About Annuities

More and more Americans are expressing concern over their long-term financial future—especially in terms of being able to enjoy a comfortable retirement. Traditional company-sponsored pension benefits are becoming increasingly rare and Congress talks repeatedly about “fixing” Social Security. As a result, many Americans have begun to assume a greater degree of responsibility for their own retirement funding. But, without a carefully thought out and comprehensive retirement plan, few of us will likely be able to realize our retirement dreams.

What Are Variable Annuities?

After you have fully funded all available qualified plans, one possible method of saving for your retirement is by purchasing a variable annuity—a type of investment that combines the advantages of professional money management with tax-deferral and death benefits. Variable annuities, which have evolved in direct response to the increasing “privatization” of retirement funding, offer two important guarantees. Annuity owners receive a guaranteed income when they annuitize their contract, while beneficiaries may receive a guaranteed death benefit upon the death of the owner (if death occurs before annuitization). These guarantees are based on the claims-paying ability of the issuing insurance company.

How Do Variable Annuities Work?

In buying a variable annuity, your money is allocated among a number of professionally-managed investment portfolios (structured similar to mutual funds). Among the choices usually offered by variable annuities are money market portfolios, fixed-income portfolios, equity portfolios and guaranteed fixed-rate accounts. The allocation process is similar to that used in 401(k) plans and your rate of return will depend on the market performance of the portfolios you've chosen. (These portfolios are sometimes referred to as your underlying investments or subaccounts.) Remember, however, that the value of your portfolios may rise or fall and that any amounts you contribute to a variable annuity are subject to market risks, including the possible loss of principal.

If you regularly contribute the maximum to your existing retirement plan(s), are interested in reducing your current investment income tax bill and are concerned that you may outlive your long-term savings, then variable annuities may be right for you. This two-part article will briefly discuss some of the major benefits available to purchasers of tax-deferred variable annuities.

Click here to see a chart of the various types of annuities.