Want to Protect Your Income in Retirement? It’s Time to Learn About Variable Annuities

When you think about your finances, what keeps you awake at night? For most women, it’s the fear they will outlive their money and become a “bag lady.” The transition from regular paychecks to full-blown retirement can be downright scary. With traditional pensions going the way of the Model T, and the Social Security platform growing rickety, most of us will need ways to generate a predictable, sustainable income that is guaranteed for life.

Enter Variable Annuities

Because so much has been written about the negatives of variable annuities, we may get a lot of flack for writing this: Annuities can be very useful in the right circumstances. There, we’ve said it.

Once maligned because of high costs and withdrawal penalties, some modern versions of variable annuities offer riders that can provide you with guaranteed income for life, just like pensions. That makes them very attractive to those seeking stability in a sea of stock market volatility. Even past Fed Chief Ben Bernanke disclosed that two of his biggest assets are annuities.

The Risks of Variable Annuities

Part of the reason that variable annuities have gotten a bad rap is because they have been indiscriminately foisted on the elderly by commission-hungry unscrupulous financial sharks. Because hefty surrender charges apply if you take the money out too soon, consider variable annuities only for long-term needs. If you cannot afford to keep a variable annuity for at least ten years, it’s probably best to consider another investment.

Benefits of Variable Annuities

Variable annuities are more costly than most mutual funds, but they offer value that mutual funds do not.  In addition to income guarantees, they have death benefits, creditor protection, and reduced transaction costs. The wide variety of available features vary from company to company, so be sure you read the prospectus carefully to determine the features of the annuity you are considering and the attendant costs.

Should You Put Your Annuity into an IRA?

In addition to long-standing arguments against variable annuities because of their cost, surrender charges, and a 10% IRS penalty on withdrawals made prior to age 59 ½, some critics protest that using IRA funds to buy variable annuities is redundant because they both contain tax-deferral benefits. But since there is no charge for the tax-deferred feature of a variable annuity, why not put one in an IRA? As a matter of fact, the “downside protection” features are a great reason to do just that. We pay for insurance on our cars, our homes, and our health, so doesn’t it make sense to insure some of our retirement nest egg as well?

Of course, before you think of buying a variable annuity, make sure you sit down with a financial advisor to discuss whether an annuity is right for you. You’ll also want to do your homework so that you fully understand what an annuity is, how it works, and its limitations. Stay in the know by reading more in our Retirement Article Archive and stay motivated to meet your retirement goals by starting a Money Club in your area.

2 thoughts on “Want to Protect Your Income in Retirement? It’s Time to Learn About Variable Annuities”

  1. What does straight Life Annuity mean?, I just found out my husband choose this Retirement Option.
    My husband wants me to sign in front of a notary public the Spouse Consent Form where says”
    “I consent to my spouse electing a retirement option other than Joint and Survival Annuity.”
    What does it mean if I sign this consent form?


    1. With Joint and Survivor annuity, if he dies before you then you will continue to get payments — he can elect 100% payments to you, or 75% or 50%. The higher the percentage, the lower the amount he gets during his lifetime. And that’s why he wants you to sign the consent form, so that his payments during his life are higher. The government requires him to provide for a survivor annuity to his spouse, unless the spouse signs that form. So what that means is that the government cares more about you getting payments after his death than he does.

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