Are Variable Annuities Right For Everybody? A Case Study

Rose, who just turned 25, has a successful career in physical therapy, and is steadily contributing to her work-sponsored 401(k) retirement account. Recently, she received a $100,000 inheritance from an aunt who passed away. She intends to use $10,000 of this money towards a new car, but she is unsure what to with the rest. Rose decides to invest $50,000 in short term, high yield savings, in order to save for a down payment on a new home. The remaining $40,000 she wants to save for retirement, but is unsure which savings methods to use. Her financial advisor has been pushing her to purchase variable annuities with the money, so that she can reap the gains of the stock market on a tax -deferred basis.

Rose has read several online articles explaining the potential benefits of tax deferral for saving and accumulating money. What she doesn’t know is whether purchasing a tax-deferred variable annuity might be a good use for her retirement money. Is the decision to buy variable annuities the right one for Rose?

While variable annuities do offer tax-deferral, with a variable annuity the principal is not guaranteed and is subject to market losses. The Principal is invested in a series of sub-accounts that Rose would have to choose. Rose, who isn’t very familiar with the stock market and its performance, is made nervous by that fact. What if she loses part or a significant portion of her original deposit?

By digging even deeper, Rose finds out that if she withdraws money from a variable annuity prior to age 59 ½, she will be subject to the IRS’s 10% penalty tax assessed on any premature withdrawals of untaxed gains. In addition, withdrawals exceeding 10% of the contract value from most variable annuities during the first 5-10 years may be subject to surrender charges. Even though she wants to use the money for retirement, there is no telling what her needs may be in the future.

Based on these factors, Rose decides that variable annuities are not the best place for her retirement savings at this time. Her financial advisor agrees with her and recommends laddering a series of fixed annuities that have guaranteed interest rates and principal protection.

Are you considering variable annuities and are having some doubts? If so, call the Annuity Specialists at FixedAnnuityDirect.com at 1-877-519-8599 to learn about alternative annuity products that offer tax deferral like variable annuities but also protect your principal.