During working years the matching funds provided by employers to 401(k) plans makes investing in the 401(k) account highly attractive. With the focus on 401(k) plans, stock market and bond investments, many investors have forgotten about annuities as a means of generating income during retirement. Most pension plans offered by employers are annuity products.
Variable Rate Annuities
Traditional annuities offer a fixed rate of return on an initial investment. With a fixed annuity, principal and interest are returned to the annuity holder or beneficiaries for a defined period of time in equal payments, generally monthly or annually. These annuities provide a steady income stream either for a fixed time period or for the lifetime of the owner. One potential problem with fixed annuities is that they typically fail to keep pace with inflation.
Insurance and financial companies are now promoting variable rate annuities (VA) with a guaranteed minimum withdrawal benefit (GMWB). Like a fixed rate annuity the GMWB provides a guaranteed monthly income amount, called the minimum amount, to the owner. However, if the underlying investments that fund the annuity grow in value during the fiscal year of the annuity, the annuity will pay out a percentage of the growth in addition to the fixed monthly payment. The amount of the extra payout, if any, is decided on an annual basis; an increase in benefit one year does not change the minimum benefit amount.
Advantages of Variable Annuities with GMWB
As with any other investment options variable annuities with GMWB have pros and cons. These annuities provide some protection from inflation, increase income in favorable market conditions and guarantee income during an economic downturn. Many of the annuities allow access to lump sum withdrawals if the funds are needed. A negative is that variable annuities with GMWB typically guarantee a rate that is lower than other forms of annuity. Annuities also have surrender charges – sometimes as long as ten years – that make it very difficult to change into other investments and other costs that can drive down your returns.
Consult with your financial advisor to determine if variable rate annuities are right for your situation.
Larry Parman
Attorney at Law
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