If you are considering the purchase or if you already own a variable annuity make certain you fully understand how they work. Annuities can be a good decision and they can also be your worst nightmare. The difference depends on how the benefits of a variable annuity can benefit you. Listed below are 10 things to fully understand before buying a variable annuity.
1. No Guarantee of Principal: Variable annuities have no guarantee of principal and this means in the event of a need for money you may not have your original deposit. Your original deposit is only available to your beneficiaries if paid as a death benefit.
2. Death Benefit Expenses: The mortality cost is in your contract and is subtracted from your account. Depending on the variable annuity you own or are considering these fees could be as high as 1.25% of your total account value.
3. Other Fees and Expenses: Variable annuities can charge fees for added riders and benefits. Each benefit can have a cost associated with it that is subtracted from your total account value. It could be possible that these fees and expenses could be as high as 1% to 2% and these fees are on top of the death benefit fees discussed in number 2 above. (Please read the prospectus, which by law must reveal fees and expenses.)
4. Loads and Acquisition Expenses: Some variable annuities have a front end or a back end load that can have an effect on the overall performance of your variable annuity. (Please read the prospectus, which by law must reveal fees and expenses.)
5. Administration fees and distribution costs: Many variable annuities charge a fee for administration expenses. These fees can range from .15% to .40% of your total account value and these fees are in addition to other fees in your contract.
6. State Guarantee Protection Exemption: Variable annuities are exempt from the state guarantee protection act because the invested assets are not at the insurance company, they are with the investment accounts and there for are not in need of this protection. Fixed and immediate annuities are protected by the State Guarantee Fund.
7. Market Volatility: Variable annuity sub accounts can be subject to the volatility and the whims of the stock market.
8. Additional Compensation to the Broker/Salesperson: Salespeople who sell variable annuities will continue to receive annual compensation from your variable annuity. This compensation is subtracted from your account value.
9. Death Benefits can Contain Tax Liability. Any accumulated value in your variable annuity over and above the total of the deposits is fully taxable as ordinary income. This tax is passed on to your heirs. Make certain you fully understand these variable annuity tax implications.
10. Confusing and Hard to Understand: Variable annuities contain fees and expenses, so it is important to fully understand how they work and how their features can benefit you.
There are benefits associated with variable annuities such as tax deferred growth and the ability to provide income. Please make certain you fully understand how these products work. Always read the prospectus and if anything is unclear ask for assistance from the salesperson or a trusted advisor.
Why is tax-deferred investing a big deal?
When you invest for retirement in a tax-deferred account, the tax advantages help boost the power of compounding: You keep what you may earn. Instead of paying a substantial percentage to the IRS immediately, the tax is deferred. And you may reduce your federal income tax bill because you may be able to deduct your contribution.
Focus on fees
You expect to pay for the services you receive from a
financial company, but high fees can really add up over time.
Look for accounts with low fees — and avoid unnecessary fees on low balance accounts
by consolidating assets to help meet minimum requirements.
Find out how much you're
paying in fees on your current accounts — and look for lower cost options.
Mutual fund sales
charges
Some mutual funds charge sales loads to purchase
shares. Some funds charge a redemption fee when shares are redeemed. In fact
some funds charge fees and sales loads when you buy and when you redeem.
Do you get better management
for your money if you pay a sales charge?
Not necessarily.
When it comes to fees, many investors overlook the
fine print. But even a small difference in fees may make a big difference in
your potential returns. That's why, at AARP Financial, we're determined to keep
fees low.
Operating expenses
Every mutual fund incurs expenses — to compensate
portfolio managers and cover operating expenses. However, the fees that funds
charge to cover these expenses vary widely.
There's no guarantee that a low cost fund will do
better than one with higher fees. However, there's no evidence that higher cost
funds do better either. But one thing's for sure — when fees are lower, you
start out ahead.
Promises. We make promises many times in our
lives, to spouses, kids, friends and others. A promise is a future debt
owed and, simply put, an obligation. Too often in life we are unable to
keep all our promises and they become unpaid debts.
We also live our financial lives depending on
promises. The bank promises to pay us interest and to keep our savings
safe. The auto manufacturer gives us a car warranty in case our car
were to breakdown prematurely. It goes on and on.
Wall Street made promises to all of us. They
promised to provide us with products that had value and an agreed upon level of
safety. They failed in that promise. The reason is very simple;
they are greedy and placed their own needs and goals over the people who
trusted them and their products. I happen to feel the blame is very
narrow on the Wall Street category and responsibility really lies with only a
handful of people. Most people associated with these firms are hard
working tax payers just like everyone else. The greed factor drove the
market but the greedy are those at the top and those who controlled the boards
of directors. Profits were the motivator and greed was the
gasoline. Combining this greed and the lack of oversight created this
monster that is now consuming all of us.
Back to promises. Lots of people do keep
promises and many companies also keep their promises. Think of the enormous
obligation an insurance company shoulders when they accept a customer’s money
in return for a future guarantee. Are those promises kept? Yes,
they are, and the question is why they are kept. The answer is very
simple, conservatism and oversight. No industry is more regulated than
the insurance industry, from federal oversight to state rules and regulations,
the industry is transparent and information is available for all to see.
Annuities are the backbone of many people’s
retirement. Annuities are promises to pay. The insurance company
accepts the responsibility of prudent management and protects the future
obligations to its annuitants. Annuities work because they are guaranteed
and because they are backed with “real” safe dollars. In the course of American
history, including the Civil War, the Great Depression, and our current times,
no one has ever lost a penny in an annuity. No one has ever missed a
retirement check with funds from an annuity. No beneficiary has ever been
denied their benefits with funds in an annuity.
Annuities are safe and they are guaranteed. They
are dependable and they are reliable. They are the backbone of our
financial well being and our future security. Wall Street and those who
have abused the system can never say that.
Safety and security is our promise, a promise that
will be guaranteed and kept.
1.
Target 10%
of your pre-tax income.
Here's what conventional
wisdom tells us: If you invest 10% of your pretax income from the time you
collect your first paycheck, you may be able to generate enough income for
retirement.
However... if you got a late
start OR if 10% feels ambitious, it's still a good number to keep in mind. Take
a look at the calculator below. A 10% monthly investment rate can make a
significant difference over time. Calculations are based on the median annual
American household income of approximately $50,000. The U.S. Census Bureau
reported median income of $50,233 in 2007*, the most recent such report.
2.
Increase
your contributions over time.
Even if you can't invest 10%,
commit yourself to an investment increase every year. As you move through your
peak earning years and you find yourself with fewer monthly
obligations—children raised and mortgage payments become more affordable—add
the extra cash to your retirement investments.
3.
Set
milestones.
Do a reality check at the end
of each decade of your working life.
For example:
o
By age 50, the
amount of money you have contributed should equal 10 times the amount you
expect to withdraw each year in retirement, in which case you would have
$50,000 in investments if you need $5,000 each year in retirement to supplement
your pension and Social Security.
o
If you need
$20,000 annually (because you will rely more heavily on your investments in
retirement) you may need $200,000 in investments by age 50.
Use
our calculator to see how much you can accumulate if you invest $100 or
more monthly. If you earn more than $50,000, it's easy to adjust the figures to
fit your personal income. Simply divide your income by $50,000 and multiply the
investment amount for any given year in the calculator, as well as the final
amount, by the result:
This rule of thumb assumes
that you will continue to add to your savings through age 62, and that your
investments earn something on the order of 5% annually.
* U.S. Census Bureau Historical Income Table Households, http://www.census.gov/