Variable Annuity Pros & Cons (60 Minute Financial Solutions Book 2)

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Your Money, Your Future

Ten-year forward income averaging: The taxable part of the distribution is taxed at special rates based on levels for single taxpayers in Example: Ron, born in , is retiring in three months. He met with a financial advisor to determine which distribution method would result in the greatest benefit after taxes.


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His advisor showed him that, under some assumptions about inflation and future rates of return, his best course would be to take a lump-sum distribution and use year forward income averaging. Under other assumptions, he would benefit from leaving his money in the company plan or rolling it over directly into an IRA. There may be other distribution options available. Contact your plan administrator for information on all options available under your plan. You can avoid paying taxes and any penalties on a cash distribution if you redeposit your retirement plan money within 60 days to an IRA or your new employer's qualified plan.

If you are under age 55 when you separate from service with your employer, and choose to take a cash distribution, be aware of how it can immediately whittle away the money you've worked so hard to save. As with all retirement and tax planning matters, be sure to consult a qualified tax and financial planning professional to ensure that your planning decisions coincide with your financial goals.

Annuities are one of the most popular investment products available today. One reason annuities are attractive is that they can help build more value over time. By providing potential growth that is tax deferred, an annuity's investment earnings can accumulate and compound untouched by federal, state, or local income taxes until you begin making withdrawals, which is usually after retirement. In addition, the issuing insurance company may also have its own set of surrender charges for withdrawals taken during the initial years of the contract.

In addition to tax advantages, annuities also offer a choice of investment options. These may include fixed accounts, which may help protect principal from market risk, and variable investment accounts in stock and bond portfolios, which offer the potential for higher returns. Together, these features make annuities attractive to those who seek investments that can help supplement future retirement benefits, and to retirees who want greater control over their income and the flexibility to continue deferring taxes on investment earnings.

Annuities are essentially contracts between the purchaser and the issuing insurance company.

Until the s, most annuities were sold through insurance companies and offered only a fixed amount to be paid out. Annuities today are sold through banks and insurance companies and are much more flexible. They may include both fixed accounts and potentially higher-returning variable investment options. The power of tax-deferred growth can be substantial compared with a comparable taxable investment. Compared with other tax-deferred accounts, such as IRAs or k s, you have much greater control over the income generated from your annuity.

In some instances you may be able to defer making withdrawals until several years past retirement. Check your annuity contract for details. Another important advantage of annuities is that they generally allow unlimited after-tax contributions, whether you have earned income or not, and your contributions can continue even after retirement. At withdrawal, only the investment earnings on your annuity contributions are taxable. An annuity can be an excellent retirement investment vehicle if you are able to forgo use of the money for several years.

Annuities also offer unlimited contributions, protection of principal on fixed accounts, and the potential to earn higher rates of return on your investments in variable accounts. Annuities may also entail higher fees and expenses than some other investment vehicles, in part due to the insurance feature annuities provide.

Although annuities today are flexible investment vehicles that can be used to meet a variety of financial needs, most people don't appreciate their usefulness. If you have been investing in mutual funds, a variable annuity might be the next logical step for a portion of your retirement investment plan. Sports commentators often predict the big winners at the start of a season, only to see their forecasts fade away as their chosen teams lose.

Similarly, market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. It's true that market timing sometimes can be beneficial for seasoned investing experts or for those with a lucky rabbit's foot ; however, for those who do not wish to subject their money to such a potentially risky strategy, time -- not timing -- could be the best alternative.

Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. Relying heavily on forecasts and market analysis, market timing is often utilized by brokers, financial analysts, and mutual fund portfolio managers to attempt to reap the greatest rewards for their clients.

Proponents of market timing say that successfully forecasting the ebbs and flows of the market can result in higher returns than other strategies. Their specific tactics for pursuing success can range from what some have termed "pure timers" to "dynamic asset allocators. Investment in a money market fund is neither insured nor guaranteed by the U. The fund's yield will vary.


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  • On the other hand, dynamic asset allocators shift their portfolio's weights or redistribute their assets among the various classes based on expected market movements and the probability of return vs. Professional mutual fund managers who manage asset allocation funds often use this strategy in attempting to meet their funds' objectives.

    Although professionals may be able to use market timing to reap rewards, one of the biggest risks of this strategy is potentially missing the market's best-performing cycles. This means that an investor, believing the market would go down, removes his investment dollars and places them in more conservative investments. While the money is out of stocks, the market instead enjoys its best-performing month s.

    The investor has, therefore, incorrectly timed the market and missed those top months. Perhaps the best move for most individual investors -- especially those striving toward long-term goals -- might be to purchase shares and hold on to them throughout market cycles. This is commonly known as a "buy and hold" investment strategy.

    Variable Annuity Explained (2019)

    As seen in the accompanying table, purchasing investments and then withstanding the market's ups and downs can work to your advantage. Though many debate the success of market timing vs. Individual investors might best leave market timing to the experts -- and focus instead on their personal financial goals.

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    If you're not a professional money manager, your best bet is probably to buy and hold. Through a buy-and-hold strategy, you take advantage of the power of compounding, or the ability of your invested money to make money. Compounding can also help lower risk over time: As your investment grows, the chance of losing the original principal declines. Buy and hold, however, doesn't mean ignoring your investments.

    Remember to give your portfolio regular checkups, as your investment needs will change over time. Most experts say annual reviews are enough to ensure that the investments you select will keep you on track to meeting your goals. Normally a young investor will probably begin investing for longer-term goals such as marriage, buying a house, and even retirement. The majority of his portfolio will likely be in stocks and stock funds, as history shows they have offered the best potential for growth over time, even though they have also experienced the widest short-term fluctuations.

    As the investor ages and gets closer to each goal, he or she will want to rebalance portfolio assets as financial needs warrant. This hypothetical investor knows that how much time is available plays an important role when determining asset choice.

    Most experts agree that a portfolio made up primarily of the "riskier" stock funds e. Clearly, time can be a better ally than timing. The best approach to your portfolio is to arm yourself with all the necessary information, and then take your questions to a financial advisor to help with the final decision making. Above all, remember that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the risks that go along with each investment.

    Your financial advisor can help you determine which investments are right for you. Individuals cannot invest in indexes. Past performance is not a guarantee of future results. Market volatility is a reality all investors must face at one point or another.

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    However, when market swings are pronounced and occur with greater frequency, plan sponsors may find themselves subject to increasing claims of fiduciary liability. But that doesn't necessarily mean sponsors need to go back to square one and completely reinvent their plans in order to avoid such a scenario. Instead, diligent and ongoing adherence to a multifaceted risk-management strategy can help sponsors accomplish two important priorities simultaneously: improving participants' ability to pursue their financial goals for retirement and reducing sponsors' potential exposure to claims of fiduciary malfeasance.

    To ensure success, however, sponsors must first understand their broad range of fiduciary responsibilities as defined by the Employee Retirement Income Security Act ERISA , and then systematically review their tactics for achieving compliance.