Deferred Variable Annuity
The Deferred Payout Structure
When purchasing an annuity you have two basic payout options: immediate or deferred. An immediate annuity starts paying dividends within the first year, often within a month. A deferred annuity accumulates earnings over the year, until payment is specifically requested. Often deferred variable annuities are converted into income annuities when the contract owner retires. In that case payments get distributed on a monthly basis for a duration of your choosing. Alternatively, there's always the option to cash out everything at once.
Variable annuities are deferred more often than not because they need time to accumulate earnings. Most variable annuity investors start off with a smaller initial premium in contrast to a fixed-rate contract. Featuring flexible premiums, variable annuities can be funded many times over, like a 401(k) or brokerage account.
The other preference for deferred variable annuities is their tax-free growth benefit. Variable annuity income isn't taxed until withdrawn, allowing investors to collect interest on would-be taxes. To exploit this benefit, many investors defer income for extended periods of time. The longer withdrawals are deferred, the greater the tax benefit. Over periods of 20+ years the difference can become significant:
Taxed Investment vs Tax-Deferred Annuity
The chart above shows a $26,000+ difference between a tax-deferred and non-tax-deferred instrument at equal rates of return after 20 years. Neither CDs nor mutual funds feature this benefit.
Don't Just Shop, Implement a Solid Retirement Strategy
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.Speak with an advisor over the phone about annuities for FREE.
Who Should Buy Deferred Variable Annuities?
Deferred variable annuities are well suited as retirement planning vehicles, and should be compared such alternatives as the 401(k), IRA, and mutual fund. They are often used in conjunction with a 401(k) or Roth IRA to avoid the $15,000 annual contribution limit. Unlike fixed annuities, variable annuities carry market risk, suiting them to investors who haven't yet retired.
Upon retirement, deferred variable annuities can be cashed out completely, annuitized, or converted into a guaranteed lifetime income. Holding on to a deferred variable annuity through retirement is an option as long as you allocate the portfolio across multiple asset classes and shift the majority of funds into fixed-interest sub-accounts. To minimize risk, a solid retirement plan will balanced out a variable annuity with added capital in fixed-rate savings instruments like CDs or Fixed Annuities.
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