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Financial
Focus
Provided by Michael J Haynes
Edward Jones Investments
Are
Variable Annuities Right for
You?
To save
the money you'll need for that comfortable
retirement you've been working toward,
your best move is to contribute as much as
you can afford to your 401(k) and IRA. But
what happens if you hit the contribution
limits on these two plans? What other
investments are there for you? One
possibility is a variable annuity.
However, before you purchase one, review
the positives and the negatives because
they're both present.
Let's look
at some of the key benefits of a variable
annuity:
·
Variety of investment choices - Your
variable annuity is made up of several
separate investment sub-accounts.
Typically, these sub-accounts have
different objectives - aggressive growth,
growth-and-income, income, etc. You can
divide your investment dollars among these
sub-accounts to create a diversified
portfolio.
·
Tax-deferred earnings - You'll pay no
taxes on your variable annuity's earnings
and income until you start making
withdrawals, typically when you're
retired. Consequently, your money will
grow faster than it would if placed in an
investment on which you paid taxes each
year.
·
Guaranteed death benefit - As with
many of these contracts, if you die before
you've started taking withdrawals from
your variable annuity, your beneficiary is
guaranteed to receive a specified amount;
at a minimum, this will be the amount of
your purchase payments. Keep in mind,
though, that guarantees on annuities are
backed by the claims-paying ability of the
issuing insurance company.
·
Flexible withdrawal options - You
generally have a number of ways in which
you can take withdrawals from your
annuity. You can set up a stream of income
that you - or you and your spouse - can't
outlive, or you can choose to take the
money over a certain number of
years.
As you can
see, a variable annuity does offer some
attractive features for anyone interested
in saving money for retirement. But, as is
always the case in the investment world,
there are (at least) two sides to the
variable annuity story. So, consider some
of the potential drawbacks:
·
Investment risk - The word "variable"
means what it says: The value of your
annuity can, and will, go up and down,
based on the performance of your
underlying investments. If these
investments are of high quality, and you
hold them for many years, you have a good
chance of achieving exceptional growth -
but there's no guarantee that your
principal will increase, or even be
preserved.
·
Surrender charges - If you need to tap
into your variable annuity within a few
years of purchasing it (typically, six to
eight years), you may well have to pay a
surrender charge, which declines gradually
over time. However, some annuity contracts
allow you to withdraw a small percentage
of your account value each year, free of
surrender charges. And others, such as
A-shares, incur no surrender
charges.
·
Early withdrawal penalty - If you
withdraw money from your variable annuity
before you're 59 1/2, you may have to pay
a 10 percent federal tax penalty - and
this penalty may be assessed in addition
to any surrender charges.
·
Fees and expenses - When you buy a
variable annuity, you'll incur annual
"mortality and expense risk charges,"
typically in the range of 1.25 percent of
your account value. This charge
compensates the insurer for risks it
assumes in issuing your contract. You'll
also have to pay administrative fees, and
fees and expenses imposed by the
individual investment sub-accounts. If
you're strictly investing for the long
term, and you can handle price
fluctuations, then a variable annuity
might be a great way to supplement your
retirement savings - but don't make any
hasty decisions. By doing your homework
now, you can avoid a lot of "wrong
answers'' later.
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