People invest in variable annuities for many reasons including the tax-deferral of earnings, the ability to name beneficiaries and avoid probate, the growth potential of the managed sub-accounts and potentially the death benefit.
Then whenever they are ready to withdraw an income from their annuity, they have the opportunity to select lifetime income payments. However, with a variable annuity you do not know what that income will be when you open the account since the future value can vary depending on the investment's performance. Sometimes though, investors overlook an important option that may help them plan for a predictable income.
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The Guaranteed Minimum Payment (GMP) option assures that you will receive no less than a specific amount of income each month, no matter what the markets do. And if the investments go up, your future monthly income goes up too.
How the GMP is determined varies among annuity companies. One example is to base it on the greater of:
• The value of your purchase compounded at 6% a year, or
• The highest account balance reached on any contract anniversary date
Another version of the GMP promises that future payouts will never be less than a certain percentage, say 80%, of your first payment. For instance if your first check is for $1,000, future distributions will be no less than $800, regardless of what happens to the markets and the value of your sub accounts.
The trade-off for this GMP rider is the extra cost. These costs can range from .1 to .5% of your annuity value ($100 to $500 annually on a $100,000 variable annuity). So you must read the prospectus to see what you pay for this benefit. And ask the retirement consultant you use to compare different companies for you or based on what comparison did he decide on recommending a particular annuity (If it becomes obvious he has not done any comparisons, go elsewhere. Better yet, ask him what he thought of Professor Moshe Milevsky's paper on this issue and if he is unfamiliar, you're dealing with a salesperson, not a professional).
recommended: http://econpapers.repec.org/article/eeeinsuma/v_3A38_3Ay_3A2006_3Ai_3A1_3Ap_3A21-38.htm
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Many Fixed Indexed Annuities have income benefit riders that will guarantee a rate of return such as 8% to be taken out as income at a later date.
It sounds like a good idea but you should look at what the intrest rate or yiled would be with the extra cost. I wonder if they have annuties that are insured that no matter what happend in the market or to the company that you bought the annutie you would still get paid.
Best etf funds lists last blog post..Bond etf.
I prefer fixed rate annuities that guarantee a fixed rate of return as most of my clients are looking at annuities for their safety and are looking to take as much risk out but not get killed by fees.
Talk to an expert on annuities or structured settlements depending on your situation.
How can one exactly make the most out of annuities? I hope you post a guide on the list of authorized people to get help from for this kind of issue.
As Bill mentions above, fixed rate annuities may be a good option for people in certain situations. Of course one should always consult with a professional individual or company that has knowledge and experience with annuities in order to give sound advice.
So from this article it seems that the fixed rate annuities are the safest bet to take then.
It is amazing how many of our customers are not familiar with this piece of info "You can pass its tax-deferred earnings advantage to your annuity beneficiary and supply her income over much of her life."
Great info!
As a NY Divorce Attorney I don't hold myself out to be an expert in Fixed Annuities, but I have worked for an investment firm in NYC in the past. I agree that one should always consult a retirement expert before making any major move in retirement investment strategy. That's one reason I love this blog. Thanks for all your contributions...
If you want more freedom with which to invest your money, you can choose a variable or index annuity. A variable allows you to invest in stocks, bonds etc. Nice Post.
I wonder if they have annuties that are insured that no matter what happend in the market or to the company that you bought the annutie you would still get paid.
thanks admin Variable Annuities and the Guaranteed Minimum Payment Rider very like post.
It is amazing how many of our customers are not familiar with this piece of info “You can pass its tax-deferred earnings advantage to your annuity beneficiary and supply her income over much of her life.”
thank you !
Talk to an expert on annuities or structured settlements depending on your situation.
Many Fixed Indexed Annuities have income benefit riders that will guarantee a rate of return such as 18% to be taken out as income at a later date...
Fixed Indexed Annuities have income benefit riders that will guarantee a rate of return
Yes, I think The Annuity world is changing fast and dramatically. There are VA's that now have guaranteed rates of return 5%, 7% etc.
Hey 6% compounded is pretty good as a guarantee i would think the extra cost has got to be worth it.
In the UK, since the 2010 Budget, the governments changes to retirement regulations now state that it is no longer complusory to buy an annuity.
With this in mind and the lack of economic stability in the UK, fixed rate annuities may be more popular than variable since interest rates in the UK are not yet stable.
I prefer fixed annuities than variable. It depends on the situation or condition of the investor. Proper planning is needed before investment.
I would just be careful witht he variable annuities...
Instead of paying more for a rider or allowing your payouts to be reduced, why not combine the potential gain of a variable annuity with the fixed rate of a fixed annuity. I usually recommend some combination of both to my clients. That way you let your upside run and at least have a floor rate to rely on...
Keep up the good work!
-John
Great Article. Its really a good idea of thinking about retirement and go about these monthly income scheme.
It is amazing how many of our customers are not familiar with this piece of info “You can pass its tax-deferred earnings advantage to your annuity beneficiary and supply her income over much of her life.”
I think most people dont realize this about Variable Annuities and the Guaranteed Minimum Payment Rider
I’m a Grand Rapids divorce attorney and a reader of Ben Stein articles. What I have learned from Mr. Stein is that folks who are close to retirement or retired should take a serious look at variable annuities as a buffer against a future market correction. A variable annuity is great because you can have part of your retirement assets in an investment that guarantees a minimum amount each and every month for life, which is a nice starting point for the rest of your assets to build on. And, when we experience a market correction, you’re still guaranteed that minimum amount despite how well your portfolio is doing. For all the younger and middle-aged investors out there, you shouldn’t worry about a market correction so much because you can wait it out... time is on your side!
Recently i had an opportunity to invest in Annuity. However didn't understand quite well how does it work. Does it really offer a guaranteed investment to everyone? I don't care even if it is 5% a year but if it is guaranteed, that's indeed a nice idea.
Thanks for nice article BTW.
Joel from hgh
I work alot with financial advisers and recommend variable annuities because along with the financial benefit there is the CPA
benefit. Take a look at my blog if you want to know more about the tax benefits.
This article nicely explains how variable annuities can offer a guaranteed minimum payment through ratcheting and participation rates. Individuals with an annuity insurance license can best advise exactly how these plans work, and should always be consulted prior to the purchase of an annuity.
I needed variable annuities explained a bit more so thanks!
The additional annual growth from tax deferral in a deferred variable annuity account, compared to a stock or bond index mutual fund that is outside an annuity account, is less than 0.2% (see cash flow projection on annuityevaluator.com). An index mutual fund that is outside an annuity account generates few short-term capital gains and, therefore, is mostly taxed at a low long-term capital gains tax rate, compared to annuity income which is taxed at the higher ordinary tax rate. Some of the annuity income is excluded from taxes, but the higher tax rate largely offsets the benefit of the exclusion.