Variable Annuities: Saving for the Future

Do you want an investment that provides retirement income and a guaranteed death benefit? Consider a variable annuity here.

Employer-sponsored retirement plans, such as the 401(K), and individual retirement accounts (IRAs) encourage people to save for retirement and to take advantage of the substantial tax benefits they offer. But there are limits to the amount of money you can contribute yearly to those plans. If you think you can't save enough money in your 401(K) and IRA for the retirement you envision, you might want to investigate another alternative, called a variable annuity, which allows unlimited contributions. When you are ready to retire, you receive your contributions and the returns as income, according to a payout plan you choose.

With a fixed annuity, your rate of return is guaranteed. However, the returns, although tax deferred, are relatively low, and your real rate of return—calculated after subtracting the effects of inflation over the years—may not be as great as you'd like.

A variable annuity is different. You choose where to invest your contributions—such as in stocks and bonds. As with other investing, you take a measure of your risk tolerance and can make your contributions based on that and your investment goals. And this type of annuity allows you to diversify within the different types of investments. Although the risk factor is greater for variable annuities, your earning potential is greater than with fixed annuities.

Your returns are tax deferred, and if you choose to move your funds into different investment vehicles during the contribution period you can do so without paying taxes. Your earnings are taxed when you start receiving annuity income, but the taxes are spread out over the payout period unless you choose to receive your payout in one lump sum, in which case all taxes would be due at that point.

In addition to providing an income stream in your retirement, variable annuities offer a guaranteed death benefit. This means that if you die before you receive the full amount of your payout, your beneficiary will inherit the greater of whatever remains in your account or a prespecified minimum.

Variable annuities could be a good source of retirement income because they have the ability to outpace inflation.


Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value.