also have an excess amount at the end of the term.
Guaranteed Minimum Withdrawal Benefit and Guaranteed Lifetime Withdrawal Benefit are just two types of variable annuities. There are also Guaranteed Minimum Accumulation Benefit and Guaranteed Account Value. Bottom line, selecting an annuity can be very confusing. Its important to remember that the better the benefit sounds, the more expensive the fees. You can learn more about annuity fees here.
This lesson is part of our Free Guide to Investing in Annuities. Continue to the next lesson here.
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